Practical Entrepreneurship in South Africa [First Edition] 9781776126743, 9781776123216

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PRACTICAL

eBook ENTREPRENEURSHIP IN SOUTH AFRICA EDUCATION Copyright © 2019 EDGE Learning Media (Pty) Ltd t/a EDGE Education. All rights reserved Ground Floor, Bell House, 16 Bell Crescent, Westlake Business Park, Cape Town, 7945, South Africa This publication and all its parts are copyright protected under the Berne Convention. In terms of the Copyright Act 98 of 1978 no part of this material may be reproduced, be stored in a retrieval system, be transmitted or used in any form or be published, redistributed or screened by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of the Publisher. Our logos are protected under the Trade Marks Act 194 of 1993. Permissions may be sought from EDGE Learning Media (Pty) Ltd t/a EDGE Education, phone (+27) 217020686; email [email protected]. However, permission to use any material in this work in any way that is derived from other sources must be obtained from the original sources. If you are aware that any part of this text has any errors, or if you find that something has been incorrectly referenced, please email us. Notice: This is an electronic version of the print textbook.

eBook: First published 2020 First Edition First Impression E1I1 ISBN: 978-1-77612-674-3 (eBook) Print: First published 2019 First Edition First Impression E1I1 ISBN: 978-1-77612-321-6 (Print) Authors: Van Nieuwenhuizen, P. J. J Archibald, G. PGDip HEd; BCom Travel and Tourism Management; Dip Hotel Operations Management; Dip Tourism Management; Cert PRISA. Kamala, P. PhD Accounting; MCom Accounting. Glazer, S. Huxtable, B. BA (Hons). Kean, C. BA (Hons) Psychology. Miller, J. Renard, M. PhD Industrial and Organisational Psychology (IOP); MCom IOP; BCom (Hons) IOP; BCom.

Shelton, S. MA Industrial and Organisational Psychology (IOP); BA (Hons) Industrial Psychology; BA Human Resource Management. Academic Manager: Ellis, N. Content Reviewers: De Beer, M., Ward, B., Ariefdien, I., Anderson, W., Lavender, M., Ward, B., Boodhram, R., Lushaba, L., Meyer, G., Ellis, N., Meiring, R. and Gosai, Y Language Editors: Eicher, J., Roux, S. and Petersen, C. Notice: No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. PREFACE Practical Entrepreneurship in South Africa is a comprehensive guide to becoming a successful entrepreneur. The textbook begins by exploring the basics of entrepreneurship, and the various skills and characteristics required of an entrepreneur when starting a business. It also explores the business development process, which includes the development of products and services. Additionally, it provides practical knowledge on creating and advertising a business brand. Students will also learn about the art of selling, as well as basic accounting skills, cash flow management skills and tax management skills. They will then proceed to explore the importance of operations management, as well as human resources (HR) – namely recruiting staff, managing employees, and applying the relevant legislation correctly. The textbook concludes with a discussion on developing an online business, and a consideration of relevant case studies

pertaining to entrepreneurship. Based on this, students will be prepared to begin an entrepreneurial venture with a sense of confidence and professionalism. Disclaimer All URLs active at the time of publication. GESPA CONTENTS 1 CHAPTER 1 What is entrepreneurship? 50 CHAPTER 2 Getting out of the starting blocks 82

CHAPTER 3 Forming a business 119

CHAPTER 4 Developing products and services 164

CHAPTER 5 Spreading the word 197

CHAPTER 6 Selling 229

CHAPTER 7 Cash is king 259

CHAPTER 8 It is in the numbers 288

CHAPTER 9 Building a team 331

CHAPTER 10 Making it run smoothly 368

CHAPTER 11 Boring but important stuff 412

CHAPTER 12 Growing the business 449

CHAPTER 13 Online start-ups 478

CHAPTER 14 Case studies – myths, leaders and inspiration 493 BIBLIOGRAPHY 539 ACTIVITY SOLUTIONS CHAPTER 1 WHAT IS ENTREPRENEURSHIP? 1 1.1 Introduction 2 1.2 Life lessons 3 1.3 Definition of an entrepreneur 5 1.4 Emergence of entrepreneurial culture 11 1.5 Is there an entrepreneurial gene?

16 1.5.1 | Entrepreneurial traits 19 1.5.2 | Entrepreneurial skills 26 1.6 Entrepreneurs and risk 30 1.7 Importance of entrepreneurs to economies 34 1.7.1 | The role of entrepreneurs in building the South African economy 36 1.7.2 | The role of entrepreneurs as problem-solvers 38 1.7.3 | The role of social entrepreneurship 40 1.7.4 | Barriers to entrepreneurship 41 1.8 Are you ready to be an entrepreneur? 45 1.9 Summary 49 1

WHAT IS ENTREPRENEURSHIP? Case studies – myths, leaders and Online inspiration start-ups Boring but Growing the Making important business it run stuff smoothly What is Building a It is in the team entreprenumbers neurship? Cash is king

Developing Selling products Spreading and the word Getting out of Forming a services the starting business blocks 1.1 INTRODUCTION The world of modern business is dominated by multinational corporations that employ hundreds, or even thousands, of people across the globe. For many aspiring professionals, attaining a position in one of these massive corporations is essentially the fi rst major step in their journey toward success. However, some ambitious individuals are more intent on forging their own paths, and building a profi table business through the development of distinct and innovative off erings. Of course, this is easier said than done; putting in the necessary groundwork to create a sustainable business can be an exhausting, nerve-racking process. Being an entrepreneur means taking risks, challenging the status quo and catering to the needs of a particular target audience. While there is no set formula to achieve success, there are some guidelines any aspiring business professional should adhere to as far as possible; for instance, ensuring a business is run with integrity and professionalism, by making sure that agreements are honoured, and that any discrepancies are expertly addressed. While it can be assumed that most organisations seek to provide some kind of useful service or product to consumers for a reasonable fee, others often exploit their customers’ shortcomings and lack of knowledge. For this

reason, it is of the utmost importance that an entrepreneur is empathetic to their various stakeholders, and shows real concern for the people they deal with on a daily basis. Naturally, possessing some knowledge on the concept of entrepreneurship itself will be of benefi t to someone looking to make their mark in the business world. Being an entrepreneur is one thing, but to make a success of a venture is something else entirely. A capable entrepreneur is able to think on their feet, make tough decisions, and come up with creative solutions to tricky issues that they will encounter throughout their journey. While it is impossible to anticipate every problem, having a few carefully honed skills can certainly help to deal with any unforeseen circumstances. 2 CHAPTER 1 In this chapter, we will briefly consider the important life lessons that benefit entrepreneurs. Thereafter, the concept of entrepreneurship will be examined, followed by a discussion on the rise of an entrepreneurial culture within modern society. Then, we will consider the different approaches to the debate around the entrepreneurial gene. This will be followed by a discussion on entrepreneurial traits and skills. The risks of entrepreneurship will also be examined. Lastly, the role that entrepreneurs play within the economy in South Africa will be outlined, as well as the various barriers that entrepreneurs face. After studying this chapter, you should be able to: • define entrepreneurship; • outline the emergence of entrepreneurial culture; • present an informed opinion on the debate around an entrepreneurial gene;

• highlight the traits of an entrepreneur; • identify the skills required of an entrepreneur; • explain the role of risk in entrepreneurial endeavours; • describe the role of entrepreneurship in the South African economy; and • discuss the barriers to entrepreneurship. 1.2 LIFE LESSONS Arguably, the most valuable trait any entrepreneur can possess is the will to learn. Indeed, a person who is not prepared to grow and learn is likely to make the same mistakes over and over again. Lobel (2015: 1–3) states that overcoming obstacles, and turning them into valuable lessons, is crucial to achieving success. In other words, failure is inevitable, but the ability to learn from your mistakes is often the defining difference between successful and unsuccessful entrepreneurs. Of course, ‘failure’ is a relative term. What constitutes a failure for one person may simply be an opportunity for another. Having said this, it is easy to become disillusioned when your efforts repeatedly fall short of your expectations. In some cases, a single mistake can be the end of a budding (new but promising) enterprise. For this reason, it is important that decisions are made with the full knowledge that things could go wrong at any time. Thus, it is the duty of an entrepreneur to accept the risks that accompany the decisionmaking process. If a risk is deemed too great, another solution must be found. The ability to solve problems creatively is a key characteristic of an effective entrepreneur. For an entrepreneur, learning never stops. There is no limit to the number of lessons that you can learn. In most cases, these lessons will be subconscious and experiential. Often, the best way to learn is not through your own mistakes, but rather through the mistakes of others. There are many stories of entrepreneurs who fought their way to the top (Clark, 2016). It is important to note that the road to

success was not a smooth one for any of these now successful business people. From stories about failed acquisitions and years of legal woes, to asset protection and the effects of stress on family members, it is clear that making a success of your business is almost guaranteed to be accompanied by difficult times. It can be difficult finding the necessary financial support to kick-start your endeavours; even when capital has been acquired, investors want a return on their 3 WHAT IS ENTREPRENEURSHIP? investment. If a business fails to perform and does not meet agreedupon targets, an entrepreneur could quickly fi nd themselves struggling to maintain it. It is, therefore, critical that an entrepreneur works hard, and dedicates their time to accomplishing goals eff ectively and effi ciently. If there is anything an entrepreneur needs, it is the ability to see past commonly accepted norms (Islam, 2017). This does not necessarily mean that someone has to take a completely new path in order to succeed, but it does mean that they need to apply their knowledge in ways that nobody else has. Every day, there are new developments, ideas and products on the market, and it becomes increasingly diffi cult to innovate. However, the key principle behind innovation is, if something can be improved, then there is an entrepreneurial opportunity. In short, there is always room for improvement. The concept of progress is founded on the pillars of invention and innovation. Thus, an entrepreneur needs to have vision, foresight and creativity if they wish to make their presence known in society. It is vital that parents allow their children to dream big, and nurture their strengths so that they can become critical thinkers who are able to apply knowledge in new ways, and come up with solutions to the many problems faced in today’s society. While it may seem clichéd, Islam (2017) stresses a key component of the entrepreneur’s experience: the pursuit of happiness. As the saying goes, ‘Do what you love and you will never have to work a day in your life’. Businesses exist in order to make a profi t, but there is

certainly more to life than simply making money. One of the most successful and world-renowned entrepreneurs, Steve Jobs (cofounder of Apple), saw a way to improve people’s lives by revolutionising the everyday computer, and has since then helped to develop many other useful technological products (iPhone, iPad etc.). The best entrepreneurs not only make a profi t, but they also fundamentally change the world as we know it. If there is any lesson to be learned from someone like Steve Jobs, it is that the vision and passion of one person can make a diff erence. In order to realise the potential of an idea, the work required is often immense, and may span months or even years. Happiness is a diffi cult thing to achieve, but a life lived with passion and determination is integral to achieving satisfaction. Entrepreneurs must possess numerous skills, particularly perseverance, if they ever wish to fi nd the success they seek. Overall, the important life lessons that are recommended to young entrepreneurs are: • they should not easily give up when encountering business failures; • they should continuously learn from their failures and from the failures of others; • they should create entrepreneurial opportunities that will foster their passion and happiness; and • they should try to see past commonly accepted norms. ACTIVITY 1A (i) Name fi ve qualities or skills you think are the most important for a successful entrepreneur to possess. Substantiate your answer. (ii)

List the four life lessons that will help entrepreneurs to succeed. 4 CHAPTER 1 1.3 DEFINITION OF AN ENTREPRENEUR It is difficult to confine the concept ‘entrepreneur’ to one concrete definition. We will start by reviewing specific dictionary definitions of the term. Then we can consider the general qualities and characteristics of entrepreneurs, and develop our own conceptions of what being an entrepreneur entails. Definitions of an Entrepreneur According to Oxford Dictionaries 1 (n.d.), an entrepreneur is ‘a person who sets up a business or businesses, taking on financial risks in the hope of profit’. Perhaps the two most important components of this definition are the words ‘financial risks’ and ‘profit’. When a person is employed by a company, they often take for granted the financial risks that the founder (entrepreneur) of the business takes to run the company. Of course, the employees also take a risk in deciding to work at such a company. If the business experiences financial difficulties, said employees may be retrenched or possibly even fired. To this end, there is an element of risk in virtually every decision an employee makes. However, in the case of employees working in a large corporation, the burden of risk is often technically distributed across the entire company. Any undesirable consequences may be shared by the organisation as a whole. For an entrepreneur, it is different. Entrepreneurs basically accept full responsibility for any problems that may arise as a result of their performance, or lack thereof. Consequently, most entrepreneurs are under constant pressure to perform and deliver on their promises. Any failure to do so may lead to serious consequences for them and their business.

This description is a very simplistic and straightforward explanation of what an entrepreneur is. A critique for this definition is that entrepreneurs do not always create ventures for the sole reason of making a profit. While the dictionary certainly provides some insight into what an entrepreneur is, this definition is rather limited, and fails to comprehensively describe the finer details underlying entrepreneurship. Another definition for an entrepreneur is ‘a person who organises and manages any enterprise, especially a business, usually with considerable initiative and risk’ ( Dictionary.com, n.d.). According to Nelson (2012), this definition is effective because it includes the term ‘any enterprise’. Nelson claims that ‘pure entrepreneurs’ are individuals who identify ‘any’ need, and aim to fulfil it through the organisation and management of an enterprise. A critique against this definition is that it is too vague. A more comprehensive and specific definition that we will use throughout this chapter is the following ( Business Dictionary in Baporikar, 2017: 1536–1537): Someone who exercises initiative by organizing a venture to take benefit of an opportunity and, as the decision maker, decides what, how, and how much of a good or service will be produced. An entrepreneur supplies risk capital as a risk taker, and monitors and controls the business activities. The entrepreneur is usually a sole proprietor, a partner, or the one who owns the majority of shares in an 5 WHAT IS ENTREPRENEURSHIP? incorporated venture. According to economist Joseph Alois Schumpeter (1883–1950), entrepreneurs are not necessarily motivated by profi t but regard it as a standard for measuring achievement of success. Schumpeter discovered that they greatly value self-reliance, strive for distinction through excellence, are highly optimistic (otherwise nothing would be undertaken), and always favour challenges of medium risk (neither too easy, nor ruinous).

Let’s break this defi nition down into segments. An entrepreneur is an individual whose actions created the process (initiative) of organising a venture (start-up entity or small business). This venture is created to take advantage of an opportunity (such as any need) in the market. The entrepreneur’s role is to supervise and control the business activities – i.e. they make the important decisions for the venture. These include what products/services should be produced, how they should be produced and how much should be produced. The individual will take full responsibility for the risks of the venture, and they will bear the full brunt of its failures. Moreover, they provide risk capital, as in they invest money into the new or unproven venture. In addition, an entrepreneur is often the sole proprietor (sole selfemployed owner), partner (one of the individuals who are in a partnership with others in a venture where they equally share the impact of its success, risk and failures), or individual who owns the most amount of shares (claim) to a corporation. Lastly, entrepreneurs are self-reliant, often perform great eff orts to attain excellence, are optimistic, seek a moderate challenge, and are not always profi tdriven. We have examined dictionary defi nitions of the concept ‘entrepreneur’, now let’s examine key qualities or characteristics that defi ne an entrepreneur. Characteristics used to defi ne entrepreneurs In this section, we will briefl y discuss characteristics that are often used to specifi cally defi ne the meaning of ‘entrepreneur’. Later in this chapter, we will look at general traits (abilities) that entrepreneurial individuals often possess and that are necessary for success. A concept that often appears alongside, and is likened to, entrepreneurship is that of leadership. For many theorists, entrepreneurs are not simply business professionals or risk-takers, but visionary leaders who take it upon

themselves to forge a new way forward for the people around them. According to Hogan (2013: 169), entrepreneurs are leaders. However, not all leaders are entrepreneurs. Moreover, an entrepreneur is a very particular kind of leader; one who possesses specifi c skills and a unique mindset that grants them an edge over their competitors and critics. Hogan (2013: 169) states that, if entrepreneurs face failures, then they often try not be overwhelmed by them. For instance, an entrepreneur may try to stay optimistic by referring to their failures as ‘setbacks,’ ‘errors’ and ‘false starts’. In this sense, it seems that Hogan holds that entrepreneurs are resistant optimists who try to see failures and challenges as mere stepping stones on their journey towards success. Having said this, many small failures (or even some serious failures) can be overcome with time and eff ort. There are scenarios that could lead to the end of an entrepreneur’s business or entire career. It is, therefore, important that entrepreneurs are not reckless in their actions, and consider their options carefully before making a decision. 6 CHAPTER 1 With this in mind, would realism not be another key characteristic for an entrepreneur? According to Vadrevu and Jumabhoy (2017), realism is generally regarded as a necessary quality for any effective leader. When this is considered in relation to Hogan’s (2013) assertions, it seems reasonable to conclude that a good entrepreneur should have a fine balance between cautious optimism and realism. This means that, while an entrepreneur should not be deterred by failure, they need to understand that, no matter how justified or seemingly well planned their efforts may appear, things could possibly fall apart at any point. However, there is not always a clearcut line between optimism and realism, as ‘some business situations require more optimism than realism, while others call for a different ratio’ (Jao, 2013). Regardless of how optimistic or realistic an entrepreneur’s attitude may be, it stands to reason that persistence is the core feature of

long-term entrepreneurial success. The ability of an entrepreneur to drag themselves back from the edge of disaster is arguably the truest test they can face. In many ways, an entrepreneur needs to strongly believe in themselves in order to overcome impossible odds, and achieve what they would consider to be success. An entrepreneur must, therefore, overcome doubt, fear and adversity, and learn to deal with unforeseen circumstances effectively. Another key entrepreneurial characteristic that Urban (2010: 89) highlights is that such individuals are self-employed; at least, in the occupational sense. A person can either be unemployed, employed or self-employed. In many instances, entrepreneurs are those persons who simply could not find employment at an existing business and thus, had no other option but to make a living on their own. What this means is that many people become entrepreneurs out of necessity rather than choice. Types of Entrepreneurship We will now define entrepreneurship by examining common types of entrepreneurs. Entrepreneurship is a very real solution to the economic woes of people in South Africa, and the world as a whole. There are also people who choose to become entrepreneurs. Thus, we can distinguish between necessity entrepreneurs (those without choice) and opportunity entrepreneurs (those who have other options available to them). For example, a person who has lost their job and tries to make ends meet by becoming a fruit vendor at a busy intersection near their home is a necessity entrepreneur. An individual who has identified a gap in the market, and provides specialised services and/or products to a certain audience, is likely an opportunity entrepreneur. Because there are a great deal of unemployed and underemployed (not being paid enough for their job) people in the world, it is safe to assume that the vast majority of entrepreneurs are necessity entrepreneurs. In many cases, these individuals have low overheads

(low business expenses) and make small profits. Thus, their levels of risk are relatively low. However, for many opportunity entrepreneurs, the risks are often much higher. Obviously, this depends on a number of factors and, thus, cannot be used as a general gauge of the experiences of opportunity entrepreneurs. In light of this, it is apparent that there are different types of entrepreneurs who exist in different geographic locations and socioeconomic contexts. As a result, it is also possible to classify 7 WHAT IS ENTREPRENEURSHIP? entrepreneurs into various categories and subcategories. According to Thompson et al. (2017: 26), there are four categories (+ two subcategories) of entrepreneur. The fi rst three, in order, are as follows: • Latent entrepreneurs: These are individuals who expect to start a business venture at some point in the future. In other words, latent entrepreneurs are people who have not established a business as yet, but plan to do so within the next few months or years. In many respects, latent entrepreneurs are wishful thinkers who have not yet taken any fi rm action to start a business. • Nascent entrepreneurs: These individuals are fi rmly dedicated to the establishment of a business in the very near future. This means that they plan to have a business up and running within a few weeks or months. The securing of licences, acquiring tax information, registering a company, fi nding premises and interviewing and hiring staff are just a few of the requirements a nascent entrepreneur may engage in on their journey towards founding their business venture. • Novice entrepreneurs: These individuals have established a business, but have little or no experience with starting up and/or running a business. Novice entrepreneurs are, therefore, new business owners who have only started a venture within the last three years. The fi rst three years of a company’s existence is a signifi cant milestone for a business owner, and while there is no set time limit for

the establishment and stabilisation of a business, 70-80 per cent of businesses fail within their fi rst fi ve years of operation (Friedrich, 2016). The next category (and its two subcategories) applies to individuals who have owned and run a business for three or more years (Lituchy et al., 2013: 151; and Thompson et al., 2017: 26): • Habitual entrepreneurs: These are established entrepreneurs who possess prior experience in the creation and running of a business. They are also often involved in a number of diff erent enterprises, and have become entrenched within the entrepreneurial world. Habitual entrepreneurs are usually well-seasoned business people who have developed their skills, and are suitably acquainted with the intricacies of running a company. There are two prominent types of habitual entrepreneurs: § Serial entrepreneurs: These entrepreneurs have either sold or closed their original business, and then moved on to buy or create an entirely new enterprise at some point thereafter. They may then spend time and money building up their new acquisition before selling or closing it, and moving on to yet another opportunity. Essentially, serial entrepreneurs set up businesses, make a profi t, and then move on to something diff erent or more exciting. § Portfolio entrepreneurs: These are people who have retained their original business, but then moved on to build and/or purchase other companies. Portfolio entrepreneurs own several businesses, and have a signifi cant infl uence on how these ventures operate. For example, some of the world’s wealthiest and most experienced entrepreneurs are portfolio entrepreneurs. They exert a great deal of control over the lives of people in countries across the world, and are able to infl uence them in profound (and often unseen) ways.

Latent entrepreneurs can develop into nascent entrepreneurs, and eventually become novice entrepreneurs. After at least three years of owning the business, the novice entrepreneur can become a habitual entrepreneur. This structure is simplifi ed in the following table. 8 CHAPTER 1 Types of Entrepreneurs Not yet in business or have been in business for Have been in business for three years or more three years or less Latent entrepreneurs Habitual entrepreneurs Nascent entrepreneurs ( Serial entrepreneurs; Portfolio entrepreneurs) Novice entrepreneurs (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Thompson et al., 2017: 26; and Lituchy et al., 2013: 151) Table 1.1: Types of entrepreneurs according to experience Having considered the various categories of entrepreneurs that exist, it is clear that the journey from latent to habitual entrepreneur is a complex and time-consuming one. It is important to note that the above categories are not necessarily the only ones that are used by theorists to separate entrepreneurs into different groups. Ahmetoglu et al. (2017: 38) distinguish between freelancers, new technology-based businesses, family business entrepreneurs, social entrepreneurs and intrapreneurs. Each distinct category has different levels of formality and involvement, and possesses its own unique characteristics, benefits and challenges. However, Baker and Welter (2015: 435) identify ethnic entrepreneurs, entrepreneurs living in developing countries, and entrepreneurs with small private

enterprises as some of the different types of players that can be considered when discussing entrepreneurship. Thus, it can be concluded that different theorists and scholars create different terms and categories to further distinguish between one kind of entrepreneur and another. In many respects, each entrepreneur is unique, and exists within a specific context with entirely unique understandings, experiences and circumstances. This is why it is difficult to arrive at any succinct, complete definition of what an entrepreneur actually is. In truth, there are many entrepreneurs, and so there are many different kinds of entrepreneurs. Whether these individuals are forced into entrepreneurship or not, they are all compelled to find ways to take care of themselves, and overcome the challenges they face on a regular basis. There are entrepreneurs who are wealthier and have access to more resources, and there are also those who are limited by their socio-economic circumstances and lack of opportunities. Unfortunately, people do not start life off on an equal footing, but what one entrepreneur may lack in financial wealth they could make up for in sheer ingenuity. Even though it is difficult to concisely pinpoint the term ‘entrepreneur’, or specifically determine the types of entrepreneurs, we will strive to do so for the purpose of allowing the diverse landscape of entrepreneurship to be quantifiable, measurable and criticisable. 9 WHAT IS ENTREPRENEURSHIP? EXA MPLE 1 A (Neo Lekgabo (Sendr))

Neo Lekgabo is one of several South African entrepreneurs who have managed to make a success out of their endeavours (Ventureburn, 2016). However, Neo is by no means a newcomer in the business world. Before launching his own company, he held the position of marketing manager for MultiChoice Africa for more than seven years. He was also the marketing manager for the SABC for two years. Neo is a well-educated individual and holds a Masters degree in Business Administration from Henley Business School, as well as a Diploma in Marketing Management from the Tshwane Institute of Technology. Sendr is Lekgabo’s own brand and unique business venture. In very simple terms, Sendr is a delivery service for small packages and items. Any person who wishes to use the service can simply download the Sendr app from their smartphone or tablet, and enter in the pickup and drop off addresses before confi rming their order. In October 2015, there were a mere ten motorbikes being used by Sendr. By March 2016, there were over 100 motorcycles in the Sendr fl eet. According to the Sendr website (2018), virtually anyone can use the app: from private individuals to law fi rms, pharmacies and banks. Sendr touts itself as an eff ective, professional and easy-to-use delivery service. Sendr accepts a number of payment methods including Visa, MasterCard, American Express, Diners Club and PayGate. The app allows users to favourite their most frequently used routes, and track the progress of their deliveries in real time. As an added bonus, insurance for all transported goods is included with the delivery price, so Sendr customers have total peace of mind when it comes to their deliveries. While there are indeed a number of courier services available, Sendr specialises in small deliveries over relatively short distances, and has thus gained a strong foothold in the market, thanks to their unique off ering. Neo Lekgabo’s formal education, years of experience and strong marketing mind have been undeniably instrumental in Sendr’s success. 10

CHAPTER 1 ACTIVITY 1B (i) List three characteristics that are often used to describe entrepreneurs. (ii) Define an entrepreneur. (iii) Briefly compare the differences between a novice entrepreneur and a habitual entrepreneur. (iv) Refer to Example 1A. Identify the type of entrepreneur Neo Lekgabo would be categorised as. Substantiate your answer. 1.4 EMERGENCE OF ENTREPRENEURIAL CULTURE We will outline the emergence of entrepreneurial cultures by discussing how the advancement of the Industrial Revolution encouraged the various factors that catapulted entrepreneurship. This includes focus on self-interest, innovation, mass production, technological advancement and availability of labour. Thereafter, we will specifically define entrepreneurial culture, and how it is manifesting in modern society (entrepreneurial generations and innovative digital ventures). Coining the term ‘entrepreneur’ The history of entrepreneurship is practically as old as humanity itself. The past is full of incredible innovators who played a fundamental

part in shaping the world as we know it today. Interestingly, many great thinkers and business people who were the first in their fields may not have considered themselves to be entrepreneurs at the time. According to Carlen (2016: 1), the term ‘entrepreneur’ only really started being used as it is at present after the French economist, Jean-Baptiste Say, gave it such meaning around the year 1800. By the middle of the nineteenth century, ‘entrepreneur’ became a commonly used phrase to describe any person willing to take risks and try something new in the world of business. However, before this time, the word ‘undertaker’ (a literal translation of ‘entrepreneur’) was used more often, and in other cases, entrepreneurs were usually referred to as ‘adventurers’. These ‘adventurers’ and ‘undertakers’ have been instrumental in changing the world in incredible and lasting ways. In this regard, it is difficult to accurately pinpoint the origin of entrepreneurism in history. For the sake of clarity and convenience, it is perhaps best for us to think of entrepreneurship as a fairly modern phenomenon with its own set of values, philosophies, conventions and methodologies. This does not mean that the past should be ignored, but a full discussion into the history of entrepreneurship would undoubtedly take up a few chapters on its own. In order to gain some insight into the intricacies entrepreneurship, an elementary understanding of entrepreneurial culture is vital. It goes without saying that entrepreneurial culture has existed as long as entrepreneurism has, but again, for the sake of clarity, this discussion will consider the emergence of entrepreneurial culture in relation to the rise of the entrepreneur in the 1800s. 11 WHAT IS ENTREPRENEURSHIP? The Industrial Revolution and entrepreneurship

This period of time was characterised by a high degree of mechanisation and mass production, thanks to the infl uence of the Industrial Revolution. As stated in an article by Hur (n.d.), the past two centuries of entrepreneurship have been driven by the rapid proliferation of machines and markets. Additionally, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, fi rst published in 1776, served to fi rmly establish the theories and values of capitalism in the hearts and minds of people around the world (Hur, n.d.). In his work, Smith essentially demolishes the concept of the ‘mercantile system’ (a political economy that promotes the wealth and power of the whole nation by promoting exports and hindering imports). He instead suggests that self-interest is the primary source of economic growth and development in societies across the globe. The idea that individuals could act out of self-interest, while still adding to and improving the lives of others, was revolutionary for entrepreneurs, and almost certainly played a defi nitive role in the rise of entrepreneurism in the nineteenth century. Self-interest was, and still is, a defi ning force in economic prosperity. Economic prosperity is ‘an economic cycle in which conditions of relatively low unemployment and high total income prevail, leading to high purchasing power (if the infl ation rate is kept low)’ ( Business Dictionary, n.d.). However, an entrepreneur who allows their own desires to run rampant is likely to meet with some major diffi culties. Indeed, an entrepreneur who is too self-focused loses sight of their target audience. When this happens, competitors swoop in to take the entrepreneur’s place (Hur, n.d.). An entrepreneur should curb any impatience driven by self-interest, and manage their expectations accordingly if they wish to succeed in their endeavours. Thus, selfinterest cannot exceed other considerations. We must logically conclude that running any enterprise is a careful balancing act: one big misstep and everything could fall to ruin. An increase in entrepreneurism meant an increase in competition, as people from all walks of life worked to create the next big thing for consumers to buy and make use of (Baumol and Blinder, 2009: 441). It was this fi erce and ever-growing competition that gave birth to the

constant need to innovate. Indeed, an entrepreneur who refuses to innovate increases their chances of failure in the long run. This is because some kind of development and/or reworking of a product or service is needed from time to time; whether this innovation is along technical, price-related, aesthetic or availability boundaries. Therefore, in order for an entrepreneur to truly look after their own self-interest, they will have to be mindful of their competitors and other potential threats to their position in the marketplace. In an ironic turn of events, an entrepreneur who cares about themselves must care about others. For instance, an entrepreneur has to ensure that their products and services are of a suitably high quality so that consumer loyalty is inspired and fostered on a continual basis. It is for this reason that innovation has, to a certain degree, helped increase the standards of living within societies (Hur, n.d.). As mentioned earlier, the Industrial revolution allowed for mass production. Mass production caused entrepreneurial endeavours to move from specialised micro-operations to large production-linebased ventures (Hur, n.d.). Since numerous factories opened up in cities and towns, many people began to move from rural areas and take up residence in and around these urban centres. With an increase in innovation and a move towards mechanisation, technology 12 CHAPTER 1 began to advance in significant ways: the internal combustion engine enabled the invention of the motorcar, and the establishment of large power plants meant that electricity could be supplied to the masses, to businesses and households alike. The fact that energy was easy to access and could be provided on a virtually perpetual basis meant that factories could run for hours a day and produce vast quantities of goods and items. These goods could then be distributed using trucks, trains and ships, and so global trade became a far more expedient and profitable practice. In short, the many limitations that once existed became a thing of the past, and so it only makes sense that this particular period was

arguably the birthplace of the modern entrepreneur. While humanity has made impressive progress in the last two hundred years, it is the industrial might and the ability to create products on a massive scale that helped launched the emergence of an entrepreneurial culture. Another important aspect of the Industrial Age was the increased availability of cheap labour (Hur, n.d.). Since there were a finite number of positions for factory workers, and an abundant supply of unskilled and semi-skilled labourers, factory owners could pay their staff a relatively small fee. This benefit to business owners helped make entrepreneurship easier than before. While this distinctly capitalist practice was criticised as exploitative by theorists such as Karl Marx and Friedrich Engels, it formed a key factor in the entrepreneurial culture found within Western society, and still persists in countries around the world today. Although there is a general assumption that employees within contemporary societies have more labour rights and power than in the past, Shen (2007: 45) claims that there are still workers in countries such as China that have become more exposed and disenfranchised at present than at any other time since 1949. Regardless of the ethical considerations of employers in relation to their workforce, an abundant supply of labourers, coupled with constant supply of energy, enabled business owners to run their factories and production lines with little to no delays. Indeed, the Industrial Revolution redirected the entrepreneurial focus on creating efficient and effective systems that facilitate the maximum possible output with the smallest possible input. Thus, innovation in processes became the central avenue of many Industrial Era entrepreneurs who wanted to optimise their ventures and gain the maximum benefit possible. As evidenced by the Industrial Revolution’s effect on entrepreneurism, it is obvious that technological advancement drives innovation and that this innovation, in turn, further stimulates the development of new technologies. For example, the first wheel that was ever created was primitive and crudely designed. As humanity’s needs have become more complex and dependent on an evergrowing number of factors, the wheel has been redesigned, repurposed and reapplied over and over again in various industries

and contexts. As better materials and processes have been discovered, the concept of the wheel has become exponentially more complicated. Regardless, one entrepreneur may ask, ‘How can I make a wheel even better?’, while another may ask, ‘What could I use instead of a wheel?,’ and yet another may ask, ‘Does the world really need wheels?’ If humans can find ways of doing something more efficiently, quickly, cheaply and cleanly, then they must strive for such a process to become reality. Indeed, Simms (2006) states that entrepreneurs envision entirely new realities. To this end, an entrepreneur’s capacity to see new worlds and possibilities is central to entrepreneurial culture, and technological advancement can help them make these ideas become a reality. 13 WHAT IS ENTREPRENEURSHIP? Defi ning entrepreneurial culture It is clear that the nineteenth century had a profound impact on the rise of entrepreneurship and the birth of entrepreneurial culture. James et al. (2018: 375) hold that entrepreneurial cultures are collective attitudes and behaviours that foster innovation on a constant, steady and regular basis. The challenge for institutions, businesses and societies is to fi nd ways to encourage and build entrepreneurial cultures so that longstanding socio-economic issues (poverty, diseases, unemployment etc.) can be addressed through innovative problem-solving ventures. While a general entrepreneurial culture has ‘always existed’, the successful manifestations of such a culture are often noteworthy, as they help turn raw entrepreneurial ideas into sustainable and profi table businesses. However, what exactly constitutes entrepreneurial culture? Culture is defi ned as ‘the attitudes and behaviour characteristic of a particular social group’ ( Oxford Dictionaries 2, n.d.). In this regard, entrepreneurial culture can be defi ned as the behaviours, attitudes, beliefs and values that are typically shared by entrepreneurs and aspiring entrepreneurs. As with

defi ning what an entrepreneur is, the task of accurately defi ning entrepreneurial culture is, inevitably, a taxing one. A review of published literature reveals that the concept and need for a modern entrepreneurial culture is regularly referenced, but it appears there has been little eff ort to delineate what modern entrepreneurial culture actually is. Fortunately, Jayathilaka and Wijesinghe (2016) off er some insight into the notion of modern entrepreneurial culture. While they do not expressly use the adjective ‘modern’ in their defi nitions, their explanations are confi ned to what one would consider a modern context. They explain that an entrepreneurial culture is one in which an individual is encouraged take risks, be inventive and create new solutions. They further add that in the context of a business, entrepreneurial culture occurs when employees are encouraged to innovate and come up with new ideas and/or products. To this end, certain communities may promote an entrepreneurial culture. For instance, Silicon Valley is world renowned for the numerous startup technology companies that take up residence there (Schigel, 2017). In this sense, a modern entrepreneurial culture is a pervasive one that is present in a number of diff erent contexts, and is promoted by businesses, institutions, families and communities all over the world. Entrepreneurial culture within contemporary society Groups such as Generation Y (millennials) and Generation Z have been immersed within an era that encourages their strong desire to fi nd occupations that will boost their passion and happiness, and fosters their belief that ‘anything is possible’ through innovation, persistence and creativity. According to Islam (2017), one of the challenges that certain millennials (individuals born between 1981 and 1994) face is that they are unsatisfi ed with working where they are. This dissatisfaction may stem from the generation’s focus on attaining meaningful work. For instance, if they feel that their work is not meaningful or satisfying enough, then they are likely to seek out opportunities that they deem to be more exciting or rewarding. For many such individuals, it seems that their work is directly linked to their sense of purpose. It stands to reason that they want their purpose to be suitably signifi cant. For this reason, if millennials want

to fi nd meaningful work, they may have to create innovative opportunities for themselves. Of course, let’s not neglect 14 CHAPTER 1 Generation Z’s (individuals born from 1995 onwards) rising interest in entrepreneurship as well. According to Baron and Hmieleski (2018), in America, around 70 per cent of their generation have ‘indicate[d] that they would like to start their own business someday’ (Kingston, 2014). Moreover, the digital savviness of this group (often said to be ‘wired from the crib’), coupled with increasingly lower barriers to become an entrepreneur, makes entrepreneurship an attractive vocation for them. In summary, the rise of the Internet era awakened a strong entrepreneurial culture among Generation Y and Generation Z. In fact, perhaps the best place to witness the effectiveness and presence of modern entrepreneurial culture is on the Internet. One need only consider a few Internet-based companies like Google, Facebook, eBay and Amazon to understand how the Internet has led to the creation of multinational billion dollar companies. However, each of these world-famous enterprises started off as small entrepreneurial projects. The Internet allowed people to connect and interact with one another on a never-before-seen scale. Since the World Wide Web has grown and connection speeds have improved, the number of offerings available on the Internet has similarly increased. One can now stream and watch videos via YouTube, Netflix and Vimeo, participate in crowdfunding initiatives on Indiegogo or Kickstarter, and attend online lectures through Udemy, Coursera and many other universities. In short, there is very little one cannot do via the Internet. As a result of Google’s incredible success, they established Google for Entrepreneurs. The goal of this initiative is to bring startup communities together and develop new spaces for entrepreneurs to grow and work in ( Google for Entrepreneurs, n.d.). In order to promote entrepreneurism and entrepreneurial culture,

Google for Entrepreneurs has built community hubs, called Campuses, where entrepreneurs can get together to discuss projects, share ideas and get their ventures going. According to the site, there are Campuses in Tel Aviv, London, Seoul, Madrid, Warsaw and São Paulo. While there is still much work to be done in many countries around the world, it does appear that entrepreneurial culture is thriving in many developed countries. Many underdeveloped and developing nations have yet to enjoy the benefits of this support for entrepreneurs and small enterprises. As time moves on, entrepreneurship and entrepreneurial culture is sure to evolve. In the last few years, an increasing amount of venture interest has been focused on cryptocurrencies and blockchain technology. Cryptocurrencies (or virtual money) are emerging as an entirely new class of digital asset, and blockchain technology, a kind of multipurpose, secure online public ledger, is fundamentally changing the way many businesses monetise and run their operations (Tapscott, 2017). Many companies use initial coin offerings (ICOs), which are unregulated methods used to accumulate funds for a new cryptocurrency venture, to finance their entrepreneurial projects. There are hundreds that currently exist. Well-known names include Bitcoin, Ethereum, Ripple, NEO, Stratis, ARK, Cardano, Lisk and Quantum ( CoinMarketCap, n.d.). While many are still sceptical of cryptocurrencies and blockchain technology, many entrepreneurs are benefitting from the heightened interest in this new form of technology. Only time will tell if this interest will endure. 15 WHAT IS ENTREPRENEURSHIP? ACTIVITY 1C (i)

List the factors of the Industrial Revolution that catapulted entrepreneurship. (ii) Name the economist who fi rst coined the term ‘entrepreneur’. (iii) Defi ne the term ‘entrepreneurial culture’. (iv) Explain in your own words how the Internet is a driving force for entrepreneurial culture. 1.5 IS THERE AN ENTREPRENEURIAL GENE? In a perfect world, all humans are born equal. While this is true in principle, many people are, unfortunately, born into disadvantaged circumstances and have less access to wealth and opportunities than others. However, this is not necessarily a determining factor in whether a person succeeds or not. Still, one must inevitably ask the question: ‘Are successful entrepreneurs born, or are they made?’ In other words, are there biological traits that separate entrepreneurs and innovators from the ‘standard’ human being? Or do upbringing, training and education ultimately lead to the formation of an entrepreneur? Or is it both? Naturally, opinions on this subject are divided, and what this argument is really premised on is the age-old ‘nature vs. nurture’ debate. In psychology, this dichotomy attempts to determine which parts of human behaviour are hereditary, and which parts are acquired or learned (McLeod, 2015). For example, if a child’s biological parents both suff er from clinical depression, many psychologists and theorists believe that the child’s risk of developing depression will be signifi cantly high. However, it is impossible to say whether this is true in every case, and there are other factors that may have an infl uence on a child’s experience. Several approaches to the ‘nature versus

nurture’ problem have been developed. These approaches are shown on a spectrum in the following fi gure. Nature Nurture Biology Psychoanalysis Cognitive psychology Humanism Behaviourism (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from McLeod, 2015) Figure 1.1: The spectrum of approaches to psychology 16 CHAPTER 1 • Biological Approach: This perspective focuses on the physical nature of human beings to explain their behaviour and way of thinking. It directs attention towards genetics, neurology, hormones and other biological factors to explain how people behave and interact with the world around them. • Psychoanalysis: The fundamental elements of psychoanalysis are the physical drives of sex and aggression, as well as a person’s upbringing during their adolescence. This perspective is relatively more ‘balanced’ than the purely biological approach, as it also considers the influence of environmental factors on a person’s behaviour and thought processes. Thus, this approach considers both nature and nurture elemental factors. • Cognitive Psychology: This kind of psychology falls more or less in the middle of the spectrum.

It supports the notion that inherent mental constructs exist, but are continuously influenced and changed by environmental factors. In this way, cognitive psychology sees nature and nurture as a reciprocal process: our physical biology affects our behaviour, but behaviour and experience affect our cognitive processes, memories and understanding. • Humanism: This perspective is closer to the ‘nurture’ side of the spectrum, and is influenced by the ideas of theorists such as Abraham Maslow, who highlighted the fact that humans have straightforward physical needs. Humanism supports the idea that society exerts significant influence on an individual’s self-concept and, thus, believes strongly in upbringing and learned behaviour. • Behaviourism: Finally, behaviourism supports that everything a person says, thinks and does is a result of learned behaviour, acquired from the external environment in which they reside. People echo behaviour through conditioning. It disregards any kind of biological influence on thoughts and actions. It is clear that there are several perspectives regarding the ‘nature vs. nurture’ debate. The approaches that lean towards the ‘nature’ side of the debate would most likely support the notion of an ‘entrepreneurial gene’ – such as the biological approach, psychoanalysis, and cognitive psychology. While these approaches indirectly provide different viewpoints on whether there is an entrepreneurial gene, there is no adequate answer to the question, ‘is there an entrepreneurial gene?’ Let’s examine the opinions of various scholars and researchers. Arguments for the ‘entrepreneurial gene’ Fisher and Koch (2008) studied 234 CEOs, and came to the conclusion that some individuals are simply more inclined towards entrepreneurship than others. In other words, they believe that hereditary or genetic factors, play the most significant role in determining whether or not a person will pursue a career in

entrepreneurism. Nicolaou et al. (2008) conducted a study and concluded the following: We used quantitative genetics techniques to compare the entrepreneurial activity of 870 pairs of monozygotic (MZ) and 857 pairs of same-sex dizygotic (DZ) twins from the United Kingdom. We ran model-fitting analyses to estimate the genetic, shared environmental and nonshared environmental effects on the propensity of people to become entrepreneurs. We found relatively high heritabilities for entrepreneurship across different operationalizations of the phenomenon, with little effect of 17 WHAT IS ENTREPRENEURSHIP? family environment and upbringing. Our fi ndings suggest the importance of considering genetic factors in explanations for why people engage in entrepreneurial activity. Moreover, Nicolaou et al. (2011) claim that there is a signifi cant relationship between entrepreneurs and the common genetic variant in the dopamine receptor DRD3 gene. This gene is strongly related to attention-defi cit hyperactivity disorder (ADHD) and sensation seeking, which according to the researchers, are key traits for entrepreneurs. Arguments against the ‘entrepreneurial gene’ Many theorists and scholars hold that there is no entrepreneurial gene. A scientifi c study conducted by Loos et al. (2011) tried to replicate the previously mentioned study by Nicolaou et al. (2011), which claimed that they discovered an entrepreneurial gene – the DRD3 gene. However, Loos et al. (2011) could not replicate the same results, and concluded that the study done by Nicolaou et al. created false positives. It is important to remember here that there are diff erent kinds of entrepreneurs, and so it is possible that certain types of entrepreneurs require a unique genetic makeup, context, upbringing

and so forth. Therefore, the possibility of specifi cally defi ning a particular ‘entrepreneurial gene’ would be extremely diffi cult. This does not mean that an entrepreneurial gene is non-existent, but from a brief review of current literature, there is no sound, replicable evidence that support its existence. It seems unlikely that any one gene decides who are the entrepreneurs and who are not. This is precisely why this section fi rst addressed the backdrop of this argument, so that you may draw logical conclusions yourself. It should be noted that even the scholars who do claim that genetics play a signifi cant role in determining whether a person will be an entrepreneur or not still agree that it is not the only factor, and that upbringing and education also have a part to play. Thus, it is safe to conclude that, while genetics do play a great part in a person’s capacity to be an entrepreneur, at present, the majority of theorists are not completely convinced that there is a single ‘entrepreneurial gene’ (Clarkson, 2016). Moreover, many scholars believe that successful entrepreneurship can be taught. More specifi cally, the skills needed to be a successful entrepreneur can be taught to individuals, and a passion for entrepreneurship can be fostered over time (Daley, 2013). In fact, a study on 3 775 College alumni, conducted by Lange et al. (2011), indicated that education does play a key role in infl uencing people to become entrepreneurs: We studied the infl uence of entrepreneurship education on intentions to become entrepreneurs and becoming full-time entrepreneurs with a sample of 3,775 Babson College alumni who graduated from 1985 to 2009. There was overwhelming evidence that taking two or more core entrepreneurship elective courses positively infl uenced students’ intention to become an entrepreneur and their becoming an actual entrepreneur both at the time of graduation and long afterward. It may be argued that, instead of focusing on a specifi c entrepreneurial gene, scholars should rather focus their attentions on

general personality traits that are associated with successful entrepreneurs. Of course, personality traits can also be argued to be either developed by ‘nature’ or ‘nurture’, depending on the specifi c theoretical psychological approach we choose to use. 18 CHAPTER 1 Perhaps the most crucial personality trait for any entrepreneur is an understanding of the self; individuals who are able to introspect and evaluate themselves in an honest and objective way are more likely to be effective leaders and entrepreneurs than those who do not engage in such practices (Zuckerman et al., 2018). Entrepreneurs need to understand their limitations and capacities by not only surveying their physical environment and the people around them, but also by developing their sense of self-awareness. Naturally, a leader cannot be too bogged down by thoughts and indecision; otherwise ‘analysis paralysis’ can occur ( Investopedia, n.d.). Over analysing the self (or any other data for that matter) can have negative consequences. So, as with most things in life, self-reflection must be done in moderation. In many cases, the inability to decide on a course of action is more damaging than actually making a decision, even if the decision may ultimately prove to be a less than desirable one. Given the various approaches and the general conclusion that both genetics and upbringing have significant parts to play in an entrepreneur’s development, it becomes necessary to consider the elements of an entrepreneur’s composition by examining typical entrepreneurial traits as well as the skills an entrepreneur must acquire in order to make their endeavours successful.

The following subsections will expand on these two interrelated areas and further clarify the mechanisms that underlie effective entrepreneurial behaviour. 1.5.1 Entrepreneurial traits While human beings are similar in many regards, there are those who seem to have a real knack for certain things, or are better suited to fulfil a particular role than others. People are all different in numerous ways. For example, one person may enjoy interacting with others in various social scenarios on a regular basis. However, another person may prefer to spend time alone because they find conversing with others nerve-racking or awkward. Neither of these individuals are ‘wrong’ for how they choose to spend their time; they just have different philosophies, beliefs or traits. A trait is defined as a distinct attribute or quality and is usually found in individuals ( Oxford Dictionaries 3, n.d.). In many cases, a trait is genetically determined. Thus, if a person’s biological parents are creative, extroverted and eccentric, there is a strong possibility that said person will possess at least one of these qualities in some measure. A genetic link may not come directly from your parents, and could even be as a result of your grandparents, great grandparents and so on. In other words, a person’s traits are typically derived from their entire lineage or family tree. Strong-willed, sophisticated, serious, competitive, rebellious, bland, boisterous, clumsy, diligent: these are all examples of personality traits ( Ideonomy, n.d.). There are hundreds of different personality traits that exist – some of them are considered ‘positive’ while others are considered ‘neutral’ or even ‘negative’. What one person may consider ‘calm’, another may consider ‘boring’; what one person may deem ‘confidence’ could be viewed as ‘arrogance’ by another. In other words, traits are abstract and relative.

The task of identifying critical entrepreneurial traits is difficult because a discussion of traits is inherently metaphysical (i.e. they do not exist in physical reality: one cannot touch or hold them or 19 WHAT IS ENTREPRENEURSHIP? physically prove their existence). Still, there is some consensus regarding the traits entrepreneurs require if they are to be successful in the world of business. While this is by no means a complete or ordered list, the following ten personality traits are generally considered to be the most important for entrepreneurs to possess. Enthusiastic Arguably, the most important trait that an entrepreneur must have is enthusiasm (Seth [a], 2017). Individuals who lack the drive and desire to remain committed to a particular task are almost guaranteed to fall short of their goals. An entrepreneur who is passionate, motivated and determined to succeed gives off a good energy that will spread to those they work with. In many respects, the entrepreneur is the ‘face’ of the business – in other words, they are the spokesperson for their own product(s) and/or service(s). A potential investor is unlikely to invest capital into a project if the entrepreneur is not convinced of their own off ering’s unique brilliance. In this way, enthusiasm is an integral part of an entrepreneur’s value proposition; they must use their own personality, conviction and energy to sell their products/services. A popular English idiom goes, ‘he could sell ice to Eskimos’. While it may simply be an idiom, it does reveal something about human psychology, and how selling ‘actually works’ – Eskimos obviously do not need to buy ice since they live in an environment that is covered with ice. Because the person they are talking to is so convincing and likeable, they are all too happy to purchase it from him.

In this way, the uniqueness of a product or service is secondary to the charisma and credibility of the entrepreneur themselves. However, if any businessman or woman wants to succeed in the long term, it is of the utmost importance that a product or service lives up to what it promises. Failure to deliver a consistently good result can have dire consequences for even the most friendly and likeable entrepreneur. The most discerning and professional investors will look at all aspects behind a particular off ering in order to determine whether it is worth investing in or not. A business should be able to properly sell and market their products (‘talk the talk’), as well as be able to produce good quality products (‘walk the walk’). It is, therefore, easy to see why enthusiasm and motivation are vital personality traits for an entrepreneur to help them conduct good business practice. Daring Yet another important factor for an entrepreneur to have is the willingness to dive head fi rst into uncertainty (Seth [a], 2017; and Burns, 2013: 42). It is impossible for entrepreneurs to exist without the element of risk. Inevitably, any discussion regarding entrepreneurism must take this into account. The general perception seems to be that the greater the risk, the greater the reward. However, you must also bear in mind that great risks also mean that the chances of failure are similarly high. In this respect, you would assume that an entrepreneur needs to have an ‘all or nothing’ attitude, and must be willing to take risks no matter how great they are. Of course, what one person may deem daring, another may see as reckless. Any discerning entrepreneur must, therefore, think carefully before making a decision, and consult key individuals before making diffi cult choices. Therefore, even though entrepreneurs are natural risk-takers, they need to 20 CHAPTER 1

take calculated risks. This is where entrepreneurs ‘hope for the best but prepare for the worst. Entrepreneurship is the art of organizing resources in the best possible manner and by taking calculated risks, helping entrepreneurs explore new realms of business that leads him to all the success desired’ (Lodha, 2014: 144). Regardless of the perception or magnitude of a risk, it is certainly important that an entrepreneur is at least somewhat daring, and ready to move forward into uncharted waters. Indeed, entrepreneurs are really modern day adventurers and explorers in the business world. It seems that many people often have desires and ideas that they would like to act upon, but because they lack the confidence, willingness or some other significant factor, they never really follow up these ideas with actions. Therefore, entrepreneurs must follow up on their ideas and plans with practical actions in order to attain some kind of a result. An entrepreneur must remain curious and be prepared for the unexpected – the ability to take unforeseen circumstances in your stride and overcome them is a hallmark of successful entrepreneurs. Effective worker Seth [a] (2017) lists ‘hard worker’ as one of the standard traits of entrepreneurs. There can be little debate that an entrepreneur who does not commit themselves to a venture will hinder their own progress, or even see their efforts go to waste. Having said this, if an entrepreneur does not create successful and sustainable work processes in their business, then they are at risk of overworking themselves. Excessive overwork may result in them suffering from stress, fatigue, depression, cardiovascular diseases, hypertension and burnout in the long run (Kanter and Sherman, 2017: 19). Perhaps the biggest problem for many entrepreneurs is finding time to relax – while it is good to be productive, people need downtime in order to recharge and rejuvenate their bodies and minds. Balance is the key to ensuring long-term success.

It is for this reason that an entrepreneur must learn to ‘work smart’, and optimise their work processes by delegating less important tasks to subordinates, and handing off certain jobs to external parties if possible. Michaels (2013: 3) states that many entrepreneurs prefer to work hard, particularly at the outset, because they cannot bear the thought of having to interview, hire and process the paperwork for a potential employee or employees. To this end, many entrepreneurs will not take out loans from banks in order to finance such activities, because they see these activities as too costly or risky to undertake. Michaels calls this kind of mindset short-sighted, and believes that the sooner an entrepreneur can begin to work smarter, the better. In fact, an entrepreneur who works smarter is able to work harder, and prioritise certain activities so that they can attain the maximum benefit possible. For this reason, an entrepreneur must be an effective worker, able to work smart and hard so that they can do as much as they are able to, in as little time as possible. Entrepreneurs must set a precedent for their employees and lead by example; an apathetic, lazy and unmotivated leader is unlikely to inspire much confidence in their peers and subordinates. Therefore, staying active and energised is essential to the success of any organisation, regardless of its size. 21 WHAT IS ENTREPRENEURSHIP? Dynamic It goes without saying that an inability to adapt will almost certainly spell ruin for any would-be entrepreneur. It is for this reason that Seth [a] (2017) states that entrepreneurs need to be both adaptable and fl exible. In a highly competitive marketplace, fi nding opportunities can be diffi cult. Even then, capitalising on any discovered opportunities can be just as challenging. While having some kind of plan is indeed necessary in order to achieve success, eventualities may arise that could result in the need to deviate from that plan.

An important part of being dynamic and fl exible is being open to suggestions – this means that any eff ective entrepreneur should use feedback from several diff erent stakeholders to measure just how well they are performing in their various endeavours. For example, by using a simple poll on social media sites like Facebook and Twitter, an entrepreneur can receive invaluable information for basically no cost at all. By asking the public about their personal preferences, product satisfaction, marketing strategies and favourite types of media, an entrepreneur can streamline or improve their off erings, and make precise calculated decisions based on this information, in order to increase the profi tability of their business. It is also crucial to remember that not all feedback will necessarily be positive. While it may be a blow to any person’s ego, it is simply part of the process of continuous development. Entrepreneurs also need to be mindful of unconstructive feedback, abuse or even trolls on their social media pages. While this can be diffi cult to manage, most social media sites have mechanisms in place to remove troublemakers. It is also important to remember that entrepreneurs should not be fl exible with everything, or become too compliant and forget their core values. Entrepreneurs should ensure that the business’s operations are largely in line with the overall goals. Savvy Seth [a] (2017) states that entrepreneurs need to know the ins and outs of both their product and their market. What this boils down to is general business know-how, and the capacity to learn. Without some kind of innate confi dence in or understanding of the way the world functions, most entrepreneurs are doomed to fail. While luck certainly plays a role in infl uencing our lives, an inherent ability to assimilate information and gain a deeper understanding of the way humans think and feel is possibly the greatest characteristic an entrepreneur can possess. Individuals who can spot opportunities, identify trends and exploit new technologies are almost guaranteed success, because they are capable of reading markets, and predicting where things will lead. In many respects, it is often

ignorance that prevents people them from succeeding. People armed with knowledge, and, more importantly, foreknowledge, are far more likely to achieve success than those who lack understanding. The term ‘savvy’ has been used because it underpins the fact that smart entrepreneurs are also able to make good decisions, and have a certain instinct that not everyone has. In many ways, the best entrepreneurs have a unique mindset and way of seeing the world. However, it is this mystery and unique perception that sets the best entrepreneurs apart from the rest of the world. The most 22 CHAPTER 1 successful entrepreneurs have a strong grasp of their competition, can foresee major changes to the market, and innovate constantly to stay ahead in their operations. Constantly reading, learning and growing allows an entrepreneur to augment their abilities, and achieve greater success as they move forward in their efforts. Economical Spending too little or too much money can have harmful effects on a business. It is, therefore, easy to see why Seth [a] (2017) lists strong money management skills as a key entrepreneurial trait. Any business has to generate some kind of revenue. In practically every scenario, money needs to be spent in order to make it. Essentially, every business professional seeks to keep their expenses to a minimum, and maximise on their overall profit. This is often a difficult task. Thus, it is up to an entrepreneur to budget accordingly, in order to create the maximum possible benefit. For instance, an entrepreneur must decide whether they should rent premises, or if it is better to purchase offices from which to operate. If the necessary funds to secure a property are not available, a bank loan or investment from an external party may be required. An entrepreneur must also consider the size of the premises, its location and accessibility, as well as whether employees are needed,

and if so, what roles they should fill. Selecting everything from suppliers and investors to target market and marketing strategies has some impact on a business’s overall budget. To this end, virtually every decision an entrepreneur makes is an economical one. Thus, an entrepreneur who is not strongly economical is more likely to make mistakes and over-and/or under-budget for certain expenses. There is also the need to keep financial records, pay salaries and tax, and deal with a plethora of money-related issues. Thus, an entrepreneur should possess some fundamental accounting knowledge. Being too strict with the budget could lead to wage disputes and the halting of many business operations, whereas being too lenient can lead to unnecessary waste, corruption and fraud. Staying within budget, and monitoring a business’s expenditure and earnings can be extremely taxing, and an entrepreneur must accept that they will ultimately be responsible for any financial discrepancies that may arise as a result of their oversights. Strategic This particular trait ties in somewhat with being dynamic, but is still distinct in that someone who is flexible and able to adapt may not necessarily be a strategic thinker. According to Oxford Dictionaries 4 (n.d.), to be strategic is to construct a plan that aims to achieve an overall aim or long-term goal. To this end, a strategic leader has a general plan and a long-term goal in mind. A flexible leader is one who considers short-term opportunities and uses them accordingly. The ultimate aim is to translate short-term goals into a long-term vision. Finding the bridge between dynamicity and strategy is essentially what most entrepreneurs strive for. For instance, consider a situation in which an entrepreneur could engage in an activity that yields a higher return in a shorter period of time, but is ultimately unaligned to their ultimate goal.

While said activity may be of great benefit in the short-term, it effectively undermines the long-23 WHAT IS ENTREPRENEURSHIP? term goals of a business. Unfortunately, the future cannot be predicted, and so making the best possible decision is often impossible. Perhaps in this scenario, the best case would be to fi nd a way to incorporate this short-term activity into the existing operations of a business. However, due to budgetary and/or other restrictions, it is often not possible to engage in a number of activities at once. At the end of the day, an entrepreneur must be able to plan for the long-term, and keep their ultimate goals in sight. While a general plan must be fl exible, it also has to be well-formulated and watertight. Entrepreneurs must ensure that strategy is kept central to their business ventures, and that both short-and long-term strategies are considered when communicating and interacting with stakeholders. Weekly or monthly strategy meetings should be held so that operations can be kept on track, and to ensure that a business performs as optimally as possible. Short-term plans may need altering in order to align them with long-term goals, and thus, strategy is an ongoing process that requires careful management and supervision. Personable Seth [a] (2017) lists ‘the right connections’ as a necessary entrepreneurial trait. While this may be of great use to any entrepreneur, it is not necessarily an inherent trait. However, this point does highlight an integral aspect regarding the makeup of an entrepreneur: they need to be a people person. An entrepreneur who is unable to interact with, and form meaningful connections with, others is unlikely to succeed in their endeavours. If other people are not prepared to back an entrepreneur or support their off erings, then their business will struggle to succeed. Put simply, people rely on one another in order to survive.

The exchange of money for goods and services is what fuels economic activity, and so without investors, suppliers, buyers, customers and various other stakeholders, a business can never grow and reach a point where it becomes profi table. While it is not necessary to have an affi nity for all people, entrepreneurs who are able to network and connect with key infl uencers have a greater chance of reaching more people, and getting the public interested in their business. As John Donne said, ‘no man is an island,’ and while this is not true in every case, it certainly is true for all entrepreneurs (Burns, 1999: 25). Having charisma and charm go a long way in winning over the hearts and minds of people. If an entrepreneur appears friendly, caring and honest, they are far more likely to get ahead of the competition. Having said this, some entrepreneurs, such as Larry Flynt, founder of the sexually explicit magazine, Hustler, have thrived on controversy and spectacle in order to further their notoriety and business ventures (Millard, 2016). To this end, one might assume that being personable and charismatic is not a necessary entrepreneurial trait. Keep in mind that Flynt’s bizarre entrepreneurial methods appealed greatly to his particular target audience. To these individuals, he is somewhat of an anti-hero who stands up for their right to go against the commonly accepted norms of modern society. It is also important to remember that having a good support network in the form of family and friends goes a long way in diminishing the stresses of entrepreneurial life. 24 CHAPTER 1 Realistic As mentioned earlier, an entrepreneur must be a realist (Seth [a], 2017). Not every attempt an entrepreneur makes will be successful, and indeed, failure is almost assured at some point. Being realistic is, arguably, one of the greatest challenges for entrepreneurs because they are encouraged to take risks and believe in their offerings. However, if something is clearly not working, it is better to abandon it

than waste more of the business’s valuable resources. To admit your flaws and mistakes is a humbling exercise, but entrepreneurs must always remember that they are human beings who make mistakes, and cannot do everything correctly all the time. The upside to abandoning certain activities is that new projects can be embarked upon – ones that are potentially more profitable and worthwhile for a business to pursue. Needlessly wasting time on pointless or unproductive processes is counterintuitive, and so changing course is simply a strategic decision, rather than an admission of defeat. Failure is a relative term, and so entrepreneurs must keep in mind that they have only failed if they believe they have. Staying positive when things go badly can be tough, but an entrepreneur who remembers their mission, and has a true passion for what they do, will carry themselves through both good and bad times in order to achieve success. Reflective The final entrepreneurial trait listed here encompasses self-reflection. Seth [a] (2017) states that entrepreneurs need to question themselves, but ‘not too much’. It is good to review your decisions and actions so that better choices can be made in the future, and successful strategies can be reapplied and improved upon. It is also possible to become doubtful and overly critical of yourself. Thus, self-reflection must be done in moderation, and only insofar as it is beneficial. We cannot properly reflect if we are not calm, and able to remove ourselves from a stressful situation or environment. Many entrepreneurs are constantly thinking of new ideas and strategies. Thus, quieting their minds and finding perspective can be a near impossible task. In order to properly reflect, entrepreneurs need to manage their stress and emotions. It is, therefore, necessary for entrepreneurs to engage in activities that allow them to reduce their stress levels, and deal with the many challenges that they face on a daily basis. By exercising, meditating or taking some time off, entrepreneurs can manage their emotions more effectively.

25 WHAT IS ENTREPRENEURSHIP? The following acronym may help you to remember all of the ten entrepreneurial traits. Personable Refl ective Realistic Eff ective worker Enthusiastic Dynamic Savvy Strategic Economical PRESSED RED Daring (Source: EDGE Learning Media (Pty) Ltd, 2018) Figure 1.2: Ten important entrepreneurial traits 1.5.2 Entrepreneurial skills Having considered some of the fundamental traits an entrepreneur should ideally possess, it is time to turn our attention to the skills entrepreneurs require in order to make their ventures successful. A skill is defi ned as ‘the ability to do something well’ or ‘a particular ability’ ( Oxford Dictionaries 5, n.d.). In essence, a skill is something

someone learns and develops over a period of time. For example, people have to learn to read and write so that they can become literate and educate themselves and those around them. While someone may have a natural talent for language and communication, if the skills that allow this potential to be harnessed are never taught and nurtured, it is unlikely that this inherent capacity will ever be fully realised. In other words, potential without development is meaningless. It is diffi cult to decide on which skills are absolutely essential to an entrepreneur’s success and which are not. Moreover, what works for one entrepreneur may not necessarily work for another. However, there are some skills that all entrepreneurs must possess in some measure. The following list of necessary skills should not be considered complete, but serves as an excellent basis for any aspiring entrepreneur to build on. Communication skills Robinson (2018), understandably, places this skill at the top of his list of essential entrepreneurial skills. If an entrepreneur cannot speak eloquently and professionally, it is unlikely that they will be able to form meaningful relationships with the people that they encounter. It is also important that an entrepreneur is conscious of their verbal (spoken) and non-verbal (body language and gestures) communication so that they can engage with people on a more personal and appropriate level. For instance, consider a person who calmly talks to an audience, but constantly blinks and clears their throat. These kinds of distinctive, non-verbal distractions can undermine a speaker’s credibility, and detract from the overall message they wish to communicate. 26 CHAPTER 1 Even if a person appears calm and collected, they may stutter when they talk, or become forgetful as a result of nervousness. When it comes to addressing large audiences, investors or other important stakeholders, entrepreneurs need to be experts in engaging with, and

selling their vision to, them. Mastering the art of conversation, having an extensive (but not overly technical) vocabulary, leveraging the power of online and traditional media, and being able to express yourself in writing are just a handful of the crucial communication skills an entrepreneur requires. Communication is an ongoing process, and it changes all the time. It is for this reason that an entrepreneur must constantly expand on their communication skills, and find all new ways to engage with audiences, both locally and abroad. Reaching audiences is easier than ever before. With such a wide range of choices freely available to people around the globe, it means that planned communication also needs to be more innovative, eye-catching and unique than ever before in order to gain and hold the attention of modern audiences. Entrepreneurs who understand and respect the power of communication hold the keys to their success, and are poised to make their mark in the world. Personal branding skills In a world where competition and choices abound, the ability of entrepreneurs to create memorable personal brands is of critical importance to their success (Robinson, 2018). For example, when people think of the computing giant, Microsoft, they often think of Bill Gates, the company’s CEO. Similarly, when they think of Virgin, a conscious connection with the brand’s founder, Sir Richard Branson, is made. In many respects, these brands are successful because the entrepreneurs who created them have certain qualities and characteristics that make them compelling or noteworthy. Bill Gates is revered (and often criticised) for his role in popularising the use of personal computers in households across the world. Richard Branson’s Virgin is a multinational company that employs thousands of people, and is involved in the areas of air travel, mobile phone services and health and fitness (to name but a few). Naturally, the products and services these companies sell have to be of a suitably high quality, but simply because the CEOs of these

companies have made their presence known to the general public over a number of years, they are basically household names. Aspiring entrepreneurs must take this into account, and work to develop their own persona that allows them to connect with multitudes of people on a meaningful level. In many respects, personal branding and communication skills go hand-in-hand as networking is integral to the process of building a strong personal brand. As Robinson (2018) states, one’s professional reputation, online presence, field of influence and perceived credibility are all components of personal branding. An entrepreneur needs personal branding skills to be well-liked and respected by the public and key stakeholders, as it will help benefit them and their various offerings. 27 WHAT IS ENTREPRENEURSHIP? Problem-solving skills This is highly important because it is, as Richard Branson (2016) states, the central focus of entrepreneurism. According to the prolifi c entrepreneur himself, entrepreneurs who are only motivated by wealth and fame have got their priorities in the wrong order. In other words, if entrepreneurs put meaning and purpose before money, they are more likely to succeed in the long run. The best entrepreneurs not only solve longstanding problems, but fundamentally change the way the world works in profound and enduring ways. Whether this is the way humans communicate, travel, do business, have fun or get fi t and healthy, entrepreneurs have been instrumental in improving living standards for many people around the world. It is important to realise that solutions to existing problems may not be the best ones. To this end, an entrepreneur may see such answers as outrageous or absurd. The task of an entrepreneur is not simply to solve problems, but to solve them better than anyone else. For instance, if something can solve an issue more quickly, cheaply and eff ectively than other remedies, it has the potential to be

massively life-altering. This may be an oversimplifi cation of realworld situations, but it stands to reason that the more benefi ts (and perceived benefi ts) a product or service has, the better. Essentially, entrepreneurs need to have ingenuity and imagination if they are to handle the challenges that the industry throws at them. The skills necessary to harness resources, and to use the right elements to gain the best results, are critical to an entrepreneur’s journey. So, resolving technical issues, wage disputes, bad press and other confl icts as eff ectively as possible is absolutely necessary to any serious entrepreneur. Business management skills An entrepreneur is a business professional. It is for this reason that they must understand the intricacies and mechanisms that enable an organisation to function. It is possible to see virtually all of the profi ciencies an entrepreneur needs to possess as part of business management skills, but in this case, this term is used specifi cally to highlight those skills that are linked to a company’s functioning. Shethna (2016) outlines several types of important business management skills, including budgeting, conducting meetings, liaising with staff across all departments, leadership, dealing with external research and development, maintaining and promoting diversity, and being honest in business dealings. These are merely a handful of skills that are essential to the smooth running of a business. Understanding business, employment and tax laws, adhering to restrictions, legislations and policies imposed by government, observing operating times, having clear rules about leave and sick leave in place, motivating and hiring employees, keeping staff turnover low, and maintaining healthy relationships with all stakeholders are also crucial elements that go into managing a business well. It also stands to reason that, depending on the type of business an entrepreneur engages in, some of these skills may be more applicable than others. Indeed, some skills may not be necessary at all. For example, an entrepreneur with a delivery business would

likely require a few diff erent skills compared to someone who owns an insurance company. Of course, several common skills are necessary, but because of their areas of specialisation, their knowledge and capabilities will 28 CHAPTER 1 differ in certain ways. Business management can be highly demanding, and requires that an entrepreneur stay up to date with the latest political, social and economic developments that take place locally, nationally and worldwide. Adaptability and the ability to preempt big changes in the business world will ensure that an entrepreneur’s endeavours continue to thrive in the future. Creativity and innovation As mentioned before, an entrepreneur can have a natural disposition towards a skill, but that skill should still be developed and improved – this strongly applies to creativity and innovation. It is impossible to speak of entrepreneurship without discussing creativity and innovation in a fair amount of detail. Khoja (2017) highlights the fact that technology and society are constantly changing and moving into new spaces as time progresses. It is for this reason that she believes it is important, now more than ever before, to nurture the creativity and ingenuity of children. Whether it is nanotechnology or green energy, entrepreneurs exist in virtually every sphere of life, and seek to harness the power of technology in order to create new and environmentally sustainable solutions to many dire human problems. Essentially, entrepreneurs create and find opportunities to explore in order to apply their ideas and strategies to real-world problems, and create benefits for a certain audience. A major component of creativity is asking questions: What problems exist? Are there solutions in place for them? Why do these problems exist? How can they be better resolved? The string of questions an

entrepreneur must ask is seemingly endless, and even once a particular solution has been realised, the process of questioning must begin again so that even more effective solutions can be found. To this end, creativity and innovation occur continuously – using outdated systems to perform demanding work or ignoring the efforts of competitors can be damaging for even well-established companies. It must be noted that it is impossible to prepare for every eventuality, but the more an entrepreneur can stay ahead of the pack and prepare themselves for any unforeseen consequences, the better. In a world that faces massive environmental problems, the time for entrepreneurs and world-changing solutions to come into existence is arguably more important now than ever before. Networking skills While an entrepreneur should be personable, they should have the necessary networking skills in order to make a success of their ventures. Nieuwenhuizen (2008: 130) states that one of the most crucial skills an entrepreneur can possess is networking skills. It goes without saying that the ability to communicate is essential if any networking is to take place, as meaningful connections can only be established through the sending and receiving of messages. It is, therefore, also necessary for an entrepreneur to be an excellent negotiator, since arriving at a common understanding can often be a difficult task. In essence, an entrepreneur must be able to influence key role players so that the networks of others can be tapped into, and used to further the efforts of the entrepreneur. For example, if an entrepreneur can establish relationships with ten people who then spread a message from the entrepreneur throughout their personal and business networks, it stands to reason that some kind of benefit will arise from this. The more influence these role players have, and the larger their networks, the higher the chances that an entrepreneur’s message will be 29 WHAT IS ENTREPRENEURSHIP?

successfully understood. The message must be strong and delivered in a convincing way, otherwise the attempts of the entrepreneur may well backfi re. To this end, networking and communication skills go hand in hand, and there is undoubtedly some signifi cant overlap between these two areas of specialisation. Entrepreneurs who are perceived as eff ective leaders with a compelling product and/or message are almost guaranteed to perform better than those who are not seen as such. An entrepreneur must grow their network, but ensure that they do not overextend themselves – failure to understand your limitations can be just as disastrous as being too confi ned by them. Networking is an art that is honed over time. Relationships are critical to the success of virtually every entrepreneur. It is for this reason that new relationships are established constantly in order to further an entrepreneur’s vision. ACTIVITY 1D (i) Name the ten most important personality traits often found in successful entrepreneurs. (ii) Discuss the personality trait, ‘eff ective worker’ as an entrepreneurial trait. (iii) In your own words, explain the diff erence between a skill and a trait. Use examples to illustrate your argument. (iv)

Briefl y summarise why communication skills are necessary for entrepreneurs to possess. (v) Construct a debate between two people who are arguing about whether entrepreneurs are born or made and, more specifi cally, whether there is an ‘entrepreneurial gene’ that can determine whether a person will be a successful entrepreneur. If necessary, you can conduct more research on this topic. The dialogue should be between 700–1000 words. 1.6 ENTREPRENEURS AND RISK Throughout this chapter, there has been a signifi cant focus on the concept of risk. Entrepreneurs need to accept that risk will inevitably form part of their experience. As such, the ability to eff ectively evaluate risks is an important component of their work. There are several ways of approaching risk management, and it goes without saying that humans both consciously and unconsciously manage risk on a regular basis. When it comes to business, experience and knowledge play a massive role in how risks are managed: the more expertise an individual possesses, the more risks they can evaluate and manage. However, for novice entrepreneurs, the task of evaluating risk is naturally more diffi cult. It is for this reason that several models and processes have been developed in order to aid inexperienced individuals in better evaluating the challenges that arise in the course of their daily activities. Zimmerman (2016) states that practically all risks have two components. The fi rst of these is the odds of an event occurring, and the second is the severity of the consequences of this event. As a result, risks can be grouped into four diff erent categories or quadrants, as illustrated in the following fi gure. 30

CHAPTER 1 Quadrant A Quadrant B Ignorable risks Nuisance risks (Minimal possibility and effect) (High possibility, minimal effect) Quadrant C Quadrant D Insurable risks Company killers (Minimal possibility, major effect) (Major possibility and effect) (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Zimmerman, 2016; and Mishra, 2015) Figure 1.3: The four quadrants of risk Let’s briefly discuss each of these categories (Zimmerman, 2016; and Mishra, 2015): • Quadrant A – ignorable risks: These are any and all risks that have little to no impact on business operations. They have a low chance of occurring and have negligible consequences. For example, an entrepreneur dismisses an employee for poor performance during their three month probation period. The grounds for the dismissal are completely legitimate and, though disgruntled, the employee accepts

that they have failed to carry out their required tasks. The chance of any serious legal recourse is very low. Even if the case is brought to the attention of the Commission for Conciliation, Mediation and Arbitration (CCMA), the chances of the former employee winning are basically non-existent. Since the entire dismissal was above board and followed all the applicable rules and regulations, there is essentially no need to worry about any real legal or financial consequences. • Quadrant B – nuisance risks: These are issues that occur frequently, but can be resolved for little to no cost. For example, an office printer may run out of ink, which prevents important documents from being processed. Ink cartridges can be easily replaced by an authorised technician who is on standby for such occasions. Power outages are fairly regular occurrences in South Africa. With the right systems and controls, most of the negative effects can be negated. However, if a business relies heavily on a constant supply of electricity, power outages are often more than a mere nuisance. It is for this reason that the nuisance risks of one business may well be the company killers of another. Essentially, risk is relative. Depending on the nature of an entrepreneur’s business, the risks will inevitably vary in both type and significance. 31 WHAT IS ENTREPRENEURSHIP? • Quadrant C – insurable risks: In many cases, these do not occur often, but the chances of them occurring at some point are inescapably high. In the event of any big, harmful incidents, there is almost always signifi cant damage. Thankfully, many risks can be covered by taking out insurance policies to prepare for such eventualities. Whether it is business, vehicle, health or another type of insurance, entrepreneurs should have several policies in place as a safety net. For example, a business makes use of a delivery vehicle to deliver their products. A delivery vehicle needs to be maintained, and having

some kind of ongoing service plan is a good way to cover the costs of such maintenance. Similarly, consider a delivery vehicle damaged in a traffi c accident. Having vehicle and/or fl eet insurance means that the cost of repairing or replacing a vehicle is signifi cantly reduced. While these kinds of events may never happen, it is irresponsible to assume that they cannot occur. While having insurance may be costly, having no policies in place could change a manageable risk into a company killer. Complacence and apathy have no place in business operations, and entrepreneurs must be mindful of this. • Quadrant D – company killers: There is no real way to prepare for certain kinds of risks, and with both a high possibility of occurring and far-reaching consequences, company killers, as Zimmerman calls them, have the power to end the ventures of both fl edgling entrepreneurs and established industry names. Zimmerman (2016) and Blackman (2014) distinguish between four primary categories of risks that fall within this particular quadrant: 1. Strategic risks: These are risks faced when an entrepreneur’s strategy is ineff ective, outdated or badly planned. For instance, a competitor introduces a new product or service that ultimately nullifi es the off erings of an entrepreneur’s business. Unless drastic steps are taken quickly, the possibility of the company’s dissolution is almost certain. 2. Compliance risks: This refers to failure or challenges in complying with industry rules, regulations, and policies. The introduction of a new law or regulation could mean that specifi c materials or products are banned and can, therefore, not be sold to the public. For example, if a pharmaceutical company sells anti-anxiety medication that is found to contain a certain substance that causes severe side-eff ects as a chief ingredient, the company could quickly be in hot water as sales plummet and lawsuits are issued against them. Failure to follow rules and regulations can be the end of even the most promising enterprises.

3. Operational risks: This refers to failures in the operational process of the business. For example, if a shipment of parts and equipment is delayed because the freighter carrying said materials is experiencing mechanical problems, the client may not accept the shipment, or penalties may be incurred for a late arrival. As such, the entrepreneur could be faced with severe problems in various areas of the business. If the supply chain is disrupted by delays, breakdowns and outages, then profi tability and credibility are often adversely aff ected. 4. Financial risks: This refers to fi nancial problems for the business. For example, a debtor continually fails to pay their account, or a sudden increase in the interest rate makes repayment on a loan impossible. If one, or both of these scenarios plays out, a company could soon end up bankrupt. 32 CHAPTER 1 Risk management is, therefore, a very time-consuming and demanding process. Accurately determining how susceptible a business is to certain risks is virtually impossible. Even the best data only really permits entrepreneurs to make educated guesses about their perceived risk. However, it is best to be prepared for such eventualities, at least as far as humanly possible. In order to manage the risks discussed, Zimmerman (2016) and Turner (2011) suggest the following four approaches: 1.

Reduce it: Risks can be reduced by implementing policies and procedures to safeguard against any unnecessary hazards and/or potential wrongdoing. For example, ensuring that delivery drivers undergo training and regular reviews, quality testing products, having a code of conduct in place for staff members, and keeping consistent maintenance schedules for equipment and vehicles are just a few of the ways an entrepreneur can significantly reduce their overall risk. 2. Accept it: When the cost of reducing a risk is too high, an entrepreneur may simply have to accept that the risk exists, and that there may be a catastrophe at some point in the future. There is no way to say when, or even if, something unfortunate will happen. Ultimately, entrepreneurs must accept that there are simply some things that they cannot control. Regardless of an entrepreneur’s capacity to plan and prepare, uncertainty is inevitable. 3. Transfer it: Insurance companies exist in order to absorb some, or all, of the risks a business may face. For the right price, an entrepreneur can transfer their risk to another entity that will assist the entrepreneur, should an unfortunate event occur. Naturally, it is important to select the right insurance company, and pay a fair premium for the cover offered. Since insurance policies are contracts between an insurer and the insured, both parties must comply with the tenets of the contract for compensation to be awarded. 4. Eliminate it: In select instances, it is possible to virtually eliminate one or more risks. For example, if a business relies on electricity to run its operations, switching to generators or solar energy may be an effective way of reducing overall costs, and preventing disruptions, should the primary supply of electricity be compromised for any reason.

By looking for smart solutions to problems and potential hazards, an entrepreneur can practically eliminate risk entirely. Note that a solution may also give rise to new risks (for example, a generator may break down or run out of petrol). ACTIVITY 1E (i) List the four approaches that entrepreneurs can use to manage risks. (ii) Outline the four different risk quadrants. (iii) Imagine that you run a coffee shop – come up with two significant risks that such a business would face and suggest ways to overcome or reduce these risks. (iv) An entrepreneur is looking for an insurance company to help manage their overall risks. Conduct your own research and identify three South African insurance companies. 33 WHAT IS ENTREPRENEURSHIP? 1.7 IMPORTANCE OF ENTREPRENEURS TO ECONOMIES Economies are comprised of individuals who work alone, together and against one another in order to compete for and exchange resources on an ongoing basis. Almost all people are involved in some kind of economic activity to some extent. Despite the eff orts of many individuals and organisations, unemployment, poverty and crime continue to plague most human societies.

According to IOL (2018), the overall global unemployment rate was expected to rise from 5.7 to 5.8 per cent in 2017, meaning an additional 3.4 million people would eff ectively become jobless throughout the course of the year. Additionally, a further 2.7 million people are expected to become unemployed throughout the course of 2018, leaving the estimated grand total of unemployed at 203.8 million worldwide. Job creation is clearly being outpaced by the growth of the labour force. It stands to reason that with every passing day, the need for entrepreneurs is becoming ever more crucial to the stability and wellbeing of the global economy. Entrepreneurs are those individuals who actively respond to the possibilities, challenges, limitations and motivations that manifest within the greater economic environment in which they exist (Szirmai et al., 2011: 10). This means that entrepreneurship is one of the driving forces behind economic growth and development. Whether entrepreneurs create or appropriate ideas and technology, they are often key role players in how the world functions as a whole. Seth [b] (2017) identifi es four ways entrepreneurs can contribute to economies around the globe. These will now be discussed in detail. Entrepreneurs establish new businesses When entrepreneurs create a new venture, they begin to have an infl uence on the economy itself. This is because a business usually requires suppliers, distributors, employees, investors and so forth. Entrepreneurs often enlist the expertise of several role players across a range of industries. In this way, new relationships are forged and new transactions are brought into existence. If a business starts to perform well, it may need to expand. In many cases, other businesses develop alongside this growing business, in order to cater to its needs. For example, when smartphones were introduced into the world, game and app

developers were able to create all new off erings to sell to smartphone owners. In other words, smartphones created an entirely new platform for programmers, artists, game designers and other businesses to capitalise on, and, thus had a signifi cant eff ect on the global economy. As a result of these newfound opportunities, many individuals have benefi tted greatly, and have seen their overall living standards increase substantially. When people have more money to spend, they usually stimulate other industries and further spending, thus driving the growth and prosperity of other businesses as well. Eff ective entrepreneurs are able to take human and fi nancial resources and use them to drive economic activity in a meaningful and sustainable way. Entrepreneurs increase the wealth of nations In many instances, entrepreneurs employ several individuals, and contribute to the improvement of life for their various stakeholders. As Seth [b] (2017) states, entrepreneurs lead to the creation 34 CHAPTER 1 of new wealth. As a direct consequence, the government stands to benefit as more taxes can be collected. This additional tax revenue can then be invested into other sectors of the economy that are not performing as well as desired. This can lead to further innovation and even greater wealth, if the right areas are targeted and nurtured correctly. It is true that certain established companies may be adversely affected by the success of entrepreneurs, but with the assistance of government and other developmental organisations, the negative effects of such events can be counteracted. The creation of new wealth is integral to the betterment of socioeconomic conditions, and the upliftment of people in general. Entrepreneurs contribute to social change Many countries around the world are still developing. The introduction of industry and technology to largely agricultural societies allows for

new business opportunities to be created. It also means that people have to expand their knowledge and training in order to fully benefit from these new opportunities. For example, a person who masters computer programming can build applications, develop websites, bolster security protocols, or create entirely new processes that fundamentally alter the way business is done. It takes a great deal of time, money and training to master specialised functions, so more schools, universities and other educational facilities must be established in order for people to acquire the skills needed for such functions. This means that entrepreneurs allow societies to become more sophisticated, which results in a higher quality of living. Regardless of perceptions, the presence of more complex technology and processes necessitates educated, capable people to participate in socio-economic activities. Indeed, when there are more trained people within an economy, more businesses exist to accommodate them. Therefore, more employment is created for unskilled workers since artisans and skilled workers drive processes forward. For example, an architect will draw up the plans for a skyscraper, and then have a construction company perform the majority of the work for them. Constructing such a building requires special equipment, as well as foremen, quantity surveyors, crane operators, plasterers, bricklayers and so forth. Therefore, the more real estate development a country has, the more specialists, equipment and workers will be needed. In essence, the presence of entrepreneurs often has a domino effect on the economy, creating the need for more resources to be supplied to projects and causes. Seth [b] (2017) also points out that with the globalisation of technology, entrepreneurs in less developed nations now have access to opportunities and equipment they previously were unable to reach. Basically, entrepreneurs create more work opportunity and help increase standards of living, which drives social change. Entrepreneurs assist in developing communities

The last point Seth [b] (2017) discusses is how entrepreneurs often contribute to the development of communities. Consider Bill Gates, the creator and CEO of Microsoft, and his ‘Bill and Melinda Gates Foundation’, which has been running since the year 2000. The foundation focuses on helping people in developing countries to access better health facilities, and provide them with new education and job opportunities ( Bill & Melinda Gates Foundation, n.d.). Thanks to the global success of Microsoft, Bill Gates has had the ability to engage with numerous charitable organisations, in order to bring about meaningful change in countries affected by poverty, war, 35 WHAT IS ENTREPRENEURSHIP? social inequality and famine. Successful entrepreneurs like Gates often feel the need to ‘give back’, and improve the lives of people around the world. By empowering others, entrepreneurs can raise living standards. Perhaps this is one of the greatest assets of the most prolifi c entrepreneurs: they understand the value of investing in people. By helping people to help themselves, entrepreneurs create communities that are able to participate in the economy and, therefore, improve the lives of those around them. In this way, investing in community-based projects allows for change to occur on a broader scale. If more people are able to participate in the economy, it stands to reason that benefi ts should increase for the entrepreneurs who invested in these projects in the fi rst place. Giving back to communities creates awareness and a sense of loyalty; many people often feel the need to show their gratitude by returning the favours to those who helped them. Entrepreneurs, therefore, empower people and create social cohesion by working to build up communities. 1.7.1 The role of entrepreneurs in building the South African economy South Africa has been a democracy since 1994, and has endured hardship for many decades. The apartheid era was characterised by terrible injustices against people of colour, and has created racial divides that still remain in today’s society. In order to gain some

understanding of the role entrepreneurs play in building South Africa’s economy, it is important to consider some statistics regarding the country’s economic status. As of January 2018, South Africa’s unemployment rate was 26.7 per cent ( Trading Economics, 2018). This represents a slight improvement of about one per cent from the fi nal quarter of 2017. Historically, the lowest unemployment rate was 21.5 per cent in the fi nal quarter of 2008, while the highest was 31.2 per cent in the fi rst quarter of 2003. While the unemployment rate may fl uctuate, it is evident that unemployment remains a major issue in South Africa. Perhaps one of the most signifi cant economic changes in recent times was the government’s decision to increase the value added tax (VAT) rate from 14 per cent to 15 per cent. As of 1 April 2018, the tax charged on many consumable items increased by one per cent, meaning that the overall cost on many goods has gone up ( IOL, 2018). While the VAT increase broadly aff ects all South Africans, certain items are zero-rated, so that lower income citizens are not adversely aff ected. The items that are currently zero-rated include bread, maize meal and rice (Rossouw, 2018). With a high unemployment rate and a general increase in the cost of living, living standards are poor for the vast majority of South Africans. In order for living standards to be improved, jobs need to be created. Therefore, government and local businesses need to work together to create employment for South Africans. It is evident that entrepreneurship needs to be actively encouraged in South Africa. Now we must ask, what factors contribute to entrepreneurial activity, and moreover, are they present in South Africa’s current socio-economic climate? The following spider diagram, compiled by Global Entrepreneurship Monitor (GEM) illustrates the conditions necessary for entrepreneurship to thrive, and highlights the current situation within South Africa. 36 CHAPTER 1

Entrepreneurial fi nance 5 Government policies: Cultural and social norms support and relevance 4 3 Government policies: Physical infrastructure taxes and bureaucracy 2 1 Government Internal market 0 entrepreneurship burdens or programmes entry regulation Internal market dynamics

Entrepreneurial education at school Commercial and legal Entrepreneurial education infrastructure post-school Research and development transfer (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Global Entrepreneurship Monitor, 2017) Figure 1.4: South Africa’s 2017 entrepreneurial framework conditions As the spider diagram reveals, South Africa fails to score over three out of fi ve points in ten of the 12 categories detailed. With a score of 3.18/5 and 3.09/5 respectively, the nation’s strongest points are its physical infrastructure to accommodate entrepreneurial activities, and the internal market dynamics conducive to a strong entrepreneurial market. However, this means that South Africa is only slightly above adequate in these two areas alone, and has a fair way to go before it can be considered suffi cient. In three of the 12 categories, South Africa scores below two points: research and development transfer (1.74/5), entrepreneurial education at school (1.78/5) and internal market burdens or entry regulation (1.91/5). Essentially, these three areas are the most insuffi cient, and require the most attention if further progress is to be made in creating a sustainable environment in which entrepreneurs may thrive. In the remaining seven categories, South Africa scores between 2.02/5 for Government Entrepreneurship Programmes and 2.71/5 for Cultural and Social Norms. Since South Africa fails to score above four points in any of the measured categories, it is apparent that local support for entrepreneurs is, at best, inadequate. It must also be

noted that South Africa is only above the global average in one category, namely internal market dynamics. This means that on an international level, South Africa is well below average in a signifi cant number of critical areas. 37 WHAT IS ENTREPRENEURSHIP? According to the GEM framework, South Africa still lacks in virtually all areas. However, it must be highlighted that government entrepreneurship programmes have improved marginally, increasing from a score of 1.89/5 in 2016 to 2.02/5 in 2017. The red fl ag is that South Africa scored lower in 2017 for eight out of the 12 categories, indicating a general decline in conditions for local entrepreneurship. Since entrepreneurship strengthens an economy, this lack of entrepreneurial support needs to be rectifi ed in order to help South Africa’s National Development Plan (NDP) to meet their targets by 2030. In summary, the role of entrepreneurship in South Africa is limited, and hindered because there is signifi cant lack of support for entrepreneurs. Mngomezulu (2017) states that big businesses need to commit to the development and integration of entrepreneurs within South Africa. He highlights the fact that a staggering 5.8 million young people between the ages of 15 and 34 were unemployed at the beginning of 2017, and that education and skills development will play a vital role in reducing this alarming fi gure in the future. As illustrated in the GEM spider diagram, entrepreneurial education at school level is ineff ective, and largely absent within the current curriculum. If the youth cannot fi nd opportunities for work, they will need to fi nd a way to create them for themselves. By assisting children from an early age to be imaginative and come up with creative solutions to problems, the entrepreneurial spirit can be nurtured and instilled within the hearts and minds of young South Africans. With the aid of entrepreneurship programmes coordinated by government and big businesses, the youth of South Africa can fi

nd the support they need in order to make their dreams a reality. By empowering individuals, disrupting the eff ects of poverty, and actively developing the skills of young people, national economic growth and development is virtually guaranteed. While all of this certainly sounds appealing, it is up to those with power to provide support to those who wish to run their own businesses, and contribute to the socio-economic betterment of South Africa. While some gains have been made in recent times, there has also been a decline in many crucial areas. If this trend is not abated in the near future, it is unlikely that the goals of the NDP will be met. However, there is still time, and with swift action, longlasting change can still become a reality. 1.7.2 The role of entrepreneurs as problem-solvers There has already been a great deal of discussion regarding problems and the need for entrepreneurs to solve them. As mentioned earlier, many problems already have solutions being applied to them, but there is nothing to say that these solutions are necessarily the most eff ective ones. Health, unemployment, pollution, environmental concerns, crime, war, diminishing resources, inequality, homelessness, no access to electricity, dirty water, no sanitation, and substance abuse are only a few of the seemingly endless list of problems humans face. However, in times of crisis, the most intelligent and thoughtful people often prosper, as they identify opportunities that will encourage growth and empowerment. As it appears, entrepreneurs usually make the lives of humans (and other living things) better in some way or another. Indeed, without the help and imagination of inventors, entrepreneurs and other great minds, it is unlikely that life would improve in any signifi cant way. Because so many problems exist, there is no shortage of potential opportunities for entrepreneurs to take advantage of. Naturally, fi nding solutions to problems can be a laborious task, and moreover, making said solutions profi table and sustainable can be just as time-consuming.

38 CHAPTER 1 In terms of South Africa’s problems, there are many entrepreneurs who are already addressing them in some capacity. For example, Crispin Russell, who has over 14 years of experience in hygiene, founded ArcAqua in 2010 (Ventureburn, 2016). Russell’s company provides an ‘ozone-based’ cleaning solution that has the ability to convert ordinary tap water into a sanitising agent. With health and hygiene being a major challenge for the vast majority of South Africans, ArcAqua provides an environmentally friendly solution to a longstanding human problem, and will likely play a pivotal role in contributing to the health and wellbeing of people everywhere. Another notable South African entrepreneur is Emma Jane Dicks of Code4CT (Ventureburn, 2016). This particular project teaches young girls to write code in order to solve existing social and communityrelated problems within South Africa. By teaching girls to code, they can create and build websites, and design applications, which effectively allows them to participate in the burgeoning global economy of developers and tech specialists. One last South African entrepreneur who has made a significant impact on the lives of people all over is Riaan Conradie of LifeQ (Ventureburn, 2016). Having lost an eye to Retinoblastoma, a rare affliction that affects the retina, Conradie became motivated to help medical practitioners and institutions to better understand the mysteries of the human body. LifeQ records the status of, and changes within, the human body using computational systems biology. The data captured through this process is invaluable to medical professionals, and allows them to gain greater insight into the intricacies of human anatomy. The cases mentioned here are just a handful of the projects and innovations being implemented to help solve real-world problems, and improve the lives of people both locally and abroad. There is certainly a great deal of competition in all of these areas, but entrepreneurs often have the advantage of spotting gaps in the market, and coming up with solutions that have not been thought of

(or at least implemented) before. Having a different perspective is often a huge advantage for many entrepreneurs. In all of the cases mentioned, these South African entrepreneurs harnessed the power of technology in order to create effective solutions for the issues experienced by countless human beings. There is no doubt that the vast majority of entrepreneurs, no matter how renowned, have used technology to reshape human societies, and bring about fundamental changes to people’s daily lives. It is for this reason that any upcoming entrepreneur must be suitably tech literate if they hope to achieve success. Many entrepreneurs hold degrees in a number of areas, and have an intimate understanding of numerous topics in order to gain a competitive edge over their counterparts. While having money is undoubtedly of huge assistance, it is powerful ideas for products that truly create wealth for entrepreneurs. Interestingly enough, South Africa has the highest level of digital literacy in Africa (Venktess, 2016). This almost equals the international benchmark in terms of access and use, as South Africans have 100 per cent mobile network coverage. The good news is that South Africa is expected to see further development in terms of digital technologies. As a result, more opportunities should become available to South Africans as time progresses. However, simply being tech literate is not enough for entrepreneurs to succeed. If problems are to be solved in new and creative ways, entrepreneurs must have a wealth of knowledge at their disposal. 39 WHAT IS ENTREPRENEURSHIP? As problem-solvers, entrepreneurs take existing solutions, and eff ectively make them obsolete (Bagaria, 2016). For example, in the past, people had to rent videos from video stores, and rewind tapes in

order to watch movies. The introduction of DVDs changed this paradigm, and basically made VHS tapes obsolete. Today, massive amounts of content can be downloaded or streamed via the Internet. For many people, DVDs are now largely outdated. In a similar scenario, 56k dialup modems have been replaced by dedicated lines that are always connected to the Internet. In addition, faster types of connections are constantly being introduced to make work and play via the Internet faster, cheaper and more dynamic. Entrepreneurs are, therefore, progressive thinkers who fi nd ways to make existing processes better and/or more widely available to potential audiences. Entrepreneurs are change agents who work to make life easier or happier for the people they cater toward. It is, therefore, evident that solutions often have a fi nite shelf life, meaning that they may not necessarily last forever. It is entirely likely that the way people work, interact and enjoy themselves will change signifi cantly within the next decade. It is also likely that many of the problems humanity faces will become far more concerning in the not-too-distant future. It is the duty of entrepreneurs to face these issues head-on, and come up with eff ective ways of preventing and addressing them. Moreover, as society and technology change, entrepreneurs must adapt and develop their solutions accordingly. 1.7.3 The role of social entrepreneurship Having discussed many of the intricacies of entrepreneurship in detail, it is necessary to give some consideration to the concept of social entrepreneurship. According to Chahine (2016: 2), social entrepreneurship is the process whereby innovation and sustainability are integrated into workable solutions, to address both social and environmental issues. For instance, entrepreneurial endeavours that help to reduce inequality, educate the previously disadvantaged, and make a positive impact on the environment all fall under the banner of social entrepreneurship. In the case of Code4CT, the business mentioned earlier, this is essentially social entrepreneurship in that the venture seeks to empower young women from poor communities

to learn how to write code. It is certainly true that in order to foster innovation, diff erent perspectives are needed. By incorporating those persons who were once disenfranchised, entrepreneurs can leverage the capacities of people who have a diff erent view of life. The trouble with many economies is that only a select few individuals are able to participate in more advanced economic activities, since they alone have access to the facilities required to develop such skills. To this end, social entrepreneurship aims to address issues of inequality, by providing greater access to opportunities to those who would otherwise be unable to participate. Inequality is a major issue in South Africa; one that profoundly aff ects most South Africans. For example, income and wealth inequality have perpetuated the cycle of poverty, and left many South African citizens struggling with low income. Before proceeding further, one must ask how social entrepreneurship diff ers from non-profi t organisations (NPOs) that seem to fulfi l similar roles in society. While there certainly appears to be a signifi cant amount of overlap, there are some key diff erences between social entrepreneurship and NPOs. Social Impact Award (2017) provides the following comparison between these two types of entities: • Diff erences in scope: Non-profi t organisations tend to have a narrower focus, and turn their attention toward vulnerable groups in an attempt to improve their general quality of life. In 40 CHAPTER 1 other words, NPOs try to help the poor, disabled and/or victims of trauma to gain access to better education, as well as housing, food, water and healthcare services. Social entrepreneurs have a wider scope, and attempt to create sustainable and innovative solutions to wider human problems such as inequality, employment, immigration, education, the environment and corruption. In many regards, NPOs help people, while social entrepreneurs try to help people to help themselves. While this may not be true in every case, it appears that social entrepreneurship looks to empower capable yet disadvantaged

groups to improve their quality of life, while NPOs aim to help those individuals who are truly debilitated or struggling in some way or another. • Differences in end goals: NPOs are not-for-profit organisations, meaning that they do not exist to make any money from their endeavours. Everything is based on donations and funding from willing parties, whether it is the government, businesses, the general public or all of the above. Social entrepreneurs still wish to turn a profit, but the realisation of meaningful social change is as important as their desire to generate revenue. By employing commercial strategies, entrepreneurs hope to create meaningful solutions to issues that affect society and/or the environment. • Duration of effects: Charities and NPOs tend to provide ongoing care to those individuals who require it, meaning that most non-profit organisations seek short-term solutions to problems. In contrast, social entrepreneurs seek to create long-term solutions, and change the social landscape in significant ways. While NPOs rely on donations, social entrepreneurs wish to enact changes that lead to mutual benefits for all involved. • Differences in approach: Again, NPOs rely on compassion and charity, meaning that the wellbeing of the organisation relies greatly on external input. Social enterprises rely almost entirely on their own mechanisms and processes, meaning that any profit generated is a direct result of their independent influence and internal actions. Thus, social enterprises must find innovative ways to integrate social resources into their business models, in order to generate any kind of noticeable income. Social entrepreneurs are, therefore, still business owners, but as Harris (2018) states, their ventures are rooted in empathy. In a world where human suffering is widespread, it is difficult for many people to stand idly by as things go from bad to worse. While most entrepreneurs want to help people in some way or another, the general focus of ‘traditional’ entrepreneurs is on their own wants and

needs. Social entrepreneurs are different in that they have a far more human-oriented perspective, and seek to create benefits for all. While having empathy alone may not be enough to be a successful entrepreneur, it certainly is a prerequisite for any person who wishes to engage in the practice of social entrepreneurship. Those individuals who wish to gain access to untapped human resources and change the paradigms of people in lasting ways may well be suited for social entrepreneurship. Will without action, however, is largely meaningless. 1.7.4 Barriers to entrepreneurship While the prospect of becoming an entrepreneur is alluring for many, there are a number of obstacles that face aspiring independent business professionals. Even once a business has been established, there is no guarantee that it will be a success. In reality, there are numerous factors that may prevent a person from becoming an entrepreneur altogether. These are collectively 41 WHAT IS ENTREPRENEURSHIP? referred to as barriers to entry, and can often curtail an entrepreneur’s ambitions. It must be noted that these barriers may diff er in diff erent countries or regions. Our discussion will be limited to barriers that exist within the African context. Some barriers are easier to overcome than others. Perhaps one of the most problematic barriers is that of government regulation. While some regulation is healthy, the over regulation of socio-economic conditions can be counterintuitive, and can take power away from those who need it most. Thankfully, regulations are not necessarily set in stone. Having them altered, however, can be a time-consuming and costly process. Nevertheless, it is the duty of government to provide the people of South Africa with the tools they need to build the economy, and live a happier, more prosperous life. Makamba Online (2015) has compiled the following ten point list regarding the barriers that entrepreneurs in Africa currently face.

Please note that this list is not in any particular order and is not necessarily complete. Inhospitable business environment Many African countries lack supportive regulations to enable entrepreneurial activity. In addition, many nations have paid little or no attention to the rule of law. As a result, property laws are largely undefi ned, and any existing regulations are inconsistently enforced. This allows corruption to take hold, and enables fraudulent criminal activity. If entrepreneurs want this changed, they will need to act collectively, and call on their respective governments to revisit current regulations, and ensure that they are upheld across the board. There are also advocacy groups, such as the African Entrepreneurs Council (AEC), that work to make entrepreneurial activity more prevalent. The AEC states that they are committed to empowering entrepreneurs by establishing a dialogue between businesses that ultimately leads to improved prospects for entrepreneurs both in Africa and abroad ( African Entrepreneurs Council, n.d.). However, while the organisation is somewhat active on Twitter, it seems that their website is, at present, outdated. Lack of funding and resources A critical barrier for many aspiring entrepreneurs is gaining access to the fi nances they need to get their ventures up and running. Because acquiring loans and fi nancing for a business can be a lengthy and risky process, many entrepreneurs are ambivalent about engaging in such processes. While there are government entrepreneurship programmes running in South Africa, they are, as evidenced by the GEM spider diagram mentioned earlier, still largely inadequate. Entrepreneurs can look for investors, and if they are able to sell a compelling idea or product to a venture capitalist, they could see their dreams take fl ight sooner rather than later. Another solution is to establish an online business, and only provide products and services as far as possible. Indeed,

there is nothing wrong with starting small and working your way up the ladder. Still, even putting a small amount of money aside in order to establish a business is practically impossible for many would-be entrepreneurs. While there are solutions, this barrier is one of the most diffi cult to overcome. Even when money and resources can be accessed, success is never guaranteed. 42 CHAPTER 1 Shortage of skills and employee-related issues There are many people looking for work in any economy, but unfortunately, finding people with the right skills and experience can be extremely difficult. Moreover, paying employees what they really deserve is similarly challenging for many entrepreneurs. Employees who lack skills can cost a business immensely, and if one or more workers constantly fall short of their targets, an entrepreneur could soon find themselves bankrupt. It must also be noted that employee costs go beyond their salaries – health insurance, paid leave, worker’s compensation, Unemployment Insurance Fund (UIF) contributions and so forth all make the task of taking on employees that much more difficult. There is also the issue of retaining staff; people are almost always looking for better opportunities. While agreements and contracts can be put into action, it is virtually impossible to keep someone on permanently. Entrepreneurs need to be extremely careful when employing people, and ensure that they are not under or overstaffed. This constant balancing act can be highly taxing, and serves as a significant barrier to entry for many aspiring entrepreneurs. Market entry regulations Often, entrepreneurs need to work through excessive levels of organisation. Restrictive policies, environmental regulations, tax laws,

loan agreements and licences can all be a major headache. Industries are regulated in order to guard against malpractice and protect employees from exploitation. While some governments are relatively efficient in processing the registration of businesses and granting licences, others can take weeks or even months to deliver what entrepreneurs need. This kind of inefficiency, coupled with often exorbitant licencing fees and unfavourable legislation can sink entrepreneurial ships before they even set sail. Lack of entrepreneurial opportunities While there are certainly opportunities for entrepreneurs to explore, it is often difficult identifying gaps in the market, especially ones that could be profitable. As discussed earlier, there is an abundance of opportunities for entrepreneurs to venture into, but with tough competition and business rivalry, gaining the upper hand is rarely a simple task. The more unique an opportunity is, the more likely it is that someone else has not yet had the time to explore it yet. However, there is no way to know for sure, as competition exists on an international scale. Even with dedicated research, some things will undoubtedly remain unknown. While some entrepreneurs may have a ‘eureka’ moment and have a brilliant idea, following this idea through to implementation is another matter entirely. Building entrepreneurial capacity takes time and effort, so perseverance is a necessity. Social perceptions of failure Judgement can be debilitating, and entrepreneurs are by no means exempt from it. People are generally taught that making mistakes is bad, and that they should avoid them at all costs. However, making mistakes and ‘failing’ are often part of the process that will help people to learn and improve their work. It is impossible to avoid mistakes, and even the very act of avoiding mistakes is, ironically, a mistake in itself. The path to success is almost never a straight line, and 43

WHAT IS ENTREPRENEURSHIP? many entrepreneurs struggle for years before they fi nally realise their full potential. There is no magic formula for success, and each entrepreneur fi nds it in their own way. One cannot please everyone all the time, and an entrepreneur may very well face judgement and condemnation. Thankfully, this barrier can be overcome with an adjustment in attitude – by accepting that there will be bumps in the road, an entrepreneur is far more equipped to withstand the criticism they will face in their ventures. Inadequate education This particular barrier is not unique to entrepreneurism, but based on the GEM analysis of the South African situation, it is evident that there is a great deal of room for improvement in South Africa’s education system. It is undeniable that a lack of knowledge regarding the intricacies of business and entrepreneurism is a major barrier to entrepreneurship. Even if a person wants to become an entrepreneur, if they have little or no idea of how to begin, then what chance do they reasonably have of ever starting a project? While this may not be the case in every scenario, a lack of knowledge and skills can be problematic, not only to those who lack education and necessary developed entrepreneurial skills, but to those around them as well. While many people have the ability to adapt and learn in their own right, others require guidance. Some form of training and instruction is always invaluable. In order to address issues with education, economic considerations must be aligned with the syllabi of existing educational institutions. Disadvantaged communities must be catered for, and inequality must be swiftly corrected. However, this is easier said than done, and will likely take years to adequately reform, should measures be implemented to do so. Lack of suffi cient entrepreneurial training

This is a similar issue to the previous point; however, education is more formal and lasts for a fi xed period of time, whereas training can be continuous and more informal. While there are courses and seminars held on entrepreneurism, they are usually only accessible to a select few people, and often fail to reach those communities that would benefi t the most from such instruction. Even when an entrepreneur is experienced and operating a business, keeping up to date with trends and new developments can be a stressful task. Training needs to be off ered to those who are still debating the prospects of entrepreneurism, as well as those who are currently involved in running ventures. If entrepreneurism is to thrive in South Africa, institutions and groups from all sectors need to off er support to those hopefuls wishing to make a name for themselves as business professionals. There are advocacy groups and online organisations that off er a wealth of information and support to many entrepreneurs. As many South African citizens still lack access to technology and other facilities, however, it is unlikely that they will benefi t from these organisations in the near future. Again, issues of inequality need to be addressed, and micro-scale projects need to be scaled up so that more communities may benefi t from training in best entrepreneurial practice. Understandably, this aspect remains a signifi cant barrier. Lack of real-world and industry experience While having a wealth of theoretical knowledge is a defi nite advantage, a major issue with entrepreneurism is a lack of experience in a practical capacity. This is why market days, work 44 CHAPTER 1 experience programmes and practical internships are required at secondary and tertiary level institutions for students who want to run businesses of their own one day. While these activities do happen at some institutions and businesses in South Africa, there needs to be a greater emphasis on stimulating entrepreneurial and commercial mindsets within the country as a whole.

Learning how to work alongside, and under the instruction of others in a business environment is invaluable to any person who wishes to become an entrepreneur. In essence, every entrepreneur should have even a little understanding of business operations at ground level so that they can be better prepared for the challenges they will face in their own ventures. While paid internships are highly desirable, they are often difficult to acquire. Even becoming an intern without any remuneration can be a challenge, and as long as most South Africans are blocked from participating in business activities in some measure, it is unlikely that an entrepreneurial culture will truly become entrenched on a national level. The exact amount of experience required in order to succeed as an entrepreneur cannot be measured, and even with years of experience, there is still the possibility of failure. However, it is better to be as prepared as possible, and equipping people with practical skills that they can apply in real-world scenarios is the fundamental keystone behind the promotion of entrepreneurism. Aversion to risk Having listed a number of barriers to entrepreneurship, it is easy to understand why many people would not dare to ever establish their own enterprise. The truth is that becoming an entrepreneur is a risky business, and for many South Africans, the perceived cost of failure or mistakes is simply too great to comprehend. As the saying goes, ‘no risk, no reward.’ It is also true that not taking risks and playing it safe is preferable for the vast majority of people. The only real way to change this perception of risk is to provide people with support, and diminish risks and barriers that prevent them from establishing businesses as much as possible. Essentially, all of the barriers mentioned here are interrelated. As one barrier is weakened, so too are the others. For example, with better education and more opportunities, people will be more willing to start up their own firms, and will start to see many risks as largely

negligible or non-existent. One could say that it takes real courage and determination to become an entrepreneur – indeed, being brave does not mean being without fear, but rather acknowledging that fear and pressing on anyway. This is naturally much easier to discuss than accomplish. However, with the right attitude, and the will to strive on, an ambitious entrepreneur may just be able to beat the odds and succeed in the modern world of business. 1.8 ARE YOU READY TO BE AN ENTREPRENEUR? It is evident that becoming an entrepreneur is no easy task. Thus, you must ask yourself, ‘Am I ready to become an entrepreneur?’ One person may feel ready right now, but another might not. Even if someone feels that they are ready, does that, in fact, mean they are? As everyone is different, it is impossible to say. Entrepreneurs need to learn on their feet, meaning that they have to gain knowledge and experience while they run their own ventures. While studying entrepreneurship 45 WHAT IS ENTREPRENEURSHIP? and testing your ability in a variety of academic and other contexts is advantageous, an entrepreneur never stops learning. It is important to have some reasonable doubt, but it should not be overpowering. Entrepreneurs need to have conviction and drive, but without objectivity and the ability to analyse oneself and the greater context in which one exists, mistakes will almost surely be made. Having studied this chapter, you should have a better idea of whether you are prepared to be an entrepreneur or not. In order to cement your position regarding entrepreneurship, some fi nal questions need to be answered. Frangos (2018) recommends using the following six questions in order to decide whether you are ready to be an entrepreneur or not. Is the impact I am making what I want?

Many aspiring entrepreneurs have been in business and doing what they love for a long time. In many instances, people who become entrepreneurs do not leave their existing positions because they are unhappy, but rather because they believe they could very possibly do more on their own. Regardless of whether an aspiring entrepreneur is currently employed by a business, or has just fi nished university, they may want to make a bigger imprint on the planet and the people around them than they do at present. While making money and fulfi lling a role has meaning and purpose, it may not satisfy all the ambitions and dreams you may have. Indeed, being the master of your own destiny is very appealing, and this is why entrepreneurism is such an attractive proposition. While there is no straight path to succeeding as an entrepreneur, the innate desires to better the lives of people, make money and contribute to environmental preservation are signifi cant factors that drive people to become entrepreneurs. What problem do I want to solve? If you are unsure of what particular issue you want to focus on, it may be diffi cult to move forward on anything. The key is to decide on a general subject, and then look for opportunities that exist within that sector. For example, the generation of cheap, clean and effi cient energy that is better for both people and the environment is a general area of interest. You might discover a way to manufacture solar panels more effi ciently, or discover an entirely new way of generating power altogether. The reality is usually more complex than this, but this is essentially the best way to decide what particular problem you want to address. The more passionate and enthusiastic you are about righting a particular wrong, the better suited you are to pursuing a solution to that problem. In order to succeed, you must have the energy and drive to change things for the better. When you feel a sense of

personal responsibility regarding a certain issue, you will be more mentally and emotionally invested in persisting in your endeavour. It is not always easy to choose a problem, and it is even more challenging to fi nd a workable solution, but those entrepreneurs who dedicate their lives to change are often the only ones ready for such trials. 46 CHAPTER 1 Will I have partners, and who will they be? Some entrepreneurs operate as sole proprietors and run things by themselves. However, when it comes to scaling up and expanding a business, having one or more partners can be highly advantageous. Different people bring different expertise and experience to the table, so for many entrepreneurs, having co-founders or partners is a must. While it may be nice to start a venture off with a friend, it is important to remember that business and sentiment do not always go well together. If a friend has the requisite skills, knowledge and capacity to assist you, then the prospect of a partnership makes perfect sense. However, starting a venture with a friend based largely on sentiment is hardly good business practice. Whether you partner with a friend, an associate or a stranger, the partnership needs to be symbiotic so that mutual benefits can be gained for everyone involved. The way the business will be structured, and how profits will be distributed relies on a process of negotiation, and an adherence to existing rules and regulations. Formal contracts and agreements will need to be drawn up to safeguard against wrongdoing. Although you might assume that all people can be trusted, circumstances can change and, without the proper protection, you can expose yourself to considerable (and unnecessary) risks. You would also need to ensure that you uphold your end of the deal, and your integrity, at all times. Partnerships create duties and obligations that must be fulfilled so that productivity and profitability are assured. It is for this reason

that entering into such a deal is no small issue. If you decide to form a partnership, you will have to think very carefully about your decision. What level of financial security do I have? Starting up a venture can be very costly, and without some kind of financial backing or cushioning, it may be difficult to get things up and running while enjoying a decent quality of life. It is possible to secure financial backing from investors or to set up loans, but without some form of liquidity, becoming a successful entrepreneur is likely to be much more difficult. Whether it is personal wealth from a previous job or a partner with a fairly well-paying job, entrepreneurs who have enough financial support and backup generally have a higher chance of sticking it out in the long-run. There can be little debate that individuals with more experience and financial cushioning have a significant advantage over those persons who lack one, or both, of these elements. This does not mean that entrepreneurs who lack backing or security cannot succeed, but it does mean that their journey will be that much more difficult. However, adversity can often act as an excellent motivator, and pushes people to go beyond what they thought was possible. To this end, comfort can be counterintuitive, as it is usually only when people are uncomfortable or lack options that they are compelled to act and move swiftly. In other words, options are a luxury for many entrepreneurs, so being ‘too secure’ can cause complacency and apathy. Nevertheless, a certain level of financial comfort has some significant advantages, and can give you some room to work with. 47 WHAT IS ENTREPRENEURSHIP? Do I have the support of my friends, family and colleagues? Because an entrepreneur exposes themselves to considerable risk, and lacks the benefi ts that go along with formal employment, a

strong support network is vital to your success. The encouragement and support of family, friends, partners and other parties can be the defi ning part of your experience. It is easy to become demoralised when things do not go according to plan, but with the advice and perspectives of some good people, you can more easily overcome the challenges you may face. If other people share your excitement and conviction, it can have a positive impact on your own attitude and emotions. Therefore, it is a good idea to consider what other people have to say about a proposed idea or project before embarking upon it. If you have the backing and confi dence of a number of diff erent people, it is far more likely that your venture will be established. If there are strong doubts surrounding your proposals, you need to reassess your situation, and decide on what needs to change. Inevitably, entrepreneurs must use what they know and learn to make decisions and create businesses that have the potential to succeed in the long-run. What will happen if I fail? Perhaps the most important question of all is, ‘Am I ready to fail?’ The judgment and criticism that goes along with perceived failure can be scathing, but if you are able to get back up and try again, then most failures can be overcome and used to promote personal growth and understanding. The path to success is rarely, if ever, straightforward. If you can bounce back after even the worst shortcomings, then there really is no need to worry – in the end, success is achieved through relentless determination. ACTIVITY 1F (i) Defi ne the term ‘social entrepreneurship’. (ii)

Explain how Emma Jane Dicks, founder of Code4CT, promotes social entrepreneurship. (iii) List the ten common barriers to entrepreneurship. (iv) Briefl y explain the following barriers to entrepreneurship: • Inhospitable business environment • Lack of funding and resources. (v) Briefl y summarise the current role of entrepreneurship within South Africa. (vi) Answer the main six questions often asked to determine whether you are ready to become an entrepreneur. 48 CHAPTER 1 1.9 SUMMARY This chapter discussed beneficial life lessons that will help entrepreneurs in their business ventures; for example, do not give up when encountering failures, learn from failures, create entrepreneurial opportunities that will foster passion and happiness, and see past commonly accepted norms. In addition, we defined the term ‘entrepreneur’ by examining common definitions and characteristics of the occupation. There are different types of entrepreneurs: necessity and opportunity entrepreneurs, as well as latent, nascent,

novice and habitual (serial and portfolio) entrepreneurs. We discussed the emergence of an entrepreneurial culture by examining how it emerged through the Industrial Revolution, and has evolved and strengthened over the decades. Thereafter, we looked at the different psychological approaches that argue for and against the ‘nature vs. nurture’ debate, and discussed recent scholars’ opinions surrounding the ‘entrepreneurial gene’. We also discussed the necessary entrepreneurial traits (enthusiasm, daringness, effective worker, dynamicity, savviness, economical, strategic, personable, realist and reflective traits) and skills (communication, personal branding, creativity and innovation, and networking skills) needed for success. Risk plays a large role in entrepreneurship. The four different risk quadrants were identified (ignorable risks, nuisance risks, insurable risks, and company killers), as well as the four approaches to risk management (reduce it, accept it, transfer it and eliminate it). Moreover, entrepreneurs play important roles within economies because they establish new businesses, increase the wealth of nations, drive social change, and assist in developing communities. Entrepreneurs also play significant roles within society, as they are problem-solvers or assist social improvement. The ten common barriers to entrepreneurship are the inhospitable business environment, lack of funding and resources, shortage of skills and employee-related issues, challenging market entry regulations, lack of entrepreneurial opportunities, hindering social perceptions of failure, inadequate education, lack of sufficient entrepreneurial training, lack of real-world and industry experience, and aversion to risk. Lastly, we asked the six questions commonly used to determine whether we are ready to become entrepreneurs. 49 GETTING OUT OF THE STARTING BLOCKS GETTING OUT OF

THE STARTING BLOCKS 2 2.1 Introduction 51 2.2 Life lesson 52 2.3 It starts with an idea 54 2.3.1 | Where to find ideas 54 2.3.2 | Research and analysis 62 2.3.3 | Validating ideas 67 2.3.4 | Elevator pitch 69 2.4 Business models

70 2.5 Business plans 71 2.5.1 | What is a business plan? 71 2.5.2 | Why are business plans important? 75 2.5.3 | Drawbacks of a business plan for entrepreneurs 75 2.6 Start-up models 76 2.6.1 | Lean start-up 76 2.6.2 | Minimum viable product 78 2.7 Do you have a killer idea? 79 2.8 Summary

80 50 CHAPTER 2 Case studies – myths, leaders and Online inspiration start-ups Boring but Growing the Making important business it run stuff Getting out of smoothly Building a the starting It is in the team blocks

numbers Cash is king Selling Developing Spreading products and the word Forming a services What is business entrepreneurship? 2.1 INTRODUCTION BusinessDictionary (n.d.) describes entrepreneurship as a capacity and willingness to create, develop and manage a business venture in order to make a profit. The same source highlights the fact that entrepreneurship is closely related to innovation. At the heart of entrepreneurship is the willingness to invest in a risky idea, in the hope that it will develop into a profitable business venture. Ferreira (2018) points out that a key component of entrepreneurship is to solve specific problems – i.e. by creating products or services that can change people’s lives. All entrepreneurs start with an idea. Over time, they continue to shape this idea, until it gives rise to a real product or service, in which the entrepreneur can safely invest money. As such, this chapter will discuss how an idea can eventually lead to a profitable product or service.

After studying this chapter, you should be able to: • describe the role that ideas play in starting an entrepreneurial venture; • outline requirements and types of research that can be used to establish entrepreneurial ideas; • explain the importance of validating ideas; • create an elevator pitch; • discuss the importance of a business plan; • list the advantages and disadvantages of a business plan for an entrepreneur; and • evaluate the lean start-up model in a hypothetical scenario. 51 GETTING OUT OF THE STARTING BLOCKS 2.2 LIFE LESSON Nowadays, many people use a computer in some form or another. There are both large mainframe computers and personal computers (i.e. desktops and laptops). There are also basic smartphones, which have more computing power than the roomful of computers that put the fi rst man on the moon (Grossman, 2017; and Pubu, 2017). Although we are now well accustomed to these products, it is sometimes diffi cult to imagine how well-established pioneering companies like Apple or Microsoft fi rst found the ideas for these powerful and highly useful computers. This section will briefl y discuss the history of computers, in order to show how one person’s idea was adopted and refi ned by others. Through asking ‘What if?’, other people elaborated on the idea of the

fi rst computer, found ways to improve it, made it more useful, and applied the idea in new ways. Charles Babbage has long been considered the ‘Father of computing’ ( Computer Hope, 2018). However, a substantial chain of historical persons contributed to the evolution of the modern computer. Many of the following automatic machines could be regarded as predecessors to the computers we use now: • The Antikythera mechanism was built in the fi rst century BC (Pruitt, 2016). This machine could predict the positions of the sun and planets at any point in the future. • Between 35 AD and 69 AD, Hero of Alexandria built a series of amazing mechanical robots and vending machines ( Gizmodo, 2014). • In 1642, the French mathematician Blaise Pascal built a sophisticated calculating machine that could add, subtract, multiply and divide (Miklos, 2013). • In 1694, the German mathematician G. W. Leibniz built a machine similar to Pascal’s (Miklos, 2013). • In 1820, Charles Xavier Thomas de Colmar worked from Leibniz’s design, and built the world’s fi rst mass-produced calculator, named the Arithmometer, which was produced until 1915 (Miklos, 2013). • In 1801, another Frenchman, Joseph-Marie Jacquard, invented a punch card system used to program and automate weaving looms in Manchester (Miklos, 2013). • Also in the 1800s, Charles Babbage designed two mechanical computers, the diff erence engine and the analytical engine, which were intended to solve mathematical equations (Miklos, 2013).

However, Babbage was unable to complete these devices, limiting the impact of his designs at the time. • In 1936, Vladimir Lukyanov built a large calculating machine to interpret diff erent water levels as diff erent numbers (Miklos, 2013). • The important work of Alan Turing during World War II (Copeland and Proudfoot, 1999; and Copeland, 2004) was the breakthrough that accelerated the way that computers work today. Turing combined complex mathematical patterns with mechanical and electrical engineering principles to break diffi cult secret codes that no one thought could be broken. 52 CHAPTER 2 • In 1948, Curt Herzstark built the Curta, a large calculator operated by hand cranks (Miklos, 2013). • Randell (1982) demonstrated how three scientists (Ludgate, Torres and Bush) designed almost identical mechanical computers without knowing about each other’s work. Until Turing’s breakthroughs during World War II, mechanical computers took a long time to solve mathematical problems. Turing was able to teach a mechanical computer how to learn different patterns, so that a solution became obvious. Scientists Norbert Wiener (Hauben, n.d.; and Vlada and Adăscăliţei, 2017) and John von Neumann (Vlada and Adăscăliţei, 2017; Rocha, 2017; and Mirkin, 2017) laid the foundations of the modern electronic computer, such as those built by Microsoft and Apple. The work of Wiener, Von Neumann and other scientists led to the significant strides made by IBM in building computers that are able to perform complicated calculations in a short time. The next important wave of computer technology was the moment small transistors replaced bulky vacuum tubes in computers. Vacuum tubes created high levels of heat that made it difficult to miniaturise computers. With the use of transistors,

it was finally possible to build computers that could fit into a single room. The next step was to focus on making computer operating systems faster and smaller. Both Tim Paterson of Seattle Computer Products and Gary Kildall began working on their own versions of a disk operating system (DOS) (Delony, 2015). In 1981, Microsoft bought the early DOS system and renamed it MS-DOS, licensing it to IBM for use on the first home computers (Delony, 2015). In 1976, Steve Jobs and Steve Wozniak began to make computers that were easy to use in homes or offices (Richardson and Terrell, 2008). They built the Apple I in a garage and sold the computer as loose components that the buyer had to assemble, but they quickly realised that selling preassembled computers would reach a bigger market (Richardson and Terrell, 2008). The philosophy of selling easy-to-use computers helped Apple to become one of the largest providers of computerbased technologies in the world. Nowadays, a basic smartphone has the same computing power as the computers responsible for the first moon landing in 1969. Then, a computer that fitted into a 100 square metre room could do no more than three functions at a time. A modern smartphone can receive emails, SMS, social media updates and many other types of messages while the user is making a phone call. Modern smartphones and tablets can even be used to read books and documents, and to watch movies. Important conclusions The aforementioned history may not seem relevant for an entrepreneur, but it does show us something important about ideas. Someone came up with an idea, and others saw ways in which to modify, expand, or repurpose the idea in order to unlock new potentials. This allowed them to create something innovative that nobody else had thought of, or to create something seemingly impossible. Here are a few examples:

• De Colmar saw the potential of Leibniz’s calculator, and developed a version that could be mass-produced. 53 GETTING OUT OF THE STARTING BLOCKS • Jacquard’s idea of using punched tape to get weaving looms to make the same patterns over and over led to Torres, Ludgate and Bush utilising Jacquard’s invention to ‘program’ their early computing devices. • Turing recognised the potential of early computers to perform many complex calculations simultaneously, and to learn patterns in numbers so that the machine could determine an answer to a problem. The new approaches of Von Neumann and Turing caused computers to move away from giant mechanical machines, to the fi rst generation of electromechanical machines. • From the development of these electronic computers came the fi rst transistors that allowed computer scientists, such a Bill Gates and Steve Jobs, to put personal computers within reach of the masses. 2.3 IT STARTS WITH AN IDEA Where does an idea come from? Many people think that ideas simply pop up into the minds of entrepreneurs. Though that may sometimes be true, ideas have to be refi ned and reworked until a sustainable product or service can be created. As can be seen from the life lesson we discussed, ideas are often formed by observing the work of others, and by adapting or reapplying it in order to solve a specifi c problem. In other words, ideas can come from examining ways of solving problems. 2.3.1 Where to fi nd ideas Problem frames

As previously discussed, trying to solve a problem can generate an idea, or it can evaluate the usefulness of an existing idea. Kovitz (1999: 73–109) shows that problems can be solved by the application of fi ve problem frames (or patterns) that can be seen in the world around us: 1. Information problems: These are about obtaining information, and making information available to others in a concise and understandable format. 2. Control problems: These are about the creation and use of rules (such a procedures and processes) to achieve specifi c results. 3. Transformation problems: These are about understanding how things must change in order to bring about a specifi c idea, product or service. 4. Workpiece problems: These are about the creation of tangible things or results, so that the benefi t of an idea can become obvious. 5. Connection problems: These are about linking with suppliers, stakeholders, customers etc. to receive feedback about an idea, product or service. Using these frames, an entrepreneur can identify problems that need to be solved in the world around them. A strong idea could emerge from considering such problems. Furthermore, these problem frames can be used to evaluate and refi ne an entrepreneur’s existing idea. 54

CHAPTER 2 Idea Information Control problems Transformation Workpiece Connection problems • What rules or problems problems problems • What is the compliances • What features • What are the • How will we idea? must be of the idea idea’s key

let customers • Why is it considered? must change? features? know about important? • Where are • What aspects • How will this idea? • What is the potential of existing these benefit • How will idea’s value? problem competitors consumers? we collect • Who will it

areas? could be • How can the customer benefit? • What changed? service or feedback? • Why will they constraints • Why could product be • How will we benefit from are there? these made easier respond to it?

• What will changes be to use? this feedback? consumers beneficial? want or • How might expect? customers respond to changes? (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Kovitz, 1999: 70–109) Figure 2.1: Example of a problem frame in the Kovitz model Efficiency-driven idea generation Many ideas and innovations arise from a desire to make a company or process more efficient. An entrepreneur can generate many good ideas by using the ‘seven wastes model’ (or muda), perfected for Toyota by Shigeo Shingo. Muda means ‘futility, uselessness, or waste’, and in the Toyota Production System, this relates to the reduction of unnecessary waste to increase profit. In this model, there are seven forms of waste to consider: 1.

Waste of transportation: Every time something is moved during production, there is a chance to waste time or cause delays. In an office, this waste can be illustrated by an official that sends a customer from place to place, before finally resolving the customer’s query. For an entrepreneur, there could be different transportation opportunities. For example, bringing resources or raw materials directly to manufacturers as a business-to-business (B2B) company, minimising transportation waste for client companies. 2. Waste of inventory: High levels of raw materials or unfinished goods use high levels of wasted capital. This is because raw materials cannot translate into profits until the product is made and sold. In a service environment, ‘waste of inventory’ can refer to services that no one wants. Entrepreneurs could become advisors to other small businesses and teach them how to adjust their manufacturing in such a way to produce what customers need, when customers have a need for specific goods. Perhaps a new product could be researched and sold that helps businesses to store their inventory more efficiently. 55 GETTING OUT OF THE STARTING BLOCKS 3. Waste of motion: Products or unfi nished goods can be damaged when moved around. In an offi ce environment, this waste can be illustrated by an ‘in-basket’ in which a document is constantly placed at the bottom of the basket, without fi nishing the work associated with that document. Entrepreneurs could have opportunities to design or re-engineer processes for small businesses. 4.

Waste of waiting: When nothing is done to process or manufacture goods, waiting occurs. A product must be manufactured, transported and sold as quickly as possible. In an offi ce environment, this waste can be seen in long queues and slow response times in answering simple customer queries. Entrepreneurs could assist other small businesses to optimise work, so that waiting times are reduced (see ‘business process re-engineering’ in the previous point). Similarly, a service that circumvents certain waiting times with more effi cient delivery could gain competitive advantage. 5. Waste of over-processing: Waste occurs when manufacturing takes more time than necessary. For example, a manager insists that a product receives six coats of varnish, whereas two coats of varnish could make the product look just as spectacular. In a nonmanufacturing environment, this waste can be illustrated by the off er of solutions (known as ‘value added off erings’) that no one wants. Entrepreneurs could help smaller businesses to research the market and product, so that they could deliver products with essential and aff ordable features. Alternatively, entrepreneurs could make their own products or services that fulfi l specifi c market needs. For example, a business could create simplifi ed smartphones for the elderly, providing the user with the essential features they need, in a simpler manner than a standard smartphone. 6. Waste of over-production: Waste occurs by making more widgets than the market needs. In a non-manufacturing environment, this waste could be seen as writing a 70-page report, where a three-page report would have been suffi cient. As independent consultants to other smaller businesses, entrepreneurs could help to make sure that production levels are constant. In addition, entrepreneurs could create and sell software that assists small business owners in writing clear and succinct performance or management reports.

7. Waste of defects (also known as waste of rework): The continuous delivery of faulty goods. In an offi ce environment, this could refer to someone having to write a report repeatedly, because it is full of mistakes. There are many opportunities for entrepreneurs to help smaller businesses master principles of quality control or quality assurance, or to look for ways of re-engineering products that frequently fail in order to reduce waste of defects, as well as gain a competitive advantage. Generating ideas through Shingo’s muda model allows the entrepreneur to ask the following questions: • What is wrong with a specifi c existing product/service? • To what extent does this product/service generate waste ( muda) that could be removed? • What are the main wastes that could be removed? • How would the removal of these wastes make the product or service more effi cient? • What product or service could be provided for other companies or customers to reduce their waste? 56 CHAPTER 2 Putting on Six Thinking Hats In 1985, Edward de Bono introduced his Six Thinking Hats method to the world. Since then, this method has been used widely in businesses. There are even consulting firms that offer special certification courses in this method. The reasons for using de Bono’s

Six Hats approach can be summarised as follows ( Six Thinking Hats, n.d.): • In a group, people have different perspectives about the same thing. • Different perspectives within a group can make it difficult to reach consensus. • If people could be moved to look at something from the same perspective, a phenomenon known as ‘parallel thinking’ can ensure rapid consensus. • The Six Hats method helps to achieve this parallel thinking and rapid consensus. People think in different modes; some are creative, some are factual, and others are negative. If a negative person can be moved to think creatively, or if a creative person can be moved to think in terms of facts, group consensus is more achievable. De Bono associates the different ways that people think with different coloured hats. For example, yellow is the colour of optimism. If all of the participants are asked to think with the yellow hat, then it means that even the pessimist is forced to think optimistically. Using the different coloured hats in sequences, a facilitator can move a group toward consensus. Colour hat Description The colour of caution or negativity. This hat can typically be used by asking a question Black such as, ‘What can go wrong?’ Blue represents overview and reflection, and is used to summarise an idea-forming meeting from time to time. This is the colour used by a meeting chairperson or Blue

facilitator. The colour is neutral, and does not allow the person wearing this hat to force their opinion upon the rest. The blue colour can also be used by anyone else to summarise proceedings at any time. The colour of creative thinking. This hat invites people to generate ideas in a similar Green way to brainstorming. The colour of intuition, emotion or feeling. This hat allows participants to express how Red they feel about a specific point or issue, and can be used to explore the feelings of others. The colour of facts. This hat can be used immediately after red, green, black and White yellow to endorse statements with facts. The colour of optimism. This hat can typically be used by asking a question such as, Yellow ‘What value or positive things can there be?’ (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Elmansy, 2015) Table 2.1: A brief summary of the Six Hats method 57 GETTING OUT OF THE STARTING BLOCKS Six Hats thinking is applicable to the entrepreneur who seeks a sustainable business idea. The following example shows how the Six Hats method can be used to generate a business idea. (Using the Six Hats)

EXAMPLE 2 A Petrus and Lindiwe started the ZZUBB Corporation, but were not sure what type of product or service they should off er. Sam Wise, a renowned business consultant, suggested that Petrus and Lindiwe use the Six Hats method in order to generate ideas. The following table shows parts of the discussion Petrus and Lindiwe had with Sam. Remember that the thinking hats can be used in any sequence, and as a basic rule, everyone in the room has to be thinking under the same coloured hat. In this example, Sam will be the independent facilitator who uses the blue hat. Sam Wise: ‘Thank you for inviting me to this Blue hat – neutral introduction and facilitation meeting. I will help you document ideas, and will summarise from time to time. I understand that you have to fi nd new business ideas.’ Sam: ‘What have you thought of so far?’ White hat – asking exploratory questions Petrus: ‘We would like to start with the “Wacker White hat – stating a fact Widget”.’ Lindiwe: ‘We’ve been working on the product for three years, and have done all our research.’ Petrus: ‘I’m not sure that the “Wacker Widget” is Red hat – expressing feelings and emotion the right product, however.’ Sam: ‘So, you want guidance to see whether Blue hat – summarising the situation this product is the right one for the market?’ Sam: ‘What is a “Wacker Widget”?’

White hat – asking for factual information Lindiwe: ‘It is an automatic mosquito detector White hat – giving factual information drone that can swat a mosquito anywhere at any time.’ Petrus: ‘The design still has some fl aws.’ Black hat – asking what is wrong or what could go wrong Lindiwe: ‘But it is a great idea! The customers Yellow hat – expressing positive enthusiasm will love it!’ Sam: ‘Lindiwe, what do you think could be Sam is asking Lindiwe to put on the black wrong with the product?’ hat, and to think about the things that could go wrong, rather than follow her optimistic yellow hat approach. Lindiwe: ‘Well, the sensors often confuse a Black hat – describing negative consequences shadow for a mosquito.’ or errors Sam: ‘What can be done to fi x the issue?’ Green hat – asking for creative ideas 58 CHAPTER 2 Petrus: ‘The sensors could be readjusted.’

Green hat – offering a creative idea Lindiwe: ‘Or we can build a small program that Green hat – offering a creative idea teaches the “Wacker Widget” the difference between a shadow and a mosquito.’ (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 2.2: Using the six hats This example shows how the facilitator keeps everyone thinking in the same fashion, by wearing the same thinking hats, in order to bring about consensus. Lindiwe thinks more optimistically, while Petrus thinks more pessimistically. Using different hats can make them change their approach and consider new ideas. Brain sketching Brain sketching is a technique that can be used when designing a product (Strydom et al., 2007: 53; Van der Lugt, 2002; Akib, 2012; and Natsir, 2015). The main idea characteristic of brain sketching is working in a group. A group is formed and, initially, one person will do a basic sketch of how they visualise a product’s design. This sketch will be passed to the next person, who looks at the original sketch, and then considers changes they would make. The second person uses a blank piece of paper and redesigns the initial concept. Thereafter, the two sketches (the original and the modification) will be handed to a third person, who reviews both sketches to create a third sketch, incorporating elements from both concepts. The third person will make their modifications, and then pass on three sketches to the next person. The process will go on until everyone in the group has reviewed the sketches and made their modifications. Finally, all sketches will be compared and discussed. Brain sketching can also be used to create a service or new business idea. In such a case, the first person in the group would write an idea and reasons for the idea on a piece of paper, and then pass it to the next person. The second person will read the first person’s idea, and

then use a separate piece of paper to write down how the idea should be modified. These two drafts are then passed to a third person to assess and improve. The process continues until each person has had an opportunity to review and modify all ideas, after which they will be compared and discussed. Brainstorming A brainstorm is a spontaneous group discussion in order to produce ideas and find ways of solving problems. Managers often make the mistake of arranging a formal meeting that they then call a ‘brainstorm’. A formal meeting is actually a focus group or a workshop, not a brainstorm. 59 GETTING OUT OF THE STARTING BLOCKS Brainstorms share the following characteristics: • They are spontaneous. • They often occur outside the normal workplace. • They may suddenly happen in the course of a conversation. • They are highly creative. • They often generate solutions or insights in unexpected ways. Despite the informality of brainstorms, a number of basic rules or guidelines should be considered: • When it is apparent that a brainstorm is happening, ask everyone in the group to make notes. • Avoid criticising the ideas of others. The purpose of a brainstorm is to generate as many ideas as possible.

• Focus on generating the maximum number of ideas as quickly as possible. Spontaneous thinking without having time to reconsider what one wanted to say often reveals a breakthrough idea. • Encourage imaginative and far-out ideas. A good way to encourage such ideas is to ask ‘What if?’, but resist the urge to respond with criticism when an answer is off ered. • Attempt to combine one or more ideas into stronger ideas. You will notice that there is little diff erence between the principles of brain sketching and brainstorming. In both techniques, the rule is not to debate or criticise any idea, until everyone in the team has had a chance to off er an idea. If teams debate while they generate ideas, they can get caught up in arguments that slow the process down, lead to confusion, or end up prematurely dismissing potentially valuable ideas. Superheroes Strydom et al. (2007: 55) suggest that ideas can be generated using fantasy characters. For example, Superman or James Bond could make use of their special powers to trigger ideas. With this technique, members in the team are each given a superhero character. Then, someone presents the problem that, for example, ‘We need a product that will be useful to people with bad eyesight yet do not want to use contact lenses or glasses’. Each superhero will be asked how to solve the problem. How would James Bond solve the problem? He would most likely ask Q to design a gadget that acts as a camera, watch, walkie talkie and radar tracker, in order to see what the villains are planning. At fi rst, ideas may seem absurd, but one idea could trigger another and another, until a number of valid solutions arise. For example, people with bad eyesight could use a special cell phone application that activates a magnifying camera with a voice command, so that they can read a book, pamphlet etc. Another idea could be to take a picture of a sentence and let the application read it back in an audible voice.

60 CHAPTER 2 Triggering Strydom et al. (2007: 56) refer to a technique where someone states an idea, and the rest of the team write down their immediate insights and ideas in response, often seeing something others have missed. Triggering is a group technique beginning with one member reading their idea to the whole group. While the group listens to the idea, they make notes, but do not say anything. Then, a second person reads the original idea, as well as the additional thoughts that were ‘triggered’ by that idea. The process repeats at least once, to allow each person to read the original idea and the ideas that were triggered in their mind. The triggered ideas might then trigger new insights from others, until everyone has contributed to a much broader and deeper set of concepts than those that the original idea may have covered. Quality dimensions Ideas do not have to lead to new products or services. Sometimes, looking at existing products or services can generate ideas on how to improve those products or services. Reviewing products or services against a set of quality dimensions could generate ideas on how to make a product or service better. Evans (2008: 14) suggests two lists of quality dimensions that can be used, which are outlined in the following table. Quality dimensions for products Quality dimensions for services • Performance: How can the primary • Time: What can be done to prevent wasting a characteristics of a product be improved? customer’s time?

• Features: What ‘bells and whistles’ are essential • Timeliness: How can a service be guaranteed to the product and which features could be at a date and time expected by a customer? the most useful to customers? • Completeness: How can you make sure that a • Reliability: How well can a product survive customer receives exactly what was ordered? without failure over a period of time? • Courtesy: How could you create a friendlier • Conformance: To what extent does a product place where customers can do business with meet specifications and market expectations? you? • Durability: How long could a product be used • Consistency: How can you make sure that all before it fails or breaks? service has the same quality, all the time? • Serviceability: How easy will it be to fix a • Convenience and accessibility: How can you broken product? make it easier for customers to contact you • Aesthetics: How could the look, feel, taste, when things go wrong? smell etc. of a product change so that it is • Accuracy: How can you avoid making more attractive to customers?

mistakes when dealing with a customer? • Perceived quality: How could the image, • Responsiveness: How can you speed up branding, or advertising of the product processes so that you can respond to change so that it is more attractive to customers quicker and better than your customers? competitors do? (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Evans, 2008: 14) Table 2.3: Quality dimensions for products and services 61 GETTING OUT OF THE STARTING BLOCKS Other places to fi nd ideas Opportunities to generate ideas are all around us. In many cases, the use of ‘fancy’ techniques is not required, as other experiences can help to generate ideas. Strydom et al. (2007: 57) suggest that ideas can also be formed by: • using your own skills, expertise and aptitude to gather insights about new or improved products or services; • identifying common customer needs; • identifying known problems in a product or service; and • observing everyday life circumstances. For example, the Kreepy Krauly pool cleaner was developed because the inventor did not want to spend time scooping leaves out of a swimming pool. 2.3.2 Research and analysis

When thinking about new products or services, entrepreneurs make one of two common mistakes: 1. Businesses fail to do enough research to understand the product or service and the needs of the customer. 2. Businesses get into a mode of ‘analysis paralysis’. In other words, they spend so much time on research and analysis that they never get to create the product or service. The Internet is full of articles on how to do research and analysis for new products or services. It would be neither feasible nor useful to list every approach to, and opinion on, eff ective research and analysis; however, there are a number of commonly used and eff ective analyses and research approaches. SWOT analysis Many popular sources such as Spaeder (n.d.) suggest that entrepreneurs must do a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. In essence, the SWOT analysis looks at a company’s internal capabilities and at external forces that could infl uence the delivery of a product or service. The internal capabilities in a SWOT analysis refer to a company’s strengths and weaknesses to deliver a product or service. On the other hand, the external capabilities refer to opportunities that could be exploited and threats from competitors or the business environment that could be eliminated or accounted for. The key idea of a SWOT analysis is not just to list strengths, weaknesses, opportunities, and threats. It is also to interpret fi ndings and to take specifi c actions based on the results of the SWOT analysis.

In order to achieve concrete and useful results, entrepreneurs need to ensure they make full use of the insights off ered by the analysis, and not perform it too early. The following table gives a brief explanation on how a SWOT analysis can be used to evaluate a business idea. Please note that these are some of the basic questions that could be asked in a SWOT analysis. 62 CHAPTER 2 Strengths Weaknesses Strengths are about the things that a company does Weaknesses refer to the things that a better than anyone else. Typical points that could be company struggles to overcome. Typical discussed as strengths include the following: points to discuss could include the following: • What is it that you do well or better than anyone else? • What are the key components in • What aspects of the product or service will be which we do not do well? ocus very hard to copy by competitors?

• Why do we not do well? nal f • What trade secrets will help the product or • What should be done to turn the er service to stand out above the rest? weaknesses into strengths? Int • What elements of quality does your product or • What could happen if the weaknesses service have that are better than those are not transformed into strengths? • of competitors? • How much time do we need to turn • How does the product/service’s cost and each weakness into a strength? differentiation make it stand out above those of • Do we need outside help to turn the the competitors? weaknesses into strengths? • How do you keep getting better in terms of your strengths? Opportunities Threats Opportunities look for things outside the company. Threats focus on the actions of competitors In addition, opportunities specifically consider to put better products or services than things that a company can do to outcompete rivals. you do in the market. In addition, threats Opportunities also consider specific market needs

can also come from social, economic, and that rivals have not considered. Typical points to political factors that could destabilise a discuss include the following: business. Threats must be neutralised as soon as possible. Typical points to discuss • What possible opportunities are there to grow include the following: ocus the business? nal f • Why have rivals not considered this opportunity? • What type of threats are we facing? ter • What must be done to exploit this opportunity? • How are we going to handle each Ex • How much will it cost to exploit the opportunity? threat? • How long will it take this opportunity to make • What will happen if we ignore these a profit? threats? • What expertise is needed to exploit this • What must be done to eliminate or opportunity? reduce the impact of threats? • How long will it take to eliminate or reduce threats? • How much will it cost to reduce or

eliminate threats? (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 2.4: Examples of questions that can be used in a SWOT analysis The mere listing of strengths, weaknesses, opportunities and threats is not enough. Entrepreneurs must know how to interpret and use the variety of strengths and opportunities that they uncover, 63 GETTING OUT OF THE STARTING BLOCKS while preparing for or overcoming weaknesses and threats. The following diagram is a suggested plan of action to consider after a SWOT analysis has been done. It is clear from the diagram that companies can have diff erent combinations of strengths, weaknesses etc. In this diagram, Company A and Company C are the strongest, and therefore have the best chance at success. Interpreting SWOT results Company A: Company B: 14 Strengths 2 Weaknesses 4 Strengths 12 Weaknesses 5 Opportunities 2 Threats 5 Opportunities 2 Threats

Good chance to succeed. Its many A large number of weaknesses and low strenghts and few weaknesses mean it is number of strengths limit this company’s likely to dominate rivals chance to succeed Company C: Company D: 7 Strengths 4 Weaknesses 4 Strengths 2 Weaknesses 15 Opportunities 3 Threats 5 Opportunities 12 Threats Many opportunities exist, and the company There are many external threats, and the has suffi cient strengths to succeed, despite company probably does not have enough some weaknesses and threats strengths to handle them (Source: EDGE Learning Media (Pty) Ltd, 2018)

Figure 2.2: Basic SWOT analysis interpretation, comparing the numbers of each result to determine how likely a company is to succeed Entrepreneurs often make the mistake of simply listing all the strengths, weaknesses, threats and opportunities, and fail to understand what the SWOT analysis tells them. Specifi c guidelines to consider regarding SWOT • A SWOT analysis is not merely a matter of listing strengths, weaknesses, opportunities and threats. • You must know how to respond so that weaknesses can become strengths and threats can become opportunities. • Sometimes it may be necessary to ask others for ideas on how to handle threats and weaknesses. • A long list of strengths does not mean anything unless you attend to weaknesses and threats. • Similarly, a long list of strengths is meaningless unless you constantly fi nd ways to improve your products or services. Integrated venture analysis Nieman and Nieuwenhuizen (2009: 326) suggest a more comprehensive way to analyse a new business venture or idea. They suggest that entrepreneurs should consider ten key question topics: 64 CHAPTER 2 1. Goals: To what extent do the entrepreneur’s financial goals, personal goals and strategic goals support the business idea? Any business

without measurable goals is doomed to fail. 2. Performance: What would the key performance criteria for the business be and how will the entrepreneur measure such performance? In addition, what quality attributes will be important to the new business venture’s products or services? 3. Key management issues: Does the entrepreneur have the right skills to manage the business venture? In what areas does the entrepreneur need help from external or internal specialists? 4. Attitudes and motivation: How well are the entrepreneur and their team motivated to succeed? How do their attitudes toward customers and the new venture influence the success of the venture? The greatest idea in the world could falter if the entrepreneur lacks attitude and motivation to make it a success. 5. Strategic issues: How does the entrepreneur plan to present the new business venture to the market? • Is the venture focused on a niche product/service? • Is the venture focused on low cost? • Is the venture focused on efficiency? 6. Value perception: How does the new venture add value to a product or service so that customers will want it? What specific competitive

advantages can the product or service create so that it is difficult for rivals to copy your product? 7. Demand: How big is the demand for the product or service? If there is little or no demand for your product or service, how will you create demand? 8. Team and resource fit: Do you have sufficient expertise to manage and sustain the business venture? For example, if you have never flown an aeroplane or have never worked in that industry, how do you plan to start and sustain an airline? 9. Finance: Do you have sufficient levels of finance to sustain the venture in case you cannot find loans or people to invest in your venture? 10. Competitive environment: How you will overcome the following challenges: • Other competitors • Barriers to enter a specific industry or economic sector • Suppliers that may not want to work with you • Buyers who may have demands that you cannot deliver • Alternative products or services offered by rival businesses, making yours seem less attractive to the market than theirs

The questions suggested by Nieman and Nieuwenhuizen (2009) highlight the following important facts: • Despite the brilliance of any idea, it must still be evaluated in clinical business management terms. • Ideas that do not make any business sense cannot survive, no matter how revolutionary the idea is. The idea must have the potential to generate profits as quickly as possible. 65 GETTING OUT OF THE STARTING BLOCKS • New ventures do not always fail because of bad ideas, but because the entrepreneur lacks the necessary skills to build the idea into a profi table venture. Fatal fl aw analysis It is often very diffi cult for an entrepreneur to realise that an idea is not strong enough to succeed (Nieman and Nieuwenhuizen, 2009: 89). There may be areas where an idea may have a fatal fl aw, or a problem that an idea (or business) cannot overcome. Entrepreneurs often fail to consider these fatal fl aws and proceed to spend excess time and money on an impossible idea. When conducting a fatal fl aw analysis, it is useful to consider market dynamics, competitive advantage, and harm versus utility. Market dynamics The following markets present fatal fl aws for an idea: • A market that is too small to ensure profi tability. • A market in which there is an overabundance of competitors and you do not have suffi cient strength to capture part of the market.

• A market in which the cost of entry is very high; for example, starting an airline could cost as much as R 400 million just to procure aircraft, crew, fuel, parking space at airports, an operating licence and the fi rst year’s operating costs. • A market in which it is diffi cult to get a competitive advantage because customers do not know your product or service. Competitive advantage Entrepreneurs do not always understand what is meant by the term ‘competitive advantage’. In the simplest terms, competitive advantage concerns the ability to: • deliver a unique product or service; • have a product or service that meets specifi c market expectations; • have a product or service that meets specifi c quality needs not found in other products or services; • do things better than your rivals; • respond quicker to market needs than your rivals do; and • off er a product with the right features, at the right time and for the right price. Leveraging competitive advantage requires a business to be aware of its own fl aws, as well as the fatal fl aws of other approaches. One problem is that entrepreneurs are sometimes so busy trying to make sales and get new customers that they do not have time to think about their own competitive advantages or disadvantages. For example, if an entrepreneur takes two weeks to answer a customer, what are the chances that the customer may be compelled to go somewhere else? If a product is constantly defective and the entrepreneur does not do anything to launch a product with fewer defects, how could he/she expect customers to remain loyal? If exactly the 66

CHAPTER 2 same product or service could be bought from someone else, how is that product or service unique? In other words, what are the potential fatal flaws facing the business, and do they threaten its competitive advantage? Similarly, an entrepreneur has to ask whether avoiding these flaws strengthens the business, or gains the business an advantage over other companies. There are times when entrepreneurs must stand back and take an independent view to see whether they are still in a position of competitive advantage or whether they are at risk of losing customer interest. Harm vs. utility An idea is only feasible if the product or service offers the customer utility and benefit without causing them harm. For example, products that harm the environment may have trouble with regulators, may displease customers, and ultimately fail in the long term. In addition, products or services where customers have a high risk of losing money will be less sustainable. Therefore, ideas that have the potential to provide the most value to a customer, and that have the least possible harmful effects, stand a better chance of success. 2.3.3 Validating ideas To validate an idea requires an entrepreneur to evaluate whether an idea makes sound business sense. It is impossible for entrepreneurs to validate an idea without taking a number of factors into consideration. One of the main ways of validating an idea is to scrutinise your business plan carefully; however, there are also many areas that can be considered during earlier stages of planning. Examples of ways to validate an idea include taking time to do the following: • ‘Look for it’: It is always important to check the market for similar ideas. For example, you may want to start a sports bar in your area.

A quick Internet search can show you how many similar ideas are already in operation (Gasca, 2014). • Ask friends and family: This is not always a useful step, because they could be hesitant to give honest feedback. Just think of the many people who entered a talent competition and failed because family and friends told them that they were good. • Interview an interest group: It could pay off to conduct a survey or arrange a focus group regarding your product. Ask people (who are not friends or family) what would influence them to buy your product or service. • Examine unwanted products or services: Research the types of products or services your target market does not want. Pick an existing product or service and ask people what they think is wrong with it and how they think the product or service could be made more attractive to a customer. It is also important at this early stage to ask what problems or challenges might arise. When an entrepreneur has an idea, it is often very difficult to see potentially fatal flaws. In other words, when validating an idea, it is important to look for unseen flaws. The author of this section has more than 28 years’ experience working with entrepreneurs. Over this time, he has learned that: 67 GETTING OUT OF THE STARTING BLOCKS • entrepreneurs tend to get upset when told that an idea has a fatal fl aw; • entrepreneurs often do not spend time considering the negative aspects of an idea; • entrepreneurs rarely ask for independent advice, fearing that someone may steal their idea; and • entrepreneurs focus more on the potential profi t of an idea and fail to consider how much an idea could cost before it becomes profi

table. Seeking expert advice It is benefi cial to talk to a number of successful entrepreneurs and ask them for tips on how to validate your idea. However, that does not mean you have to share all of the details of your idea with an outsider. You need to use the expert to help you learn how to look objectively at your own idea. Repeatedly asking ‘Why?’ Management expert John Kuypers (2012) uploaded a video to YouTube in which he encourages managers to ask ‘Why?’ seven times, in order to learn the true cause of an event. A similar technique, called the ‘fi ve whys’ exercise was proposed for Toyota by Sakichi Toyoda (Serrat, 2009: 2). Such methods also inspired Kaoru Ishikawa, developer of the ‘fi shbone diagram’ for fi nding the root cause of a problem ( CMS, n.d.). From a practical perspective, an ‘ask why?’ exercise could be done either negatively or positively. The positive use of ‘asking why’ is to look for unique selling points, or the sources of advantages for your business. For example, asking why people would need your product can help to focus on customer benefi ts. The negative use of asking why is to examine threats or weaknesses and look for fatal fl aws in your idea. For example, it can be used to predict future challenges by asking why things might go wrong. Positive use of asking ‘why?’ Negative use of asking ‘why?’ Initial statement: ‘I want to start a new restaurant’ Why do you want to start this type of restaurant? Why might the restaurant have challenges?

Why would people come to your restaurant? Why would these problems cause the business to fail? Why will your food be of higher quality? Why would your business be able to survive these threats? Why will your restaurant stand out from others in Why would people choose not to eat at your the area? enterprise? Why would I like the food that you plan to off er? Why should you consider diff erent approaches? Why will people choose to pay for your food Why are you willing to risk your fi nances? instead of cooking it at home more cheaply? (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 2.5: Asking ‘why?’ 68 CHAPTER 2 2.3.4 Elevator pitch The ‘elevator pitch’ is a generic term for making a short and succinct presentation to potential buyers. It is a summary of your product or service, its key functions, and what sets it apart from others, and it is crucial that it is convincing in a short period of time. It is said that if

you cannot convince a person in one minute to buy your product, you need to rethink how to present it, and you may need to rethink your product altogether. In other words, being able to create a strong elevator pitch is a final validation of your idea’s simplicity and attractiveness. The following needs to be considered when working on an elevator pitch: • What is the product or service? (No more than 15 seconds.) • What are its key functions? (No more than 15 seconds.) • What makes the product or service different from the rest? (No more than 15 seconds.) • Why should anyone buy this product or service? (No more than 15 seconds.) There are many articles and resources with tips for crafting an elevator pitch. However, the following basic advice should be followed (Simpson, n.d.): • Be prepared. Although the elevator pitch is a more informal presentation, you should still write out a draft, practise and refine it, and then memorise the best version. • Speak slowly and clearly, even though you need to be brief. Choose your information carefully so that you do not need to rush. • Avoid using technical language that will confuse your listener. • Stay focused on your topic. Rambling about unrelated topics will use up valuable time. • Have a business card or document for your listener to take away. Such items act as reminders and provide a means for them to contact you later on. • Be approachable and natural. A stiff or robotic monologue can put your listener off, regardless of how good the content of your pitch may be.

• Take the opportunity to use your elevator pitch. Ensure you are ready and confident when the time comes. ACTIVITY 2A (i) Critique the following statement in a brief paragraph. You may refer back to the life lesson, your own examples, or any of the techniques above to support your answer. You have to be a genius to be a successful entrepreneur because you need to come up with an idea completely by yourself. (ii) List the types of waste or muda to consider when generating efficiency-driven ideas. (iii) Explain what it means to validate an idea, and why this process is important. (iv) Imagine that your friend is an entrepreneur with an idea for a new phone app, Local Lunches. The app allows users to order homeprepared lunches delivered to their class or office. The app offers banting, vegan, halaal or kosher meals as well as a regular menu, prepared by users who offer to prepare and deliver meals. Your friend is nervous about how to pitch this idea for an investor. Give advice to your friend on how to create an elevator pitch for their idea. 69 GETTING OUT OF THE STARTING BLOCKS 2.4 BUSINESS MODELS

In essence, a business model describes the way in which a business venture operates. Three of the obvious business models include the following: 1. Brick and mortar business models: The business is situated and operated in a building. Customers can visit the business’s physical premises and interact with people in the business. 2. E-commerce business models: The business uses the Internet as the primary channel through which customers can buy goods and services. In this type of business model, customers never meet faceto-face with anyone in the business. 3. Brick-and-click business models: Combines features from the fi rst two models. Customers can come to a physical location, or make use of the Internet to buy goods and services. The above three business models could be called ‘geographic’ business models, because they describe where an entrepreneur wants to interact with customers and sell their products or services. Besides geographic business models, entrepreneurs can choose the type of business activity that their enterprise will conduct. Examples of activity-based business models include the following: • Manufacturing business models: Enterprises in which entrepreneurs make products, usually in factories. • Service-oriented business models: Businesses in which entrepreneurs provide customers with advice and/or professional services (e.g. doctors, lawyers, fi nancial services and colleges).

• Import/export business models: An enterprise that move, buy or sell goods over national borders. • Distributor business models: An enterprise that buys goods from a manufacturer and ships them to other businesses in a specifi c area. • Aggregator business models: Enterprises that buy diff erent goods and services from smaller enterprises and then repackage those goods and services under their brand’s name. • Retail business models: A business that buys goods from a wholesaler or distributor and then sells the goods directly to the public. • Franchise business models: Businesses that operate under a larger brand name and pay royalties to use the larger brand, such as fastfood franchises like McDonald’s or Steers. • Nickel and dime business models: Businesses that focus on off ering low cost goods and services. • Freemium business models: Enterprises that off er some services free of charge while access to additional or premium features requires customers to pay. • Subscription business models: Businesses where customers can sign up for a regular payment for access to a range of goods or services, usually on a monthly or annual basis (e.g. Netfl ix or DStv). • High touch business models: Businesses where there is a lot of human interaction between the enterprise and its customers. • Low touch business models: Businesses where there is little or no human interaction between the customer and the enterprise; 70 CHAPTER 2

• Innovation-based business models: Enterprises that focus on creating new products and services at a rapid rate. • Intellectual property trading business models: Businesses in which an entrepreneur buys someone else’s ideas and develops them into profitable products or services. 2.5 BUSINESS PLANS A business plan (sometimes referred to as a business case) is a vital part of any potential business venture. This section will discuss what a business plan is, why it is so important, and what the possible drawbacks may be. 2.5.1 What is a business plan? A business plan is a document that describes the overall goals of a business or new venture from two main perspectives: 1. A financial perspective: A narrative that spells out an enterprise’s plans in financial terms. 2. A strategic perspective: A narrative that speaks about the overall strategies and plans of the enterprise, and how it intends to generate a profit. Schmidt (2003; and 2005) makes it very clear that a business plan is a set of compelling and convincing arguments that are a means to garner support for an idea or for a business venture. For a business plan to be convincing it must show a balance between the financial and strategic narratives. Just as an attorney would use evidence to build a case in court, an entrepreneur must use evidence to build a believable and comprehensive business plan.

There are numerous sample business plans online, and thousands of entrepreneurs who offer help with writing compelling business plans. A brief look at a fraction of these samples is enough to realise that no two business plans are exactly alike. Business plans differ in content, and the financial and strategic narratives can be presented in a multitude of ways. Despite such variances amongst business plans, there is a series of essential building blocks that every sound business plan should have (Schmidt, 2005). Each of these building blocks must have a logical structure, and must be backed up by evidence, as business plans without evidence are not believable. There are at least five building blocks in a business plan (Schmidt, 2005): 1.

Introduction and overview 2. Assumptions and methods 3. Business impacts 4. Sensitivity and risk analysis 5. Conclusions and recommendations 71 GETTING OUT OF THE STARTING BLOCKS Introduction and overview The introduction is meant to provide a quick overview of the business plan. This section is very important because, when deciding which business venture to approve or support, the introduction may be the only section that potential investors read. In essence, the introduction of the business plan could be seen as a longer, comprehensive ‘elevator pitch’ in written form. It is important that a business plan’s introduction shows the following (Schmidt, 2005: 2): • A title and, if necessary, a subtitle.

• The authors of the business plan, because an anonymous business plan is not credible. • A list of the people who are the audience of the business plan (also known as business plan recipients). • The date on which the business plan was created. • The version number of the business plan in case there are other versions of the business plan. • A subject to show what the business plan is all about. • A purpose statement to explain why the business plan exists and what it will be used for. Some business plans are written to seek fi nance, others are written to attract investors, and some can be written to justify specifi c levels of capital expenditure. Additionally, well-written business plans include cross references in the introduction section to show readers where to fi nd additional information. The subject and purpose of a business planshould clearly explain what will be covered in the subsequent sections. At least, the subject and purpose must describe why the business plan was written (e.g. for getting fi nance or attracting investment). Next, the subject and purpose should reveal what the business plan wants to achieve (e.g. cost savings, revenue growth, or boosting the balance sheet with an acquisition). All statements made should be substantiated by evidence, to assure recipients of the business plan that the writer has researched the business’s situation and goals. The disclaimer in the business plan normally contains non-disclosure formulas and statements such as ‘to the best of our knowledge, we have presented all the facts that we should have’. Disclaimers are brief statements which limit liabilities in case of any errors in the business plan.

Disclaimers can also place duties on the recipients to neither disclose confi dential material nor commit intellectual property theft. Although the executive summary appears early in a business plan, a good rule is to write it last, after all other parts of the business plan have been written. It should be no more than two pages and should act in a similar way to the elevator pitch. The executive summary must contain the following, which should be cross-referenced with sections that contain further information: • An explanation of the following key fi nancial elements, such as: § the needs of the business plan; § how much the venture will cost over the next three to fi ve years; 72 CHAPTER 2 §§ how much revenue can be expected over the next three to five years; and §§ how much profit can be expected over the next three to five years. • A disclaimer • A situational summary explaining: §§ objectives; §§ opportunities; §§ threats; §§ weaknesses; §§ limitations and constraints; and

§§ operational strengths. Many business plans are rejected due to poorly-written executive summaries, regardless of a business idea’s quality. Decision-makers do not want to have to read hundreds of pages so that a conclusion can be reached. Consequently, the executive summary is a vital part of any business plan. The situation section of a business plan (also known as the background, overview or motivation) describes the current situation of the enterprise. It then elaborates on how the business plan is meant to improve the enterprise’s current situation. The situation section of the business plan forms part of its ‘strategic narrative’, because it contains the enterprise’s business strategy in clear and concise terms. Typical areas discussed in the situation section include the following (Schmidt, 2005: 7): • The objectives and needs associated with the business plan. • The management expertise of the enterprise. • The resources and resource structures in the enterprise. • The overall strengths, weaknesses, opportunities and threats associated with the business plan. • Plans to overcome weaknesses, build strengths, exploit opportunities and eliminate or reduce threats. • Plans for marketing the product, service or enterprise. • An overview of competitors and competitor products. • A discussion of your enterprise’s competitive advantages and how you plan to gain a foothold in the market. • The overall track record of the enterprise.

• Alternative actions and plans if the current business plan is not acceptable. • Statements on how the business plan’s overall performance will be tracked and managed. Assumptions and methods This section contains financial data and planning information to assess the feasibility of the business plan as a whole. 73 GETTING OUT OF THE STARTING BLOCKS A business plan should show the following financial metrics (Schmidt, 2005: 8): • The annual cost (including the cost of fi nance) that the enterprise will have once the business plan is improved. • The annual income planned for the business plan. • The eff ect of infl ation on the future values expressed in the business plan. • The net profi ts expected after all the costs have been deducted from the business plan’s projected income. • The expected return on investment (ROI) associated with the business plan. • How long it will take (in months or years) before any loans will be repaid. • How long it will take to reach a profi t, given all the costs outlined in the business plan.

All business plans should have an assumptions section. An assumption is a statement that is accepted to be true until facts prove it otherwise (Schmidt, 2005: 9). For example, a business plan could assume that infl ation will not exceed ten per cent over the period for which the business plan is valid. Typical assumptions in a business plan include: • rates of infl ation over time; • interest rates on loans over time; • annual growth in revenue; • annual increase in costs; • bad debt rates on credit sales; and • percentage of market share that the enterprise wants to capture. Scope and boundaries in a business plan will address issues such as (Schmidt, 2005: 10): • the period for which the business plan is valid (e.g. three years or fi ve years into the future); • the location of operations – i.e. where business will be done; • the overall structure of the enterprise (such as departments and management teams); • technologies to be used in generating profi ts; • key constraints to be considered (e.g. time, money, people, machines and quality); and • the type of product or service associated with the business plan. Most business plans have a data sources section. This is where all the evidence (e.g. research, market analysis and consumer surveys)

is listed, so that readers can validate statements made elsewhere in the plan. Business impacts The business impacts section shows expected fi nancial results (income, expenditure, cash fl ow, assets and liabilities) associated with the business plan. Typically, the fi nancial data in this section is shown in yearly increments (e.g. Year 1, Year 2 etc.). Investors will spend a lot of time interrogating this section, so entrepreneurs must make sure that the fi nancial numbers are believable and achievable. 74 CHAPTER 2 When investors look at this section, they expect to see that the enterprise will start to show a profit at some point in the future and be able to sustain that profit. Sensitivity and risk analysis The sensitivity and risk analysis section discusses how the enterprise will react if things go wrong with the business plan. There are a number of key issues to discuss in this section, which include the following: • What could go wrong with the enterprise? • How do you plan to prevent things from going wrong? • If things were to go wrong, what are the financial and non-financial impacts to consider? • How do you plan to limit damages if things do go wrong? • What will the financial and non-financial impacts be if things go wrong and nothing is done about it?

• If nothing is done when things go wrong, will things get worse, stay the same, or get better? • All things considered, what should you do? Conclusions and recommendations At the end of the business plan, this section attempts to emphasise: • why the business plan should be accepted; • why the acceptance of the business plan is a good business decision; • why the business plan will create a sustainable flow of profits into the future; and • how the business plan will be managed to ensure the best possible results. 2.5.2 Why are business plans important? A business plan is not simply something that an entrepreneur needs in order to get finance. Serious and successful entrepreneurs know that a business plan should also be seen as: • an important planning tool; • a tool that must be used on a regular basis to see whether the enterprise is performing as expected; • an early warning system to alert the entrepreneur that things could go wrong; and • a tool to help the entrepreneur focus on the right areas in order for the enterprise to prosper.

2.5.3 Drawbacks of a business plan for entrepreneurs Business plans can have the following drawbacks: • Income and profits can be overstated. • Costs can be stated as much lower than what they really are. • Once written, business plans can be forgotten and not used to review the goals of the organisation. 75 GETTING OUT OF THE STARTING BLOCKS • As the enterprise moves on, business plans are not reviewed and adjusted according to the actual performance of the enterprise. ACTIVITY 2B (i) List the fi ve key parts of any good business plan. (ii) Write a paragraph explaining the importance of drawing up a business plan. (iii) Describe potential pitfalls involved when drawing up a business plan. Select the correct answers from the options provided. (iv) The introduction of a business plan contains: a.

the executive summary, which is a detailed breakdown of the business plan. b. the scope and boundaries section, which is like an elevator pitch. c. always a SWOT analysis. d. never supposed to discuss competitors. (vi) The assumptions covered in a business plan are: a. not carefully planned according to metrics. b. mistakes that the business made in their plan. c. in the section that shows when the business will turn a profi t. d. ideas or forecasts that the business is assuming to be true, unless proven otherwise. 2.6 START-UP MODELS This section will discuss two types of start-up models, namely lean start-up and minimum viable product start-up. According to Eric Ries,

a start-up is an organisation that aims to deliver a new product or service, and does so in a situation that is very uncertain ( The Lean Startup, n.d.). Lean start-up and minimum viable product start-up models are approaches to creating these organisations. 2.6.1 Lean start-up In 2011, Ries published a book about the lean start-up. The ‘lean’ philosophy is to produce goods or services, or to operate a business with as little waste as possible. It involves a rapid turnaround of ideas and prototypes to quickly capitalise on any source of advantage. In essence, this book revisits Juran’s ideas about continuous improvement, and it repackages the ideas of Shingo’s muda (seven wastes) in order to create a model for start-up companies. We have already discussed how muda can be used for effi cient idea generation in an earlier section. 76 CHAPTER 2 Any enterprise should be conscious of how wasteful practices could cause loss of income. Besides the fact that companies must attempt to reduce waste as much as possible, they must strive to keep on improving what they do (Juran’s idea of continuous improvement). Every day, enterprises should aim to improve by a small fraction. This means that over time, each day’s small improvements add up to large overall improvements. Lean principles Principles of continuous improvement Eliminate waste at all costs.

Focus on processes that eliminate waste. Identify areas where there are high levels of Keep on improving processes by small rework. Question why high levels of rework exist, increments. For example, strive to produce 100 remove the cause and implement improvements items without any defects in this month. Then, in constantly and quickly. the following month, produce 101 items without defect. Implement controls that can quickly alert anyone Question processes. Processes that do not identify when waste occurs. defects or waste should be eliminated. Where possible, standardise all work. Make teams responsible for the quality of their work, and encourage them to feel psychologically rewarded by it. Do not go to the next step in production unless If necessary, engage with customers to help all rework or mistakes in a previous step have identify and eliminate waste. been identified and corrected. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Ries, 2011; and Singh and Singh, 2015) Table 2.6: The principles of the ‘lean’ and ‘continuous improvement’ approaches When trying to start a new enterprise, resources are precious, and waste should be kept to a minimum. A key part of the lean approach is that spectacular success rarely happens overnight.

Instead, rapid and continual improvement in processing and design will eventually add up to a great ROI. For the early stages, a start-up needs to focus on finding a niche and maximising its competitive advantage through waste reduction and continuous improvement. For example, it is important for a start-up to quickly identify where time or resources are wasted on unnecessary features of the product or service, and redirecting focus onto more important features. This involves creating a minimal viable product (MVP) early, and then slowly adding extras. This will be discussed below. Challenges for start-ups Considering lean approach, start-ups have the following challenges to face: • Entrepreneurs may not be aware of lean principles. • Entrepreneurs may be so busy meeting sales targets that they forget to consider wasteful practices in their own businesses. • Entrepreneurs may not know where to find or look for information regarding lean principles. 77 GETTING OUT OF THE STARTING BLOCKS • Consultants in lean management are very expensive and entrepreneurs may not be able to aff ord those fees. • Entrepreneurs may not know how to implement waste prevention controls. 2.6.2 Minimum viable product The basic assumption of minimal viable product (MVP) is to collect as much information about how to improve a product or service, using the least possible eff ort. In other words, it involves building a ‘buildmeasure-learn feedback loop’ ( The Lean Startup, n.d.), which

emphasises rapidly outputting a simple product, measuring the ways it is used, and then learning from this data in order to improve. Learn from Build a data to prototype for improve the potential users next prototype Measure responses, problems and use of features (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from The Lean Startup, n.d.) Figure 2.3: The build-measure-learn loop The theory of MVP also assumes that there is already a demand in the market for the product or service. Therefore, there is no need to do extensive market research before a product or service is launched. Instead, the business must rapidly adapt or pivot its focus based on what it learns. This connects to the reduction of waste, as the business ensures it does not waste its time in the crucial early stages developing features that the customer neither wants nor needs. MVP theory states that an enterprise can take a ‘leap of faith’. It involves looking at an existing product or service and making a small tweak in its function or performance. Then, the improved product or service is launched and the market is told how your product is worth

the customer’s money. This is known as ‘rapid prototyping’ (Ojo, 2017), and involves putting out the MVP quickly, assessing feedback and rapidly moving to create the next prototype. After this, the business can then focus on simply reducing waste and improving the product by adding more desirable or useful features and fl eshing it out ( The Lean Startup, n.d.). 78 CHAPTER 2 ACTIVITY 2C Read the following case study about a fictional South African start-up company, and answer the questions that follow. Thandazo and Mustafar are two friends studying software development together. They want to create a South African smash hit mobile game. They figure that, since South Africans are increasingly connected on smartphones, this will be easy enough to do. The only problem is that, while they know a little about developing a game, their knowledge of running a successful start-up is limited. They have already run into some challenges, and they come to you asking for advice. They have formed a company called Hamerkop Software and are renting a medium-sized office in Cape Town. They have a small team of coders, artists, and a musician working on their games, but many of these employees are bringing their home equipment into the office whenever they come in. Hamerkop Software has raised some capital already, but their expenses are also quite high. Thandazo has been working on an idea for a game that will be marketed to parents, to play with their children. Mustafar, on the other hand, has been working on a challenging strategy game aimed at teenagers and young adults. They have hired three artists to create brilliant visuals, and they have been asking them to keep changing their projects as each of the two software developers refines their

own game idea. The musician, on the other hand, is still waiting for some finalised areas before she creates the soundtrack. The team has hired a number of coders to help them keep up with the new ideas and concepts they want to include in the two games, as both Thandazo and Mustafar keep having new ideas for what they could do in their two games. Thandazo thinks they should be doing market research and trying to get some users to try out the ideas they have been working on, but Mustafar is afraid that their ideas are not good enough to show off yet, or that one of these users may steal the idea if they try it. Required: (i) Explain all of the ways in which the approach taken by Hamerkop Software is producing waste. (ii) Write a paragraph, suggesting how the entrepreneurs could apply the lean start-up model to their company. 2.7 DO YOU HAVE A KILLER IDEA? A killer idea relates to the development of a product or service that is so essential that nobody could afford to be without it. Killer ideas include the iPhone, the home computer, or home delivery of fast food. Killer ideas are not always obvious at first and it could take some time to develop and hone an idea until it simply overwhelms all the others. 79 GETTING OUT OF THE STARTING BLOCKS Creative Bloq (2017) suggests the fi ve main aspects of a killer idea: 1.

The idea is exciting and contagious; the team cannot stop talking about the idea and they spontaneously start to improve the idea without being asked. 2. Sometimes, the killer idea emerges by coincidence. Someone could ask a question or say something that sparks the killer idea. 3. Killer ideas are fl exible. They can change and improve and could have the ability to solve more than one problem. 4. Killer ideas can survive the toughest tests and challenges that someone could throw at them. 5. Killer ideas are prepared for the worst. In fact, a killer idea could survive and rise above tough situations. From these fi ve ingredients we can draw some features of killer ideas to consider. Killer ideas are unpredictable and the idea could come from the most unexpected of sources. Most importantly, sometimes the idea seems silly at fi rst but the more one thinks about the idea, the more exciting and obvious the idea becomes. Finding that your team or potential customers are excited by the idea could give an indication that you have stumbled upon a killer idea. However, the idea needs to survive a basic acid test before the entrepreneur should embark on spending time and money to develop it. As we have discussed, it is important to consider challenges, fatal fl aws or threats when coming up with an idea. Consider the following questions as a basic acid test for your killer idea:

• What type of problem will the idea solve? • How will the idea help to make your enterprise unique? • How diffi cult will it be for rivals to copy the idea? (the more diffi cult it is for rivals to copy your idea, the bigger your competitive advantage) • What is the expected demand for the product or service? Are you drawing a few, niche users or a big number of users across multiple market segments? • How quickly can the idea be moved forward? • Do you have all the resources you need to make the idea a reality? 2.8 SUMMARY Ideas are at the heart of starting an entrepreneurial venture. However, it is not enough to simply generate an idea and expect it to succeed. Instead, it is important to search for the best ideas and to refi ne them. There are many tools, from brainstorming to wearing de Bono’s six hats, that entrepreneurs can use to look for problems that their business could solve with a new idea. Entrepreneurs must conduct research on their ideas too, by performing SWOT and integrated venture analyses in order to expose any weaknesses, threats and fatal fl aws the idea may have. This involves ensuring 80 CHAPTER 2 the business will have the finances and skills required, and making sure there is a market that is willing to pay for the product. Research should conclude by doing a full validation of the idea, through tapping into experts and asking questions of the target market. From there, an entrepreneur must be able to distil the idea into a convincing and concise elevator pitch, and a clear and detailed

business plan that outlines the business’s financial and strategic narratives. To do so, entrepreneurs must select their business model, and work to attain a lean start-up approach. This detailed approach to generating an idea, validating and evaluating it, and then making it concrete will give a start-up the best chance of succeeding. 81 FORMING A BUSINESS FORMING A BUSINESS 3 3.1 Introduction 83 3.2 Life lesson 83 3.3 What is a business? 84 3.3.1 | Legal definition 85 3.4 Setting up a business 85 3.4.1 | Types of business entities 87 3.4.2 | Legal requirements

108 3.5 Duties and responsibilities of owners, partners and directors 109 3.6 Registering a business and statutory requirements 111 3.6.1 | How to register a business 111 3.6.2 | Licences and other regulations 111 3.7 Opening a bank account 114 3.7.1 | Account types 115 3.7.2 | Selecting a bank 116 3.8 Business checklist 116 3.9 Summary 118 82 CHAPTER 3 Case studies –

myths, leaders and Online inspiration start-ups Boring but Growing the important business Forming Making it run stuff a smoothly Building a business It is in the team numbers Cash is king Developing

Selling products Spreading the word Getting out of and the starting services What is blocks Entrepreneurship? 3.1 INTRODUCTION The aspiring entrepreneur, having gained a good understanding of the principles, advantages and challenges that lay ahead, and with a business plan in hand, now has to investigate the various types of business structures that will best suit their circumstances. It should be noted that there are benefits and downfalls to all types of business entities. In many cases, the choice of what entity to utilise is not clear; rather, it is an evolution – a small sole proprietorship could develop into a medium-sized enterprise, and even a large company. It is natural for an entity to change over time, and to adopt the most suitable legal framework for its business structure. This ranges from a very informal, unstructured business, to one that is bound by legal and financial reporting standards.

After studying this chapter, you should be able to: • define a business; • describe the various types of business entities; • explain the duties and responsibilities of owners, partners and directors; • outline the statutory requirements in relation to a business; • describe the process involved in opening a business bank account; and • complete a hypothetical business checklist. 3.2 LIFE LESSON Zanele always wanted to own a business, and from a young age, she helped her grandmother sell surplus eggs from the family’s chicken coup. She learned how to count change, provide good service to regular customers, and present her goods attractively. She also learned that bad weather and adverse conditions could not allow business to stop. These lessons were to be an important factor of her success in later years. 83 FORMING A BUSINESS While at the Cape Peninsula University of Technology (CPUT), where Zanele was completing a diploma in computer studies, she arranged a small community-based outreach project. Together with fashion design students, they started advertising on social media for used graduation gowns, which they then made available for newly graduating students at a more aff ordable price. This enterprise grew to the extent that Zanele and her team became agents for buyers and sellers, taking a small commission, although they kept their ‘not for

profi t’ section of the business for students who could not aff ord to pay. After completing her diploma, Zanele was off ered a year-long contract at the offi ces of the Electoral Commission of South Africa (IEC), where she managed databases of voters. She found this work to be interesting, and learned a great deal about administration, good offi ce practice and the dynamics between staff and management. After her contract ended, she applied for a claim from the Unemployment Insurance Fund (UIF). With this income secured, she started reaching out to her old contacts from CPUT, with an idea of putting together a business plan, securing fi nance via the Department of Trade and Industry, and starting up a business along the lines of their college enterprise; however, this was to be done on a larger scale – i.e. with a designer and sewing room. Today, they have incorporated their enterprise as a private company. They have employed 12 women, and make an annual turnover of over R 1 million. Since the company has been doing so well, the founders/directors have now started to consider establishing new outlets. With two successful outlets in Cape Town and Johannesburg, which target the student market, and which are located in parts of cities near student residences, they are now considering franchising their business model. As young mothers, they are hesitant to commit to more working hours, and see franchising as an answer. By doing this, other groups of young women are given the chance to open a business that has a proven recipe for success, is gaining a growing market and has tried-and-tested manufacturing and operating procedures. 3.3 WHAT IS A BUSINESS? In order to understand the meaning of the term ‘business’, one has to separate it from the many and complex legal defi nitions. The Law Dictionary (2014) does a very good job of simplifying and explaining the term, by stating that a business is an endeavour that ‘occupies the time, attention and labour of [persons] for the purpose of a livelihood or profi t.’ In this sense, a business can range from an

informal shoeshining operation in the street, to a large multinational company. The Law Dictionary (2014) further explains that a single act relating to a specifi c business is not considered to be carrying out a business. For example, When Zuko sells his secondhand cell phones to friends every couple of years, it does not mean that he is running a cellular mobile business. Therefore, the terms of labour and work are not readily interchangeable with business; for example, a house owner labouring in their garden is not considered a business, and a business does not have to involve labour (it could be an enterprise involving abstract activity). 84 CHAPTER 3 3.3.1 Legal definition The legal definition of a business depends entirely on the type of business under discussion. South African commercial law is sophisticated and detailed, and covers almost every situation. Many sectors are heavily regulated, as you will see when we discuss the types of business entities, along with their licencing and regulatory requirements. The exceptions to this are sole traders and partnerships. For the purposes of legally defining a business, we will be looking at the definition as prescribed by the Companies Act 71 of 2008. This Act defines itself as promoting compliance with the Bill of Rights, as provided for in the Constitution in the application of company law. The Companies Act seeks to develop the South African economy by encouraging entrepreneurship and enterprise efficiency, and it mandates the Companies and Intellectual Property Commission (CIPC) to control the requirements for each type of business. The

CIPC administers all, or parts, of 15 pieces of legislation in this regard. Furthermore, it encompasses companies, close corporations (CCs), cooperatives, trademarks, patents, designs, copyright and the enforcement of the applicable rules and regulations. In so doing, the CIPC creates a predictable and effective environment for formal business to operate and grow, while protecting the interests of the owners and the public at large. In short, the legal definition of your business depends on a number of factors, which includes, but is not limited to, the following: • The type of business entity you choose – i.e. company, partnership etc. • Any legal contracts that you enter into that govern the distribution of profits, scope of business, services or products offered, and other matters covered by a standard or customised legal agreement. • The various Acts covering the nature of your business. • How the South African Revenue Services (SARS) sees your operation in terms of the tax it needs to recover. • The rules and regulations stated by the CIPC, which cover forms of ownership, duties, legal liability etc. 3.4 SETTING UP A BUSINESS There are many forms of business ownership to be found in South Africa today. These range from sole traders (e.g. fresh fruit vendors, domestic electricians, hairdressers, spaza shop owners) to multinational chain stores and manufacturers, usually organised into companies that are either privately or publicly owned. In most instances, the natural progression is from a small business to a medium-sized, and sometimes large, corporation. Those individuals with the courage and resources to become entrepreneurs often want and need to expand their businesses. Others are happy to run small,

manageable operations as their preferred way of trading. Whatever the plans, intentions or opportunities of business people, in order to determine the best fit with their own circumstances and aspirations, it is important that they are aware of the various forms of business ownership. 85 FORMING A BUSINESS Key terms In this section, there are a number of terms that you may not be familiar with. Since these terms appear in every section, it is best to familiarise yourselves with them. • Audited fi nancial statements: These include, among others, a statement of comprehensive income and a statement of fi nancial position. When audited, these fi nancial statements include the opinions, explanations and remarks produced by a registered fi rm of auditors, who possess the nationally recognised qualifi cations and credentials to do so. Although a company can complete its books on its own, an auditor still has to check the statements against the generally accepted accounting principles (GAAP), as interpreted by the South African Institute of Chartered Accountants (SAICA). • Corporation, incorporate, incorporators: These all come from the Latin root word meaning ‘body’. Therefore, the corporation would be a body incorporated by the incorporators. • Legal person: Such a person is also known as a juristic person, and is not the same as a natural person – i.e. a living human being. The law defi nes a juristic person as a social entity, community or an association of people that has an independent right of existence under the law. It can be ‘the bearer of judicial capacities and subjective rights,’ and, just like a natural person, it accompanies legal entitlements and obligations (Jordaan and Davel, 2005: 3). These

legal or juristic persons are taxed as such, depending on the nature of the corporation. • Limited liability: The protection given to directors and shareholders of a company, where they are not personally responsible for losses. In the event of the company being declared insolvent, directors’ and shareholders’ assets remain intact, and their losses are limited to the amount that they have invested in the entity. • Memorandum of Incorporation (MOI): The founding document that sets out the rights, duties and responsibilities of various stakeholders, as well as shareholders, directors and others within a company. • Perpetual succession: The very useful construct of an entity outliving its founders, directors, shareholders and employees. Only trusts and companies enjoy this state, and it is guaranteed by complicated legal agreements, registration by a controlling body, and compliance to the law governing such an arrangement. • Tax: Money that is collected by SARS from individuals and companies. If income is generated, a percentage of it is handed over to the government for all its projects for the benefi t of citizens; for example, schools, hospitals, roads, dams and policing are all dependent on the collection of such tax. Personal income tax is collected based on your earnings by the employer who pays it over to SARS. Another source of tax income for the government is value added tax (VAT). Generally, all goods and services sold by a business (where annual turnover is more than R 1 million) bear 15 per cent VAT. This is known as output VAT. However, in most cases, this is off set against input VAT, which is any VAT that the vendor has paid to other VAT vendors through purchases for the business. 86 CHAPTER 3 3.4.1 Types of business entities

In practice, the type of entity that a business identifies as often evolves. Typically, this is a progression from a sole trader, to a partnership, to a company. Until May 2011, a CC was another option; however, this is no longer the case, and only those established before that date are recognised. This evolution from sole trader to company takes place as the size, complexity and wealth of the entity progresses. In some cases, if the business owner has the necessary skills, knowledge and capital, then the most fitting form of business ownership can be implemented from the start-up phase. An example of this would be if someone wants to own a Spur, Wimpy or SPAR. Since these are franchise operations, the form of business ownership is predetermined. An informed choice, as opposed to a mandatory choice, would be if a farmer chooses to run their farm as a trust. It is always wise to consult legal, tax and banking professionals before deciding on the optimal form of business ownership, as each business form has its advantages and disadvantages. It is also important to note that the level of turnover/profits generated may not justify forming a company. Often, a sole trader or partnership is an adequate framework to begin with; however, when high risk, wealth and growth are considered, more sophisticated structures need to be established. The following table provides a summary of the various factors that affect an entrepreneur’s decision when choosing an entity. Sole trader Partnership Trusts Company Starting procedure

Simple Complicated Complicated Complicated Size and value of Varies Varies Varies Large business Legal personality* None None For tax only Own Access to capital Limited Limited Limited Good

Ownership and One person Two persons Group Group management Distribution of profits Owner Partners Beneficiary Shareholders Income tax Owner pays up Partners are Trust income is Company is to 45 per cent as taxed up to taxed at taxed at a flat income increases 45 per cent as 45 per cent

rate of 28 per income increases cent Expertise Sometimes More skills at Can call on a Can employ all lacking hand range of skills skills that are necessary (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 3.1: Brief summary of the different types of business entities * Legal personality: The higher the risk, the more advantageous it is to protect personal assets by establishing a company. For instance, if a sole trader makes a lot of money, but then makes some 87 FORMING A BUSINESS bad business decisions, their creditors can legally seize personal items of value – i.e. vehicles or property. If this same person had formed a company at the height of their success, when hard times fell, creditors could only seize company assets, and not those of the

founder. In this sense, the company has a legal personality and, like a person, can be the subject of legal action. 3.4.1.1 Sole traders Sole traders (also known as sole proprietorships), are the most common form of business ownership in South Africa. They dominate the informal sector, where it is largely a default choice, since other business forms can become complex. SARS, which is the government agency responsible for collecting tax, has defi ned all forms of business ownership, and defi nes a sole trader / sole proprietor as follows: ‘A sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity’ ( SARS 1, 2014). Here, the owner is taxed, as an individual, from the profi ts accumulated minus deductible expenses. In other words, their tax percentage is based on their profi ts minus their expenses. For example, Dudu makes R 5 000 profi t from her business, and she has R 500 allowable expenses. Instead of being taxed on R 5 000, SARS will deduct that R 500 from her R 5 000 profi t, and tax her on the R 4 500 instead. Many South Africans currently run their businesses along these lines – informal, easy to operate, and free from the rules that govern larger, more complex forms of enterprise (Fourie, 2018). Despite national and local government backing and assistance, such as the National Informal Business Upliftment Strategy (NIBUS), sole traders are constrained by many existing by-laws. In addition to this, sole traders have a lack of essential business skills, and have limited access to the fi nancing necessary for them to improve and expand their operations. With national government and businesses supporting the facilitation of growth and sustainability, enterprises that are fl exible, simple and owner-directed are the key to establishing a thriving small, medium and micro enterprise (SMME) sector. This is an acknowledged generator of employment in developing countries. Characteristics of a sole trader

Sole traders are inherently resourceful, entrepreneurial, hard-working, disciplined and open to opportunity wherever it presents itself. In South Africa, the most compelling examples of this are to be found in the townships and informal settlements, where apartheid has placed a large section of the population at a distance from chain supermarkets and large branded service providers. Here, many spaza shops, food stalls and other small retail outlets thrive, and are fully supported by the community. If a sole trader wishes to expand, there are government agencies dedicated to supporting both access to fi nancing and the improvement of business skills. A sole trader usually has an in-depth knowledge of, and appreciation for, local trading conditions. Furthermore, they are ideally placed in order to adapt and focus the business on community needs, likes and dislikes, as well as the latest trends. It is this closeness to the marketplace that often gives sole traders an edge over chain stores, which import goods based on international, rather than local, market research. 88 CHAPTER 3 Advantages and disadvantages of a sole trader Advantages Disadvantages No need to register a name – trading can be done Owner cannot reserve a unique name or brand in own or a fictitious name Bank accounts can be operated by owner – Banks would be opposed to granting loans to no need for banking mandates and multiple expand the business signatories The owner takes all profits

The owner has unlimited liability and assumes all risks As the sole owner of the business, the owner The owner may lack the necessary skills makes all of the decisions There is simplicity in its establishment and A licence is needed to trade in certain areas, and operation – no separate legal entity attendant fees would be a constraint (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 3.2: Advantages and disadvantages of a sole trader Dissolution of a sole trader There are no specific steps or regulations governing the dissolution of a sole trader, and they may cease business at any time. If the business is registered for VAT purposes (VAT will be discussed in later chapters), a deregistration form must be submitted to SARS. 3.4.1.2 Partnerships Partnerships have been a logical step for many sole traders, as there are often various opportunities for joining forces and increasing business. For example, consider a hairdresser and a beautician – together, they can offer a bigger and better service, save on rent, jointly employ assistants, and enjoy many other benefits of working together. In the South African context, partnerships have been an ideal way of addressing the Broad-Based Black Economic Empowerment (B-BBEE) legislation and initiatives, which seek to address the historical exclusion of black people from the economy. B-BBEE’s scope is broad, as it includes women, workers, youth, people with disabilities and people living in rural areas. Through diverse, yet integrated, socio-economic strategies, this legislation

aims to economically empower all black people. These strategies include, but are not limited to ( Western Cape Government, 2013): • increasing the number of black people that manage, own and control enterprises and productive assets; • facilitating the ownership and management of enterprises and productive assets by communities, workers, cooperatives and other collective enterprises; 89 FORMING A BUSINESS • developing human resource and skills; • achieving equitable representation in all occupational categories and levels in the workforce; and • preferential procurement – i.e. investing in enterprises that are owned and managed by black people. There are a number of well-documented reasons for entering into this type of partnership – not the least of which is the rating system that certifi es business entities at certain levels of compliance. These ratings are often taken into consideration when awarding tenders and appointing suppliers, and can be a vital step in the success of a new partnership, should they wish to do business with government and corporations. Essential elements for a valid partnership A partnership refers to a type of business entity where its owners (now called partners) share with one another the profi ts or losses of the business. The rules governing a partnership fall under common law, and SARS recognises that a partnership can accommodate between two and 20 persons in an unincorporated joint venture. These relationships can get very confusing, and may lead to confl ict. Therefore, it is strongly

recommended that a legally binding agreement is drawn up, which includes all partners and sets out concerns, rights and responsibilities. Ideally, it should include the following specifi cs (Loubser et al., 2013): • The name and purpose of the business, as well as the conduct of its partners – i.e. the responsibilities and performance expected of each partner, as well as their remuneration. • How profi ts or losses will be administered. • The division of earnings and procedures, should the partnership be dissolved. • Whether partners are full-time, or whether other business activities are allowed. • Steps to be followed when a partner is disabled or dies. • A detailed description of each partner’s investment in the partnership – cash, assets, loans, labour etc. • Guidelines for the withdrawal and admission of partners, as well as the grounds for expulsion. • Whether a partner can sell membership interests to an outsider. • Which partners will perform the fi nancial role, handle payments and have signing powers. • Who may draw from the partnership’s bank account. • How and where the books will be kept. • The methods that will be used in order to determine the value of the business in the event of sale, dissolution, disability or withdrawal of a partner.

• Decisions on whether a partner who leaves should be obliged to sign a non-compete agreement – this inhibits the potential for abuse of private information, client lists, business practices and upcoming products, and prevents the copying of marketing plans. • A buyout clause covering the details of partners who retire, die or leave. • How disputes must be settled – i.e. whether by negotiation, mediation or arbitration. 90 CHAPTER 3 Types of partnerships There are three types of partnerships, as defined by SARS 2 (2018): 1. General/ordinary partnerships: Partners are jointly liable for the debts or profits of the business. 2. Anonymous (sleeping) partnerships: The anonymous partner is not known to the public, yet still shares in the risks and benefits of the business. 3. Commanditarian partnerships: One ‘partner is purely a financial participant with a restricted liability – similar to a shareholder in a company. He shares in the profits and losses, but their liability is restricted to their specific contribution or to an agreed amount.’ A commandite partner shares certain characteristics with the anonymous partner: no labour or managerial role is performed, and the only contribution is a fixed sum of money, with the proviso

(condition attached to an agreement) that a share of the profits (if any) is paid over. Furthermore, in the event of a loss, the partner will only be liable to the extent of their contribution; however, in certain circumstances, they may be fully liable. Advantages and disadvantages of partnerships Advantages Disadvantages It is easy to establish, as it has no statutory Partners have unlimited liability – i.e. all partners requirements – i.e. auditors do not have to assume risk prepare financial statements Banks are more inclined to provide finance All partners are liable for debts of the business There is a wider skill base A partnership is not a legal entity and, therefore, has no continuity in the event of a partner’s death Each partner has a personal interest in the Decision-making and consensus can be difficult; business and is, therefore, motivated to act in the for example, if one partner exercises bad best interests of the partnership judgement, all other partners will have to bear the brunt of the consequences (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 3.3: Advantages and disadvantages of partnerships Dissolution of a partnership

In a partnership, if one partner is sequestrated, dies or leaves the partnership, then it is automatically dissolved. Any existing agreements then become null and void, unless they are comprehensively covered, and the provisos are implemented according to the founding agreement. For example, for a partner to leave their share of the partnership to their child, which includes both profit shares and management responsibilities, it would have to be stipulated in the original partner agreement, and signed by all partners. 91 FORMING A BUSINESS Partnerships do not have perpetual succession in common law – i.e. they do not have continual existence in the event of bankruptcy, death, or change in membership. Therefore, they are not an ideal form of business ownership for a group of people seeking such stability. Let’s take another look at the previous example. A share in the partnership being handed down as part of an estate may cause many unforeseen problems, create confl ict among partners, and hamper the successful functioning of the operation. 3.4.1.3 Companies The nature of the company A company can be loosely described as a business enterprise that earns an income by producing goods or services. There are four main features that distinguish a company from other entities: 1. It tends to be larger in size and value than other types of business ownership. 2. The ownership of a company is divided into units of equal value called shares. Should a company want to expand, it can do so by raising capital through the sale of these shares to persons who

become part owners of the business, who are referred to as shareholders. The company is run by a board of directors, who make important, strategic decisions, and who employ managers and staff to run operations. 3. A company has a legal personality that is not only separate from its employees, but also separate from its directors and shareholders. In the event of insolvency, such an arrangement prevents creditors from making claims against the directors, employees or shareholders for the payment of debts. 4. Companies have perpetual succession, which means that they have their own legal personality, and the death of directors or shareholders does not aff ect their status as going concerns. The Companies and Intellectual Property Commission (CIPC) This is the offi cial umbrella body that regulates all activities associated with companies. The CIPC is a member of the Department of Trade and Industry, and is responsible for the following (CIPC, n.d.): • The registration of companies, cooperatives and intellectual property rights (trademarks, patents, designs and copyright), as well as the maintenance thereof. • The disclosure of information on its business registers. • Promoting education and awareness of company and intellectual property law. • Promoting compliance with relevant legislation.

• The effi cient and eff ective enforcement of relevant legislation. • Monitoring compliance with, and contraventions of, fi nancial reporting standards, as well as making recommendations to the Financial Reporting Standards Council (FRSC). • The licensing of business rescue practitioners. • Reporting, researching and advising the minister on matters of national policy relating to company and intellectual property law. 92 CHAPTER 3 The CIPC is headed up by a commissioner, who oversees a number of departments that control the regulatory aspects of the legislation under its jurisdiction. Examples of such legislation include the following Acts: • Companies Act 71 of 2008 • Close Corporations Act 69 of 1984 • Share Blocks Control Act 59 of 1980 • Consumer Protection Act 68 of 2008 • Co-Operatives Act 14 of 2005 • Patents Act 57 of 1978 • Trade Marks Act 194 of 1993 • Designs Act 195 of 1993 • Copyright Act 98 of 1978 The CIPC has digitised most of its operations, and most submissions, reporting etc. is now done electronically.

Parties to a company Parties to a company include directors, shareholders and employees. An important concept to understand is that of ‘conflict of interest’ – i.e. a conflict between one’s obligation to the public good, and one’s selfinterest. For example, there would be a conflict of interest if a director or senior member of the management committee used their influence to appoint a supplier to whom they are related. Conflict of interest issues have to be carefully managed and declared, and must be transparent if they exist. Legal personality of a company There are two types of legal personalities in South Africa: a natural person (a human being) and a juristic person (e.g. a company or CC). Such a juristic person possesses the same rights and duties as a natural person – i.e. it can sue or be sued, is liable for tax, and can enter into contracts. In most cases, this legal personality of a company protects the directors from any legal action against them personally. For example, if a large motor manufacturer was sued for one of its cars not having efficient brakes, thereby causing death or injury, the company (not the directors) would be liable for the damages. However, there have been a (very limited) number of cases in which directors have not been protected from personal liability. This is known as ‘lifting the corporate veil’, which the courts do not apply lightly. Only in extreme cases of theft and fraud would this measure be considered, and then only on a case by case basis, usually when the corporation has been created in order to hide or shield criminal activity. Categories of companies There are a number of categories of companies operating in South Africa, and each one has to be registered with the CIPC. However, each type of company differs in terms of reporting and 93 FORMING A BUSINESS

registration requirements. Each company also needs to reserve a unique name, which then becomes the registered name for use by that company only. The following table highlights the various categories of companies, as well as the main features of each. Indicated by the company Category Characteristic name ending with: State-owned companies This type of company is owned by SOC a division of the state; for example, Eskom. Private companies Private companies incorporate (Pty) Ltd one or more persons, with at least one director. These companies do not have shares available for sale to the public. Personal liability companies Personal liability companies are Inc. or Incorporated similar to private companies, except directors are jointly and

individually liable for any debts; for example, medical or law practice fi rms. Public companies These companies must have Ltd or Limited at least three directors, and are allowed to sell shares to the public. Non-profi t companies Incorporated by a minimum of NPC or NPO should appear on three persons, with three directors offi cial documents to be of benefi t to the public; for example, a church with no shares available to the public. Although the company may make a profi t, these may not be distributed to the shareholders. After closure, assets must be distributed to similar public benefi t organisations. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from BusinessOwl, n.d.) Table 3.4: Categories of companies We will now briefl y discuss the requirements, processes and ongoing duties of each category, as stipulated by the CIPC.

State-owned companies A state-owned company is either a company that is defi ned as a ‘state-owned enterprise’ in the Public Finance Management Act 1 of 1999 (PFMA), or a company that is owned by a municipality. The majority of the requirements of a public company will apply to state-owned companies as wel . 94 CHAPTER 3 In order to register a state-owned company, the applicant has to register as a customer with the CIPC, as well as deposit funds and reserve a name. It is important to note that the Memorandum of Incorporation (MOI) will not be standard, and will need to be substantially customised in order to reflect the legislation, restrictions, regulations and intentions of the organ of state. As such, it must be submitted manually, rather than electronically, to the CIPC, as is the case with private companies. It is also mandatory to appoint an auditor, audit committee, a company secretary and directors. Each year, an annual return has to be submitted, together with audited financial statements. Failure to do so will result in deregistration. Private companies Private companies may not offer shares to the public and restrictions are also placed on the transferability of their shares. Private companies must have at least one director and one incorporator. The director and incorporator may be the same person. The word ‘person’ includes a juristic entity. This means that a legal entity or a trust may be an incorporator of a new company. Most private companies are owner managed and tend

to have a smaller number of directors. ( CIPC, n.d.) All companies, including private companies, must have an MOI, which sets out the rules agreed upon by the shareholders for the management and maintenance of the business. Private companies may be registered with a standard or a customised MOI. The standard MOI is provided by law, and expedites the registration process. A customised or nonstandard MOI, on the other hand, allows shareholders to impose certain conditions or waive certain requirements, such as an audit. Such an MOI must be attached to the application, and may require the assistance of a legally qualified person, or someone with company secretarial knowledge. At present, private companies with customised MOIs can only register manually, whereas the registration of a standard MOI offers electronic registration on the CIPC website. The aspiring company has to register as a customer with the CIPC on its website before the process can begin. Once the company is a customer with the CIPC, it is issued with a customer code and password, and is required to deposit a fee in order to reserve a name. In order to apply for a particular name, the proposed name first has to be approved. If the proposed name already exists, and other variations also fail, then the company will be registered using a company enterprise number. The company then has to apply for a name change once it has completed the registration process. In order to avoid this potentially messy situation, there is a database of reserved names that is available for inspection on the CIPC website – this allows the company to validate and reserve the proposed name before registration. Once the company name is successfully reserved, the company can register either online or manually. For registration, the following details and documentary evidence are required: • A certified copy of the applicant’s identity document (ID) • Certified copies of the IDs of the directors and incorporators • The name confirmation certificate, if applicable 95

FORMING A BUSINESS • Power of attorney (if applicable) • In order to register a trust or company/juristic person as an incorporator, the resolution and certifi ed copy of the duly authorised representative’s ID must be attached Once registered, the CIPC will issue the company with an approved MOI, whether it be the standard or customised version. With this in hand, along with the company enterprise number, the company may now open a bank account, register for VAT, and apply for loans and assistance as required by the relevant institutions. Each year, a private company is required to submit an annual return. Prescribed fees must accompany the return, which is submitted electronically. This has to be received by the CIPC within a certain period of the anniversary date each year, or the company will be deregistered. Personal liability companies This type of company is very similar to a private company; however, in a personal liability company, the directors (and, in some cases, the past directors) are jointly and individually liable for any debts and liabilities arising during their periods of offi ce. Registering this type of company must be done manually through the CIPC. As with a private company, applicants must register as a customer, reserve a name, and deposit name reservation fees. In order to obtain an MOI, a standard form can be completed; however, it is advised that legal advice be obtained in order to customise the agreement. As with all companies, annual returns have to be submitted to the CIPC, together with annual fees. Public companies

As its name suggests, this type of company may off er shares to the public, which is an ideal way to raise capital for expansion. Capital can be raised this way, because as the value and success of the company increases, so does the price of the share. It is important to note that public companies are the only type of company that may trade on the Johannesburg Stock Exchange (JSE), where such shares may be bought and sold. Many members of the public, as well as pension funds, banks and wealth asset fi rms invest heavily in shares. While some shares are considered to be high risk, where the most profi t or the most loss can happen, other shares, particularly of large and well-established companies, have shown a slow but steady appreciation over the years, and are known as ‘blue chip’ shares. Public companies must have at least three directors, be audited, and annually produce audited fi nancial statements, which are listed with their shareholders. Depending on its size, a public company may also be required to have an audit committee and a social and ethics committee. These obligations are laid down and monitored by the CIPC. 96 CHAPTER 3 As previously mentioned, a public company may only be registered manually (not electronically). This is done through the following steps: 1. It needs to register as a customer with the CIPC. 2. Once this is done, it needs to deposit funds for name reservation. 3.

Next, it needs to reserve a corporate name. Any company may be registered with or without a company name. If a reserved name is not included in the initial application, the company will be registered with its enterprise number. In this case, a name may be added at a later stage through a name amendment, which requires an approved name reservation, and a special resolution to effect a change to the MOI. However, this is an expensive and complex process that is best avoided. 4. The next step is to register the company manually by submitting the prescribed forms (CoR14.1, CoR14.1A and CoR14.1 Annexure D). These forms cover the appointment of directors, an auditor, audit committee members and a company secretary. 5. In terms of the MOI, a company may draft its own (customised MOI), or submit a CoR15.1B form, which results in the generation of a standard MOI. 6. In the MOI, restrictions on the management and ownership of the company may be imposed, where certain aspects of the MOI are not subject to amendment at a later date. This is referred to as the ring-fencing of provisions. For ring-fencing, yet another form (CoR14.1C) is mandatory. When manually registering a public company, additional forms have to be submitted, such as a confirmation notice of name reservation, a CoR9.4 form (if applicable), a certified copy of the applicant’s ID, certified copies of IDs of all incorporators, directors and power of attorney (if applicable). On an annual basis, annual returns must be submitted, together with a fee and the audited financial statements of the company.

Non profit companies Registering a non-profit company without members, and with a standard MOI (CoR15.1C), is a fairly simple process. However, if a non-standard version of the MOI is preferred, and if there are multiple members, then the number of forms and requirements increase. The steps to registering an NPC with a standard MOI, and without members, is typical of the processes previously discussed – i.e. register as a customer on the CIPC website, pay a fee to reserve a unique name of your choice, and complete forms CoR14.1, CoR14.1A and CoR15.1C. In order to appoint an auditor, audit committee members and/or a company secretary, an additional form must be completed; however, it is not necessary to appoint these for a non-profit company. When appointing such individuals, the usual supporting documents should accompany the forms – i.e. confirmation notice of name reservation, certified copy of the applicant’s ID, and certified copies of IDs of all incorporators, directors and power of attorney (if applicable). With regard to annual returns, these have to be submitted together with a fee and audited financial statements. 97 FORMING A BUSINESS Advantages and disadvantages of companies The main advantage of a company is the limited liability status of the directors and shareholders. Because directors and shareholders know that their personal assets are not at risk, more risks are taken, which often leads to exceptional phases of growth and innovation. Furthermore, as a public company, there is the potential to raise funds by selling shares on the open

market, which, again, provides opportunities for expansion and employment, and the provision of world-class products and services. However, there are also disadvantages to companies; for example, incorporating a company is not only time-consuming, but it is also complicated. Furthermore, in spite of streamlining by the CIPC, the process can be quite daunting for the would-be incorporators, or the parties applying on their behalf. Even after registration, there are annual returns and ongoing fees that need to be managed. Even if the directors are unanimous in their desire to alter an aspect of the MOI, it can be time-consuming, and has to be properly lodged with the CIPC. In the case of public companies, there is the matter of equity dilution – i.e. part of the company is sold and controlled by outsiders. This may result in loss of management control and hostile takeovers. A hostile takeover occurs when a larger player buys out a company, and does not intend to run it as a going concern; rather, its intention is to absorb it. In extreme cases, the takeover is purely carried out in order to eliminate the competition, and the company is liquidated, resulting in a loss of employment. Dissolution of a company There are two ways in which a company can dissolve; the fi rst is deregistration. Here, a special resolution is made by the members of the company, which is fi led with a fee, a sworn statement by the director that the company has no debts, and a certifi cate from the company’s auditor. In many cases, especially in the days before digital registration, a customer code with the CIPC had never been acquired. Therefore, this must fi rst be applied for, before carrying out the aforementioned steps. A legal personality is only terminated once the company is offi cially dissolved and removed from the registry. The second way in which a company can be dissolved is by liquidation. The term liquidation assumes that the company has fi nancial problems. A company may be liquidated:

• as a result of a legal court process; • at the request of its creditors; or • by making a voluntary decision to liquidate – the voluntary termination of an insolvent company is the same as the deregistration of a solvent company. With regard to dissolving a public company, there are additional steps that need to be followed. Firstly, an extraordinary meeting of the shareholders must be called, with a minimum of two thirds adopting a resolution to dissolve. The management board must then submit an application to the CIPC, together with the resolution of the shareholders, and the minutes of the general meeting. An approved annual report for the last fi nancial year, and an overview of the activities of the company 98 CHAPTER 3 in the current year, must also be submitted, with the latter indicating how the demands of creditors will be satisfied. The company will then be liquidated and deleted from the commercial registry. 3.4.1.4 Trusts Trusts may be difficult to understand, as they have complex legal and personal dimensions. Such entities are typically established for, and on behalf of, the following individuals ( Sanlam, n.d.): • Minors • People who cannot take care of their own affairs • People with indivisible assets • People who want to save on tax • People whose assets grow faster than inflation

• People with a complex family composition • People who want to protect their assets There is also provision in South African law for the creation of business trusts, which is explained in the section to follow. Characteristics of a trust A trust is a legally binding agreement in which assets are transferred into the custody of named individuals (trustees), who then act as instructed, usually for the benefit of another individual, group or business. Unlike a company, a trust does not enjoy legal personality benefits – i.e. it cannot sue or be sued. However, it is considered a legal entity for tax purposes only, and is taxed according to the tax deduction tables provided by SARS. For a period, this tax was lower than personal tax, and individuals took advantage of this by forming trusts in order to evade the required personal tax. This loophole has subsequently been closed, with tax levied on trusts that is now in line with personal tax levels, and often exceeds these levels. However, trusts remain popular for a variety of reasons (Taute, 2017): Trusts, like companies, have “perpetual succession”, so they survive the death/incapacity/insolvency/ removal of trustees, with all the practical benefits that entails. For example, the business can continue to operate normally after the death of the founder or trustees, rather than be tied up in the process of winding up the deceased estate. And trusts that are properly created and administered can protect assets from creditors in the event of insolvency, divorce etc. of the founder/trustees/beneficiaries. Furthermore, there are no estate duties (tax levied on the property of deceased persons) imposed on trusts, nor is there tax imposed on capital gains. Parties to a trust

A trust consists of a donor or founder who transfers ownership, as well as the control of assets, to one or more trustees. The trustees are then appointed to administer these activities, and to control the distribution of income to the beneficiary. In its simplest form, there are three parties involved: 99 FORMING A BUSINESS the donor, the trustee and the benefi ciary. It can be argued that the Master of the High Court is yet another party to all trusts, as it is through their jurisdiction that the registration and appointment of trustees is legalised. Types of trusts There are two main types of trusts: the inter vivos trust, which is created between living people, and the testamentary trust, which only comes into operation when the donor dies. Creation and registration of a trust Prior to registering a trust, trustees sign acceptance forms, which are lodged with the deed. A number of other documents are also required, all of which are legislated by the Department of Justice and Constitutional Development. These documents diff er depending on the type of trust being created. Business trust A business trust, which has all the characteristics of an ordinary trust, has the additional function of being able to trade for profi t, for the benefi t of the benefi ciaries named in the trust deed. In this way, the trustees may acquire more assets, and all assets remain at risk from trading liabilities – i.e. if the business goes into a loss situation, then the trust’s assets would have to be sold in order to satisfy any commitments. Business trusts are not very common in South Africa for various reasons, one reason being that there is no tax benefi t to be gained. However, they do

serve an alternative purpose. If diff erent parties hold land, property or other assets in common, business trusts can protect these assets in the event of bankruptcy, divorce or death of one or more of the parties. For example, consider a married couple who opens a business trust together. If, down the line, they get divorced or one partner dies, the assets that they placed in the business trust will remain untouched and unaff ected. Advantages and disadvantages of a trust Advantages Disadvantages Protects assets and interests of vulnerable parties There are diffi cult legal obligations; for example, the registration of a trust deed No estate duties payable on death of a party, and There are many administrative burdens; for capital gains tax is avoided example, fi nancial statements have to be submitted to the Master of the High Court Supplies continuity of operation past the death of Minutes and resolutions of all meetings have to a donor be kept It is easier for business trusts to raise fi nances, Overall taxes are high than it is for sole traders and partnerships to do so (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 3.5: Advantages and disadvantages of a trust 100

CHAPTER 3 Dissolution of a trust A trust will terminate on the date set out in writing by the founder. Alternatively, termination will occur as a result of the trust’s goal having been reached, or due to the fact that it cannot reach its goal. Once the trust is terminated, its assets must be distributed as per the trust deed. 3.4.1.5 Others There are also other forms of business entities, such as franchises and CCs. Franchises Franchising is a growing global trend, accounting for 13 per cent of the GDP in South Africa. Franchises arise from small, successful businesses, where the owner (the franchiser) wishes to expand, but needs additional capital, as well as committed and engaged business partners, to do so. For business partners (the franchisees), the main benefit is in the areas of marketing and distribution; however, its value can have a much wider scope. Since it is often difficult for the public to understand the difference between a franchise and a business opportunity, clarity is essential for potential investors. It is important to understand the difference between a franchise and a business opportunity, as it influences how you will run and operate your business venture, as well as how customers and potential investors perceive the business ( The Franchise Association of South Africa, 2017). For example, an operator provides Person A and Person B with equipment, information and capital, and tells them to run a coffee stall at a weekend food market. However, Person A is given a business opportunity, whereas Person B is given a franchise.

Since Person A is offered a business opportunity, they are given a lot of freedom to attempt gaining as much profit as possible from the coffee stall. As a result, Person A adds more options to the coffee menu, starts selling pastries, and adds more decor to their stall. This person is not closely monitored, and the operator is not really concerned whether their operations veer from the operations of the franchise ( The Franchise Association of South Africa, 2017). Person B, on the other hand, is closely monitored by the operator, and is given a more lengthy and strenuous training programme. This is because the franchiser needs to be confident of the franchisee’s skills and ability to represent the franchise. In addition to this, in comparison to Person A and the operator, there is more communication between Person B and the operator. In this sense, Person B is not given the same freedoms as Person A, as they are expected to report on all their operations to the operator. Person B is also expected to strictly follow the franchise business model and system, as this ‘is the “business format franchise” which is what the general public expects from someone who calls themselves a franchiser. It is a protective structure for the relatively innocent investor’ ( The Franchise Association of South Africa, 2017). Therefore, it is important that Person A conveys to the public that they are running a business opportunity rather than a franchise, as this may confuse the public and create misleading messages about what the operator’s real franchise looks like. 101 FORMING A BUSINESS Some of the biggest names in retailing, especially in the food outlet industry, are sold as franchises. In South Africa, household names include SPAR, KFC, Steers, Wimpy, Mugg & Bean and Cash Crusaders. A potential franchisee should have access to fi nance ranging from a few hundred thousand rand to a multimillion-rand layout for well-known brands.

Nature of the franchise agreement A franchise agreement is a legal document that covers the relationship between the two parties of a franchise: the franchiser, who is expanding their original business, and the franchisee, who is looking to follow the success of a tried-and-tested business model. Although there is no specifi c format, a sound agreement generally covers the following: • Duration, territory, renewal and resale rights, as well as winding up arrangements • Operational norms • Training and ongoing support off erings • Investment, royalty and licence fees, as well as start-up costs • Trademark and signage use, and standards for store/location/stock • Advertising commitments, and how the costs are apportioned • A comprehensive disclosure on key matters – i.e. fi nancial status of the franchiser and details of fellow franchisees, including those who have closed or been terminated, and reasons for failure of exfranchisees. Advantages and disadvantages of franchising Advantages Disadvantages The right franchise is a low-risk business The franchise agreement often includes investment that is built on a transparently restrictions and high standards, which makes total successful idea and its implementation. compliance diffi cult.

The business has a ready-made market share, a Franchise standards are not always geared to the recognisable brand, a supplier base and a sound local market, as it is run in a specifi c way, and caters reputation. to a specifi c market; for example, in rural areas, the shopper may want to buy in bulk, but the franchise agreement may not be accommodating for this demographic. The franchisee is assured training and support, Franchise monitoring may become a matter of and does not necessarily have to be experienced. stress and disagreement. A franchise is the only form of business ownership The fate of the franchisee is tied to the fate of the that enables a person with a small business to franchiser and other franchisees. If any signifi cant compete with big businesses – i.e. SPAR competes change of fortune occurs, it has a negative eff ect with Shoprite, which is a multinational group. on all partners; for example, in Spur, a racist incident and management response led to a boycott of other Spurs ( News24, 2017). Financing is more accessible than for a sole trader Although there is profi t sharing with the franchiser, or partnership. risks are generally assumed by the franchisee. 102 CHAPTER 3

The franchise benefits from mass marketing and Many potential franchisees do not conduct bulk buying, which is unaffordable for a small proper research – i.e. they do not speak to other business. franchisees, nor do they invest in proper legal and financial advice. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Nibusinessinfo.co.uk, n.d.) Table 3.6: Advantages and disadvantages of franchising Duties of the parties to a franchise agreement A franchise operation has the potential to be successful and sustainable if the duties of the franchiser and franchisee are well defined, as well as if there is sound leadership and properly chosen owner-operators. The various duties of the franchiser are summarised as follows: • Provide an established business model. • Utilise the franchisee’s investment and ongoing contributions in order to grow the brand, and to increase efficiencies, network, training programmes, support initiatives, group insurance, good loan rates and assets. • Assist in site selection – this the most important factor for success. • Build productive and fruitful relationships with suppliers, which enables bulk buying discounts. • Advertise to a wide consumer base, either nationally or provincially. The various duties of the franchisee are summarised as follows: • Adhere to the standards and restrictions agreed to, while still exercising entrepreneurial responsibilities. • Promote the enterprise locally, in whichever way is appropriate.

• Seek out training gaps in self and staff, and ensure that there is continual training and development that is in line with franchise standards. A franchise may be terminated by either party being in breach of the franchise agreement, or by going out of business. Close corporations (CCs) CCs were established via the Close Corporations Act, in response to the business community’s request. A simpler version of a private company was required, where the members/owners had a more direct management role, yet would be able to enjoy the benefits associated with a company – i.e. limited liability, legal personality and perpetual continuity. However, since the implementation of the Companies Amendment Act in May 2011, no new CCs can be registered, nor can a company convert to a CC. Although existing CCs may continue in this form, it is no longer an option as a choice of business ownership. 103 FORMING A BUSINESS Characteristics of a CC The owners of a CC are known as members, and these members are natural persons or trustees of either an inter vivos trust or a testamentary trust. The minimum number of members is one, while the maximum is ten. Each member has a membership interest in the CC (which is expressed as a percentage) – this interest percentage is not necessarily related to the members’ initial contributions to the CC. Membership interest can be acquired directly from the CC, or from an existing member. Although a CC is taxed as a company, in all other respects, it is simpler to manage; for example, there is no need to appoint a board of directors. In terms of the Close Corporations Act, members of a CC are expected to exercise care and skill in the interests of the

corporation, and will be held liable to the CC for any loss that is suff ered. Although members are protected to a large extent against liability, in certain circumstances, they can be personally liable for any debts and liabilities that are incurred, particularly in the case of reckless or negligent behaviour. A member can exit from a CC under the following conditions: • Voluntary disposal of interest • Forced disposal due to insolvency or attachment • Death, in which case the interest can be disposed of in terms of a will • Deregistration or liquidation of the CC • By order of court on the application of any member The future of CCs The importance and relevance of CCs was diminished by the provision of the private company, as defi ned by the ‘new’ Companies Act of 2008. As a result, the fl exibility and simplicity of the CC was incorporated into the structure of a small private company. After May 2011, no new CCs were registered, which has caused their numbers to gradually decline. Although it is not compulsory, many CCs have opted to convert into private companies, which is done by fi ling a notice of conversion with the CIPC. This conversion assists with continuity within the business structure, as explained by VDMA (n.d.): The eff ect of the conversion of a CC to a company is that the entity that existed as a CC will continue to exist as a company. Anything done by the CC is deemed to have been done by the company. As such, all of the rights, obligations, assets and liabilities of the CC forthwith vest in the company. This also has the result that any legal

proceedings instituted by or against the CC may be continued by or against the company. Advantages and disadvantages of CCs Many small businesses chose this structure due to its numerous advantages, many of which have been carried forward to private companies. Such advantages include the following: 104 CHAPTER 3 • A CC is easy to establish and operate. • A CC enjoys perpetual succession, and can operate as members change. • Members have limited liability – i.e. they are generally not liable for the debt of the CC. • Transfer of ownership is easy. • There are fewer legal requirements than in a private company. • Members are responsible for, and close to, management and operations. • It is permissible for a CC to own shares in a company (although it cannot own shares in another CC). The disadvantages of CCs include the following: • The number of members are restricted to a maximum of ten. • There are more legal requirements than for a sole trader or partnership. Dissolution of a CC

Dissolution occurs as a result of liquidation or deregistration. Deregistration can be initiated by the member(s) via letter to the CIPC, or it can be initiated by the CIPC itself, if the required annual returns are not submitted. ACTIVITY 3A (i) In your own words, define the term ‘business’. (ii) Identify whether the following statements are true or false (If false, substantiate your answer.) a. Generally, all goods and services sold by a business (where annual income is more than R 1 million) bears a ten per cent value added tax. b. A sole trader, as well as a partnership, has unlimited liability and assumes all risk. (iii) State the specific year that the registration of CCs ceased under South African company law. (iv) Name three types of partnerships as defined by SARS. (v)

Outline the essential elements that should be included in a legally binding agreement. (vi) State the three parties to a trust. (vii) Conduct your own research, and then list at least four typical types of sole trader enterprises that are found in South Africa (these should not be the ones mentioned in this textbook). (viii) State the three types of companies that need to submit their audited financial statements with their annual returns. (ix) Name three functions of the CIPC. 105 FORMING A BUSINESS (x) Briefl y diff erentiate between a franchise and a business opportunity. (xi) Explain the dissolution process for a sole trader. (xii) Justify why sole traders are unburdened by responsibilities in relation to other business entities. (xiii)

Discuss the characteristics of a juristic person. Substantiate this explanation with an example. (xiv) Provide one example of a type of enterprise in which the legal personality of a company does not protect the assets of the directors. EXA MPLE 3 A (Comparison of business entities – deciding which one is right for you) On its website, the Small Enterprise Development Agency (SEDA) provides a useful set of questions for a business owner who is seeking to compare and make a sensible choice in the face of risks and opportunities. For the purposes of this table, we will disregard trusts, as this is an uncommon choice of business entity, and is only entered into under unusual or specialised circumstances. Question Sole trader Partnership Company If you are in business on your own, for yourself, X without major expansion plans If you know your partner(s) well and trust them, and X X if the business is simple, with not too many assets

over which disputes can arise Partners with a short-term business in mind X X If some of your partners are organisations (not X people) If you want to sell the business one day X If shareholding is (or will become) more complex X than a simple 50/50 or 60/40 split If the business risk is slightly higher X If you want to tender for government contracts X X If you have some resources to start with, but need X to keep costs low

If you are working with a shoestring budget X If you have a fair amount of fi nancial resources X If you do not have to convey an impression of being X X a substantial business 106 CHAPTER 3 If you have to convey the impression that you are a X substantial business If you want to access loans from banks X X If you have major expansion plans X (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from SEDA, n.d.) Table 3.7: Assessment of risks and opportunities for choosing a business entity ACTIVITY 3B

(i) Mr Okeke has a substantial amount of capital and wants to invest in a tried-and-tested business model, which he wants to run himself. Decide what sort of business entity Mr Okeke should invest in, and justify your answer. (ii) Mrs Bankole is a talented seamstress, and wants to sell her creations at the local market. Recommend what sort of business enterprise she should be looking at, and substantiate your answer. (iii) Ms Smith wants to compete for government tenders. However, she does not have the capital to invest in complex legal or audit requirements. Choose the most appropriate business ownership model that Ms Smith should be looking at, and justify your answer. (iv) A group of students has launched a very successful brewery offcampus. They are at the stage where they want to expand, as they have enough resources to hire a manager and some permanent staff, and have some legal and financial post graduate students among their number. However, they would like to remain in strategic roles. Assess what sort of company they should form, and substantiate your answer. (v) Identify the disadvantages that the above group of students may encounter if they decide on forming a public company. Changing from one form of business ownership to another The main reasons for changing from one form of business ownership to another are well known, and are seen every day across our business

community. The main drivers behind this are tax, record-keeping and growth. Tax Tax owed by companies can sometimes be lower than personal tax, depending on the levels of personal tax. This would be a major factor in converting to a company after a period as a successful sole trader. In theory, for a sole trader, the tax payable on a monthly income of R 100 000, with no 107 FORMING A BUSINESS permissible deductions (e.g. medical aid or pension) would be R 33 000. If a private company was earning this, the company would pay R 28 000, and would be able to further off set the tax owed by a host of valid business expenses, such as electricity, water and depreciation of assets. Record-keeping For companies, record-keeping can be burdensome, and many new companies revert back to more informal forms of ownership because if it. Auditing fi nancial statements, which is a duty defi ned by the law, is expensive, needs qualifi ed people on site, and needs qualifi ed consultants – i.e. auditors. In addition to the fi nancial aspects of record-keeping, there are annual reports, fees, and the many requirements imposed by SARS in respect of income tax, VAT, skills development levy (SDL), workers’ compensation and other regulatory bodies. It is, therefore, understandable that many companies prefer to deregister when the reality of the extent of record-keeping kicks in. Growth Growth, as well as the desire to grow further, is a mitigating factor to the administrative stumbling blocks that a company experiences. By appointing people in administrative positions who can handle the

record-keeping requirements, management is freed up to pursue opportunities to raise capital, and to develop the company going forward. The following examples illustrate other common reasons for changing the form of business ownership: • Change in management: You may be taking on a business partner, so you decide to change from a sole trader structure to a partnership structure. • Change in ownership: If you buy an existing business, you may decide to change the business structure in order to meet your goals for the business. • Operational reasons: You may be reorganising your internal functions, such as sales and marketing, in order to improve the way in which your business operates. • Economic downturn or downsizing: You may want to downsize or simplify your business structure; for example, move from a company structure to sole trader structure. 3.4.2 Legal requirements Now that we understand the various types of business entities, we will take a look at how the legal requirements of each diff ers substantially. Each type of business entity is subject to rules and regulations under tax and labour relations laws. There are also various legal requirements that cover the type business being carried out (e.g. health, transport and music requirements), which will be explained in more detail in a later section. However, a short summary of the main legal requirements, in terms of the framework of each entity, is as follows: • Sole trader: This entity has no specifi c legal requirements, and is legally responsible for all activities and operations.

• Partnership: A partnership has no specifi c legal requirements, other than those covered by 108 CHAPTER 3 an optional (but recommended) partnership agreement. Here, liability for all activities and operations falls on the partners. • Close corporation: Such an entity had to adhere to the requirements as laid down by the Close Corporations Act. This involved registering as a CC, as well as annually submitting returns to the CIPC, which has now taken over those CCs still in existence. As per the Companies Amendment Act, this type of enterprise was discontinued, and no new CCs have been registered since then. • Trust: The legal requirements for a trust are covered by the trust deed, which is lodged with the Master of the High Court. • Franchise: The legal requirements for a franchise are covered by a franchise agreement. • Company: A company is administered by the CIPC, and there are a number of legal requirements that differ according to the type of company. Such legal requirements include submitting audited financial statements and paying yearly fees. The most important legal aspect of a company is the limited liability status of the directors and shareholders – i.e. personal assets are not at risk. ACTIVITY 3C (i) Ms Ekwensi wants to open a coffee shop. Guide her through the process by explaining to her what sort of licences, as well as other permissions, would be required for her to open her coffee shop. (ii)

Name the regulatory body that Ms Ekwensi needs to approach in order to start her company. (iii) State the regulations that a person should consider if they want to run a stall that sells fruit in Cape Town. (iv) Imagine that you are entering into a construction partnership. Name at least two advantages of drawing up a partnership agreement. 3.5 DUTIES AND RESPONSIBILITIES OF OWNERS, PARTNERS AND DIRECTORS In sole proprietorships and partnerships, the duties and responsibilities of owners and partners are fairly straightforward, and have been covered extensively throughout this chapter. In summary, these entities are responsible for: • profits and losses; • adherence to legal requirements concerning tax and labour law; • various by-laws covering their sector (e.g. health, entertainment etc.); • business operations, including the quality of the product or service; • public liability – i.e. any injury, damage or death incurred during the manufacturing or provision of goods or services; and 109 FORMING A BUSINESS

• ensuring compliance to any legal agreements entered into (e.g. contracts, partnership agreements, loan agreements or insurance policies). When it comes to the duties and responsibilities of directors of companies, the list and scope is much wider ( CIPC, n.d.): • Directors are legally responsible to fi le the company’s annual accounts and annual return on time. Companies that deliver accounts late will receive a late fi ling penalty. • Directors must ensure that their company details are up to date. • Information that is submitted by directors, including personal information that is submitted as part of their appointment, will be placed on a public register, which is available for public inspection. Since fi ling dates are displayed on the public record, late fi ling can damage a company’s reputation. This list does not incorporate the many other implicit duties of the board of directors, which are covered extensively within The King III Report on Corporate Governance for South Africa 2009. King III is widely used as the benchmark for individual directors, as well as for the boards on which they serve. A director is jointly responsible to act with and manage the board as follows (The Institute of Directors in Southern Africa, 2009): • The board has to act as the focal point for, and custodian of, corporate governance. As such, the board should manage its relationship with management, shareholders and other stakeholders of the company along sound corporate governance principles. • The board’s most important function is to ensure value creation, while, at the same time, considering strategy, risk, performance and sustainability.

• The board has to provide eff ective leadership that stands on an ethical foundation regarding responsibility, accountability, fairness and transparency. • The board must ensure that the company is a responsible corporate citizen. Such citizenship is closely related to ethical leadership. As a responsible corporate citizen, the board has to ensure that the company considers not only the fi nancial aspects of the business, but also the impact that business operations have on the environment and society within which it operates. • The board should ensure that the company’s ethics are managed eff ectively, as this sets the tone for ethical behaviour. • The board must ensure that the company has an eff ective and independent audit committee. Although the Companies Act prescribes the composition and functions of the audit committee for state-owned and public companies, King III proposes that all companies should appoint an audit committee. This committee would be responsible for nominating the external auditor for appointment, verifying the independence of the auditor, and determining the scope and fee of the audit. • The board should ensure that the company complies with applicable laws. It should also ensure that awareness of laws, rules, codes and standards is conveyed and enforced through management structures. 110 CHAPTER 3 • King III proposes integrated reporting. In this way, financial information, strategy and other vital information is collated and distributed, so that all stakeholders are able to assess the economic value of the company. The discussions regarding the limited liability of directors – i.e. the protection given to directors and shareholders of a company, where

they are not personally responsible for losses – has recently come under the spotlight. Scandals, corruption and fraud within South African corporate and state-owned enterprises have led to many people questioning just how far this protection reaches. However, our courts are increasingly willing to establish whether directors have fulfilled their duties. In cases where they have not done so, they can be held personally liable in certain circumstances. Moreover, with new legislation being passed, these circumstances of personal liability are increasing. Therefore, it is critical that directors understand the organisation’s affairs, as well as the consequences of the law, should they default in their obligations. 3.6 REGISTERING A BUSINESS AND STATUTORY REQUIREMENTS There are a number of ways in which to register your business, depending on the type of business entity it is, as well as the sector in which you are operating. 3.6.1 How to register a business Apart from the steps taken in order to decide on and implement a certain type of business entity, there are other, sometimes complex processes, to enable you to trade legally and compliantly. Some of the most common registration and statutory requirements will be covered in the section to follow. 3.6.2 Licences and other regulations Not all businesses require a trade licence. According to the Business Act 71 of 1991, the sectors that should apply for a trade licence include, but are not limited to, health facilities, food providers, escort agencies and adult shops. However, there are businesses from this list that are excluded from needing a business licence. These include the following: • A business that is conducted by the state or a local authority.

• A business that is conducted by a charitable, religious, educational, cultural or agricultural association, if all profits originating from the business are devoted entirely to the purposes of that organisation. • A business that is conducted by a social, sports or recreation club (non-proprietary club) that sells food on the business premises. • A business that prepares and sells meals in a private dwelling. If a business is not included in the Business Act as requiring a trade licence, then it does not have to apply for one. However, if a business does require a licence, then the application process will depend on where that business is located. Generally, the metropolitan council, local town council 111 FORMING A BUSINESS or an area district council is the issuing authority. With regard to rural areas, it is often the tribal authorities who are a good resource for advising on the proper application routes. Over and above the areas covered by the Business Act, there are also specifi cally legislated areas and controlling bodies for various sectors; for example, the liquor and music sectors ( Standard Bank, 2018). The liquor industry The liquor Industry is subject to a number of regulations, and is governed by a number of bodies, such as the National Liquor Authority (NLA). This body deals with the processing of applications for the manufacturing and distribution of liquor. It is also responsible for conducting inspections and investigations, in order to ensure compliance with the Liquor Act 59 of 2003. There are also national and provincial Liquor Acts, which are governed by liquor boards that regulate the retail sales and micromanufacturing of liquor in their respective provinces. If your business is planning to sell or distribute alcohol, then you will have to apply for a liquor licence via the liquor offi cer at your nearest police station, or, alternatively, by contacting

the Liquor Board. The issuing of licences, and the conditions under which the business may operate, diff ers from province to province. For example, in the Western Cape, very strict trading hours for liquor stores are defi ned and enforced. Liquor licences are divided into three distinct categories: 1. On consumption liquor licences 2. Off consumption liquor licences 3. Distribution liquor licences or wholesale liquor licences It is important to note that applying for a liquor licence can only be done on the fi rst Friday of every month – these dates are advertised on the Government Gazette. It is also important to remember that licences have to be renewed annually, and must be displayed in a prominent place on the premises. In order to be eligible to apply, you must reside in South Africa, have no criminal record, and not be insolvent. If you are not going to be present at your premises at all times, then you are required to appoint a manager to oversee the business in your absence. The music industry The music industry is regulated by two organisations: the Southern African Music Rights Organisation (SAMRO) and the South African Music Performance Rights Association (SAMPRA). If playing music (even background music) on your premises, it is necessary to obtain licences from these organisations. It is important to note that these are two completely separate companies and, therefore, a licence is required from both. A licence from SAMRO covers the copyright of the actual song – i.e. the composition and the lyrics of the song. The royalties payable in terms of this licence is distributed by SAMRO to the respective music publishers and songwriters. A licence from SAMPRA, on the other hand, covers the copyright in the recorded

version of the song. The royalties payable in terms of this licence will be distributed by SAMPRA to the applicable record companies. 112 CHAPTER 3 Other regulations In addition to the licencing requirements that we have just discussed, there are a number of other regulations to which most businesses need to comply. These include zoning regulations, health regulations, informal trading permits, public transport operator’s permits, tourist guide registration, and financial and tax regulations that govern employees Zoning regulations These regulations are laid down by the local municipality, which divides the area under its control into residential zones, open space zones, business and commercial zones, industrial zones, government zones, agricultural zones, and special use zones. Health regulations If a business serves food or drink to the public, it will have to comply with the laws that ensure that food is safe for consumption. As with liquor regulations, health regulations differ from area to area, and are defined by the local municipality. After a successful inspection by the health authority, a certificate of acceptability is issued by the municipality to the business. Informal trading permits These permits are also available through local municipalities, with conditions, costs etc. differing from area to area. Public transport operator’s permit If your business involves transporting passengers for gain, then you will need to acquire a public transport operator’s permit. This can be

obtained from the provincial board that deals with operating licences. Tourist guide registration A tourist guide needs to be registered with the provincial Tourist Guide Office. In order to fulfil the requirements for registration to be granted, there are many courses, qualifications and diplomas that are available both at institutions and online. Financial and tax regulations that govern employees Once in business, and successfully generating an income and employing staff, the business becomes liable for pay-as-you-earn (PAYE) tax for employees, workers’ compensation, SDL and payment of VAT. Furthermore, the business becomes subject to the rules governing the Broad-Based Black Economic Empowerment Act 53 of 2003 (BBBEE). In addition to this, the treatment of staff is extensively covered by the Basic Conditions of Employment Act 75 of 1997 (BCEA). 113 FORMING A BUSINESS For compliance to all of these regulations, the business owner must register, and thereafter comply, to the various reporting, submission and adherence guidelines. However, many of these guidelines only apply after the business has reached a certain level of turnover and/or number of employees. For example, although the BCEA refers to all staff , the skills development levy is only payable by the business if the salary bill is expected to reach R 500 000 per annum. In terms of VAT, a business is required to register as a VAT vendor if the turnover exceeds R 1 million rand per annum (although a business can also voluntarily register if turnover has exceeded R 50 000 in the past 12 months). In terms of B-BBEE compliance, the government has applied certain turnover thresholds to exempt micro enterprises (EMEs) and qualifying businesses (QSEs). This allows these entities to trade

without the B-BBEE certifi cation needed by medium-sized and large enterprises 3.7 OPENING A BANK ACCOUNT Although opening a separate bank account for a business is recommended, it is not required for a sole trader that is not registered for VAT. In such a case, the business takings can be deposited into the individual’s existing bank account without complicating matters too greatly. In this way, the deposit is handled as a salary by the receiver of revenue, and will attract personal tax rates (if the amount is higher than the minimum threshold). If the sole trader is liable for tax, they will need to register with SARS as a provisional tax payer, after which tax owing is calculated or estimated twice a year. For all other types of business, a dedicated bank account should be opened. In the case of partnerships, such a bank account would serve to isolate the income and expenditure of the partnership from that of the partners. For trusts and companies, a dedicated bank account is a requirement of accountants, auditors, customers, suppliers and SARS – all of whom require bank details, and sometimes detailed records, of the account. These entities use the direct interfaces available for payment, accounting and review. Banks have very strict rules on checking the credentials of the parties opening accounts. These include IDs and proof of address (or an affi davit, if no utility bills are available). If a business wants to open a bank account, the following is required: • Copy of ID (per business member / individual member and/or director) • Proof of address (per business member / individual member and/or director) • Proof of physical address of business (this may not be applicable for a sole proprietor) • Bank statements for the last three months (this not applicable for start-up businesses and sole proprietors)

• Business member/owner to submit three months’ bank account statements from a personal account • Company registration documents (not required for sole proprietors and partnerships) • Company resolution (where there is more than one signatory) 114 CHAPTER 3 The last point is the basis for what is known as a bank mandate. These documents are filled in by the agreed signatories and officers of the enterprise. The mandate states who, and in what combination, they are entitled to withdraw money and commit the company to banking services; for example, loans or application for cards. In most cases, a business would opt to have at least three signatories, with a mandated instruction that any two have to sign or authorise banking transactions. In today’s world of card-, Internet- and ATM-based transactions, banks have designed a two-tier Internet banking authorisation process. When a business is paying online, via electronic funds transfer (EFT), signatory A is authorised to set up the transaction on the bank’s website, while signatory B is authorised to release the payment. For this purpose, these two signatories are issued with individual cards, usernames and passwords. This process has largely replaced the cheque system, where a cheque was issued and signed by all signatories – this method of payment is being phased out as a result of high bank charges and incidences of forgery. 3.7.1 Account types There are three main types of bank accounts in South Africa, all with their own advantages and disadvantages, as well as different target markets. These accounts include a curren t or cheque account, a savings account and an investment or money market account, and each can be opened in the name of an individual or a body of people

– i.e. a company, trust, church, stokvel, partnership, charity, school etc. Type Uses Advantages Disadvantages Current account, also • Cheque, card and Any type of financial High costs known as cheque or electronic payment business transaction is transactional account facilities possible with a current • Deposit facilities account • Overdraft or loan facilities Savings account • Deposits Small interest payable Lack of flexibility – i.e. • Withdrawals

there is a limit on the • Electronic number of transactions payments per month, there is no overdraft facility, and electronic banking is not always offered Investment account or • Excess funds are Higher interest rates It also lacks flexibility, money market account deposited and is sometimes • These funds are not constrained by offering needed for day-tofixed periods and day expenses minimum investments (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Oneil, 2019) Table 3.8: Uses, advantages and disadvantages of various account types 115

FORMING A BUSINESS 3.7.2 Selecting a bank It is well worth doing research into the various products and off erings of commercial banks in South Africa. However, there are also various other banks that are not commercial in nature, and are very specialised – i.e. banks that only off er housing bonds, or banks that off er particular investments. When opening an individual or business banking account, whether it be for transactional, savings or investment purposes, the following banks have the best reputation and biggest footprint in South Africa: • Standard Bank • ABSA • First National Bank (FNB) • Nedbank • Investec • Capitec The fi rst fi ve are the most established and widely spread banks in the country, while Capitec is still establishing itself as a worthy competitor, especially in terms of low bank charges. In South Africa, the banking sector is known for its exorbitant charges, which are much higher than international norms, and Capitec, by challenging this trend, is quickly developing itself within this sector. Deciding on a bank remains an individual choice, and largely depends on location, services off ered, level of customer service and bank charges. Length of queues, complexity of forms, and the ability to serve customers in their mother tongue are also factors that feed into the choice of bank.

3.8 BUSINESS CHECKLIST A business checklist is a useful tool that brings to your attention the most important factors to consider when starting a business. It is important to note that this checklist is not exhaustive, and serves as a guide only. The following provides an example of what a business checklist may look like. Question Matters to consider What form of business entity do I choose? Have I decided on the best form of business entity, and have I researched the requirements for each? What registration and licences are applicable? Am I familiar with the municipal, provincial and national requirements? Who is a partner to my business? If not a sole trader, do I have a partnership agreement? If there are multiple partners, should we The CIPC has made it very easy to register a private consider forming a company? company, which protects members and directors from personal loss and

liability. 116 CHAPTER 3 Do I have a suitable bank account? Is the business bank account protected in terms of signatory limitations? If I have employees, do I comply to the legal This includes the Labour Relations Act as well as the framework? Basic Conditions of Employment Act. Occupational health and safety is another area of law, as is B-BBEE, and both are applicable after a certain number of employees and turnover threshold have been reached. Am I familiar with the tax regulations that This includes PAYE, VAT, SDL and UIF, all of which affect my business? need to be paid to SARS, together with submissions after certain thresholds have been reached. What is the best way in which to manage Although other business functions are not covered

marketing, sales, production, logistics, in this checklist, depending on the type of business, administration? all need to be researched by the entrepreneur in order to maximise the business’s success. (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 3.9: Business checklist Aside from this checklist, there are many other sources that can help budding businesses, which includes assistance in choosing the right type of enterprise. The government is committed to making it as easy as possible for emerging businesses to flourish, and has, therefore, appointed SEDA to provide development and support services for small business. In addition to this, the South African Government’s website provides information, in all official languages, on registering a business, and the Department of Labour provides useful tips for selfemployment – i.e. for the sole trader. Funding for various types of businesses is available through the Industrial Development Corporation (IDC), or through the Department of Trade and Industry’s government investment incentives. Banks are also always ready to help open business accounts, even if it is unknown territory for the client. As you can see, entrepreneurs now have more support than at any other time in South Africa’s history. As the formal job market continues to constrict worldwide, there is no better time to elicit as much help and assistance as possible. ACTIVITY 3D (i)

Imagine you own a coffee shop. Compile and complete the business checklist for your hypothetical business. (ii) Suppose you want to open a bank account for your coffee shop. Create a checklist of the things that you would consider to be important when selecting a bank. (iii) Compile a shorter, less complicated checklist for a sole trader, with added items that are specifically designed for a sole trader. 117 FORMING A BUSINESS 3.9 SUMMARY Choosing the correct business entity is a key decision that an entrepreneur has to make early on in the process of starting a business. Each entity has its own set of advantages and disadvantages, and selecting the best one depends on the type of business the entrepreneur is starting. Sometimes, a business can start out as one business entity, and then fi nd it benefi cial to change to a diff erent business entity, due to the changing nature and needs of the business. This chapter discussed the main forms of business, namely a sole proprietorship, partnership, company, franchise and CC (although no new close corporations can be registered, quite a few older ones still exist in South Africa). A sole proprietorship is perfect for entrepreneurs who are just starting out with something small, as it is the easiest entity to set up. A partnership is often the next logical step for sole traders, as the set-up requirements are also relatively few. However, sole trader’s and partnerships do not enjoy the benefi ts of limited liability. Companies, in addition to potentially paying less tax, are separate legal entities, which means that the owners enjoy the

benefi t of limited liability. However, a company is more diffi cult to set up and, depending on the type of company, may have additional ongoing legal requirements, such as an annual audit. 118 CHAPTER 4 DEVELOPING PRODUCTS AND SERVICES 4 4.1 Introduction 121 4.2 Life lessons 122 4.3 Product and service 123 4.3.1 | Distinguishing between a product and service business 124 4.3.2 | Advantages and disadvantages 127 4.4 What is product development? 132 4.5 Innovation and creativity 133

4.5.1 | Role of innovation and creativity in entrepreneurship 135 4.5.2 | Solving the problem 135 4.5.3 | Fostering and harnessing innovation and creativity 136 4.6 Research 139 4.6.1 | Market research 139 4.6.2 | Competitor analysis 142 4.6.3 | Competence research 145 4.7 Unique offering 146 4.7.1 | What is a unique selling point (USP)? 147 4.7.2 | Understanding your value proposition 148 4.7.3 | Enhancing your USP 149

4.8 Costing 150 4.8.1 | Why it is essential to know your costing 150 4.8.2 | Product costing models 151 4.8.3 | Service costing models 154 119 DEVELOPING PRODUCTS AND SERVICES DEVELOPING PRODUCTS AND SERVICES 4.9 Pricing 156 4.9.1 | Why pricing is so important 156 4.9.2 | Pricing strategy 156 4.9.3 | Pricing models 159

4.10 Do you have the right product or service? 160 4.11 Summary 163 120 CHAPTER 4 Case studies – myths, leaders and Online inspiration Developing start-ups Boring but Growing the products Making important business and it run stuff services

smoothly Building a It is in the team numbers Cash is king Selling Spreading the word Forming Getting out of a What the starting business is blocks Entrepreneurship? 4.1 INTRODUCTION On a national and global scale, economies comprise of different kinds of businesses, industries and service delivery-orientated enterprises.

Such businesses can be state-owned, private enterprises, or have public-private partnerships (i.e. private organisations that have project contracts with their government). Entrepreneurs create their enterprise(s) for many reasons – it could be motivated by various ideological, economic, social, individual and financial aspirations. For instance, entrepreneurs’ motives could be solely to make a profit, to drive economic transformation, develop private-public partnership initiatives, to improve people’s standard of living, to attract foreign investors, or to advance technological products. With the increasing world population and the rise of exciting new markets and opportunities, many governments are fostering entrepreneurial ecosystems (i.e. interconnected systems wherein entrepreneurial actors effectively work and support each other), and encouraging young people and organisations to actively embrace the business opportunities of the 21st century (Mazzarol, 2014; and Mason and Brown, 2014: 5). Contemporary societies often present various opportunities and challenges for entrepreneurs. Our jobs and careers are at threat of constant change, simply because the information and technology revolution is constantly creating almost unknown opportunities (Ahmed, 2017; and Block, 2018). On the other hand, environmental issues challenge individuals, governments, businesses, investors and entrepreneurs to think and act differently. While a degree or educational qualification will certainly assist you in acquiring a sufficient job, it must be noted that, within contemporary society, it is rare for a person to keep one job or even one career within their lifetime (Carrick and Dunaway, 2017). In order for entrepreneurs to grasp opportunities and face challenges, they need to be flexible, trained and retrained, and be able to learn and unlearn. Therefore, within contemporary societies, the idea of a guaranteed employment contract is decreasing; on the other hand, the emphasis on entrepreneurship education and self-employment is increasing. 121

DEVELOPING PRODUCTS AND SERVICES In this chapter, we aim to provide you with the necessary background and knowledge about how businesses plan and develop their products and/or services. Usually, an entrepreneur starts with a product or a service – something that is in demand. Whatever drives someone to start up a business, this person (i.e. the entrepreneur) should be taught the fundamental tools that will help them to organise, plan, research, develop, and price products and services. An entrepreneur should, therefore: • understand what kind of research is needed to determine the need and opportunities for their new business proposition; • know exactly which products or services are already in the market; • have an understanding of how current competitors are performing, and who could become future competitors; and • know exactly how the costing of such products or services should be calculated. After studying this chapter, you should be able to: • compare and contrast product-based businesses with service-based businesses; • outline the basics of product development; • assess the role of innovation and creativity in entrepreneurship with reference to a hypothetical scenario; • discuss the importance of research in the development of products; • illustrate the concept and importance of the unique selling point (USP);

• explain the signifi cance of knowing the true cost of your product or service; • describe product and service costing models; • explain the importance of pricing; and • identify pricing strategies and pricing models. 4.2 LIFE LESSONS In this section, we are going to take a look at the important life lessons that played a pivotal role in the remarkable success stories of innovators and entrepreneurs – especially from those whose businesses started with an idea and, subsequently, changed industries, as well as the world. Let’s take a look back in time and think of innovators, such as Thomas Edison (who discovered light bulbs), Henry Ford (who founded Ford motors), Alexander Bell (who invented the fi rst telephone), the Wright Brothers (who built the fi rst airplane), Mark Zuckerberg (who co-founded Facebook), Benjamin Franklin’s fi rst lightning rod, Konrad Zuse (who built the fi rst functional program-controlled computer), and Jerome Lemelson (who patented a number of medical instruments and magnetic tapes). 122 CHAPTER 4 Living in the time of a so-called ‘information technology (IT) revolution’, it may be appropriate to reflect on the life lessons of Steve Jobs, a renowned entrepreneurial technology guru who co-founded Apple Inc. His life story is one of the most inspiring, successful entrepreneurial stories, and goes as follows (Schwartz, 2011; Chaffin, 2012 ; Raizcorp, n.d.; and Hakobyan, 2015): • He knows what the customers want without having to ask: When asked what market research was done to lead to the invention of the iPad, Jobs famously answered that nothing was done, as it is not the customers’ job to know what they want, but rather the job of the

creator. His focus was not so much on the customer, but on the job that the customer is trying to achieve. • He possesses a love for innovative ideas: Jobs has an extraordinary ability to blend art, design and technology that customers love. • He holds a holistic approach to innovation: Jobs was responsible for revolutionising the access that we have to different media platforms. This occurred in the form of revenue models, by charging only 99 cents for digital songs, creating new channels – such as iTunes and the App Store – changing the way that we experience retail shopping with the Apple Store and its Genius Bars, and lastly, developing new and exciting approaches to advertising. • He held a radical approach to simplicity: Jobs made it a priority to keep his devices and products, as well as their processes and user accessibility, simple. • He used failure as a gateway to success: Jobs used every failure in his life as a learning and growing opportunity. He started NeXT after being fired from Apple at the age of 30, which ended up being a huge failure. He chose, however, to use this impetus as the launching pad for the Apple renaissance. • He possessed revolutionary thinking: Jobs was a counter-intuitive industry leader who made ‘think contra-culture’ his life motto and the motto of his company. He never stopped asking the question: ‘Why do we always do it that way?’ He encouraged staff to not live with the results of other people’s thinking. • He disrupted his own market: Jobs differed from many other companies in that he chose to disrupt Apple’s market by offering better solutions at a more reasonable price to customers; for example, the iPad. He chose to do this, rather than investing in the core business sellers. 4.3 PRODUCT AND SERVICE

As mentioned in the introduction to this chapter, different businesses begin for different reasons. The easiest way to categorise businesses is to determine whether they are product-orientated businesses (similar to manufacturing organisations) or service-orientated businesses. This can be done by examining (Linton, 2018): • whether they create goods (that can be touched) or intangible services; • whether or not they need to accumulate inventory; • the type of labour and skills required; and • whether or not the business requires a physical place to create its goods. 123 DEVELOPING PRODUCTS AND SERVICES In today’s age, many businesses off er both products and services. In order for such businesses to be successful, both the employees that produce products and the employees that produce services should be skilled professionals. For instance, the Bootlegger Coff ee Company (a coff ee shop branch in the Western Cape) provides products (e.g. meals) and services – i.e. the chefs make the food, the baristas make the drinks, and the waitrons deliver the food and drinks. A South African example of a product-orientated company is the major supermarket retailer, Pick n Pay. An example of a serviceorientated business is the South African company, weFix, which provides services to repair smartphones and other devices. Lastly, an example of a company that is both product- and service-orientated is the restaurant and store franchise, Melissa’s. 4.3.1 Distinguishing between a product and service business As mentioned before, the key diff erences between a product-orientated

and a service-orientated business are centred around whether they sell goods or services, whether or not they keep inventory, the type of customers they often have, the type of labour they use, and whether or not a specifi c location is required. These main diff erences have been summarised in the following table. Category Key diff erence(s) Service-orientated business Product-orientated business Goods Tangibility of A service-orientated business Product-orientated businesses output does not produce goods. sell goods. Goods are tangible Businesses are often considered items that can be seen and service businesses when they touched by both the client and relate to providing a service, manufacturer; for example, consultation, training, or even a toy shop that sells toys for a maintenance contract; for children. example, an electrician who goes to a client’s house to fi x an electrical problem. Inventory Keeping of Service-orientated businesses Product-oriented businesses inventory

cannot hold inventory, as they are responsible for producing only perform the services as goods that are to be sold and when required by their as inventory, and that are customers. For example, an in alignment with the IT company cannot hold its demand in the market. These services, as the IT consultants businesses should be wary only get to perform their services of demand forecasts, and when they acquire a customer. should ensure that they are producing enough goods to create enough supply for the demands. For example, it would be unwise to stock multitudes of winter jackets right before summer. 124 CHAPTER 4 Customers A predetermined Service-orientated businesses Product-orientated businesses customer (the do not produce a service unless can produce goods without specific product or a client specifically requires a customer’s specific order, or service is tailored

it. They generally produce a forecast of future customer to the customer’s service tailored to a client’s demand. For example, a needs), as opposed needs; for example, doing clothing company can to ‘not yet knowing one week’s consultancy, plus produce a new set of pink who the customer two weeks’ worth of training. T-shirts without any demand will be’ Another example is that a for it (hoping that the service-oriented business, such customers would see the as a consulting firm, may write T-shirts and want it). This a report on a how a specific cannot be done by service business operates, and make businesses that specifically recommendations on how to require a customer to improve the specific institutional approach them and ask for a culture or work productivity service. However, producing within that business. goods that are not specifically in demand by customers is a poor strategy, and places a business at risk. Labour Use of automated A service firm recruits people Product developers can processes and with specific knowledge and automate many of their the common skills in the service disciplines or production processes type of labour

domains in which they operate. to reduce their labour requirements This kind of service usually relies requirements. Less staff for each type of on manual skill, and cannot be is needed if machines business bypassed to machines to do are able to complete the work. Service-orientated the manufacturing or companies usually require more production tasks. staff to provide the services. Location Whether the Service-orientated businesses Businesses that develop business requires usually do not require a physical products must ensure that a specific physical production site. The ‘service they posses a physical space workspace for deliverer’ can usually create where they can store their production and deliver the service almost inventory, and where their processes and to anywhere. production processes can

hold inventory. take place. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Linton, 2019) Table 4.1: The differences between service-orientated and product-orientated businesses 125 DEVELOPING PRODUCTS AND SERVICES Now, let’s discuss two types of product-orientated businesses, namely merchandising and manufacturing businesses. This will help give us a better comprehension of product-orientated businesses when we compare their strengths and weaknesses to that of serviceorientated businesses in a later section. In order to understand the diff erence between merchandising businesses and manufacturing businesses, we can look at the specifi c roles they play. A manufacturer is responsible for creating new products, usually from scratch, or from raw materials. A merchandiser is not involved in the production process, but rather sells the products. We commonly recognise merchandisers as wholesalers and retailers, who serve as an intermediary seller (Benge, 2018). Let’s use the example of a factory that creates something essential that many businesses use; for example, nuts and bolts. Most businesses do not sell one nut and one bolt at a time, but rather, sell bulk packages to various traders and distributors. These traders and distributors are then likely to sell these products in smaller portions to various diff erent stores or retailers. Therefore, in this example, the factory would be the manufacturer, and the various distributors and stores would be the merchandisers (Benge, 2018). Merchandising companies that conduct business as wholesalers, generally sell in large numbers. Ordinarily, wholesalers tend to sell their products to retailers as opposed to individual customers.

If a customer is looking for a specifi c item, they will go to the retailer, rather than to the wholesaler. For example, an individual is not likely to buy a bulk supply of nuts and bolts, but rather, will go to a hardware store to buy one or two when it is necessary. Big manufacturing companies may sell their products to distributors only, as this means that they can guarantee consistent bulk buyers. In these cases, distributors can be thought of as one type of merchandiser (Benge, 2018). Manufacturers make their profi ts by creating a new product that ensures a profi t on each item. In order to guarantee a profi t, some of the costs that it would need to exceed are the cost of the raw materials, as well as the production costs. These costs are categorised as direct materials (i.e. materials that are used to make the product), direct labour (i.e. the cost of paying employees to help produce the product) and manufacturing overheads (i.e. the expenses required to keep a factory up and running). Wholesale merchandisers make profi ts on the markup of goods, which means making a profi t on the diff erence between a good’s selling price and the actual cost of the good. The markup is the amount that the wholesalers add to the product that was purchased from the manufacturers, so that they can make a profi t when they sell the products to the retailers. Retailers also make their profi ts by adding on another markup to the product, before it is sold to customers at the retail price. Therefore, the cost of the product is very diff erent to the cost of it from the manufacturer; however, the price is also discounted for buying in bulk. Merchandisers can calculate their net profi t by deducting all of the operating expense costs from the gross profi t (Benge, 2018). 126 CHAPTER 4

EXAMPLE 4A (Manufacturers, merchandisers and service-orientated businesses) An example of a company that acts as a manufacturer and a merchandiser, is that of the worldwide petroleum company, British Petroleum (BP). Many large companies follow the same pattern. However, these large multinational corporations generally are split into manufacturing and merchandising divisions, in order to secure management that is more effi cient. For example, BP practises manufacturing by drilling for petroleum and partaking in the extraction and conversion processes that produce petroleum, so that it can be sold for commercial use. The merchandising side of this type of business occurs when these products are sold to petrol stations, so that they can then be sold to the consumer. The same is true for PetroSA, Caltex and Shell. Another good example is Walmart, which acts as one of the largest merchandising companies in the world. It works with manufacturers and wholesalers by buying bulk products, and then selling the fi nished repackaged or repurposed products to consumers in its retail stores. It is well known for being an aff ordable supermarket in the United States (US) (Benge, 2018). South African examples that act in similar roles and provide similar products are that of Pick n Pay and Checkers, where products are bought from manufacturers, and the fi nished products are sold at aff ordable prices to customers at their retail outlets. On the other hand, service-orientated businesses are defi ned as organisations or individuals that exist or work to provide a service, rather than a product to the public. Hospitality businesses (e.g. hotels and restaurants), as well as maintenance fi rms (e.g. plumbing outlets) and personal service groups (e.g. dog groomers) all fall under this umbrella. There are certain advantages of working in the service industry that are simply not attainable in other types of jobs (Fagnani, n.d.). 4.3.2 Advantages and disadvantages

Let’s have a look at the general advantages and disadvantages of both product-orientated and service-orientated businesses. It should be noted that not all product-orientated and service-orientated businesses have these specifi c benefi ts or weaknesses, and in the digital age, these may overlap due to the complex nature of contemporary companies Startup costs While both product-orientated as well as service-orientated start-ups require capital, new service-orientated businesses tend to start off slower; for example, a hairdresser who travels to people’s homes initially, until they have the space required from which to run their hairdressing service. It also takes time to grow trust with customers and grow a customer base within service-orientated businesses. However, service-orientated businesses often have the benefi t of having lower start-127 DEVELOPING PRODUCTS AND SERVICES up costs than product-orientated businesses (Quain, 2018; and Caramela, 2017). Many product-orientated businesses often require a location to house their inventory, and need to purchase all the necessary materials or goods for the business. (Quain, 2018) Flexible hours Service industry jobs diff er from product-based jobs in that they tend to off er the employees greater fl exibility in their daily lives, due to their diff erent job requirements and/or shift times (Caramela, 2017). For example, individuals who work in service roles at hotels, restaurants, or hospitals usually work irregular shifts, and their days diff er largely from a typical nine to fi ve job, such as most productbased jobs. To an extent, this allows workers to have a degree of more fl exibility and free time in their daily schedule (Fagnani, n.d.). Living in the 21st century, many employees who just work on computers are given the opportunity to work from home, or ‘virtually’, since people can just about work from anywhere. This, of course, depends on the Internet connectivity, and the accessibility to highspeed bandwidth and servers with which these service employees are provided.

Automatic processes replacing human processes In comparison to the majority of service-orientated businesses, the product-oriented industry often does not rely as much on human presence, due to its dependence on technological advances, which are used extensively within businesses (which could be even more so in future). Many big companies downsize their staff as a result of technological advancements (many machines produce products faster, and are often seen as cheaper than human staff ). For instance, an automobile factory downsizes its staff due to its increasing use of automated machines within the factory to make the cars. However, some would argue that there is more job security within the serviceorientated industry. Although we live in an age where most things are technology-driven, we cannot discredit the needs of human beings to interact with others, rather than with automated machines (Schiff man et al., 2015). For instance, the healthcare industry, as well as the tourism, hospitality, security, education, fi nance and insurance industries, among others, are expected to remain of great importance in the service-orientated industries. However, service-orientated businesses are implementing more and more automatic processes in their services. For instance, many human resource, service-orientated businesses are faced with the dilemma of choosing between ‘high tech’, ‘high human touch’, or both, in their production output (Duval, 2015; and Miller, 2017). Need for strong interpersonal skills Entrepreneurs require many skills in order to be successful in their ventures. These skill can be broken down into three groups – i.e. technical skills (which are used to take care of the technical aspects of the business), good business management skills, and eff ective personal skills (Elmuti et al., 2012). Therefore, it is in a business’s best interest to assist its employees in developing all the appropriate skill. Service industry jobs require that employees have good and

professional interpersonal skills, as a large part of their job is dealing with people. Some of these skills may include eff ective communication, problem-solving and confl ict-mediation skills (Fagnani, n.d.). 128 CHAPTER 4 This is because these employees need to work with people, execute highly effective interpersonal relationship skills, and demonstrate the ability to work with diverse groups of people – i.e. people with different worldviews, cultures, religions, sexual orientations, languages, ethnicities and races. In today’s business world, social intelligence, like emotional intelligence, is highly valued, as we no longer work or live in societies that are homogeneous. However, this does not mean that employees working in product-orientated businesses do not need these ‘people’ skills. In this instance, interpersonal skills are more emphasised and developed within service-orientated businesses. For example, let’s compare a worker on a wine farm versus a waitron at a restaurant on the same wine farm. The worker, who is involved in the production of the wine, does not necessarily need to possess good interpersonal skills to pick grapes; the waitron, on the other hand, deals with a diverse group of people daily, and would need to possess these skills and act professionally in order to increase their income through means of tips, or by encouraging customers to come back for more good service. Inventory Having inventory can be seen as both a strength and a weakness. Service-orientated businesses do not have inventory, and a disadvantage of this is that it is often more difficult to sell something that is intangible to consumers. For this reason, service-orientated businesses have to convince their target market that their services will improve their quality of life. Having no inventory can also be seen as a strength, as service-oriented businesses do not have to worry about inventory control or manufacturing products. They do not have

to wait on products to be manufactured and inspected (Johnston, 2018). For instance, as there are no products to deliver, the emphasis is rather on the improvement of practices, work flows and levels of efficiencies that could lead to a company, industry, or sector performing better, receiving greater acknowledgment of clients, and generating greater income and financial reserves. Valuing services and products It is more complex to assess the value of service-orientated businesses than the products delivered and sold by productorientated businesses (Johnston, 2018). This is because serviceorientated businesses use the skills of their employees as a type of asset, which is more intangible to measure, as opposed to a direct production line, or how many products are manufactured in a day. In other words, financial assessment for service industries is often difficult, as it does not merely involve the valuing of physical materials, but also the valuing of labour, skills and knowledge. The value of a service tends to heavily depend on how much worth the customer places on said service. Often, entrepreneurs need to establish a record of excellent service delivery accomplishments, in order to prove their worth. For this reason, service-orientated businesses face the challenge of continually convincing their customers that their services are needed and of importance (Johnston, 2018). Stringent economic times and service-orientated businesses In difficult economic times, consumers usually cut back on services, implying that a service-orientated business may experience challenging financial times when the economy is in a 129 DEVELOPING PRODUCTS AND SERVICES downward spiral. Certain product-orientated businesses may also suff er setbacks in economic depressions, especially if the products are not considered staple necessities. For example, a toy-manufacturing company may not sell as many toys during this time, as toys are not a priority during economic hardship. However, according to Johnson

(2018), service-orientated businesses seem to struggle more than product-orientated businesses. In tough economic times, certain services are viewed as ‘nice to haves’, and not as necessities. The challenge for a service-orientated business is, therefore, to regularly evaluate its services, and to invent innovative ideas so that clients will continue returning for its professional services. A further challenge is to make customers continually aware of important services that they do not know of, in order to use expertise they do not possess. Raw materials and product-orientated businesses However, a specifi c disadvantage of product-orientated businesses is their indirect dependency on raw materials. A product-orientated business often relies on manufactured products, which is dependent on raw materials that are used to create them. Given that materials are required to produce a product, a business is forced to purchase the materials for whatever price they go for, or they need to consider terminating the manufacturing process. For instance, a productorientated business, such as a fruit and vegetable shop, depends on the harvests of the local fruit and vegetable farms. However, if a yearlong drought aff ects the local farms, then the availability of the fruit and vegetables would decrease, and the farmers’ selling price would increase, which ultimately puts strain on the shop. The shop would then have to either increase its prices, or source new raw materials. The demand for new products and services Both product- and service-orientated businesses need to continuously improve and enhance their products and services. As the world’s population increases, so too does the need for new products, as well as the improvement of existing ones. Therefore, one can assume that as long as a product is not out of date, and its quality is appropriate and correctly priced, then the product-orientated business should, in theory, remain strong. The success of productorientated businesses, however, will always depend on their ability to reinvent themselves, and on whether or not there is a business

culture that strives for improvement and excellence. While the product-orientated business may be a tough business, it can also be a satisfying one. Instead of producing a service or experience, a manufacturer creates an item, and has an opportunity to be continually innovated (Wolfe, n.d.). Think back to Steve Jobs and his counter-business knowledge about providing customers with aff ordable and good-quality products. To see happy customers is, indeed, rewarding (Hindle, 2008). The same concept applies to service-orientated businesses – they need to keep innovating and improving their services to keep abreast of changing wants, needs and demands. However, the advantage that service-orientated businesses have is that they are able to adapt to changing needs or demands better than product-orientated businesses. For example, a hair salon realises that their customers are demanding a new type of haircut resembling a famous celebrity. The 130 CHAPTER 4 hairstylists take this into consideration, research the new hairstyle trend and how to cut the hair, and successfully and quickly adapt to the change. Now, imagine a clothing company realises that the new clothing trend for the summer is denim skirts. The clothing company needs to design the new skirt, organise and purchase the material, and train the staff in how to make the new skirts – it is a lengthy process. (Quain, 2018) (Successful product- and service-orientated businesses) EXAMPLE 4 B Two worthy examples of well-known product-orientated businesses include Apple and Oakley (a sports equipment company). Apple is a very successful international company and was founded by American entrepreneur, Steve Jobs. Apple has a very strong marketing team. Its focus is on developing simple, sleek products that eight to ten per cent of the market love and promote. The company sells a variety of products, such as the iMac, iPad, iPhone, Apple Watch, iTunes etc.

Oakley prides itself on making revolutionary technology across several sports categories (most notably eyewear). It does work with top athletes in product development, and is, in essence, a technology-centric company. Two worthy examples of well-known service-orientated businesses include Uber and Airbnb. Uber is a large international company that off ers the service of driving people around. It uses a mobile application (app) that allows its customers to choose where they want to be picked up, where they want to be dropped off , and at what time they would like this service. Airbnb is the biggest accommodationsharing website. It off ers a hospitality service, where people book lodging through the company. ACTIVITY 4A (i) Defi ne, in your own words, the diff erences between a productorientated and a service-orientated business. (ii) Conduct your own research, and identify three examples of productorientated businesses and three examples of service-orientated businesses. Justify why each of the six identifi ed businesses are successful. You may use the following table: Identifi ed Distinctive Distinctive Identifi ed productservicefeature for feature for

orientated business orientated success success business 1. 1. 2. 2. 3. 3. 131 DEVELOPING PRODUCTS AND SERVICES (iii) Imagine that you are a business development consultant. Two individuals who would like to set up a business approached you. The one has developed a product that will revolutionise the cosmetic industry (which could become a product-orientated business) and the other has an idea that will empower senior female leaders (which could become a service-orientated business). Summarise the advantages and disadvantages to illustrate to the clients the benefi ts and challenges of the type of business they are interested in pursuing. You may use the following table as a guide: Type of business

Advantages Disadvantages Product-orientated business Service-orientated business (iv) Contrast the diff erences between customers for product-orientated businesses and customers for service-orientated businesses. Provide an example for each to substantiate your answer. 4.4 WHAT IS PRODUCT DEVELOPMENT? We have just looked at the diff erences between product-orientated and service-orientated businesses, as well as their advantages and disadvantages. The next question we need to ask is: What does product development entail? In essence, product development is the development or creation of new products that can be benefi cial or useful to consumers. This may include creating a product in its entirety from scratch, or making changes to an already existing production, in order to better the experience for the consumer ( BusinessDictionary, n.d.). Let’s go back and look at what a product is. In short, a product can be understood as an article on sale, such as an item, artefact, device or piece of equipment. Articles can be tangible, or in virtual or cyber form, such as an antivirus software that you buy for your computer. All products are made at a cost and are sold at a price, which should, as far as possible, guarantee profi t. The price that can be asked for a product will depend on the market, the quality of the product, marketing opportunities, and the segment of the market that the product or service targets. It is important to recognise that most products have a shelf life after which they need to be replaced or reinvented.

It is often necessary for product-orientated businesses to be revamped, relaunched, or extended in order to make them more relevant to their feeder markets, but without having to change their products (Kahn, 2012; and Koen, n.d.). What makes a product sell? First, a product needs to be relevant. In other words, users must have an immediate use for it (think of the life lessons taught by Steve Jobs). Secondly, it needs to be functional and do what it is supposed to do, while being of quality (meaning that it is of a high 132 CHAPTER 4 standard and is durable). Thirdly, potential users and buyers should know why they need to use it, what benefits they can derive from it, and what it adds to their lives. Fourthly, a product requires a good name, as it helps people to relate to it; a product should become a brand that stands out from other products (Mitchell, n.d.). Lastly, a product should be adaptable, trendy and relevant. A business can, at no time, be too confident that it will survive strong competition and changes in markets. It should always be secondguessing itself and striving to be better. 4.5 INNOVATION AND CREATIVITY In today’s highly competitive business world, it is critical for businesses to be creative and innovative. Creativity is the ability to produce new and unique ideas. Innovation, on the other hand, is the implementation of creative ideas. Creative ideas can be a new thought that identifies new and better processes, procedures, systems solutions or products. Therefore, creativity is the first step in the innovation chain. A business that has the ability to restructure, reinvent or question its original thoughts and knowledge around existing practices and products, will have a strong ability to create new inventions. Creativity can be seen as the driving force behind innovation, and the ability to look at the world through a different lens. However, as asserted by Mumford (2003), creativity is more than

simply the creation of ideas; rather, it is a complex process of conceptualisation, combined with identifying problems, searching for solutions, problem solving and evaluating ideas. A question often asked is how and where does innovation start? Singh (2014) writes about the five distinctive steps in the creative process, of which we will now take a brief look. Step 1: Opportunity or problem recognition A person discovers that a new opportunity exists in a market, or a specific problem needs resolution. Step 2: Immersion The individual concentrates on the problem and becomes absorbed by it. They then recall and collect information that seems relevant, ‘dreaming up’ alternatives without refining or evaluating them. Step 3: Incubation The person keeps all of this information in their mind for a while. They then actively work on the problem; however, their subconscious mind is still engaged with the problem (or opportunity), as well as solutions to solve it. While the information is simmering in the back of this person’s mind, it is arranged into meaningful, new thoughts and applications. 133

DEVELOPING PRODUCTS AND SERVICES Step 4: Insight The problem-conquering solution fl ickers into the emerging business owner’s mind at an unexpected time, such as on the brink of sleep, during a bath or swim, or while running. This insightful moment is also called the ‘aha’ moment – i.e. a moment where experiences, thoughts and intuition meet. It can be seen as a ‘magical breakthrough’ moment. Step 5: Verification and application The potential entrepreneur decides that their creative solution has merit and worth. They then actively start reviewing the possible business idea, and a verifi cation process starts. A verifi cation process includes gathering supporting evidence for the creative idea, while, at the same time, using logical persuasion and the experimentation of novice ideas. The following fi gure captures this process, which highly successful entrepreneurs often (intentionally and unintentionally) follow.

(Source: EDGE Learning Media (Pty) Ltd, 2018; and Flat Icons; adapted from Singh, 2014) Figure 4.1: The creative process 134 CHAPTER 4 4.5.1 Role of innovation and creativity in entrepreneurship Before explaining the role of innovation and creativity, it is important to revisit entrepreneurship as a concept. The word entrepreneurship is derived from the French word, entreprendre, which means ‘to undertake’. In 1734, Richard Cantillon (Brown and Thornton, 2014) defined entrepreneurship as someone being self-employed with uncertain results. This definition implies that entrepreneurs often take risks. Montanye (2006) asserts that entrepreneurs are often driven by potential profits arising from their ‘new combinations’ of ideas and resources, and are enthusiastic to put these ideas into practice. Once they experience success, they want to reinvent more opportunities for personal and financial growth. Often, entrepreneurs are viewed as courageous figures whose creative and innovative ideas improve ordinary people’s way of living. For example, Richard Branson is a well-known entrepreneur who had many failings before his Virgin enterprise took flight. Yet, on the other hand, large numbers of entrepreneurs often work on the thin line between legal and illegal business procedures in order to gain a competitive advantage ( UK Essays, 2016). For example, certain restaurants or businesses that operate from entrepreneurs’ homes may not in fact be business registered. If certain businesses insist that you pay cash only, they may be trying to evade tax, or hide their business for some reason. The characteristics of an entrepreneur There are various characteristics that make a good entrepreneur; however, they mostly point to inherently being able and ready to take big risks. In an interview about entrepreneurship, Richard Branson

(Barfuss, 2013) spoke about his own characteristics, as well as those of other influential entrepreneurs. Branson (Barfuss, 2013) understands an entrepreneur as someone who aims to receive great personal and financial achievement. In order to do this, an entrepreneur needs to take risks, and needs to be energetic and enthusiastic about the endeavour. An entrepreneur also looks for any opportunity to incite change and grabs any opportunity that comes their way. An entrepreneur needs to be innovative and opportunistic if they wish to make a profit and satisfy goals. Entrepreneurs should always be challenging the status quo of existing products and services, and recognising any needs in the market for new ideas and new products. At the end of the day, entrepreneurs take big risks to get big rewards, and the kinds of risks that are taken are usually indicative of the kind of entrepreneur the person is. For instance, if the entrepreneur is willing to spend all of their capital on a venture that could lead to failure, then there must be much belief, on the entrepreneur’s part, in the business or product (Barfuss, 2013). 4.5.2 Solving the problem Entrepreneurship and new products and services often start with a problem, and then aim to find a solution for it. The problem could be a gap in the marketplace, a chronic health problem like stress, an inefficient way of delivering human services, the need to take unnecessary red tape out of systems etc. The passion that entrepreneurs feel, combined with their urge to solve a problem, drives them to make a change, develop new ideas, and bring about innovation. For entrepreneurs and innovators, problem-solving phases are dynamic, collaborative and multifaceted processes, 135 DEVELOPING PRODUCTS AND SERVICES which often have multiple solutions. The challenge is to identify the most appropriate and profi table solution. Entrepreneurs often have to

pivot from a fi rst idea or attempt, because their fi rst idea does not work, or is not always practical, realistic or implementable. 4.5.3 Fostering and harnessing innovation and creativity In today’s world, fi lled with change and innovations, companies understand the urgency to continually develop their existing products and services. They understand that if they do not respond to trends and developments, they may become irrelevant and fi nancially unsustainable (Chang, 2008). A survey conducted by Chang (2008) implies that organisational creativity is aff ected by many factors, such as the organisation’s environment, the collaboration between teams, staff motivational levels, whether or not staff members are recognised for their innovation, and the ability to break silos down – i.e. when certain departments in a company do not want to share their information with other members of the same company (Gleeson, 2013). There are a couple of good reasons for cultivating creativity in all businesses (Polewsky and Will, 1996). Firstly, creativity is a vital ingredient of innovation, which is an important ingredient for success. Secondly, decentralising hierarchical structures within the business often promotes creativity, which results in imaginative solutions and ideas. Thirdly, allowing employees the opportunity to be innovative and creative inside any business, ensures that the business continuously grows and off ers new ideas based on the skills of their employees. For a business to be innovative, it needs to depend on creative leadership. Creative leadership is defi ned as the ability to defi ne a clear, compulsory and exciting vision that others will follow. Creative leaders must be able to think and observe ideas or issues from diff erent angles (McLean, 2005). The main objective of creative leadership is to establish a creative, friendly environment inside organisations. This means to change the inner culture of an organisation in such a way that it allows for enough trust and encouragement for individuals to be creative, without fear of being laughed at or ridiculed for making mistakes (McLean, 2005).

An organisational culture, which supports creativity, should nourish innovative ways of representing problems to employees who show talent for innovation. Creativity should be regarded as desirable and normal. We will now take a look at the practical advice that Chahar (n.d.) provides on how a business can encourage creativity in the workplace. Promoting eff ective collaboration Businesses should encourage employees from all departments in a company to work together collaboratively in the hopes of coming up with eff ective solutions. Businesses should create an environment in which employees are encouraged to work together combatively, in order to address any issues that arise with new products. In turn, the employees should be recognised and be rewarded for their eff orts. 136 CHAPTER 4 Brainstorming sessions Many large and well-known companies host brainstorming sessions, so that employees can work together to foster new ideas and creative innovations. An example of this would be a ‘Hackathon’ (i.e. an event, lasting several days, in which a large number of people meet to engage in collaborative computer programming to foster the culture of innovation in a company), which is usually hosted by social media platforms, such as Facebook and Twitter. The ‘like’ button, Facebook Messenger and Facebook timelines are the results of these events. Reduce the barriers between employees and senior management Employees should be included, as far as possible, in the big decisions of the company. Employers should continually be requesting the feedback of employees in any creative or output task. In this way, employees can feel that their voices are being heard, before any finalities are decided, ultimately fostering a feeling of

involvement among all employees. Even if a limited number of the employees’ ideas are used, it could develop a sense of collaboration and ownership of new products. Allocate resources, time and money for experimentation Allocate resources to the budget and annual programmes to experiment with new ideas and products. Assure job security Employers should always ensure that their employees have job security when working on new innovative tasks or designs. Employees may be cautious of being too risky in their ideas, in case they lose their status in the company, or lose their job. They need to have the assurance of being able to take some risks and make bold moves, without the threat of losing their jobs. Therefore, businesses should encourage innovation, while ensuring employees that it will not affect their employment, nor their chances of attaining a promotion. Rewards Employees should be incentivised with rewards and benefits for their hard work. This could be in the form of financial benefits, such as a raise or a promotion of status for their hard work. Both monetary and non-monetary benefits are encouraging rewards for innovation. 137 DEVELOPING PRODUCTS AND SERVICES (Thando’s aftercare) EXAMPLE 4 C Thando is a 25-year-old crèche teacher in the informal settlement, Imizamo Yethu in Hout Bay, Western Cape. She has been working in the crèche for over two years, where she looks after children between the ages of three and fi ve, from 07h00 to 17h00, from Monday to

Friday. The crèche provides a safe educational environment for the children while their parents or legal guardians are at work during the week. Thando noticed that many parents, or legal guardians, were struggling to pick up their children on time, due to afternoon traffi c and infl exible job hours. Unfortunately, Thando’s crèche owner strictly instructed Thando that it is not her responsibility to wait with the children until their parents or legal guardians arrive. However, this leaves the children vulnerable during the late afternoons, or even early evenings, when they are alone and waiting for their parents or legal guardians to fetch them. This problem really bothered Thando, as she grew increasingly worried about the children and their parents or legal guardians. She started thinking of possible solutions to this problem. After a couple of brainstorming sessions, Thando came up with an entrepreneurial idea that could solve everyone’s problem. Thando wanted to create her own aftercare centre in Imizamo Yethu. It would be called ‘Thando’s Care’. This would then ensure that those children who could not be fetched by 17h00 would have a safe place to stay. In addition, it would remove the stress from the children’s parents or legal guardians and would provide Thando with some small, extra means of income. Thando’s Care would be one of the few aftercare centres in the large informal settlement where there is a big demand for this need. After months of conducting her own research on how to set up a successful aftercare, Thando fi nally launched her business. In the fi rst two months of the business opening, Thando had already acquired 30 children in her after school programme. Due to the big demand in aftercare, Thando is considering increasing her price per child, and hiring another employee to help her run her successful business. 138 CHAPTER 4

ACTIVITY 4B (i) List the five things that make a product sell. (ii) Name the five steps in an entrepreneur’s creative process. (iii) Define product development. (iv) In your opinion, discuss how innovation and creativity help an entrepreneur to solve problems. (v) Refer back to the example on Thando’s aftercare centre, and discuss the role of creativity and innovation in Thando’s entrepreneurial venture. Imagine the five steps of Thando’s creative process. (vi) Refer back to the example on Thando’s aftercare centre, and imagine that Thando’s crèche has grown drastically. Thando now has four assistants who help her with her crèche. Outline six ways in which Thando can encourage creativity in the workplace. Create examples for each method. 4.6 RESEARCH For any business to stay relevant and be successful, ongoing market and product or service research is critical. Business research assists companies in obtaining data and analyses it, in order to manage their

businesses better. Research could include, for example, the collection and interpretation of financial data, customer feedback, the results of product research and information received from competitive analyses. It is essential that businesses collect accurate marketing research, as it could aid in bettering their products or services. Some of this may include information about the customers’ wants and needs, and the industry itself, as well as the work and prices of competitors. Prospective business owners need to be aware of the risks and costs associated with running their business before they commit to such a big venture ( Ninecor, n.d.). Executives and managers who use business research methods are able to better understand their company, the position it holds in the market, and how to improve that position (Leonard, n.d.). 4.6.1 Market research Market research is the process of gathering, analysing and interpreting information about a product or service, which is offered to a specific segment of the market. It gathers information about the past, present and potential future clients for a specific product or service. Furthermore, it provides businesses profiles of their customers’ spending habits, where they are located, from which income groups they derive, their careers and professions etc. ( Entrepreneur 1, n.d.). Moreover, market research assists a business in identifying a specific group within a market for its target market and with product differentiation. Product differentiation refers to creating a specific identity or brand for a product or service that distinguishes it from its competitors. Therefore, the value of market research is that it helps a business to understand shifts in markets and within an industry, changing consumer needs and preferences, as well as legislative trends that may create new markets or a shift in markets. 139

DEVELOPING PRODUCTS AND SERVICES Types of market research There are a number of market research methods and instruments that exist. However, they can be divided into two groups: primary data and secondary data. Primary data is fi rst-hand information that is collected by the market researcher, while secondary data is preexisting public information; for example, data shared in magazines, newspapers, government, industry reports, or electronic-based information (McDonald, 2007). The following table outlines the diff erent research instruments that can be used in conducting primary market research. Tools for data Description collection Surveys A survey can be understood as a list of questions that an individual answers, in order to present their thoughts or opinions on a particular topic or matter. Surveys are used when companies or offi cials want to collect information in an organised or accessible manner. Businesses often conduct these in order get an individual’s opinions on a new product, or their experience of the service at a new place. Nowadays, distributing surveys is much easier through technology, as many people can complete them using their cell phones and on computers. Focus groups Focus groups ordinarily consist of a small group of individuals who have a mediated discussion about a topic of interest. This is a good way to get a conversation fl owing about the opinions on the product

or service, as well as their likes and dislikes. There are usually a few questions that are asked with the hopes of encouraging conversation that could be informative and benefi cial to the business. A focus group often comprises of between eight and 12 participants, who have been chosen based on at least one key characteristic. Observation Market researchers may choose to conduct their research through methods of observation; for example, by watching how customers engage with a product, or observing their preferences between diff erent products. Researchers may observe how individuals use a particular cellular app, in order to see if it is understandable and accessible to the customer. In-depth interviews Researchers may wish to conduct interviews with customers, or potential customers, of a new product, in order to see if they are enjoying the product, or what their needs or demands are for better products. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Shopify, n.d.) Table 4.2: Primary methods of data collection for market research Survey questionnaires are a very popular data collection method used in market research. When designing a survey questionnaire, the following guidelines should be used ( Entrepreneur 1, n.d.): • Questions should always be concise and no longer than two pages. • The questions should be relevant to the respondent. 140 CHAPTER 4 • A letter or consent form should be attached to the survey, explaining its purpose and what the research will be used for.

• If printed questionnaires are going to be used and need to be returned, they should include a return envelope with the address printed on it and a paid postage stamp (recently, most surveys are done online and by mobile devices). • Incentives, such as discounts on future purchases, could entice more respondents to participate in surveys. Phone surveys are generally the fastest and most cost-effective form of interview. Usually between five and six interviews can be conducted per hour. This also allows for researchers to interview respondents from all over the country. When designing a telephone survey, the following guidelines should be used ( Entrepreneur 1, n.d.): • Researchers should have a set script that they follow and memorise, but should try to sound more conversational than rehearsed. • Researchers should ensure that they have the name of the respondent before conducting their questions. • Researchers should try to avoid long pauses, as this may result in them losing the interest of the respondent. • Researchers should ask if they can conduct a follow-up call in the future, in case they need to obtain more information. We will now examine secondary research methods in the following table. Methods of data collection Description Public sources can usually be obtained from public access or government-owned places, such as libraries or various government Obtaining public sources

departments. These sources are typically cost-free and contain a lot of useful information. Commercial sources are usually valuable in terms of the information that they provide; however, they can often incur costs, such as Obtaining commercial sources subscription fees, in order to get this information. Financial and trading institutions are good examples of businesses that house informative commercial sources. Universities and colleges are responsible for conducting a lot of new and informative research; however, these sources are often Obtaining information from overlooked as avenues for valuable research. Most of this content educational institutions has also gone through rigorous reviews and plagiarism checks, in order to ensure that it is factual and coherent. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from DJS Research, n.d.) Table 4.3: Secondary research methods 141 DEVELOPING PRODUCTS AND SERVICES 4.6.2 Competitor analysis Competitor analyses are critical components of any business marketing. An entrepreneur can conduct an analysis by being aware of their competitors’ business and evaluating the competitors’ strategies, in order to determine their own strengths and weaknesses. Competitor analyses aid businesses in understanding what makes a product or service a success, and what kind of market is attracted to such a product or service. In doing this, the business can ensure that it keeps attracting customers (Kerin and Czepiel in Shankar and Carpenter, 2012; and Entrepreneur 2, n.d.). There are specifi c processes to follow when a business wishes to conduct a competitor analysis.

The fi rst thing should be an evaluation of all the competitors, which should, thereafter, be placed in groups depending on how big a threat they are to the business. For each competitor or group, the business should make a list of its market share, its products or services off ered, its growth pattern or profi tability, an assessment of its strategies and marketing objectives, its strengths and weaknesses, and its various cost structures. Use the following guideline on the questions you should ask ( Entrepreneur 2, n.d.): • Which competitors pose the greatest threat? • What do they off er (both in terms of products and services)? • What are the competitors’ market shares? • What are their previous marketing strategies? • Do they have current marketing strategies? • What forms of media do they utilise for their marketing platforms? • How much is their product or service advertised in the media? • What are the various competitors’ strong points and downfalls? • Do they provide any opportunities for your business? If so, what are they? Competitor analysis is an essential component of any business or corporate strategy. Yet, many businesses do not conduct it regularly and systematically enough. Instead, many enterprises operate on what is called ‘informal impressions’, assumptions and intuition gained through the, often unsubstantiated, information about their competitors ( NetMBA, n.d.). An eff ective competitor analysis typically comprises of fi ve key aspects, namely objectives, assumptions, strategies, resources and capabilities of a competitor (Porter in NetMBA, n.d.).

These aspects are critical areas for a business to understand their competitors – not only current competitors, but also future ones. Porter’s framework is divided into two parts. While the drive of the competitor stems from its objectives and assumptions, its strategy, resources and capabilities are ordinarily what defi ne the competitors’ limits in the business. These components form a competitor response profile, which can be used to heighten the awareness of what actions the competitor is likely and willing to take. The key aspects of competitor analysis and the resulting competitor response profi le are illustrated in the following fi gure. 142

CHAPTER 4 A competitor’s abilities and things that Things that drive a competitor give a competitor direction Objectives

Strategy Competitor response profile Resources and Assumptions capabilities (Source: EDGE Learning Media (Pty) Ltd, 2018; and Flat Icons; adapted from NetMBA, n.d.; and Porter, 1980: 49) Figure 4.2: The key components of competitor analysis The following table provides a breakdown of the various components in Porter’s model. The objectives of the Knowing the competitor’s business objectives is a crucial first step. The competitor competitor could be doing a host of things, from expanding its market to simply trying to maintain a profit. The second step is to find out whether or not the competitor is actually achieving its objectives. Understanding these will aid in being able to weigh up how successful the competitor is. This can be used for both current competitors and potential competitors. The strategy that the Certain companies that have stock shares, or that are in the public eye, competitor uses

often have their strategies publicly available on their media platforms, making it very accessible to assess their strategies. Other companies’ strategies may not be as readily available. If this is the case, then a company can analyse such competitors’ strategies through conducting its own extensive research on the company, or using the help of an industry expert. Businesses should focus on trying to ascertain what strategies their competitors plan to use, and on which markets they are focusing. The resources and In order to fully grasp the strategies of the competitor, you must also capabilities of the gain an understanding of which resources it has at its disposal, as well as competitor what its capabilities are. This kind of information can usually be gained from newspapers, media articles or the news. For example, a technology company may wish to create Google Alerts for rival companies so that they can see when they appear in the media. It is important to understand competitors’ strengths, in order to understand what their capabilities are. 143 DEVELOPING PRODUCTS AND SERVICES The assumptions of the In order to fully understand how a business’s competitor’s operate, you competitor must understand their assumptions about the market they are in, and their assumptions about how their business operates. For example, competitors could defi ne their actions (e.g. increasing their social media marketing strategy) purely based on what their assumptions

are around the growth of a specifi c market (e.g. the increasing use of social media apps used by their target market). The response profi le of Combining all of these aspects leads to a greater understanding of the the competitor competitor response profi le. Using this profi le, a business can formulate its own conclusions about which actions competitors may choose to take. This provides businesses with more awareness and preparedness to respond to any actions that competitors may take. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Tripod, n.d.) Table 4.4: The key components of a competitor analysis In order to stay competitive, it is also critical that a business identifi es future competitive threats. New competitors could typically come from the following sources: • Companies competing in a similar market, or with a similar product • Other companies that utilise similar forms of technology • Other companies that attract the same target market • Companies that off er similar products, but are located in diff erent areas • New venture or start-up companies that are founded by employees with previous experience in the fi eld New competitors usually enter the market when (among other reasons): • there are high profi t margins in the specifi c industry, or there are unmet demands in the industry; • no big barriers exist;

• future growth potential is visible; or • there is no strong competitive rivalry. An ideal method for conducting a competitor analysis would be to create a table that compares business competitors by their various features. Some of these may include more technical aspects, such as their market shares, patents, and sales tactics and practices, as well as observable traits, such as their advertising procedures, the range of their products, their alliances and location ( Edgnett, n.d.). Obviously, gaining as much information on their fi nances is benefi cial too, such as being aware of their markup costs, their fi nancial strength, and the growth of the business ( Edgnett, n.d.). By representing this in the form of a table, it allows for the researcher to accurately present the information in such a way that clear comparisons can be made to ascertain where the competitors’ strengths and weaknesses lie. 144 CHAPTER 4 An example of a competitor analysis table could be represented in the following way. Fly Buy Babies Kids R We Location Various locations all over the Only in major cities (provide a link to a country (or a link to a directory of directory) all of the locations) Sales tactics

Appeal to expecting mothers with Appeal to children’s senses and parents’ easy-to-use products wallets Advertising procedures Dress up an individual as a stalk to Advertise on television with hand out flyers commercials for children Range of products Mostly items for expectant moms Toys suitable for children between the and baby shower hampers ages of three and 18 Patents Has a patent for a baby stroller Has no patented toys or licences Alliances Maternity wear shops Sports department stores (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 4.5: An example of competitor analysis using fictitious companies A competitor analysis can be as lengthy as the researcher wants it to be; both in terms of traits to analyse, and how many businesses to compare.

4.6.3 Competence research A core competency can be understood as a collection of skills and resources that separate a business in the marketplace, thereby creating the groundwork of a company’s competitiveness (Prahalad and Hamel, 1990). Core competencies should be responsible for: • providing access to an array of new markets; • ensuring that the finished product will be beneficial to consumers’ lives; and • ensuring that the products or services stand out and become difficult for competitors to imitate. Therefore, core competencies should offer the consumer a unique experience by using your business. Furthermore, they should separate your business from all of your competitors, based on the skill sets and techniques that the business chooses to employ. These skill sets and techniques can be developed by continuous improvement and fine tuning. The competitiveness and the edge that a business possesses is based on its ability (i.e. core capability) to develop strong core competencies (Alexander and Martin, 2013). A business’s ability to master its core skills and techniques is an outcome of successful strategic architecture, which is the way that the business was developed from the ground up. Top management should continuously observe and encourage the development of core competencies. 145 DEVELOPING PRODUCTS AND SERVICES As previously mentioned, competencies refer to the ideal strengths or strategies that a business possesses, and that could potentially give them an advantage over other competitors. A core competency

should allow businesses to continually expand and try new and innovative ideas. In order for businesses to have a long lifespan, and to have a competitive advantage over other companies, they should be aware of what their core competencies are, so that they can continue to work on them, improve them, and allow the company to grow and survive ( Investopedia, n.d.). A business should be practising many core competencies, rather than just one. The core competencies may change over the years, as the business grows and adapts to new markets. For example, hospitals may practise core competencies of promoting good patient care and providing top medical knowledge; primary education centres, on the other hand, may choose to adopt growth and development, and health practices. Some other core competencies may include recognising and building up the brand of the business, practising eff ective marketing, staying innovative, or providing excellent customer service ( Investopedia, n.d.). ACTIVITY 4C (i) List the key issues to take into consideration when you design a survey questionnaire. (ii) Discuss why marketing research is essential for businesses. (iii) Explain the diff erent methods of conducting market research. (iv) Defi ne the concept of competitor analysis, and explain why it is important for businesses to conduct proper competitor analyses.

(v) Outline the key components of a competitor analysis. 4.7 UNIQUE OFFERING Successful businesses usually start with a product or service that meets a need, or is in high demand. Once businesses know that there is a need in the market, and they have created the product and are happy with it, the business starts to develop an identity. Some businesses are known for only one product; for example, Lindt chocolates. Lindt only produces chocolates, packaged in a specifi c way. Its off ering is distinctive and diff ers from Nestlé, or Cadbury. It is a more expensive product and talks to a specifi c sector of the market. Pick n Pay, on the other hand, sells a variety of products with diff erent brand names, as well as a no name brand. The key issue is that all businesses try to either sell a product, or to deliver a service that will distinguish them from other business’s products or services ( Entrepreneur 3, n.d.). Can you think of any businesses that have a unique off ering? 146 CHAPTER 4 4.7.1 What is a unique selling point (USP)? A unique selling point (USP), also called a unique selling proposition, is the essence of what makes a business’s product or service better than that of its competitors (Arline, 2014). A USP defi nes a business’s unique position in the marketplace. In short, it has to do with the value that the business can off er, and the problem it can solve. A strong USP clearly conveys the specifi c value or advantage that a similar product of a competitor does not provide. In order to maintain a competitive advantage in the market, it is imperative that a product has a distinctive feature(s), that will attract potential clients. A well-articulated selling point assists buyers in diff erentiating between the varieties of choices on off er. It is becoming more important in the

online commercial world, where consumers have a crucial part of eff ective selling, especially online, where consumers have even more options. With the ease of online shopping and the wealth of options available, businesses need to take extra steps to separate themselves from other brands, and add features to their products that will separate them from their competitors. For example, off ering free shipping on an online purchase may persuade consumers to choose your business over another. A USP can serve an important internal role as it forces a business to revisit the reason for its existence. The owner(s) of a business should communicate who the business is for, what drives the business, and how the business is making an impact. (USPs) EXAMPLE 4 D In South Africa, there are online platform shops, such as Takealot and Superbalist, that off er free shipping on certain items under certain conditions. Free shipping can be considered as one of their USPs. Let’s consider a hypothetical company, called Comfortable Shoes, and its USPs. Comfortable Shoes is an online store that specialises in selling aff ordable and comfortable shoes. Although there is not much that distinctly separates these shoes from other stores, one of its USPs is off ering free returns. This means that customers can return shoes that do not fi t them properly, to the store. Customers benefi t from this and, in turn, are more likely to use this store over another one that does not provide this option. It also may make them less hesitant to buy the pair of shoes online, because they know that they can always return them ( Optimizely, n.d.). USPs are mostly determined by quality and price. Quality, on the one hand, refers to the use of superior materials or ingredients, superior craftsmanship, and excellent manufacturing methods.

In terms of price, however, a USP could be based on the lowest price guaranteed, price matching, free shipping, bulk discounts, special off ers etc. 147 DEVELOPING PRODUCTS AND SERVICES In order to promote a USP for a product, marketers fi rst need to conduct research to determine whether there is a need for this product in the market, and whether consumers are interested in it. Marketers should ensure that what they are marketing is unique, and that there is a demand and space for it. Lastly, having a point of distinction to stand out from others is critical to draw in and retain customers. 4.7.2 Understanding your value proposition A value proposition is a guarantee of value to be delivered. It is the primary reason someone would want to buy from a business. In brief, a value proposition is a clear statement that explains how a business’s product: • solves client’s problems or improves their situation; • provides specifi c benefi ts; and • conveys to potential clients why they should buy that specifi c product, and not buy it from a competitor. According to Barnes et al. (2009), a business should present its value proposition as the fi rst thing visitors or potential clients see on the business’s web page. Value proposition is something anyone should be able to understand. It should be written in a way that it is accessible to the client, and should join the conversation that is already going on in the customer’s mind. The best way to ensure that one’s language style speaks to clients is to gain feedback from them through social media or interviews.

The following advice is issued for creating a value proposition. It usually consists of some text, in the form of a heading or a short paragraph and a corresponding visual picture. The following table can serve as a helpful guideline for value propositions. Component Description The headline This should catch the customer’s attention. Ideally, if you can do this in a shorter sentence, or even one word, it is even better. The nuance of the product should come across in this. The sub-headline or a short This could include a short explanation of the product that is on off er paragraph and why it is useful or benefi cial to the customer. Three bullet points Bullet points can be used to list key features or positive elements about the product on off er. The visual The saying, ‘a picture is worth a thousand words’ springs to mind. Visuals can often communicate things much quicker, and can be used to portray the product or complement your message. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Laya, 2018) Table 4.6: Elements of a value proposition 148

CHAPTER 4 You can ask the following typical questions in order to assess whether a business’s current value proposition is relevant or not (Laya, 2018): • What is the product or service that is being sold? • Is it benefiting the customer using it? How? • Who is the target market or customer? • What is the USP of this business? The uniqueness of the product needs to be something that will attract customers, and make them desire something they did not realise they were missing (Laya, 2018). It is often those little things that help a client to decide on a product. It could be things like free and fast shipping, a free bonus with a purchase, free installation, no long-term contract, a licence for multiple users etc. 4.7.3 Enhancing your USP Unless a business is fortunate enough to be the only player in its industry (e.g. the only dedicated supplier of a specific kind of nano microchip on the African continent), the business will need to differentiate itself from its competition through its USP. Businesses should make sure that they use their USP in a manner that promotes their business, and as the cornerstone of their marketing strategies. Having an identifiable USP is what differentiates a business from its competitors and gives the business a competitive advantage (Shewan, 2017). Businesses that do not know what their USPs are, and do not know how to capitalise on it, will suffer as a result. The next question is: How should a business go about developing a powerful USP? First, the business owner should have a definite understanding of what kind of business they are. USPs can be grouped into a variety of categories – based on their offering of quality, service, convenience, guarantees or warrantees, originality or

customisation, and the speed at which they are delivered or operate (Markus, 2017). Secondly, it is important to be explicit about the business’s unique strengths. Use the following questions to guide you: • What does the business offer that competitors do not? • How important is the offering for customers? • How easy is it for competitors to imitate? • Can it be communicated easily to the market? Thirdly, it is imperative to identify the concepts that will be used as a USP. For example, if a business decides on ‘service’ as a USP category, it has to say more than ‘We offer great services’. It should provide lists of the services on offer, or the lengths that it is willing to go to for its customers; for example, offering a 24-hour helpline or leaving a comment box on its website, and ensuring that it gets back to the customer within a certain amount of hours. 149 DEVELOPING PRODUCTS AND SERVICES 4.8 COSTING The price a business charges for a product or service is one of the most important decisions a business has to make. Setting prices that are too extreme on either spectrum (i.e. too high or too low) can hinder the fi nancial growth of the business. It can create cash fl ow issues in the business and negatively aff ect the sales of the business ( Info Entrepreneurs, n.d.). Before a business starts, it is critical to consider which costing and pricing models to use, and then review them regularly once your business is up and running. The process to determine the price of a service or a product, is called costing. 4.8.1 Why it is essential to know your costing

Costing requires much forethought and planning, as businesses essentially need to make a profi t in order to sustain their operations. Before we go any further, it is important for you to understand the following diff erences between costs, price and value ( Infor, n.d.; and Info Entrepreneurs, n.d.): • The cost of a product or service refers to the amount of money that is used in order to manufacture or produce it. This includes the cost of the raw materials used to produce a product, or the materials needed to provide a service. • The price is the cost of the product, plus a markup for profi t. This is the price at which the product or service is sold. • The value is the amount that the consumer understands the product or service to be worth and is, essentially, willing to pay for it. For example, the cost for an electrician to come and fi x a loose connection at a customer’s home might be R 100 for travel and vehicle expenses, R 30 for materials, and an hour’s labour at R 150. This totals to R 280; however, the value of this service to the customer, who is in a potentially dangerous situation with loose wiring and connections, may be well over R 300. In this case, the electrician could work out his worth to the customer and charge R 350 and keep R 70 as profi t, and the customer would still be satisfi ed with paying this amount ( Info Entrepreneurs, n.d.). It is of vital importance that you know the true cost of your product or service. This will set the foundation for accurately and successfully pricing your product or service. Accurately pricing a product or service can determine whether a business will fail or succeed. If you do not know the true cost, then you make your business vulnerable to either overpricing or underpricing your product or service. If an entrepreneur is aware of the true cost of a product or service, then they are able to make more profi table decisions for the business. ‘With knowledge of labour costs and manufacturing costs, a company

will much more eff ectively set your gross margins’ ( Touch Support, 2015). Now that we have discussed why costing is essential, let’s discuss costing models. It should be noted that each of the costing models that we will discuss can be used for both products and services; however, some models are more commonly used by either productorientated businesses or service-orientated businesses. In the next section, we will discuss a common costing approach 150 CHAPTER 4 for product-orientated businesses, namely standard costing; a common costing approach for service-orientated businesses, namely the ABC model; as well as a costing approach that can be used by both service- and product-orientated businesses, namely job costing. 4.8.2 Product costing models In most instances, the purpose of starting a business is to generate profit. Success with product-orientated businesses usually starts with choosing an effective product-costing model. Before a business can finalise prices, it needs to think carefully about the following things: • Does the business sell its product or service at a profit, considering all direct, indirect and hidden costs? • Can the business afford to accept, in some instances, an order at a special price? • Would an increase in sales actually result in increased profit? • Would it be more profitable for a business to buy a product, rather than manufacture it itself? • How cost-effective is the equipment and machinery of the business? • Is there wasted time, money and unnecessary duplication of effort in the business’s processes?

There are a number of different kinds of costs that exist (Blocher et al., 2016). Each business should conduct an analysis of its needs before adopting a costing method, as each need presents a different cost. Let’s take an example of an entrepreneur who wants to run her own coffee shop. Before she assesses what the costs would be for her coffee shop, she would first have to determine what her coffee shop needs – i.e. rent, barista, coffee machine, milk, water etc. – in order to determine the expenses for which she must plan. Understanding the different kinds of costs is applicable to the price costing process, as they will be exposed to different costing techniques and methods. The following table distinguishes between the different kinds of costs that should be taken into consideration when a product is costed. Kind of cost Description Recurring Recurring costs are consistent overhead costs that occur , such as staff salaries. Non-recurring costs occur once-off, and are not likely to recur again. For Non-recurring costs example, if a new telephone system needs to be put into the office, this will be a once-off cost; not something that happens systematically. Direct costs can be easily identified as they are closely associated with the production of the main product. Some categories of direct costs include the following: Direct costs • The costs for raw materials, or costs for the procedure or delivery of the product

• Operational costs (directly related to production); for example, the labour and machinery • Billable expenses for location costs or subcontracted work 151 DEVELOPING PRODUCTS AND SERVICES Indirect costs relate to the overheard costs that are not directly involved in production, but are necessary in order to run a business. Examples of production overhead costs include: • the cost of depreciation on fi xed assets; • the costs for maintenance; • the costs for supervision and monitoring; • the cost of electricity; and Indirect costs • taxes. (overhead costs) Examples of non-production overhead costs (general costs that usually remain the same, regardless of output), include: • the cost of salaries of all staff members (this refers to workers who are not producing any products, and are therefore not being paid per product produced; for example cleaners and receptionists working at a factory); • the cost of advertising; and • administrative costs. Fixed costs refer to those costs that are always there, regardless of how much Fixed costs

or how little is sold; for example, rent, salaries, printing costs, telephone costs, insurance etc. Variable costs refer to those costs that rise as sales increase, such as additional Variable costs raw materials, extra labour and transport. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Infor, n.d.; and Murphy, 2018) Table 4.7: Different kinds of costs involved in product and service costing Costing methods A costing method (costing model) is the method by which the total cost of the product can be calculated. The most well-known and widely used costing method among businesses is the standard costing method. This method means that a business formulates an estimated standard cost for a product by creating ‘standard’ rates for the materials and labour that was used to manufacture that product ( LillyWorks, n.d.). In other words, the business adds all the standard costs of a product’s input, such as the direct materials, direct labour and manufacturing overhead (Averkamp [a], n.d.). Additionally, this costing method can be used as a control technique, whereby the business can compare the estimated standard cost for a product to the actual costs of a product. If there is a large cost discrepancy between the estimated standard cost and the actual cost of a product, then it means that the business’s estimated profi t will be less than planned. Therefore, management should investigate if there are any processes that may need to be corrected or adjusted in the business, in order to meet standard costs for their product (Chartered Institute of Management Accountants Study Text, 2011: 154–157). For example, a company uses a standard costing, as it can easily determine the standard costs of inputs for a product, and it wants to use the control technique in the method to manage its operations and expenses (Averkamp [b], n.d.).

152 CHAPTER 4 Job Costing: A service and product costing model A common costing method that can be used by both serviceorientated as well as product-orientated business is the job costing method. Job costing calculates the sum of costs for a specific job (whether it is service- or product-related) by adding expenses, such as the cost of necessary materials, labour (including time and activity) and overhead expenses. According to Bragg (2017), this costing method: […] is an excellent tool for tracing specific costs to individual jobs and examining them to see if the cost can be reduced in later jobs. An alternative use is to see if any excess costs incurred can be billed to a customer. This is a method where an employee’s job is assessed and the costs of performing this job is noted ( Infor, n.d.). Often, job costing is used by smaller businesses. Let’s briefly examine how job costing can apply to a small product-orientated business (such as a jewellery company) as well as a service-orientated business (such as a plumbing business). For example, a plumber will charge more if they are asked by a big business to fix three toilets in an office block, whereas they may charge less for an individual client who wants their clogged drain fixed. Each job may be different for the plumber, therefore, different costs will be attributed to each job, depending on the materials needed, what the actual problem is, and how much time it will take. Now, let’s look at an example of job costing for a productorientated business. For instance, a particular jewellery company uses the job costing method. Why? Because each jeweller makes unique jewellery, depending on the different orders and instructions from their clients. One jeweller may receive a small order from a client, wanting a simple silver ring. Another jeweller may receive a complicated order from another client, wanting an intricate

engagement ring that includes diamonds and sapphires. Using the job costing method, the simple silver ring will not cost as much as the intricate engagement ring, due to the different materials and labour used for each ring. Some basic principles in product costing ensure that the business is able to ( Infor, n.d.): • include resources that are connected to the production of the business; • value materials accurately at the time that they were purchased, and at their present value; • avoid under-absorption and over-absorption; and • test whether or not the business is accurately using its desired costing model by evaluating the use of expenses in the past. Under-absorption ‘[…] means that more actual overhead costs were incurred than expected […] [and] if overhead is over absorbed, this means that fewer actual overhead costs were incurred than expected’ (Bragg, 2018). Avoiding under-absorption and over-absorption can be done by measuring the volume of activity that occurs over an extended period of time, and using that date to predict accurate overhead expenses. 153 DEVELOPING PRODUCTS AND SERVICES 4.8.3 Service costing models Service costing can be diff erent from other costing methods. Firstly, this is because service-orientated businesses do not require as many direct material expenses as product-orientated businesses (Chartered Institute of Management Accountants Study Text, 2011). For instance, a hair salon would not require as many direct material

expenses as a toy factory would. Secondly, direct costs may take up a bigger proportion of total costs for a product-orientated business; on the other hand, indirect costs often take up a higher proportion of total costs for a service-orientated business. Thirdly, the outputs for a service-orientated business are usually intangible, which makes it diffi cult to place a distinct and accurate cost unit for each service. For example, some hair salons would claim that a haircut would cost R 100; another hair salon would claim that it costs R 150. Fourthly, a business that makes use of a variety of services will need to use diff erent costing structures. Imagine the services at a restaurant. Here, waitrons, bartenders, cooks, cleaners and runners are employed – each service is diff erent, and each service will have diff erent costs. Lastly, service-orientated businesses usually have high fi xed costs. These high fi xed costs ensure that businesses can operate at full capacity throughout their operating hours – even when those operating hours are underutilised (Chartered Institute of Management Accountants Study Text, 2011). For instance, a coff ee shop may have very few customers between 10h00 and 11h00, and 15h00 and 17h00. However, it would be too impractical to close the business between those hours every day. Therefore, the business continues paying for those fi xed costs during those underutilised operating hours – i.e. paying hourly wages for baristas, bartenders, cooks and managers. For a service-orientated business, annual costs, industry standards (for profi t and revenue), and what customers consider ‘fair’, are all key factors to consider in determining the cost of a service (Meyer, 2007). An entrepreneur fi rst needs to assess what the serviceorientated business needs are, before any costs can be calculated. For example, if the entrepreneur is a sole employee, he will need to consider the minimum income that he would need in order to make ends meet ( Bond Street, n.d.). If he decides to give himself an hourly wage, then he would need to work out how many operating hours he would need to keep the business afl oat fi nancially. An entrepreneur should also determine the ‘cost of labour’ in a service-orientated business; this is not always an easy task. For

instance, you need to determine the cost of labour for a fl at-fee service, or a service that requires an hourly invoicing ( Bond Street, n.d.). Deciding how much an individual expert and their colleagues’ or employees’ time is worth is diffi cult. Another important consideration for service costing is to keep track of what competitors ask for similar services, as well as to stay inside the parameters of what customers can aff ord to pay. By assessing what competing businesses charge for their services, businesses can fi nd out what customers in the market are willing to spend on such services or products. This can be done through methods of observation, or by simply asking potential customers. Moreover, it is important to determine what activities and processes in a business would be categorised as ‘labour’, and whether or not that will be included in the cost of labour. Lastly, the fi nancial calculations for service costing need to consider certain factors, such as whether employment benefi ts will be seen as labour costs or overhead costs, and whether fi xed incomes or incomes based on profi t will be used ( Bond Street, n.d.). 154 CHAPTER 4 As mentioned before, entrepreneurs should identify all the needs of their businesses ( Bond Street, n.d.). For instance, when writing a book, a writer would need electricity, Wi-Fi, rent, computer, antivirus software, computer maintenance etc., just to keep their business up and running. Determining the needs of a service-orientated business will help the owner to calculate the costs (material and overhead costs) for the business. Material and overhead costs are important aspects of calculating service costing. Time is an important asset in a service business, and business owners should remember to calculate all of their overhead costs (e.g. rent and electricity) that are required in order to get their work done ( Bond Street, n.d.). These should be represented in the costing strategy. Material costs should also be considered, as direct

costs include any items that have been bought or used to deliver a service. For example, a writer would classify the purchase of a laptop as a material cost, as they would need that laptop to write their book. Overhead costs can be calculated as indirect costs, as they are the costs that accrue just from running a business with the day-to-day expenses (e.g. electricity or rent). As is the case with material costs, overhead costs should be represented in the service business’s costing and strategy, in order to ensure these costs do not decrease the necessary profit needing to be made ( Bond Street, n.d.). A careful pricing strategy is an important element to ensure a business stays financially healthy and sustainable. A common costing model used for services is the Activity-Based Costing (ABC) model. This costing method ‘[…] aligns an organization’s resources and their activity to their cost consumption. Unlike job costing methods, ABC costing incorporates more indirect costs into direct population activities to help drive pricing decisions’ ( LillyWorks, n.d.). ABC allocates overhead costs (all costs except for direct labour, direct materials and direct expenses) to each product or service. ABC does this by converting overhead costs (indirect costs) into direct costs. ABC looks at all of a business’s expenses, groups them into expense categories, such as planning, engineering and manufacturing, and then pinpoints how those expenses are related to a final service (Mihut and Tomai, 2010: 359). Let’s break this down: Using ABC, a service-orientated business will calculate the cost of direct materials needed, as well as the overhead costs, such as indirect costs (Averkamp [c], n.d.). For instance, a company identifies all the activities (complementary tasks) involved in making a service. Thereafter, it will determine the necessary resources required for those activities. Then, it will calculate the cost of those resources. After adding up the costs of all the resources, the company will have a total cost price for its services. Using this costing

model, it allows businesses to determine which activities and resources are actually beneficial and increasing their profitability, and which activities and resources are detrimental ( Inc., n.d.). 155

DEVELOPING PRODUCTS AND SERVICES ABC model (Source: EDGE Learning Media (Pty) Ltd, 2018; and Flat Icons; adapted from Ramani, 2009) Figure 4.3: Basic premise of the ABC model 4.9 PRICING As mentioned before, there is a distinct diff erence between cost and price. We will now examine pricing strategies and pricing models. 4.9.1 Why pricing is so important The pricing of products and services is a critical step in any business. What do we mean by the term price? In short, the price of a product is the payment or compensation that is exchanged for a good or service (Schindler, 2012; and Spann et al., 2015). Pricing determines how much consumers will pay, and how much profi t the business will make. If this is set too low or too high, it could have drastic eff ects on the business. It is important to accurately research and calculate costs before pricing a product or service.

We will now examine diff erent pricing strategies, as well as pricing models. 4.9.2 Pricing strategy Pricing strategies or tactics are used to attract customers and maximise profi ts ( Info Entrepreneurs, n.d.). A pricing strategy takes diff erent sales components into account. These might include the market segments, what the customer is willing to pay, the conditions of the market, the movements of competitors and various other costs that are involved in the process. The pricing strategy should always be marketed toward a specifi c target market and against rival companies ( Economic Times, n.d.). Common pricing strategies consist of the following ( Economic Times, n.d.): • Premium pricing: This strategy works in industries in which the company already possesses a strong competitive advantage due to its brand. Therefore, because of a business’s established quality of brand, it is able to off er a premium, or higher price; for example, Porsche (in the car market) and Gillette (in the cosmetics market).’ 156 CHAPTER 4 • Penetration pricing: In this type of pricing, the price for a product or service is relatively low in order to obtain a good market share. This is typically used when a new product has just been launched. Prices are understood to increase to ‘normal’ prices, once the initial promotion period is over. For example, a new coffee shop lowers the price of its coffees in order to attract customers. • Economy pricing: This type of pricing aims to target the mass market and high market shares, wherein the margins are thin; for example, generic frozen vegetables.

• Skimming price strategy: In this strategy, businesses place relatively high prices on their products or services, since they are dominating a specific market that does not have many competitors. However, their prices will decrease when other strong competitors step into the market to compete. The strategy here is to make a large amount of money before competitors get hold of the product and decrease profits. For example, some businesses originally sold the first cell phones at a really high price, since they were the only competitors in the market. In addition to the previous pricing strategies mentioned, there are also more specific service pricing strategies that service-orientated businesses could consider (Dolgui and Proth, 2010). Strategies to price services Below is a few of the strategies that can be used to price services. Hourly wages Hourly pricing for services is well known. When a business chooses to make use of hourly wages, management should examine and scrutinise the work process so that employees effectively make use of their work hours. In order to be successful in this type of pricing, employees have to practise discipline and keep records of the work that they conducted in those hours, so that it can be verified by management and/or their client. Hourly pricing is a good option if one works frequently with a particular client, conducts similar work, or is unsure of some of the parameters of the job (Weaver, 2017). Project-based pricing Project-based pricing, which can complement the hourly model, is also called a ‘flat-fee’ pricing model. A client may ask you how much translation work costs for a 30-page document. You may tell him R 7 500, irrespective of how long it takes you. The risk is that there may be much more work than what was originally anticipated, or that such drastic changes need to be made, that the job ends up being

underpriced. This could result in less profit, or awkwardly asking the client to raise his payment. This method can be profitable, and can lead to value-based pricing and higher profits (Weaver, 2017). This approach works well when a client agrees to pay for a project upfront, or if it is clear that the project will be easier than the client anticipates. 157 DEVELOPING PRODUCTS AND SERVICES Retainer pricing A retainer can be best understood as being on par with a consistent wage or pay cheque. It is usually a pre-allocated fee for a set time or amount of work that needs to be done. This can usually be based on time (e.g. charging per hour for a month), or it can be based on the value of the service. There are two kinds of time-based retainers: rolling and use-it-or-loseit. If an employee conducts a rolling retainer based on time, clients can roll over any unused hours or time to the next month. In a use-it-or-lose-it retainer, the time that was not used is lost, as the balance resets every month. Rolling retainers could end up being more costly for the business, as it could mean that it ends up doing meaningless work ( Entrepreneur 4, n.d.). For example, an entrepreneurial gardener uses a rolling retainer pricing model (based on time value) for his business. His client wants him to work for ten hours in their garden weekly for one month. The gardener will be paid R 35 per hour, and will therefore be paid R 1 400 for the whole month. However, an entrepreneurial gardener using the use-it-or-lose-it approach may note that he only needs to work for fi ve hours in the week to accomplish the same amount of work. Instead of doing meaningless work to fi ll the time, he will still be paid the R 1 400 for the month, even though he worked for half of the number of hours.

The service-orientated business’s record of accomplishment This approach to pricing is usually based on the employee’s past experience, before determining what can be charged for the services on off er. If the employee is an expert in what the company off ers, then obviously the fee that will be charged for the services rendered will be higher. Companies often need to have evidence to support that the services that they are off ering are sound and better than the services off ered by competitors. The employee would need to demonstrate skills, competence and expertise, in order to assert that they are worth the cost of the service. Performance-based pricing This type of pricing is based on the performance of the employee’s performance – i.e. the fee is derived from how good the service is. The company should convey a measurable outcome to the client on which to judge the employee’s service (Weaver, 2017). For instance, a social media infl uencer, Ziyanda, promotes a specifi c shoe brand, called Joburg Kicks, on her Instagram account. The two parties (the infl uencer and the shoe company) agreed that Ziyanda will be paid a certain amount of money for every 20 shoes that she sells. Therefore, the social media infl uencer’s income will depend on her performance – the more shoes she sells, the more money she will be paid. It is important to be well-informed about competitors’ off erings and prices. It would not be sensible to set a business’s prices much higher or lower than other competitors would; unless there is a well thought-out reason not to. Prices that are too low will lead to less profi t, while prices that are too high may lead to a loss of customers. 158 CHAPTER 4

It is also important to take consumer behaviour and psychology into consideration when it comes to pricing – sometimes high prices make customers believe the product is of a high quality and, therefore, results in them buying the product. Prices that are too low may achieve the opposite. Often, companies offer different prices to different customers, depending on their loyalty, or how often they purchase from a particular company ( Info Entrepreneurs, n.d.). 4.9.3 Pricing models Every business needs to be operating above its expenses in order to make a profit. Determining accurate costs is an essential part of determining a price. Depending on the type of business, the competition and the factors that influence the customers, the best pricing model can be decided after an analysis of what we have just discussed. We can use cost-plus pricing and value-based pricing as methods of pricing business products and services. A pricing model is a broader pricing system than a pricing strategy. An entrepreneur may also change their pricing strategies more than changing their pricing models for the business. We will now focus on the distinguishing differences between cost-plus pricing and value-based pricing models ( Info Entrepreneurs, n.d.; and Rawes, n.d.). Cost-plus pricing model Cost-plus pricing starts with the cost of manufacturing or producing a product or service, and thereafter adds the amount that will be needed in order for the business to make a profit on that product or service. This is typically done as a percentage of the cost, in order to account for when the cost of manufacturing increases. This method is ordinarily used for businesses that deal with large quantities of products that operate in markets that are price competitive. For instance, imagine it costs R 5 to manufacture a pen. The business will then add 20 per cent of the cost (20 per cent × R 5 = R 1) of the pen to make a profit (R 5 + R 1 = R 6). This method, however, tends to ignore certain aspects of the product, such as its image and

marketing position. There are usually hidden costs that are involved in production; therefore, the true profit per product may be lower than expected ( Infor, n.d.). Value-based pricing model Value-based pricing focuses on the price a business believes its clients would be willing to pay, based on the benefits the business offers them. Value-based pricing depends on how convincing the business is about the benefits it offers to its clients. If a business has obvious benefits, it will provide such a product or service with an advantage over its competitors and can charge according to the value that the business thinks (and can prove) that it is worth to its customers. For instance, a masseuse charges R 700 for an hour massage. The oil and labour for the massage cost R 200; however, the masseuse knows that many of her customers are stressed and are in dire need of stress relief. The masseuse claims that her massages have great value, as it enhances her customer’s quality of living and decreases their stress levels, which benefits numerous other areas of the client’s life as well. Additionally, the masseuse is the only one in the town, which makes her service even more valuable ( Infor, n.d.). 159 DEVELOPING PRODUCTS AND SERVICES 4.10 DO YOU HAVE THE RIGHT PRODUCT OR SERVICE? At the heart of every successful business, you will be sure to fi nd that the owner and/or manager has the ability to identify the perfect product or service to off er. This is not a once-off decision or activity; rather, it needs to occur regularly. Products and services from fi ve to ten years ago diff er from what the current market and customers need. There are thousands of products and services that are available to consumers in the present day – essentially, there is a lot of competition.

However, entrepreneurs have many tools and resources available to conduct substantial market research, which helps them to choose and develop the right product or service for their business. Entrepreneurs are often anxious about whether or not their products and services will attract customers. If they fi nd themselves in this position, they can ask themselves the following self-refl ective questions (Tracy, 2005): • What kind of products do I like to purchase and benefi t from? • Would I enjoy the service that I plan on selling? • Is it something that I would personally use? • Would I recommend this product or service to others? • Can I picture myself still doing this in fi ve to ten years? • Am I able to passionately sell this product or service to the customers? • Can this product or service enhance the lives of the customers? How is this product or service valuable? • Who are the types of customers that will be interested in this product or service? Another important step in determining whether a business has the right product or service is to work out how the business will convince a sales and marketing consultant to sell it. The person having to market and sell a product or service should fi nd answers for the following pertinent questions, before taking on the task (Tracy, 2005): • What method of sales and promotion will be employed? • How will the product be produced? • Who is going to pay for the product?

• How will it be delivered to the customer? • Will there be a guarantee or warrantee on the product, if applicable? • Is there a demand in the market for this product or service? • Is this product or service better than something that is currently available? • Is the price better than anything else that is available? • Does it have potential to become a preferred product or service for customers? 160 CHAPTER 4 Methodology, tools and techniques to establish the need for a product or service Once the entrepreneur is convinced that a market exists for a specific product or service, it is advisable to (Punjabi, 2013): • use available industry data; • investigate competitors by visiting their websites and finding out their statistics; • use Google Adwords Keyword Planner to determine the number of searches related to the product or service that take place on Google each month; • study trends on the Internet to ascertain the number of queries that take place; and • conduct research on the offers that competitors make in order to estimate their pricing and revenue numbers. Research on your potential target market is of vital importance. Once you have identified a specific market, find about five to seven people

who are in it and question them about their opinions and experience concerning the type of product or service that you want to sell. Ask potential clients open-ended questions and try to get an understanding of their needs. Another possible method for understanding your potential target market is through observation. For instance, imagine you want to open a clothing shop near a university campus. Your target market is, therefore, university students. You can observe their fashion trends on campus. Being on the lookout for patterns in consumer behaviour can be useful in discovering needs in the market. According to Punjabi (2013), being able to build and authenticate a product should be a corroborative part of the process. Entrepreneurs should continually be asking themselves whether the product or service fills a need in the market. Validation is an important process in establishing whether your product or service meets the right need. Validation will help you avoid numerous problems or errors that you might encounter, and it will help you understand your target market more. Moreover, validating a product early in the process of product or service development will help you determine if it will be successful, or if you are wasting your time (Punjabi, 2013). The following figure outlines the steps in the validation of products and services. The first step would be to identify a need, gap or problem in a market. The second step would be to formulate a validated idea that will address the identified need, gap or problem. In other words, the idea should be realistic, sufficient and useful, and have the potential to be successful. The third step would be to create a prototype based on your idea. That prototype should be tested and validated. Based on the feedback of the prototype, you should then design an actual product or service. This is the fourth step. The fifth step would be for the entrepreneur to develop the actual product or service, and to let it be tested and evaluated again. The feedback from that validation process will then be used to create the final product (Punjabi, 2013).

161

DEVELOPING PRODUCTS AND SERVICES Step 1: Validated problem Step 2: Validated idea Step 3: Prototype Step 6: Validated product Step 5: Product Step 4: Design (Source: EDGE Learning Media (Pty) Ltd, 2018; and Flat Icons; adapted from Punjabi, 2013) Figure 4.4: Methodology, tools and techniques for validating the product or solution ACTIVITY 4D (i)

In your opinion, name any two skills that entrepreneurs should possess. (ii) List the pricing strategies that are specifi cally geared for serviceorientated businesses. (iii) Defi ne USP and explain why it is important for a business. (iv) Explain the importance of knowing the true cost of your product or service. (v) Explain the importance of pricing. (vi) Discuss how validation is an important tool for product or service development. (vii) Briefl y diff erentiate between the pricing strategies that can be used for both product- and service-orientated businesses. South Africa is not performing as well, globally, in Mathematics and Science. Imagine you have identifi ed a great need for secondary school learners to receive tutoring in Mathematics. You have decided to fi ll the need in this market by starting your own tutoring services. More specifi cally, you have developed a software package that can assist high school learners in improving their performance.

(viii) You have chosen to use surveys as your primary market research tool. Defi ne this tool, and briefl y state the guidelines for how to design a survey. 162 CHAPTER 4 (ix) Formulate your business’s USP. (x) Select a pricing strategy for your business, and justify your answer. Imagine that you are the chief financial officer (CFO) of an education technology company, and have discovered that 25 per cent of your target market went to your biggest competitor. (xi) Discuss how you will you go about trying to understand why those customers would go to your competitor and how will you address it once you have established the reasons for them discontinuing business with you. 4.11 SUMMARY Entrepreneurship is definitely something that requires passion and the ability to take risks. It is evident throughout the chapter that in order for a business endeavour to be successful, it needs to fit the needs of the consumers and be something that fills a gap in the market. It is pointless to start a business that is already swarming with affordable options and lots of competition. At the end of the day, a business needs to yield a profit, and it needs to ensure that it is benefiting the consumer, while supplying a good quality product or an excellent service. There are various methods for conducting market research in order to safeguard a strong foundation of research, and to

determine whether the product or service will be a success or not. These methods and strategies can usually help businesses to ascertain where any gaps in the market lie, and how to take advantage of these gaps. We have discussed the various methods to use in order to set the profit that can be made on the product or service on offer. Taking risks can be scary, yet they can also yield high rewards. As the saying goes, ‘fortune favours the bold’. Those who are willing to put in the effort and take the chance on themselves and their passion, usually see their dreams into fruition. 163 SPREADING THE WORD SPREADING THE WORD 5 5.1 Introduction 165 5.2 Life lesson 166 5.3 The basics of marketing 168 5.4 Entrepreneurial marketing strategy 169 5.4.1 | Entrepreneur as the chief marketing officer 170 5.4.2 | Marketing budget 171

5.4.3 | Acquisition costs 173 5.4.4 | Guerrilla marketing 174 5.4.5 | A basic marketing plan 177 5.5 Building a brand 182 5.6 The basics of advertising 184 5.7 The basics of public relations (PR) 187 5.8 The basics of distribution 188 5.9 The basics of customer relationship management (CRM) 190 5.10 The basics of digital marketing 192 5.11 Marketing plan checklist 194 5.12 Summary

196 164 CHAPTER 5 Case studies – myths, leaders and Online inspiration start-ups Boring but Growing the Spreading Making important business the word it run stuff smoothly Building a It is in the team numbers

Cash is king Developing Selling products and Getting out of Forming a services What is the starting business entrepreblocks neurship? 5.1 INTRODUCTION Entrepreneurs are often challenged to compete with larger, established companies that have more staff and larger budgets, but even organisations such as Virgin and Microsoft started off with these entrepreneurial challenges. With the increasing popularity of entrepreneurship as a separate business category, entrepreneurs are learning ways to overcome these obstacles and take advantage of available opportunities, by using their flexibility to create strengths, and using marketing creatively to build a unique identity (MarketingSchools.org, n.d.). After studying this chapter, you should be able to: • describe the role of marketing in an entrepreneurial business; • discuss the entrepreneur’s role in marketing;

• evaluate an example of a marketing strategy; • develop a basic, hypothetical marketing strategy; • evaluate an example of a marketing plan; • develop a basic, hypothetical marketing plan, and complete a marketing plan checklist; and • describe the basics of: § advertising; § public relations; § distribution; § customer relationship management (CRM); and § digital marketing. 165 SPREADING THE WORD 5.2 LIFE LESSON In 1975, Bill Gates co-founded a computer software company called Microsoft. Even though the company’s rapid growth meant that Gates quickly took on the position of CEO, and was no longer responsible for coding, he still reviewed and often rewrote the coding his employees created. This meant that he maintained a strong sense of the quality his organisation was off ering, thereby building a solid reputation (Scheidies, n.d.). In the early 1980s, Gates and his partner, Ballmer, travelled America giving presentations on how graphic interfaces would change the

future of operating systems. These presentations were met with much negativity, and they were told that these interfaces would be too slow. These attitudes were quickly changed, however, when Apple launched the Macintosh in 1984. Suddenly, it was obvious that the future of technology included windows, menus and icons. Within a few short years, the market was fl ooded with this software, including Microsoft Windows, which was released only one year after Mac’s success. This was possible because, although they had been subjected to so much negativity, they truly believed in what they were saying, and had continued to invest in these operating systems. This proves that entrepreneurial success lies largely in identifying opportunities or gaps in the market, and then working toward fi lling these gaps with your own products or services. While Microsoft was not the fi rst to enter the market, they were quick to follow Mac, and were able to off er software that fulfi lled the needs that Mac was not yet able to. However, Windows 1.0 was not very successful, and even Windows 2.0, which was released two years later, did not do much better. In fact, it was not until 1990, when Microsoft launched Windows 3.0, that they found success, selling more than ten million units within two years (Scheidies, n.d.). The secret that Gates learned is that people do not simply buy products because they are cheap, or because of the logo on them; they buy them because they believe the product will fulfi l a need they have, better than the competition will (Seidman, 2017). This means that one of the most diffi cult marketing tasks for an entrepreneur is not coming up with a catchy tagline or a brilliant logo; it is fi nding a gap in the market, and being creative enough to develop a solution. It also means that, as everything is changing so rapidly, no entrepreneur can ‘rest on their laurels’ – i.e. be so content with their achievements that they do not make further eff orts to improve and progress ( Oxford Dictionaries, n.d.). A product or service that fulfi ls consumer needs today, may no longer be relevant tomorrow. As the needs of consumers change, organisations need to be continually adapting to fulfi l these emerging needs. Bill Gates summarised this

well when he stated that ‘if you show people the problems and you show people the solutions, they will be moved to act’ (Scheidies, n.d.). According to McAllister (2013), Microsoft does not always have happy customers, and not everything that they do is successful; in fact, they fi eld many complaints about the ‘blue screen of death’, or stop error screen. Yet, that Microsoft boasts an 88.7 per cent market share ( NetMarketShare, n.d.), a fi gure which has remained relatively constant since 2011. They owe much of this to the fact that their marketing department continuously responds to customer feedback, 166 CHAPTER 5 and uses this feedback to improve their products. On this note, Gates is quoted as having said: ‘your most unhappy customers are your greatest source of learning’ (Scheidies, n.d.). ACTIVITY 5A As mentioned earlier in this chapter, not everything that Microsoft does is successful. During an interview, Gates reported that he was unhappy with their performance in the mobile market; in fact, he went as far as calling their smartphone strategy ‘a mistake’ (McAllister, 2013). Read the following article (adapted from Seidman, 2017) and then answer the questions that follow: In order to be successful, an organisation needs to be the cheapest, the first or the best, and Microsoft did not fulfil any of these requirements. Google took the position of ‘cheapest’ when they gave away Android for free. Apple took the position of ‘first’ in the market and

‘best’ in quality, with their iPhone. This left Microsoft out in the cold. They charged mobile phone manufacturers between 20 and 30 dollars for the operating system (OS) for a single device, making them far more expensive than Google, for a product that was inferior to the IOS in both features and quality. To make things worse, when asked why consumers would choose a Windows phone over an iPhone or Android, the marketers and founder of Microsoft could not answer. One of the mistakes they made was creating a model that was entirely different from iOS and Android, making it difficult for apps to be ported. This was a problem, because no one wants to use a platform that has no apps, and no one wants to build apps for a platform with no users. Seidman (2017) suggests that Microsoft’s biggest downfall was that they were so accustomed to people having to use Windows, that they expected the same acceptance for the mobile operating system. The only advantageous feature of the Microsoft OS was that Office was loaded, but this was not enough of a differentiator to have any major influence, as both Android and iOS had acceptable document viewers and editing tools. Required: (i) Looking at the success of Microsoft reported in the previous section, explain what you think their failure in the mobile market could be attributed to. (ii) Do you agree with the statement that in order for an organisation to be successful, they need to be ‘the cheapest, the first or the best’? Substantiate your answer. 167 SPREADING THE WORD

5.3 THE BASICS OF MARKETING Marketing is a process that involves the entrepreneur identifying a target market, and then creating a product or service that will satisfy this target’s needs in terms of price, quality and location, as well as creating promotional messages to make customers aware of the entrepreneur’s off erings. This awareness results in sales and, ultimately, builds mutually benefi cial relationships and a competitive advantage (Business Queensland, n.d.). From this defi nition, it is clear that marketing focuses on diff erent elements; these are commonly referred to as the ‘marketing mix’ or the ‘fi ve P s’. This mix of elements needs to be designed and organised in such a way that there is consistency between them ( Business Queensland, n.d.). For example, if a company is trying to establish itself in the market as off ering high-end quality to the upper income market, it must off er superior products at high prices, in exclusive stores. Focusing on each element of the marketing mix helps the entrepreneur determine areas of the business that need improvement, in order to satisfy consumer needs. These elements include the following ( Business Queensland, n.d.): • Product: This is what the customer buys, and includes both tangible and intangible off erings, along with their features, branding, packaging, service plans and warranties. • Price: The amount charged will depend on the amount it cost to produce or purchase the product, along with any transport and storage costs, plus a mark-up. This price will need to take into consideration what the target audience is willing to pay, and what they consider value. It will also depend on where the organisation is placed in the market; for example, people are willing to pay more for branded items than for their generic counterparts.

• Promotion: This includes all the activities a company uses to create awareness and a desire for its products, and to build customer relationships and loyalty – e.g. public relations, advertising, sales promotions, events and direct marketing. • Place: This refers to how the product or service is delivered to the customers, including the physical location they visit, Internet downloads and delivery methods. Companies need to think about convenience, and whether positioning themselves near to their competition would be in their best interests or not. • People: This refers to both staff and customers. Companies need to consider the level of customer service they off er, and whether their staff need any training. Communication with both parties is very important in building mutually benefi cial relationships. Entrepreneurs need to consider these fi ve P s when establishing their business, but this should not be seen as a once-off process; instead, the macro-environment should be continually scanned for changing trends and emerging opportunities for the company, which may require changes to one or more elements of the marketing mix. 168 CHAPTER 5 5.4 ENTREPRENEURIAL MARKETING STRATEGY Entrepreneurial marketing differs from traditional marketing in that it involves unorthodox practices that allow start-ups to establish themselves in already established markets. The most common features of an entrepreneurial marketing strategy are innovation and risk-taking. These strategies build on the company’s strengths, and focus on the value it adds for customers. Startups and emerging companies make use of marketing to establish themselves comparatively to their competition within an industry. This is done in order to grow as fast as possible, so that the company can become a

major competitor in as short a time as possible ( MarketingSchools.org, n.d.). Marketing is the one area entrepreneurs can use to carve out unique identities and create powerful consumer perceptions. However, entrepreneurial marketing needs to focus on different principles to traditional marketing, because many of the traditional practices are designed for medium to large, well-established organisations ( Marketing-Schools.org, n.d.). While new businesses may have a small group of people working on their marketing, it is often just the entrepreneur trying to manage all aspects of the start-up. They usually work with limited budgets, and have little to no access to the marketing luxuries that their more established competitors may have, such as graphic design teams and advertising consultants. The result of this is that entrepreneurs’ marketing strategies are often more innovative, out of necessity, and also involve more risk ( Marketing-Schools.org, n.d.). One of the biggest entrepreneurial challenges is to stand out from the competition. An effective way to ensure start-ups achieve this is to market in a unique or aggressive way that makes the organisation easily identifiable, or easy to remember. Some of these methods will be discussed in the sections that follow, but other examples include the following ( Marketing-Schools.org, n.d.): • Relationship marketing aims to building strong relationships between the organisation and their various stakeholders by focusing their attention on investing in their staff, remaining loyal to suppliers, providing transparency with investors, giving customers what they want, and making them feel heard. • Expeditionary marketing refers to being trendsetters in terms of developing unique products and markets. • One-to-one marketing refers to individualised marketing, which personalises the message delivered to each individual.

• Real-time marketing allows entrepreneurs to interact with customers in real time, through the use of technology. • Viral marketing allows entrepreneurs to post messages on the Internet in such a way that customers can share them and expand on them. • Digital marketing takes advantage of email and social media to complement the entrepreneur’s other marketing efforts. Modern-day customers have a large amount of choice. We have come a long way from Henry Ford’s statement about the Model T: ‘you can have it in any colour, as long as it’s black’. This is 169 SPREADING THE WORD why it is important to use marketing to communicate with customers and persuade them that what you are off ering is exactly what they need. This means that the focus should be less on what the entrepreneur and their company is about, and more on the customer or potential customer and how their needs will be met. This requires an intimate understanding of the target market (Business Queensland, n.d.), including what is important to them, how much money they have to spend, where they like to buy their products and services from, and what features are important to them. (Deli) EXAMPLE 5 A In 1984, a college student named Michael Dell started a computer company that, today, is one of the most well-known and established in the world. Marketing-Schools.org (n.d.) identifi es the following steps that Dell took in the early days in an attempt to stand out from the industry competition: • Dell identifi ed that there was a gap in the market for custom business computers. Until that stage, the only market being fi lled

was for medium to large companies that were happy buying computers in bulk. • Computers were only available through retail stores; Dell decided to cut out the middleman and sell computers directly to consumers, making it easier and cheaper for the company to place large orders. It also allowed Dell more freedom to customise their computers. • Dell focused on targeted marketing, such as trade shows and trade magazines, to showcase how their products were suitable for businesses. • They off ered exceptional service, by providing 24-hour technical support to all customers. This was extremely benefi cial at a time when companies were only just beginning to integrate computers into their business operations. 5.4.1 Entrepreneur as the chief marketing offi cer One of the most important marketing jobs as an entrepreneur is conducting market research. This research should focus on who the company wants to target, including their age, gender, lifestyle and geographical location, among other factors. Additionally, the entrepreneur must aim to satisfy this market in terms of the product or service off ering, the price, location and promotional methods. Lake [b] (2017) points out that market research is diff erent to marketing research, which involves taking a closer look at the behaviour that drives consumers to make certain purchase decisions. 170 CHAPTER 5 Both types of research are important, because the entrepreneur needs to understand who they are aiming at, so they know what product or service is best suited to that market. They also need to understand what drives those people to spend money on products or services, so that they are able to design their offering around what their target market most values. This affects the way they will

promote, price and bundle their offerings. Understanding why people buy particular products and services will allow the entrepreneur to influence these decisions (Lake [b], 2017). According to Lake [a] (2017), there are four ways that an entrepreneur can grow their business organically: • Attracting new customers • Persuading existing customers to buy more products or services • Convincing customers to buy more expensive products • Persuading customers to buy products with a larger profit margin The most favourable of these is the acquisition of new customers, as this results in the business having more people to sell products to, as well as a broader base from which word-of-mouth marketing can spread. Lake [a] (2017) further suggests that the entrepreneur could attract new customers through: • researching; • creating a marketing plan; • offering competitive pricing; and • designing promotional messages to communicate the solution that the product, service or company provides. Another task of the entrepreneur is to build relationships with all stakeholders (Lake [b], 2017). This includes staff, suppliers, the media and their customers. 5.4.2 Marketing budget According to Lake [a] (2017), having a small or limited marketing budget does not mean that entrepreneurs cannot compete with their more established counterparts – it simply means that they need to be more creative. He goes on to suggest that an entrepreneur launching

a marketing campaign could deal with a limited budget in one of the following ways: • Approach a supplier to share advertising space and costs with them. • Spend time connecting with existing customers and encouraging them to refer your company to their friends and family, and building their loyalty through incentives such as loyalty programmes. • Connect with the media, and share information with them about your journey as an entrepreneur and business; they may provide some free publicity in the form of a press release. • Offer tours of your factory or offices, if that is applicable, or consider getting involved in local corporate social investments (CSIs) or sponsorships, to get publicity and build relationships with the public and stakeholders. 171 SPREADING THE WORD Once we understand these factors, we still need to consider how large the marketing budget will need to be in order to achieve the right results. When deciding how much to spend on marketing, Mintz (2015) suggests the following: • Companies in their fi rst year of operation should spend more eff ort on coming up with creative ways to market their business (e.g. press releases, launch events and guerrilla marketing), rather than spending large sums of money on traditional advertising. • Companies that have been operating for one to fi ve years should spend between 12 and 20 per cent of their gross revenue, or projected revenue, on marketing in order to build the brand and brand loyalty.

• Companies that have been operating for more than fi ve years should spend between six and 12 per cent of gross revenue, or projected revenue, on marketing to remind customers of what they have to off er, and to attract new customers. The entire budget should not be spent on creating one or two messages; rather, it should be spent on a combination of messages and channels. These channels increase the overall visibility of the brand, so that we are able to introduce potential customers to our off erings. Some examples of multiple messages and channels include the following (Mintz, 2015): • Branding could cost a couple hundred rand, or hundreds of thousands, depending on how far the entrepreneur decides to go with branding. It can stretch to business cards, letterheads, email templates, branded pens and other stationery or objects that serve to reinforce the company’s image. • The entrepreneur can save money by creating and maintaining the company’s website on their own, through templates on Wix, WordPress or similar sites. Alternatively, the company could employ someone professional to design and manage the site. • Social media is a wonderful way to market on a tight budget. The entrepreneur can set up several, or select, social media accounts, which will reinforce the message the company is trying to convey. These accounts can be monitored by the entrepreneur, or someone else in the company who has been appointed to this task. • Events are another way of creating awareness and networking with those who could prove benefi cial to the company. The entrepreneur could choose to host an event of their own, sponsor someone else’s event, or simply attend as many as possible in an attempt to build relationships. Lake [a] (2017) states that once money has been spent on marketing, it is critical that the success of that eff ort is tracked. This can be done by providing a code in the marketing message, which needs to be

quoted in order to qualify for a discount or special off er. In doing this, the company will know how many sales were generated through that particular message. However the entrepreneur chooses to spend the company budget, it is important to remember that there is no one single way to appeal to an entire market; but, conducting research into who the company’s market is and what they expect to see is a starting point for deciding how to spend the marketing budget. As Lake [b] (2017) suggests, marketing should be seen by entrepreneurs as an investment, rather than an expense. 172 CHAPTER 5 5.4.3 Acquisition costs For an entrepreneur starting out, money will have to be spent in order to attract customers; as the business grows, the entrepreneur may choose to decrease this spending. However, it is important to never lose sight of the importance of those who already support the company ( Grapevine, 2018): • It is cheaper to keep existing customers than to attract new ones. • Existing customers are 50 per cent more inclined to try new products. • Existing customers are more inclined to listen to marketing messages, and to respond to those messages. This does not mean that the entrepreneur should ignore customer acquisition; however, they should focus on benefitting from new and existing customers by actively reducing the cost of acquiring customers (CAC). Some ways to do this include the following ( Grapevine, 2018):

• Focus on website conversion: This could include personalising emails, offering promotions linked to online purchases, making use of online analytics, ensuring the site speed is optimised, and following up on any online enquiries. • Enhance customers experience: This can be done through offering loyalty programmes, extended warranties or guarantees, exceptional service, or anything else that will be valued by the customer, and will encourage loyalty and positive word-of-mouth recommendations. • Build strong relationships with customers: They will feel valued if their queries and concerns are addressed timeously, and if they leave the company’s online store without finalising their purchase, a followup reminder will make them feel that their business matters to the company. A company that balances customer acquisition and customer retention will be in the best possible position for reaching its long-term goals ( Grapevine, 2018). Skok (n.d.) notes that the three key factors to the success of any start-up are ‘team, product and market’, with product–market fit being the most important. He goes on to suggest that a fourth element be added: the need for a viable business model. He believes that this comes down to the entrepreneur’s ability to balance the cost of acquiring customers, with the ability to make a sustainable profit from these customers. To calculate the cost of CAC, the entrepreneur would take the cost of sales and marketing – including digital marketing, business development salaries and event marketing ( Grapevine, 2018) – for a defined period of time, and divide that by the number of customers who purchased products or services during that time (Skok, n.d.). The customer’s lifetime value is also important to determine. This will answer whether the money spent on acquiring these new customers is worth it in the long run (Skok, n.d.). This can be done by calculating the gross margin that the entrepreneur anticipates making from these

customers over the lifetime of the relationship, and should take into consideration any associated installation, support and servicing costs. 173 SPREADING THE WORD Monetisation (LTV) Cost to acquiring customers (CAC) (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Skok, n.d.) Figure 5.1: A well-balanced business model While it can be diffi cult to track consumers and whether they are potential or existing customers, or once-off or loyal customers, technology is making this task far easier ( Grapevine, 2018). Skok (n.d.) states that the Internet is responsible for many of the changes in consumer buying behaviour. He goes on to suggest that entrepreneurs can take advantage of these changes in the following ways: • Use inbound marketing to build traffi c, instead of paying for traffi c with search advertisements. • Use customers’ social networks to grow your brand, where possible. • Use software to automate search engine optimisation, social networking and lead scoring.

• Upload demo videos that answer potential sales questions to your website. • Allow customers to post comments or referrals on your site. • List answers to common sales questions on the company’s website. Potential investors may use CAC to determine how attractive and sustainable the entrepreneur’s business venture is before deciding whether or not to invest (Grapevine, 2018). 5.4.4 Guerrilla marketing Guerrilla marketing can be described as marketing that pursues conventional goals (such as sales, profi t and increased brand awareness) in an unconventional way among large audiences, often with a very limited budget ( Entrepreneur 1, n.d.). It requires imagination, creativity and ‘out of the box’ thinking ( Marketing Ideas 101, n.d.). 174 CHAPTER 5 Zantal-Wiener (2017) suggests that much like ‘guerrilla warfare’ refers to a surprise attack, so guerrilla marketing refers to marketing that surprises, or even shocks, people into paying attention. It consists of four subcategories (Zantal-Wiener, 2017): • Outdoor guerrilla marketing • Indoor guerrilla marketing • Event ambush guerrilla marketing • Experiential guerrilla marketing

Outdoor guerrilla marketing adds something to the environment that does not naturally belong there; for example, a massive cup of coffee as tall as a person that is positioned as though it has been knocked over and leaked all over the pavement. Another good example is the Amélie Company’s tailgating advertisement that appeared on a billboard. The 3D billboard was designed in such a way that it appeared as though a car had crashed into the back of a truck, thereby representing the dangers of tailgating a truck and not maintaining a safe following distance. This advertisement can be viewed at the following link: http://ameliecompany.com/work/tailgating/ Indoor guerrilla marketing is the same as outdoor guerrilla marketing, except that the items are placed indoors; for example, in malls and university campuses. For example, Frontline placed their advertisement for their new flea powder on the floor of a shopping mall. As people walked over the advertisement, it gave the illusion of fleas walking on the dog, causing the dog to scratch. The message of the campaign was ‘Get them off your dog’. This advertisement can be viewed at the following link: https://d3nuqriibqh3vw.cloudfront.net/images/frontlineoff.jpg Event ambush guerrilla marketing takes advantage of a gathered crowd at an event, such as a music festival or sports event. The marketers do not usually get the event organisers’ or sponsors’ permission prior to the ambush. An example of an ambush guerrilla marketing campaign is the campaign launched by Pringles. Pringles handed out samples with new labelling on them that stated, ‘These are not tennis balls’. The brand intended to make the tubes look like the ones that tennis balls are sold in. As a result, Pringles distributed approximately 24 000 tubes outside of Wimbledon. This advertisement can be viewed at the following link: https://i.pinimg.com/originals/37/29/33/37293377497b6dcb574f23b6d 20676bb.jpg 175

SPREADING THE WORD Experiential guerrilla marketing can include any of the other subcategories, but is executed in such a way that the public is required to interact with the brand. An example would be an advertisement that incorporates four rollercoaster-looking seats at a bus stop that people can sit on, with a clever backdrop that makes it appear as though the people seated are actually on the rollercoaster, hanging upside down. This prompts people to take note of what is being advertised, to sit down, and to take pictures and share them on social media. In this way, at the cost of overhauling one bus stop, a company that makes use of such an advertisement can aim to gain global publicity, and at the same time, create a name for itself in terms of creativity. An example of such an advertisement can be viewed at the following link: https://d3nuqriibqh3vw.cloudfront.net/rollercoaster_aotw_0.jpg While these marketing strategies are indeed impressive, you may wonder whether or not traditional promotions and advertising could get the same results. For example, instead of spending money on changing bus stop seats into roller coaster style seats, would a billboard close to the amusement park not be more attentiongrabbing? The answer is no. People go out of their way to avoid exposing themselves to marketing messages, so if they are driving along the road and see a regular billboard, they may not pay as much attention as they would to one that looks like it has been ‘crunched’, or to a bus stop that has been completely redone to look like a ride from an amusement park (Zantal-Wiener, 2017). Additionally, we have proof that a single bus stop could get international attention. People walking past would stop, take a picture of themselves on the ‘ride’ and post it to social media. Not only would their friends and followers see the picture, but these unusual marketing tactics are generally met with such interest and enthusiasm that they are shared and reshared. Likewise, the Frontline message would not be nearly as aff ective if that same poster was on the wall. Instead, the people walking across

the dog appear as moving ticks and fl eas, making it a far more eff ective and eye-catching message. Entrepreneurs usually have a very small budget with which to market, especially when compared to their more established competitors. They need to use this limited budget to generate as much awareness and excitement about their new business or product as possible. This means that cleverly used ambush marketing will get the public’s attention at the lowest possible cost, and with the biggest possible impact. This can be clearly illustrated through the example of Gold Toe, an underwear company that promoted its new products by placing them on statues throughout New York, including a large brass bull in the fi nancial district (Zantal-Wiener, 2017). This campaign can be seen at the following link: https://blog.hubspot.com/hs-fs/hubfs/guerrilla-marketing-companynew-york-city. jpg?width=1004&name=guerrilla-marketing-company-new-yorkcity.jpg 176 CHAPTER 5 5.4.5 A basic marketing plan A marketing plan is a document that outlines the company’s marketing strategy and tactics. It identifies the company’s target market, and defines how the business will create awareness and build a consistent brand across all media ( Four Quadrant, n.d.). It is often referred to as a road map, as it provides direction for how the business will reach its marketing objectives (Duermyer, 2017), including customer recognition and loyalty (Lake [b], 2017). This requires the entrepreneur to have a good understanding of their core mission ( Marketing-Schools.org, n.d.). Some entrepreneurs include their marketing plan in the overall business plan, but Duermyer (2017) suggests having a separate, detailed marketing plan that clearly defines who the business’s target

market is, and gives direction for effective marketing messages that speak directly to this market, thereby providing focus and direction. A marketing plan should be developed following thorough research in which the market and the business are analysed to determine what needs exist in the market, and what the business can do to best meet these needs. This phase requires that the organisation complete a SWOT analysis. This means they should identify their internal strengths (e.g. their resources and capabilities) and weaknesses (e.g. lack of skilled staff, a small budget or a lack of resources). They also need to scan the external environment to identify any opportunities or threats which may impact their business ( Marketing Bright, n.d.). Let us look at an example of a SWOT analysis for a company that has recently started to expand their brand overseas: Strengths Weaknesses International presence Less control over each franchisee Strong brand identity Legal differences Talented staff across each country Opportunities Threats

Growth in developing Local competitors countries is guaranteed may already have lower running costs Investment into new technology could improve Other international costs brands are spreading (Source: EDGE Learning Media (Pty) Ltd, 2018) Figure 5.2: Example of a SWOT analysis 177 SPREADING THE WORD During the research phase, the business’s target markets should be identifi ed based on factors that go beyond simple demographics, and this should also include their needs and motivators. This should show a clear understanding of the company’s marketing strategy, and lay the foundation for a plan that will provide clarity and direction for all stakeholders (Pono, 2016). Marketing plans should include several basics (Duermyer, 2017): • Details of the business’s current situation: This includes the products and services they off er, what is working, any challenges with attracting new clients, and any issues or opportunities that are

anticipated in the coming year – e.g. changing laws or the opportunity to expand to a new town. • Defi nition of the business’s target market: This should be based on segmentation criteria, such as demographics, psychographics, behaviour and geographical location. If the business has more than one target market, these should all be included in this section, along with the product or service aimed at each of these segments. For example, a higher education institution could target school leavers with full-time degree programmes, as well as working individuals doing the same degree part-time via an online model. • Specifi c marketing goals for the time period of the plan: These could include attracting a certain number of new customers, or increasing sales by a certain percentage. It is important to be specifi c so that the results can be measured. • The tactics that will be used to reach the target market and, ultimately, the business’s goals: These tactics should be relevant to the target markets identifi ed. For example, the higher education institution could include school visits and social media marketing to their tactics for targeting school leavers, whereas their marketing eff orts for working adults could be focused on advertisements placed in business magazines, in newspapers and on Facebook. • A budget: This budget should not only include a fi nancial outlay of the design and placement of advertisements, but also the money that will need to be paid to staff for the time they spend conducting the school talks, the petrol to visit the schools, and any giveaways – e.g. branded pens or T-shirts. Creating a detailed plan requires input from each area of the business, including fi nance, production and human resources. The plan should refl ect realistic circumstances that the business may face ( Marketing-Schools.org, n.d.). This will help the entrepreneur to understand what they need to do and why, and having this clear vision of where they are headed will allow the entrepreneur to gain confi dence, and prevent the company from wasting time and money

(Lake [b], 2017). A marketing plan should contain the sections outlined under the following headings (D’Angelo, 2018). Executive summary This summary should give the reader an overview of the business and the overall goals of the marketing plan. 178 CHAPTER 5 Mission statement This describes the business’s values, and should answer the following questions: • What does the business do today? • What is important to the business? • What would the company like to do in the future? • What is the business’s brand identity? • What is the organisational culture? • What benefits does the business provide for its various stakeholders? Target market Identify the company’s potential and existing customers by establishing the following: • The target’s demographics (age, gender, race, education, occupation and income) • Their psychographic profile (lifestyle, interests, attitudes and values)

• Their needs and interests • Their behaviour • Products, services and brands they already use Products and services This section includes a description of what the target market needs, what the business provides its target market with, and how this offering satisfies customers’ needs and adds value to their lives. Distribution channels This section should describe how the products will be accessible to the customers. This includes whether they will be able to shop online and collect their orders or have the products delivered, how many physical stores will sell the products or services and where these stores will be, and any other considerations, such as transport and storage. Competitive profile This section includes a discussion of the business’s unique selling point (USP). This includes product features or service levels that separate the business from its competition. Pricing strategy Developing an appropriate pricing strategy assists in marketing the product. The entrepreneur should consider the following when completing this section of the marketing plan: • What is a reasonable price to cover all variable costs and make a profit? • Will the target market be willing to pay that price, and will they see value in the purchase?

179 SPREADING THE WORD • Would it make sense to drop the profi t margin per item, to increase market share? • What are the marketing and distribution costs? Marketing strategy This requires a breakdown of the marketing channels that will be used to communicate with the target market. This may include any (or any combination) of the following channels: • Print • Broadcast • Public relations • Trade shows and exhibitions • Event marketing • Online advertising • Social media • Online sales • Joint marketing with complementary companies Objectives This section includes any specifi c goals the organisation wants to achieve that are related to market penetration and revenue, such as the following: • Sales targets

• Number of new customers • Customer retention percentages • Revenue targets • Market penetration • Level of brand awareness • Website traffi c Action plans This section includes the steps that will be taken to achieve each of the above outlined goals, including a breakdown of responsibilities and timelines. This section should also include a summary of any obstacles the entrepreneur foresees, along with any potential solutions. It is important that this analysis is realistic – all companies have obstacles, and ignoring these will not make them go away; rather, the entrepreneur should be aware of these challenges and be prepared for them. Financial projections This step allows the entrepreneur to establish a realistic budget and understand, from a fi nancial perspective, what the marketing plan will look like. The overall return on investment should also be considered, in addition to: 180 CHAPTER 5 • The cost of implementing the plan • The cost of producing the product or service • Existing and projected cash flow

• The number and value of anticipated sales • Projected profits Marketing a small business, or start-up, can prove challenging, especially when there are financial constraints. To overcome this, many entrepreneurs include a mix of social media marketing and traditional marketing in their marketing plans (Lake [b], 2017). Entrepreneurs should focus on creating a plan that spans no longer than one year, as start-ups often face uncertainties and rapid changes that require them to be flexible ( Marketing-Schools.org, n.d.). However, it should be viewed as a working document, which means that it should evolve as the business grows and trends change (Duermyer, 2017). ACTIVITY 5B Using the template below, which has been adapted from Tayla (2018), complete a basic marketing plan for a local toy shop that sells indoor and outdoor toys, as well as educational games and toys targeted at boys and girls between the ages of 0 and 13. Marketing theme Category Strategy My reason for existence: What sets my business apart from the rest? My target customers are: 1. 2. What is most important to my ideal 1.

customer when they are buying what I am 2. selling? What I want to accomplish this year: The top three things that are going to get 1. me there: 2. 3. What will trigger my ideal customer to think of me? Programmes I am running to reach my 1. goal: 2. 3. 181 SPREADING THE WORD 5.5 BUILDING A BRAND Forbes (Schenker, 2017) explains branding as the perception that the company’s target market has of the brand. Coca-Cola is a good example – it is not unknown that their soft drinks are unhealthy; however, they have branded their product in such a way that the public associates the drink with happiness, fun and socialising. Einzig (n.d.) adds that branding can also be referred to as the business’s identity – the way it looks and sounds, and the values it encapsulates – and the core of what the business stands for.

A strategically defi ned brand provides an opportunity for customers to identify shared values and beliefs, thereby encouraging an emotional connection. A company that achieves this level of connection will enjoy the resultant customer loyalty, increased sales and market share, improved brand diff erentiation, and, ultimately, increased profi ts (Einzig, n.d.; and Schenker, 2017). Einzig (n.d.) provides the following tips for entrepreneurs to implement branding: • Start with defi ning the brand: Analyse the products or services the business off ers, and identify a gap in the industry that it falls in. Conduct research on the emotional and physical needs and concerns of the intended target market. The brand character chosen by the entrepreneur should promote the business, while creating a connection with customers and diff erentiating the company from its competition. • When building a brand, think of it as a person: The entrepreneur should consider the company’s purpose, beliefs and values. Not only should the brand refl ect these, but the entrepreneur should focus on building a brand that refl ects this personality. • Aim to build long-lasting customer relationships: Create trust through branding that is honest and true to the values of the organisation; this will lay a foundation for brand loyalty. • Communicate in a consistent tone: This will ensure that customers know what to expect from the brand (this is discussed in further detail later on in this section). • Avoid communicating the same message, in the same way, repeatedly: While consistency is important, consider reinforcing the message, or brand identity, with the same (or a similar) message delivered in a variety of ways. Schenker (2017) reiterates this, stating that successful branding requires exposing the target market to consistent branding across various channels. • Avoid copying the branding of larger competitors: Customers want authenticity; companies that create original brands that stand out

from the competition, rather than blend in, will be more successful in attracting attention. • Take advantage of the lack of bureaucracy: Entrepreneurs can use their fl exibility to react to the ever-changing needs of their target market. • Keep the brand at the centre of all communication: Do not compromise on, or contradict, the key message that the business is trying to communicate. • Putting the company’s logo on everything is not enough: Branding should be engaging and intriguing in a way that persuades people to become loyal customers and ambassadors. Negari (2017) adds that you should know all of your potential audiences. The business should select a brand name and slogan that translate well, work in other markets and have a global reach. Entrepreneurs should identify their businesses’ target consumers and focus all communication on them alone. It is also important that you do not limit the brand to a single region. Instead, create 182 CHAPTER 5 a brand that is attractive to international markets, in case the company expands internationally or develops an online presence. Another strategic move is to design a brand around the company’s advantages. These are the aspects in which the company outperforms its competitors, and which create improved value or versatility. The entrepreneur should find what makes their brand stand out from their competition. You should also design creative marketing campaigns that focus on building relationships. This could include giving away free samples of the entrepreneur’s product. This will not only create awareness for the brand, but it may also result in brand loyalty.

Schenker (2017) suggests having a user-friendly website that provides information about the brand, and allows the entrepreneur to track the number of enquiries the company receives, as well as the number of conversion-to-sales these queries result in. Entrepreneurs just starting out can even make use of free websites, such as Wix, to save costs. The company should also have a social media presence that provides links to the website. This reinforces what Einzig (n.d.) says about communicating the same message across several platforms, thereby creating more awareness of the brand in places that the target market is looking. It is important that brands have logos, even those companies just starting out. A logo, which could be a sign or symbol, helps to communicate the message the company is trying to portray in a visual way that is easy for the target market to recognise and remember (Schenker, 2017). This logo can be displayed on the company’s website, social media pages, stores, company stationery, and even company clothing and vehicles. The Nike ‘swoosh’ is a good example of a logo that is easily recognisable, means the same in any language and illustrates, through the tick, that Nike is the right choice. Just as Einzig (n.d.) identified that consistency in branding is important, Schenker (2017) explains that using different colours or logos across various platforms may confuse the company’s audience, and this inconsistency may result in a loss of followers who think the brand has changed. He also explains that consistency ensures increased engagement through easy recognition. When designing the actual branding, there are four practical considerations ( 99 Designs, n.d.): 1. Keep it simple: Simplicity is important, because a simple logo or slogan is easy to recognise and remember, and it tells the customer what to expect without much further explanation needed. For example, consider Nike’s ‘swoosh’ logo and their simple slogan ‘Just do it’, the golden arches and bright colours of McDonald’s, and Avis’s slogan ‘We’re number two – we try harder’. As an entrepreneur, designing your brand should begin with identifying what your

customers see as important, and communicating very clearly and simply that you will deliver that to them 2. Choose how to spend your money, wisely: There are many free website and stationery templates that entrepreneurs could use, thus saving money for things like logo design. 3. Be organised: Gather inspiration and create a visual board, so that you can ensure the colours, fonts, messages, logo and all other elements work together cohesively. This could include the branding of your closest competition, so that you can compare your ideas to ensure your brand will stand out. From this research, it will be evident which elements can be handled in-house, and what will need to be outsourced. 183 SPREADING THE WORD 4. Do not become stale: As the company grows and evolves, the branding needs to evolve with it. Changing products may require changed packaging, the logo may need to be updated, or the website may need to be changed from a free one to one that can handle more traffi c. It is dangerous to think that the same branding can work for 20 years; everything needs to be updated, even if the updates are subtle. Even the most well-established and recognisable brands have changed their branding over time. For example, Coca-Cola has changed its logo several times – although the changes are subtle each time, this shows its commitment to staying relevant. More often than not, entrepreneurs need to design their own branding strategy due to limited funding, and their emotional connection to the business may make it diffi cult to be objective ( 99

Designs, n.d.). However, entrepreneurs who understand that branding is about how the company makes its target audience feel when they think of and experience its products or services, will persevere in this task and be successful (Schenker, 2017). 5.6 THE BASICS OF ADVERTISING Advertising requires getting your target market’s attention through a variety of methods and media, usually with the intention of selling products or services ( Entrepreneur 3, n.d.). The purposes of advertising can be outlined as follows ( Entrepreneur 3, n.d.): • Creating awareness of existing products or services • Creating awareness of new products or services • Convincing customers that your product or service off ering will satisfy their needs • Enhancing the company image • Reinforcing the company brand • Creating a desire for your product or service • Reinforcing the salespeople’s messages • Encouraging customers to take the next step (this may include requesting more information, or making a purchase) The entrepreneur’s advertising goals should be established in the business plan; these may include identifying what percentage of growth they would like in their sales fi gures, or an increase in the number of enquiries they receive, or the number of people signing up for their loyalty programmes. The specifi c goals will depend on the industry and market that the company is operating in ( Entrepreneur 3, n.d.).

The entrepreneur should also be aware that all products and companies go through three distinct stages, and that their advertising goals will diff er depending on which stage they are in ( Entrepreneur 3, n.d.). The introduction stage is when the business is in its infancy, and the focus should be on establishing its identity. This can be achieved through sales promotions and publicity that is designed to get attention and arouse interest. The growth stage begins once the business is established within its market and industry, and the focus of advertising should shift to 184 CHAPTER 5 differentiating it from its competitors, and convincing the target audience that the products or services are worth trying. Finally, in the established business stage, advertising should be designed to remind customers that they should continue to support the business. It could include making them aware of new products and services, or stores that have opened. When the entrepreneur is designing their advertising campaign, they should consider the following four steps ( Entrepreneur 3, n.d.): 1. Determine who the target market is 2. Establish an advertising budget 3. Determine the most effective media for reaching the target market that has been identified 4. Create an advertising strategy, which should include a combination of a strong message and visuals When determining the best strategy to follow, the entrepreneur should be aware that approximately 92 per cent of online advertisements are

completely ignored; Halevy (2018) therefore suggests that entrepreneurs follow specific rules when designing their advertising strategy. Be mindful of the fact that people’s attention spans are approximately only eight seconds. This means that advertisements should be short and to the point, and must stand out from the competition. Nando’s has a reputation for controversial, ‘tongue-in-cheek’ advertisements that grab people’s attention. They have used this strategy to achieve what most companies dream of – not only does their audience not ignore their advertisements, but they actively seek them out. In fact, there are over 36 000 subscribers to the Nando’s YouTube channel. Most people need to be exposed to an advertisement seven times before they take it seriously. The entrepreneur should, therefore, consider exposing their audience to the same message through a variety of media, so that the message is reinforced. For example, a television advertisement could be reinforced with the same jingle being played on the radio, so that when the audience hears it, they are reminded of what they saw on television. Additionally, the same actors who appeared in the television advertisement could appear in the print one; this way, all the messages have a similar thread, helping to reinforce the message. The probability of selling to a new customer is as low as five per cent, whereas this probability increases to 70 per cent among existing customers. This means that entrepreneurs should focus their messages on existing customers who may need to be reminded about the product or service, and who will do marketing for you through word of mouth. Choose the colours that you use in your advertising and branding carefully. According to Olson (2014), colour has the ability to arouse emotion, stimulate appetite and calm nerves. Colour can signify love,

happiness, passion and peace, and can influence consumers with regard to buying specific products or services, making it a powerful tool for entrepreneurs designing advertising messages and campaigns. Study the colour wheel in the following figure to learn more about colour psychology. 185

SPREADING THE WORD (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Olson, 2014) Figure 5.3: Colour psychology Listed below are some famous examples of brands that have successfully used colour psychology (Olson, 2014): • McDonald’s, KFC and Pizza Hut all use red – a colour known for stimulating appetite. • Chanel, Prada and Michael Kors use a combination of black, white, silver and gold – colours associated with luxury and a feeling of sophistication. • Victoria’s Secret uses lavender, pink and white to portray femininity. These colours are also known for their calming eff ect. Halevy (2018), however, states that consumers react best to colour adaptation – i.e. colours that stand out against their backgrounds; for example, a fuchsia pink logo against a white background. • Research has shown that targeted emails, which are sent to users targeting their specifi c interests, result in a 208 per cent higher conversion rate than bulk emails. Entrepreneurs should, therefore, collect personal information from their customers, request referrals or collect data from third parties, so they can send emails that target their audience more intentionally and specifi cally. 186 CHAPTER 5 Regardless of whether the company is advertising to create awareness, or to remind their audience that they are still around, all advertising should follow the AIDA principle. This means that advertisements should get the audience’s attention, make them interested enough in the product that they search for more information, appeal to them in such a way that they desire to try or own the product, and call for action ( Entrepreneur 3, n.d.).

5.7 THE BASICS OF PUBLIC RELATIONS (PR) Public relations can be defined as the practice of creating and maintaining goodwill between a company and its publics, including its employees, shareholders, suppliers, intermediaries, customers and the society in which it operates. Usually, this is achieved through publicity and other nonpaid forms of communication, including sponsoring of events or charities ( Business Dictionary, n.d.). With consumers having constant access to multiple online channels, the entrepreneur needs to work at keeping their business visible in such a way that their audience will perceive them positively. According to DeMers (2014), entrepreneurs should use public relations strategies to achieve this. One such strategy is to encourage the business’s social media followers to share their experiences with the business with their own followers; these testimonials are often more effective than paid-for advertising, as they are seen as trustworthy. Those who share their testimonials could be rewarded with a discount or free giveaway, and this would encourage users to share in a way that could build brand credibility in a relatively inexpensive way. The business could also submit press releases whenever it does something that deserves the public’s attention. For example, when the business first opens, the entrepreneur could be interviewed by a local newspaper. Other newsworthy events include the introduction of new products and services, or when the company contributes in some way toward society or the environment. A key strategy is to set aside ten minutes a day to read social media posts on the company’s newsfeed, and to reply to comments and queries, so that those posting feel ‘heard’. This time could also be spent keeping up to date with what the competition is doing, and what people are saying about them. This will give the entrepreneur insight into what their target market wants, as well as what their competition is doing in an attempt to identify gaps in the market. This strategy should be focused on one or two channels, rather than many. The more focused the strategy, the more time and resources the entrepreneur will have to focus on building the message and the

following. Having a smaller potential audience is worth the relationship that the company will be able to build with them. Another strategy is to encourage influencers, or opinion leaders, to share their experiences with the brand, and to be photographed using its products. Sporting companies commonly use this tactic, sponsoring a famous sporting hero with clothing and equipment, so that others see them using the brand and follow suit. After all, if the brand is good enough for a celebrity, then the public will believe it is good enough for them, too. For example, Coca-Cola had the famous Selena Gomez in one of their advertisements. She is seen sipping from a Coca-Cola bottle. This 187 SPREADING THE WORD photograph was taken in such a way that it looks natural, and it was the most liked photograph on social media in 2016. In addition to this, Gomez documented her tour of Coca-Cola, Atlanta, and this tour has been viewed more than nine million times (Moye, 2016). Opinion leaders could also be bloggers; for example, a travel blogger would have a following of people interested in travel, and the owner of a B & B could off er the blogger a free weekend of accommodation and meals in return for a review on the blog. CP Communications (n.d.) suggests that entrepreneurs should spend time networking. There are 112 Business Network International (BNI) groups, known as chapters, throughout South Africa ( BN I, n.d.). These groups provide entrepreneurs with an opportunity to network with other people who have the ability to infl uence their professional growth. This is achieved through making personal connections, building the business’s and the entrepreneur’s reputation, and creating awareness of the business ( CP Communications, n.d.). 5.8 THE BASICS OF DISTRIBUTION Distribution can be defi ned as the ‘marketing and carrying of products to consumers’ ( The Beer Club, 2015). This can be done

directly from producer to consumer, or through one or more intermediaries, also referred to as ‘middlemen’, as can be seen in the following fi gure. Producer Wholesaler Retailer Consumer Producer Retailer Consumer Producer Consumer (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from The Beer Club, 2015) Figure 5.4: Levels of distribution When deciding which of these approaches is most suited to the company, the entrepreneur should identify their target market and the demand for the product. By considering these two factors – along with the distribution channels available, consumer wants and any constraints – the entrepreneur should be well-positioned to make an informed decision about whether to 188 CHAPTER 5 distribute directly to their target market, or to go through one or more intermediaries ( The Beer Club, 2015).

When making this decision, new businesses often underestimate the benefits of building relationships with distributors, or get put off by how long it will take to build these relationships ( Score, 2014). However, when the entrepreneur is deciding the best way to distribute their products, the traditional model of producer, wholesaler, retailer is a good starting point. This system works well because the members at each level are established, which means that the entrepreneur can rely on their experience and expertise ( Entrepreneur 4, n.d.). If the entrepreneur chooses to make use of distributors, there are five tips they can follow to ensure that they secure the right one for their company ( Entrepreneur 4, n.d.): • Ensure your business has a website that is up to date with contact information, the location, and information on the business’s products. The site should also reflect the business’s image and values, as distributors may visit the site to learn more about the business before choosing to distribute its products. • Do research into what prices your competition is charging, and ensure you sell to all distributors at the same price, or offer them all the same sliding prices, so that none of them feel undercut. Also, communicate any recommended resale prices to them so that they can remain competitive. • Produce high quality marketing materials for your distributors to use. These materials could be in either digital or print format, and should consist of images, as well as pertinent information the end consumer would want. • Establish payment terms from the start of the relationship; if distributors default on their payments, or even pay late, it will affect the company’s cashflow, which in turn may affect its ability to do business. One way to encourage timeous payment is to offer a discount to distributors who settle their accounts within ten days of placing their order.

• Do not agree too quickly to exclusive distributorship – i.e. to allowing only one distributor to have control over your products. If they do not have competition, they may not be as committed to your brand as a company that is competing. Instead, you could incentivise them, stating that exclusivity could be negotiated if they reach a certain sale point. This model does not always work, because each party is ultimately looking out for their own benefit. This means that while the manufacturer wants to make optimal profit, the wholesaler has the same plan, so they will want to pay as little as possible for the product. The conflicting interests can lead to disagreements, which could be detrimental to both parties ( Entrepreneur 4, n.d.). In these situations, the entrepreneur may choose direct distribution. Avon is a popular example of direct distribution; the company distributes its products through a network of sales representatives. This is especially popular among companies that offer specialised products that they want to market to their audience directly. It is also a way to cut costs, as they do not need to share the profit with intermediaries. However, doing this can alienate the company from potential wholesalers and retailers, so this needs to be considered carefully and with sustainability in mind ( Entrepreneur 4, n.d.). 189 SPREADING THE WORD An entrepreneur’s choice of distribution may be infl uenced, or dictated, by various factors, such as where their target market is located (Entrepreneur 4, n.d.). If, for example, a manufacturer of sports clothing is based in Port Elizabeth and they choose to use direct distribution, they will need to open their own store, or have salespeople around the country selling for them, if their market is national. In this example, it may make more sense for them to sell their product to sports shops (retailers), either directly or through wholesalers around the country, as these stores may already have a large customer base who would be more inclined to go to a store they

know when searching for sports clothing, than to a brand store they are unfamiliar with. However, some sporting brands, such as Nike, use a combination strategy, whereby they sell their clothing and apparel both through retailers and their own branded stores. They are careful to charge the same price in their stores as the retailers do, so as not to alienate them. Other items, such as dairy products, are convenience items that consumers are not willing to shop around for; they expect them to be available at local grocery and convenience stores, and if they are not, they will simply settle for an alternative brand. In these situations, the manufacturer needs to ensure that products are available where the customer wants them. The amount of space required to display the products is also a consideration. For example, car dealerships are usually located outside of shopping areas, where they can get the large pieces of land they need to display the vehicles at a slightly cheaper price ( Entrepreneur 4, n.d.). Car dealerships are also usually near to one another, so that people wanting to test drive and compare vehicles can do so conveniently. If the entrepreneur chooses to distribute through an intermediary, their success will rely heavily on their relationship. Score (2014) suggests that the entrepreneur does the following in this regard: • They should communicate from the outset by introducing themselves to the owner of the distribution company. This opens the lines of communication for feedback, which new businesses need for growth. • They should acknowledge the diff erences between distributors, and tailor a diff erent strategy to each of them. By focusing on each relationship individually, both parties will benefi t. • They should list each distributor on the company’s website, so that interested consumers know where and how to access them.

Securing the right intermediaries, and building strong relationships with them, can lead to mutually benefi cial relationships that last many years ( Score, 2014), as well as cost-saving, increased effi ciency, access to a larger consumer base, and the freedom to focus on new product development ( The Beer Club, 2015). 5.9 THE BASICS OF CUSTOMER RELATIONSHIP MANAGEMENT (CRM) Customer relationship management (CRM) is a term used to refer to the practices, strategies and technologies used by companies to analyse and manage customer interactions, from query to repeat purchase, with the intention of improving customer service relationships and retention ( Tech Target, n.d.). It is an eff ective tool for managing and building relationships with both prospective and existing customers, in an attempt to improve profi tability ( Sales Force, n.d.). In fact, research 190 CHAPTER 5 has revealed that companies that engage in CRM experience a significant increase in customer satisfaction and retention, as well as in upselling and cross-selling results (Daisyme, 2016). CRM allows organisations to focus on relationships with individuals, including suppliers, employees, intermediaries and the public. This means that it is not simply a selling tool, but rather a marketing effort that is entrenched in all business functions, including human resources, supply-chain management and marketing ( Sales Force, n.d.). Some examples of customer relationship management include the following ( IES, 2018): • Sending out a ‘thank you’ message when customers make purchases • Sending birthday messages with promotional codes or offers • Notifying customers when sales are coming up

• Sending customers emails when their online shopping carts are abandoned before a purchase is made • Making suggestions for an upsell or cross-sell • Offering after-sale support in the form of how-to tips • Conducting customer satisfaction surveys These tactics can be achieved using CRM software. Daisyme (2016) identifies several of these CRM software products: • Insightly: This user-friendly software tracks communication with clients and potential clients. The software has a social media ‘feel’, which makes users feel comfortable and confident. It works as a mobile and non-mobile application, and can be integrated with other applications, including Dropbox and Google Drive. It offers five different pricing structures, including a free version, making it a good option for entrepreneurs starting out. • ProsperWork s : This software can be used in conjunction with a Gmail account. Users have the ability to add contacts to the ‘lead list’ directly from a Gmail account. Other advantages include the quick setup, minimal training required, and the ability to see real-time interactions via iOS and Android. Although this software is not free, the monthly fee is affordable for small businesses and start-ups. • ContactMe: This software can be used to organise contacts and keep track of leads. It offers two options: Form Plus adds automatic responses, text message alerts and detailed statistics, while the Biz Pro level includes tasks, notes, attachments, reminders and a calendar. According to IES (2018), CRM software helps organisations to streamline, automate and organise all customer functions effectively,

so that the entrepreneur can focus on what is important – customer satisfaction. This is achieved in the following ways: • Business analytics can help organisations to identify trends or market segments that may be experiencing specific problems. For example, a CRM system could help the organisation to identify and fix a problem before it becomes worse. • CRMs generate automatic responses whenever customer contact occurs. This could be a simple ‘thank you’ in response to a completed survey, or an automated response to an emailed 191 SPREADING THE WORD query. This is an excellent tool for making customers, or potential customers, feel valued and for opening communication channels. • CRM software can be used to track customer activity from prospect to upsell. By using social media posts or the number of clicks on an email campaign, organisations can track key behaviours, and understand what is and is not important to customers. These examples are focused on communicating with external parties; however, CRM platforms can also be used to improve communication internally. For example, the company could customise and automate monthly sales reports to be shared with sales staff . Similarly, if a customer downloads information or issues a request, this can be fi ltered to a sales person in that area to follow up with the potential customer ( IES, 2018). Strong customer relations are not simply a good idea; in today’s competitive climate, they are a prerequisite to organisational success. If the public does not trust a brand, or the people behind it, they will not support it. CRM is focused on building not only a positive image, but also strong relationships on a foundation of trust ( IES, 2018). 5.10 THE BASICS OF DIGITAL MARKETING

Digital marketing refers to promoting products, services or brands through electronic media. While the Internet is the most obvious source for digital marketing, other sources such as mobile messaging, electronic billboards, podcasts, mobile applications, radio and television can also be used. It is based on the premise that consumers have access to digital media all the time, and rely on it for entertainment, news, social interaction and shopping. This information is not limited to what companies want their audiences to see and hear, but it also includes their friends’ and family’s opinions, perceptions and experiences; these are usually viewed as more trustworthy than what the business says about themselves ( SAS, n.d.). The entrepreneur needs to have a good understanding of which tools the company’s target market is using, and for what purpose. Consider the following statistics, which highlight how the use of digital media is on the rise in Africa. From January 2017 to January 2018, Internet users saw a 20 per cent increase (73 million), active social media users saw a 12 per cent increase (20 million), there was a four per cent increase in mobile connections (45 million), and a 15 per cent increase (23 million) in active mobile social users (Dahir, 2018). Simply seeing these fi gures is not enough; the entrepreneur needs to understand what this means for their business and target market. For example, millennials spend more time on mobile devices than the other generations combined. It is, therefore, more likely that this generation will respond to marketing done via Instagram or Facebook, rather than through television advertisements (Patel, n.d.). Consumers like to feel that they have found a good deal and made the correct purchase decision, and so, they conduct research before making these decisions. Technology has simplifi ed this research process, allowing consumers to search various options, and make product or brand comparisons from the comfort of their own homes and offi ces. This means that if your products do not appear during their search, they will simply overlook you (Patel, n.d.).

192 CHAPTER 5 The following can help to make digital marketing successful ( SAS, n.d.): • Manage customer relationships across both traditional and digital channels • Initiate and respond to customer conversations • Extract value from data to assist in making the right decisions, quickly These considerations are important because, according to Patel (n.d.), digital marketing helps entrepreneurs to connect with customers, reach a mobile audience, increase their return on investment (ROI), track visitor interactions, and even increase conversion rates. Bajaj (2017) suggests the following cost-effective digital marketing tools for entrepreneurs: • Buffer is a user-friendly platform that allows entrepreneurs to schedule social media posts in advance, and to connect multiple accounts, including Facebook, Twitter and Instagram, to a single dashboard. It also allows for the performance of posts to be analysed. • Google Analytics offers entrepreneurs the ability to measure the performance of their website and other digital presence. • Google Forms are useful for getting feedback from customers, which helps to gain insight from the consumers’ perspective. This software allows the entrepreneur to create, upload and share surveys quickly and conveniently. The feedback is easily collected and sorted into graphs and charts for analysis. • Canva is a free and extremely user-friendly platform that offers visually appealing graphics and numerous free fonts. This platform allows entrepreneurs to design flyers, banners and posters that can quickly and easily be shared to Instagram, Twitter, Facebook or even via WhatsApp.

• SEMrush allows entrepreneurs to track their competitors’ web traffic through researching their keywords. This can help the entrepreneur to improve their own website and search rankings. However, as with all strategies, caompanies face certain challenges when they use digital marketing ( SAS, n.d.): • People use multiple digital devices and platforms; they may use each of these for different reasons and in different ways. For example, they may connect to the Internet via a laptop at work for business purposes, via their mobile phone for social interaction, and via a tablet for personal shopping. • There is increasing competition, because digital marketing is relatively inexpensive compared to traditional marketing, making it accessible to all companies. This means that it is becoming more difficult to get consumers’ attention among the advertising clutter. • Digital users leave a large amount of information behind, making it difficult to capture all the data, and to sift through what is important and relevant. The growing popularity of digital marketing can be largely attributed to the fact that companies can easily collect data, which enables the analysis of marketing campaigns, to determine which work and which do not, often in real time. This includes the ability to monitor what is being viewed, how often, for how long, and how many visits convert to sales. This is important, because customers want to feel that their needs are understood, their concerns are heard, and their satisfaction is important to the company ( SAS, n.d.). 193 SPREADING THE WORD (Gucci) EXAMPLE 5 B

In March 2017, Gucci wanted to increase awareness and create an enthusiasm for their brand among a target audience younger than those who typically buy their products. They created a campaign that featured primarily on Instagram, but was supported by a microsite that provided additional information, creating a more well-rounded, richer digital campaign. The #TFWGucci campaign was centred on the popular Internet catchphrase ‘that feeling when …’ and was accompanied by memes related to Gucci products. The memes accumulated almost two million ‘likes’ and over 21 000 comments on Instagram. Each post received an average of 67 000 likes and 768 comments, creating awareness and a ‘buzz’ around the brand with the target market they were aiming at (T he Digital Marketing Institute, n.d.). 5.11 MARKETING PLAN CHECKLIST Marketing plans are not cast-in-stone documents that follow a strict format, regardless of the business, industry or stage in the business life cycle. Rather, they are fl uid documents that range from tactical plans to detailed, strategic ones. Consider the generic checklist for a marketing plan that is shown in the following table ( Modern Marketing Partners, n.d.): Background Company/brand Historical sales, margins and volume External analysis SWOT analysis Market analysis targets Size of market

Market segmentation Distribution channels Sales process Market research Secondary research (Internet and publications) Syndicated research (consulting fi rms and analyst reports) Primary research (surveys, interviews and focus groups) Competitors Market share Branding/positioning Marketing initiatives Prior marketing Resultant sales programmes and results Number of enquiries, leads and new customers Website traffi c statistics 194 CHAPTER 5 Objectives Number of sales desired Market share Other measures, such as return on investment and break-even

Strategies New products or services New markets (new segment, new location) Promotions Customer initiatives (e.g. loyalty programmes) Tactics Branding Re-branding Creating an identity Registering a trademark Internet Creating a website, redesigning the website or creating a microsite Search engine optimisation/marketing Creating or redesigning social media profiles, posts and content Email campaigns, including the design and distribution of registration forms Advertising Research, planning, placement and monitoring of media Design and placement of print advertisements Design and optimisation of online advertisements, including banners

Design and placement of broadcast advertisements Publicity News and press releases Writing and placement of news articles Media relations Sales promotions Contests or coupons Training of sales staff Collateral Brochures, product sheets and flyers Catalogues, manuals and instructions Trade shows and exhibits Exhibit design Stand graphics Channel marketing Dealer programmes Promotions Merchandiser support Training programmes Launch kits

195 SPREADING THE WORD Direct marketing Direct mail Email Telemarketing (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Modern Marketing Partners, n.d.) Table 5.1: Marketing plan checklist This is a comprehensive checklist of all areas in which organisations can employ marketing tactics, and all of the considerations when designing a marketing plan. However, although this list is comprehensive, it is certainly not exhaustive. As the business grows and adds more products or target markets, this checklist should be consulted for necessary additions and adjustments. Businesses range in complexity, number and type of requirements, and budget. Diff erent markets and products or services may require very diff erent marketing strategies; for this reason, a marketing plan checklist can be used, but adapted, to each situation the company may fi nd itself in. ACTIVITY 5C Jayvid is a new sporting brand that produces football boots and apparel. They have identifi ed a gap in the entry level market – children who are starting to play the game and adults who have joined clubs to let off steam, keep fi t and have some fun. Their prices are extremely competitive, because they have limited overheads and, currently, they are only selling their products online. However, the interest in their brand has exceeded their predictions, and they are now redoing their marketing plan to incorporate additional distribution

channels, including a national sporting chain store that has approached them to stock their products. They will also be adding branded soccer balls and water bottles to their product mix. (i) Based on your knowledge of distribution channels, would you suggest that Jayvid agree to let the national chain stock their products? Substantiate your answer. (ii) Recommend a colour for Jayvid to use for their branding. Explain your answer by referring to the colour wheel in fi gure 5.10. 5.12 SUMMARY This chapter has outlined how an entrepreneur should approach marketing in order to grow their business in a competitive environment. No matter how small you start, there is always a way to fi nd a gap in the market that will allow you to establish a foothold in the industry, and begin to gain more serious traction with consumers. Entrepreneurs must also bear in mind the roles of advertising, public relations, distribution and customer relationship management (CRM) while building their businesses. Being fl exible in these areas will allow an entrepreneur to change or adapt their business according to the needs or trends within their industry. Above all, an entrepreneur should have a mapped-out plan that will help them to track their progress, allocate resources eff ectively, and make sure that they always have a new goal to continue pursuing. 196 CHAPTER 6 SELLING

6 6.1 Introduction 198 6.2 Life lesson 198 6.3 The role of sales 199 6.3.1 | The entrepreneur as the head of sales 200 6.4 Sales strategy 201 6.4.1 | Developing a sales strategy 201 6.4.2 | Developing a sales plan 204 6.5 Selling 206

6.5.1 | Lead generation 207 6.5.2 | The pitch 209 6.5.3 | Quoting 211 6.5.4 | Follow-up 212 6.5.5 | Closing 214 6.6 Managing salespeople 216 6.6.1 | Appointing the right people 217 6.6.2 | Providing product training 219 6.6.3 | Setting targets 220 6.6.4 | Motivating sales teams

222 6.7 Selling through a third party 223 6.7.1 | Using a third party 224 6.7.2 | Advantages and disadvantages 225 6.7.3 | Things to consider 226 6.8 Am I ready to sell? 227 6.9 Summary 228 197 SELLING Case studies – myths, leaders and

Online inspiration start-ups Boring but Growing the Selling Making important business it run stuff smoothly Building a It is in the team numbers Cash is king Developing products Spreading and the word Getting out of Forming a services What is

the starting business entrepreblocks neurship? 6.1 INTRODUCTION In 2011, over 400 000 businesses were opened in America. A mere two years later, one-third of them had gone out of business. According to clinical professor of entrepreneurship, Waverly Deutsch, one of the biggest contributors to this failure was a lack of salesmanship (Efti, n.d.). She adds that many people start businesses because of skills they possess or fantastic ideas they have, without realising the importance of being able to sell the product/service that they have created. With this in mind, this chapter will focus on the importance of sales and a strong sales strategy to the long-term success of businesses. After studying this chapter, you should be able to: • illustrate the importance of sales in a business context; • discuss the role of the entrepreneur in sales; • evaluate an example of a sales strategy for a business start-up; • develop a simple sales strategy for a business start-up; • evaluate an example of a plan for a start-up; • develop a simple plan for a start-up; • outline the sales process;

• explain the role of lead generation, pitch, quoting, follow-up and closing in the sales process; • describe the basics of managing salespeople; and • discuss the use of a third party to sell on behalf of a business. 6.2 LIFE LESSON Since the 1920s, Red Spot Paint & Varnish has been an industry leader in plastic coatings for vehicles, as well as a leading innovator in new coatings for the sports and consumer products 198 CHAPTER 6 industry. However, this was not always the case. For five years, they experienced flat or declining sales and, as a result, decided to invest in an intense sales-management training programme followed by training for the entire sales team, including all of their sales representatives. Integrating this new culture took patience and persistence, but within a single year, the company was enjoying positive results and success stories. One such example concerned a major prospect who was already the customer of one of Red Spot’s competitors. During their sales training, the sales team learned about maximising relationships with prospects, even with those who were already seemingly loyal to competitors. This gave the sales team the confidence to approach the prospect when they heard a voiced concern about the company with which they were already doing business. The sales representative suggested that the prospect try Red Spot Paint & Varnish products. The trial was successful, and the prospect requested a quotation. Although the quotation was 20 per cent higher than their competitors, Red Spot Paint & Varnish were awarded the deal as they used what they had learned during their training to ‘value sell’ the organisation. This single deal, at a price 20 per cent higher than the competition, created a differential of one million dollars per year.

From this case, we can learn that regardless of how well established a company is, ongoing sales training is important. People’s needs and demands are constantly changing, and both the entrepreneur and the sales team need to keep abreast with these changes. By listening to the needs and concerns of prospects, skilled sales staff can find openings in order to show how their product/service can satisfy the prospect better than the competition can. Entrepreneurs should empower their staff to instil confidence in offering trials, discounts and other special offers that may secure a deal ( The Brooks Group, n.d.). 6.3 THE ROLE OF SALES According to Melfi (n.d.), entrepreneurs take a large financial risk when opening their own businesses. The best way to reduce this risk, is by creating revenue that enables the business to cover its expenses, while simultaneously creating an opportunity for growth. Through generating this required revenue, sales is one of the most powerful catalysts of entrepreneurial success. In fact, according to John Mulry ( Rescue a CEO, n.d.), sales can be used as a direct measure of an entrepreneur’s success. Mulry states that regardless of the number of jobs an entrepreneur creates or the technology they use, if the business is not generating sales, it cannot be considered successful. Casserly (2013) reiterates this, stating that without sales, most businesses simply cannot survive. Katie Donovan ( Rescue a CEO, n.d.) takes this one step further, stating that if the business is not making sales, then the entrepreneur should investigate what is ‘wrong’: either the product/service is not meeting the needs of the target market, or it is not being marketed effectively. This leads us to believe that not only can sales be used as a measure for success, but also as a benchmark for entrepreneurial effectiveness, as well as a platform for identifying what is not working or where deficiencies exist.

Sales also creates a system, or process, for growth. This requires that entrepreneurs successfully identify their target market, and understand what the market’s wants/needs are and how to meet 199 SELLING them (Melfi , n.d.). After all, sales is linked to satisfaction – the more the entrepreneur understands and appeals to the consumer in their sales pitch (and delivers on this promise), the more sales they will make. This will result in growing profi tability. It requires connection, infl uence and relationship building (Melfi , n.d.). Loyal customers do not only buy more products, but are also inclined to spend more money and refer others to the entrepreneur’s business ( Rescue a CEO, n.d.). 6.3.1 The entrepreneur as the head of sales According to James (2015), many entrepreneurs start their careers working in sales. This may be due to many reasons, such as the expertise gained from working with customers and learning to recognise what is important to them. Working in sales requires many conversations with customers, and really listening to what they want, what their concerns are, and what they perceive to be good value. Entrepreneurs need to acquire the same skill: they need to have a relationship with customers, or encourage their staff to have a relationship, in which they really listen to what the customer says, in order to pick up on cues and gaps. This level of understanding helps to highlight what is important to the customer as a selling point. For example, if entrepreneurs know that warranties are very important to their customers, they can advise salespeople to mention extended warranties in the sales pitch, even before the potential customer asks. A warranty is a ‘written guarantee issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary, within a specifi ed period of time’ ( Oxford Dictionaries, n.d.).

Salespeople are expected to have a deep understanding of the products/services they sell. They need to know all of the features, benefi ts, drawbacks and competitive advantages of their off ering. This knowledge helps entrepreneurs, and their salespeople, to understand how their products/ services fi t into the market, and how they can satisfy customer needs and expectations (James, 2015). When working in sales, people are often called on to network with executives from other companies and to build relationships with prospective clients. This allows potential entrepreneurs to create contacts that they can take into their own business (James, 2015). Part of this network could be potential investors. Therefore, when developing a sustainable sales strategy, the entrepreneur will have a deep enough understanding of stakeholders to include information that could appeal to both investors and staff who are able to generate sales and leads (Casserly, 2013). When you put all of your thought, eff ort and energy into an idea, it does not necessarily mean that you are the right person to create the sales pitch. In fact, you could be the wrong person to make this pitch, as you are too emotionally invested in the idea. In other words, passion and conviction in the product could lead the entrepreneur to adopt a ‘hard-sell’ approach, when they would be better served by approaching a prospective customer and asking them what problems they need solved, and then highlighting the ways in which the product/service could achieve this (Casserly, 2013). Additionally, the entrepreneur may not have the sales experience needed to sell the product. In this scenario, the entrepreneur’s role is to be the problemsolver. Entrepreneurs should empower their staff to take the same approach. If we look at each of the tasks that the entrepreneur needs to undertake, we will notice that the underlying role in each of them is managing and building relationships with investors, staff and potential

customers. Before we can sell a product/service, we need to sell an idea and a promise as 200 CHAPTER 6 to how we can satisfy a need or solve a problem. However, it is also important that these promises are based on fact and truth: any empty promises will result in a breakdown of the relationship, as well as a negative attitude toward the product, brand and entrepreneur. 6.4 SALES STRATEGY Entrepreneurs develop a sales strategy as a plan for how they will generate sales and increase revenue. These strategies are based on leads (i.e. potential customers, people or organisations that have shown an interest in your product/service) that have been generated. The strategies lay out the number of leads that the sales team is expected to convert to sales (Leonard, 2018). In this section, we will learn how to develop a sales strategy and a sales plan as tools to drive sales. The following figure demonstrates the steps to take in order to achieve this. • Analyse past performance Step 1 • Identify the most profitable target market(s) Step 2 • Conduct a SWOT analysis

Step 3 • Identify growth potential Step 4 • Set broad sales targets Step 5 • Empower the sales team to set individual targets Step 6 (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Heiman, n.d.) Figure 6.1: Steps in creating a sales strategy 6.4.1 Developing a sales strategy Heiman (n.d.) uses an analogy of a ship to explain the importance of a sales strategy. He suggests that before the captain can tell his crew to cast off, the crew needs to know the direction in which they are headed, how to steer the ship, how to trim the sails and how to avoid danger. In much 201 SELLING the same way, before entrepreneurs can send salespeople out to represent their company, they need to ensure that the salespeople understand what they are selling, who they are selling to, and who the competition is.

Salespeople should have a clear idea of the target market (who they are, what they want, how much they are willing to spend, what benefi ts they are looking for, and how they prefer to receive their communication). They should be aware of the company’s strengths, weaknesses, threats and opportunities (SWOT), as well as the revenue goals, action plan and positioning strategy (Heiman, n.d.). All of these will aff ect not only the way they approach potential customers, but also what they say, and how they say it. For example, when approaching full-time students fresh out of school, salespeople would most likely take the approach of using social media to make contact, and use words such as ‘aff ordable’ to get the students’ attention. They may also create interest by emphasising the social benefi ts of using their products/services. Sales strategies should not focus solely on growing sales numbers or developing new products (Heiman, n.d.); rather, they should be based on consumer research and environmental analysis. An example of this is Coca-Cola. Each year, this company develops sales targets based on a one per cent increase over the previous year’s sales. However, the recent sugar taxes have resulted in a drastic increase in the prices of Coca-Cola’s products. It would be extremely diffi cult for their sales team to achieve increased sales in the present economic climate. This may result in a decline in sales staff morale. Therefore, companies rather need to create a strategy that motivates their staff and works toward sustainable growth. In order to create a strong strategy, there are various steps that should be taken (Heiman, n.d.). The fi rst step is to determine the success of the previous year’s strategy before planning for the future. This can be based on: • the number of sales; • the people who bought the product/service; • which sales staff and mediums were the most successful in generating leads and converting them to sales;

• how many repeat purchases were made; and • which were the most, and least, profi table markets. Once these questions have been answered, entrepreneurs can determine how the results diff ered from the anticipated results so that they can start planning for the future. This may include: • determining how well positioned they are to achieve their sales targets; • what resources they have, and what additional resources they may require in order to achieve these results; and • which markets they should look toward for achieving these results. It is a well-known fact that 80 per cent of sales are generated from only 20 per cent of a company’s clients. The entrepreneur can determine which part of the market makes up this profi table 20 per cent by looking at the previous year’s sales. The people making up this part of the market will generally buy more than one product/service and be easy to work with (i.e. they do not demand 202 CHAPTER 6 extended warranties or complain about ‘faulty’ products). By determining who these people are, the organisation should be in a better position to know who to focus on in their future efforts by appealing to: • their demographics (e.g. age, gender, race, religion, education, occupation and income); • their geographical location; • psychographics (e.g. interests, opinions and lifestyle); and • the benefits they look for in a product.

This information can be used to create a customer profile and a sales strategy that appeals directly to this market. Next, the entrepreneur needs to determine how well positioned they are to grow existing accounts, and to find new ones. This requires both internal and external research to identify the company’s strengths and weaknesses, and to identify possible opportunities and threats. Once these have been identified, entrepreneurs and their team should use a SWOT analysis to find ways to counter any threats and to take advantage of any opportunities. At the same time, they should work on building their strengths and overcoming their weaknesses. This could include ‘owning’ their weakness. For example, Avis Car Rental struggled to keep up with Hertz, the top-performing company in the industry. Avis eventually decided to claim their position as number two. They designed a marketing strategy around this ‘weakness’ claiming ‘we’re number two, we try harder’. This strategy won Avis much support as the underdogs. This is not to say that weaknesses should all be celebrated, nor should entrepreneurs bury their heads in the sand. Rather, they need to look for reasons as to why leads are not being converted, or why customers are not making repeat purchases. If it is something that can be controlled, they need to take corrective action. However, if it is something outside of the company’s control (such as in the example of Hertz and Avis), then they need to find a way to take advantage of new trends, new markets and new product lines, or take a fresh approach when appealing to the market. Now that the entrepreneur has a good understanding of where the company has been, as well as where it is right now, they can start to plan for the future. The following questions should be answered at this stage: • What is the potential for growing sales/revenue with existing customers?

• How can existing customers be convinced to refer friends/family? • How much could revenue be increased in the current area of operation, with existing offerings? • How much can revenue be increased if existing products/services are offered in other geographical areas? • Could revenue be increased by offering new products/services to the existing customers? • Could new offerings be made to appeal to a new market in order to increase revenue? Once entrepreneurs have combined their revenue targets with the strategy developed, based on their assessment of their past, and current situation, they will be in a good position to determine realistic goals and the level of support their sales staff will need in order to reach these. Sales staff will be more motivated and committed to achieving the results if they are involved in this process. 203 SELLING Once the entrepreneur has a clear idea of how much revenue they are after, and which segment(s) are going to provide that revenue, this must be communicated to the team. Each member of the team should then be responsible for creating their own plan to achieve their target. This requires them to answer the following questions: • How much revenue am I expected to generate? • How many sales does that require? • How many calls does that represent? • How much time will be required?

Action plans and timelines should be generated from these results, and then used as a benchmark to measure the eff ectiveness of the overall strategy and of the salesperson/team eff ort. Strategies should be monitored, and changes made, as and when necessary, to ensure that the strategies remain eff ective in achieving the organisational goals. Jennifer Willey, the chief business offi cer (CBO) of Independa, has a slightly diff erent view on what the fi rst step in developing a sales strategy should be. She suggests that rather than looking to the past, the organisation should focus fi rmly on the future, asking where the entrepreneur sees the business in a year, and which customers are the ideal (Project Entrepreneur , 2017). Once this has been done, she suggests working backward – from the goal place, to where the organisation is now – identifying all the tasks that need to be done to get there. These tasks may include creating a list of the target market(s), and designing a plan for how best to reach them. While Willey does not mention looking at past sales, from what we have already learned, it is clear that much of what the entrepreneur knows about the target market, and the most eff ective way of communicating with them, is learned from the past. Whether looking to the past as the fi rst step, as Heiman (n.d.) suggested, or as a point of reference for future plans, as Willey eludes to, it is important that entrepreneurs identify what did and/or did not work in the past in order to get a clear idea of how to make things work better in the future. 6.4.2 Developing a sales plan Sales plans are working documents that are updated every six to 12 months. They lay out both sales targets and the tactics for achieving them ( Business Queensland, 2017). They are often used alongside marketing plans to help direct the eff orts of the sales team (Chait, 2015), as they help organisations to select sales strategies that will

be best suited to their target market(s), while motivating sales staff to achieve their targets. Additionally, sales plans help entrepreneurs to budget. They also provide a point of reference against which to measure whether targets are being met, or whether further control measures are required ( Business Queensland, 2017). We will now take a look at the sections that are typically included in sales plans (Frost, 2018): Target market Organisations need to identify their target markets. This may change over time, either due to new and/or emerging markets, the introduction of new products, or changing trends in society. The 204 CHAPTER 6 target market for a start-up may differ vastly from that of a company in mature stage. Entrepreneurs need to keep up to date with what is happening in the market, as well as with who their current, and potential, consumers are. Revenue targets These goals can be expressed in financial terms; for example, an organisation aims to achieve R 5 million in annual recurring revenue (ARR). Alternatively, they could set a volume goal; for example, the company could aim to achieve two hundred new customers during the financial year, or aim to make one thousand sales. The goals, whether financial or otherwise, need to be realistic, so that they motivate the sales staff. Sales strategies and tactics Sales strategies and tactics act as a game plan for how the targets are to be reached. For example, an objective could be to acquire 12 new contracts. A game plan, on the other hand, could involve: • conducting a training course with sales staff on how to ‘close a sale’; • identifying 20 potential contracts, and assigning them to the sales team;

• offering a commission on each closed contract; or • offering a bonus to the salesperson/team that closes the most contracts. Pricing and promotions This section should include a description of any changes in pricing, or any promotions that will be run, together with the anticipated reaction to these pricing changes. For example, if the organisation plans to increase the price of a product from R 12 to R 15, they may anticipate a reduction in sales of three per cent on that product. They may choose to counter this loss by running a promotion on another product, such as a free upgrade on any purchase valued over R 200. The anticipated result may be a 20 per cent increase in sales. Deadlines and directly responsible people Deadlines should be set and used as benchmarks to determine whether the organisation is on track to achieve their sales targets. These deadlines should be set regularly, allowing the organisation to identify any deviations, with time to take corrective action. Where relevant, people’s names should appear next to the deadlines so that the relevant people take responsibility for what is required of them. It is common practice to set monthly sales targets (with the annual target in mind). In this case, each salesperson/team may set individual targets, and at the end of the month, they can easily judge whether they achieved this or not. If they did, they know they are on course to meet the annual target; if they did not, they know they will need to increase their number of sales for the remainder of the year, in order to reach the annual goal. 205 SELLING Team structure and resources

The team and their roles should be included in the plan. This could include the total number of people employed in sales, their job titles and descriptions, and any additional people that may be added to the sales team (including their anticipated start date). This section should include a description of available resources, such as money available for staff incentives, the marketing budget, and a budget for sales conferences and workshops. Market conditions Identify competitors, and check how your products match up and/or compare in terms of quality, availability and price. This should focus on market trends, and on what the consumers see as relevant in the current environment. In order to do this, entrepreneurs should keep up to date with what is happening in the industry in which they operate, and be able to predict how these trends will aff ect the way in which they do business. Although each of these seven sections of a sales plan are relevant and cover all the information needed to make decisions, there is no one-size-fi ts-all sales plan. The template can be customised to suit the needs of individual organisations and their goals. The only wrong way to approach the plan, according to Frost (2018), is to design it and never look at it again. Customers and markets are constantly changing and, as a result, the sales plan should be considered a working document that is subject to change at a moment’s notice (Chait, 2015). ACTIVITY 6A (i) In your own words, explain the role of the entrepreneur in sales. (ii) Imagine that you are part of the sales team for a recent start-up that is retailing hybrid vehicles (a combination of petrol and electric).

Develop part of a hypothetical simple sales plan for this company by completing the following: • Target market • Revenue targets • Sales strategies and tactics • Pricing and promotions • Deadlines and directly responsible people • Team structure and resources • Market conditions 6.5 SELLING The act of selling is a transaction that takes place between a seller (in this case, the entrepreneur’s organisation) and a buyer(s) (the target market). Selling involves exchanging money, or something of value, for a product/service (Ward, 2018). 206 CHAPTER 6 Organisations should focus on the skills required to make these transactions happen. This is referred to as the ‘art of closing the deal’ (Ward, 2018). It is viewed as an art because it involves balancing customer and organisational needs: persuading customers that the product/service will benefit them while avoiding putting sales-based pressure on prospective customers, which may result in long-term damage to the relationship between the two parties. In the following section, we will discuss how to generate sales leads, and how to pitch the product/

service/brand to these leads before quoting them, following-up and, finally, closing the sale. 6.5.1 Lead generation A lead is a person or company that has indicated, in some way, that they are interested in the company’s offerings. This could be through a visit to the store to view products, a phone call to request a quotation, or completing an online survey. Because the prospects initiated the contact, they are more likely to respond to the communication when they receive communication from the company (Kolowich, 2018). This benefits the organisation as they are approaching someone that they know is interested, rather than initiating a conversation with someone who may not have any interest in what the business has to offer. It also helps as the salesperson would have the information about the lead that was collected during the initial interaction. This information allows the salesperson to personalise their approach to include information the lead views as important (Kolowich, 2018). The following figure illustrates this move from being a ‘stranger’ to the brand/product/service, to being an advocate for the brand. Strangers Attract Visitors Convert Leads Close Customers Delight Promoters

(Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Kolowich, n.d.) Figure 6.2: Steps in creating a sales strategy 207 SELLING This diagram illustrates how people may become aware of a brand/product/service (perhaps through something that appears on social media), to interest them enough to visit the company’s website or premises to get more information and/or request a quotation. Once this happens, they become a lead: they are now someone that the company can pursue, knowing that they are interested and receptive to information about what they have to off er. If the company is able to answer questions and eliminate any reservations the lead may have, they could ‘close’ the sale, converting what was a ‘stranger’ into a customer. If the customer is satisfi ed with the level of service they experienced and the product/service they purchased, they could move on to the fi nal stage – a promoter. This is what all companies, and especially entrepreneurs that are starting out, aim for – customers that are so satisfi ed that they become walking, talking advertisements for the company (Kolowich, 2018). A s mentioned earlier, leads are generated when an audience’s attention has been captured and their interest piqued enough that they search for more information. Sometimes, prospective customers share their information in exchange for a discount voucher or competition entry, while at other times, they provide their information because they genuinely want more information on the product/service. For example, they may log on to an insurance company’s website and provide personal information, because they need to take out a policy or save money by switching to a new provider. Kolowich (2018) describes this process of lead generation as follows: A visitor discovers the business through a marketing channel, whether this be a social media page or blog. This channel should have a call to action (CTA) , which could be in the form of a button,

message or image that leads the prospect to the landing page of the company’s website. This could include a form, although the form could be anywhere on the website. This form is used to collect information about the visitor in exchange for an off er of some sort. A form of this sort could be used to collect information such as the following (Kolowich, 2018): • Full name: This basic information allows the company to personalise their correspondences. • Email address: This allows the company to send personalised emails and to add clients to the bulk mailing list. • Company: This is useful when the company is targeting other businesses and therefore will not always be relevant. • Role: Understanding the role the prospective client plays in the organisation helps the sales team to understand how best to communicate with them. Again, this is only relevant when the start-up is appealing to other organisations, and not to individual consumers. • Country/state: The city/town/province/country the prospect lives in helps the company with geographical segmentation, and with tailoring their message to what is relevant to that area. Where the organisation has offi ces around the country/world, helps them to allocate sales staff from the same geographical location to contact the customer. Companies can buy leads. Although this is more expensive than generating leads themselves, it is usually faster and requires less eff ort. However, it also means that when the company approaches the prospective customer it is more of a ‘cold call’ than a generated lead. This means that the prospective clients have not initiated the communication and have not received anything (such 208 CHAPTER 6

as a discount). They may therefore not be as receptive to the communication (they may even flag your emails as spam). This can be very dangerous for companies, especially start-ups that are not yet established in the market: not only does the receiver’s inbox get trained to ignore your emails, but it also indicates to their email provider (e.g. Yahoo or Gmail) which emails to filter out. If enough people flag your emails as spam, your company will be ‘blacklisted’. This list is shared with other email providers. Once this happens, it is extremely difficult to become unlisted and even if unlisting occurs, your Internet protocol (IP) reputation will, in all likelihood, be harmed (Kolowich, 2018). Not surprisingly, the more revenue an organisation has, the more leads they generate. So how do small start-ups generate the leads they need? Firstly, they should invest some time and effort into lead generation software. This does not have to cost the entrepreneur a lot of money; for example, PowerPoint has over 50 free and customisable CTA templates, which allow the user to create clickable CTA buttons that can be added to the organisation’s blog and website. There are other tools, such as Hotjar, that help organisations to understand what their users want, and what they do on the company’s website (Kolowich, 2018). Social media is a powerful and cost-effective tool in generating leads. The entrepreneur, or someone from the company’s sales team, should regularly post information and links to all social media accounts, so that the target market is constantly being faced with the brand and that their interest is aroused. If an individual sees an advert, link or pop-up on social media once, it may not tempt them to click on it. However, if they see it often enough, they may be curious enough to click. Another effective way in which to generate leads from social media is to run a competition; for example, having to post a picture with the product to Instagram to stand a chance to win something. This will ensure that people engage with the brand and share pictures and hashtags that will reach a wider audience. Lastly, social media platforms offer lead generation platforms. For example, Facebook allows a CTA button to be placed at the top of the organisation’s Facebook page, which followers can click to get to the

company website. Twitter has ‘Twitter Lead Gen Cards’ that allow organisations to generate leads without having to leave Twitter: the users name, email address and Twitter username are automatically pulled in the card when they choose to ‘submit’ (Kolowich, 2018). 6.5.2 The pitch Although the idea of a sales pitch may seem a little outdated, today, it is less about selling, and more about starting meaningful conversations with potential customers. The pitch should focus on what matters to the customer, not about how wonderful the company’s products are or how many sales have been made in the last month. The customer cares most about what the company can do for them (Do, 2016). Leung (2014) agrees, stating that an effective sales pitch is one in which the salesperson listens to the buyer, asks questions, and then tailors the pitch to answer how the product/service can solve their problem, or assist them in achieving their goals. In order to achieve this, salespeople should be approachable and try to form meaningful connections. After all, a salesperson who is liked and trusted will be referred to others, and this positive word of mouth will result in a far greater return on investment than any advertising can achieve (Rioja, 2018). 209 SELLING The following table illustrates how the focus of the sales pitch has evolved. Traditional pitch Modern pitch Goal: To sell

Goal: To help Focus is centred around the product Focus is centred around the customer, and how their problems can be solved Follows a monologue style (i.e. the speaker does Follows a dialogue style (i.e. the speaker will ask most of the talking, and the audience is expected the audience questions, and listen carefully to to listen) how they answer) Provides the prospect with features and benefi ts Provides solutions to the specifi c problems of the product or service brought up by the audience Intention of the pitch is to convert the prospect The intention is to simply start a conversation (i.e. make a sale) with the prospect (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Do, 2016) Table 6.1: Differences between the traditional and modern pitch An eff ective sales pitch usually begins with research. This research should include knowing about the product so that you can speak with authority (Rioja, 2018), and should also include researching the customer, including what they are looking for in the product. This will help the salesperson to make a strong fi rst impression and to tailor a pitch that holds the audience’s attention long enough to win them over by using information that is important to them (Leung, 2014). Do (2016) reiterates this, suggesting that in order to achieve positive results, the conversation should centre on the prospective customer. Instead of telling customers what the company or sales team can do for them, rather start the pitch by wording the statement in the form of a question. This may make customers feel that it is something they can relate to. For example, ask: ‘Have you ever found that … ?’.

Daniel Pink, author of To Sell is Human, off ers alternatives to the sales pitch that may be helpful to start-ups really focused on building connections and relationships with their customers. These include the following (in Do , 2016): • The rhyming pitch: Besides remembering rhymes, our brains process messages delivered in rhymes more easily. When something is easier to understand, we subconsciously believe it is more accurate. This may be why, for a long time during the 90s, so many companies used rhymes in their adverts; for example, ‘Oh thank heaven for 7-Eleven’. • The question pitch: People are more inclined to respond to questions than to facts or statements. Asking a potential client what their current insurance broker does for them, forces them to really think about it, whereas if the salesperson told the potential client what they could do for them, they may respond with, ‘I already have a broker, thank you’. • The subject line pitch: When sending an email to a potential customer, whatever is in the subject line is the pitch. This should make the receiver curious or interested enough to open the mail. • The Twitter pitch: This conveys the message in 280 characters or less. With society being used to receiving short messages that get straight to the point, this approach may become increasingly popular, especially when appealing to millennials. 210 CHAPTER 6 • The Pixar pitch: This includes lines such as, ‘Once upon a time’, ‘every day’, ‘until finally’ and other lines that we associate with animated movies and Disney stories.

Regardless of the method used to deliver the pitch, the approach should be one of clear, authentic conversation that provides real stories and facts to back up claims. This will help to create a relationship built on trust. It should also be delivered enthusiastically. It will be very difficult for someone to get excited about what you are selling if you are not passionate about it (Do, 2016). Your enthusiasm needs to be coupled with calm confidence, as too much excitement may put your target off (Rioja, 2018). Part of this excitement may involve being prepared with all of the facts, so that when asked questions, or when being confronted by doubt, the salesperson is armed with the answers/solutions, demonstrating to the audience that they care enough about the product/service to know everything about it (Leung, 2014). Until ‘the close’ of the sale, all the salesperson has done is inform the potential buyer and answer some questions. However, it is only at the point of closing the sale that the salesperson will know whether their efforts have been worthwhile. If the salesperson cannot close, or can see that the prospect looks uncomfortable or is objecting so much that it will never end in a sale, then they should know when to walk away. Time spent trying to convince someone who will never buy, is time that could rather be spent talking to someone who could be convinced (Rioja, 2018). If the lead does not make a purchase, that is fine: a friendly conversation was had that did not involve the salesperson putting pressure on a potential customer, leaving them feeling awkward. This friendly conversation could lead to the person referring someone else to the company, rather than suggesting people avoid the company for fear of pressure and discomfort. If the salesperson offers potential customers something they would like, the conversation should flow easily, ending with customers making an appointment to get more information or making a purchase. When a salesperson approaches a lead with a tailored approach, an attitude of helpfulness and an ear to listen to what is really important, most of the time the pitch is successful (Do, 2016). However, if it looks as though customers may be hesitant, salespeople could consider offering them a sample, or free trial which could help to dispel any hesitations they may have.

Offering a discount may make the purchase seem like a good deal (Rioja, 2018). 6.5.3 Quoting A quotation is a document that companies send to potential customers to let them know the cost of the goods or services in which they have expressed interest. Once the quotation has been sent, sellers have committed themselves to the price they have quoted. This is why quotations are only valid for a limited period, such as 30 days ( Reviso, n.d.). This prevents people from accepting the quotation long after the cost has increased ( VARStreet, 2017) . When a prospective or current customer requests a quotation, it shows the seller that they are interested in making a purchase. The request should therefore be dealt with professionally and timeously, in order to prevent the prospect from going to the competition. However, before quoting salespeople should know exactly what the customer wants and expects. If clarification is needed, appointments can be set up or phone calls made to the potential client to request more 211 SELLING information. It is important to have all the details needed to determine whether the salesperson will be able to deliver on what customers want and to meet all of their needs. Once a quotation has been accepted, a legal contract is entered into to avoid any miscommunication, and to ensure that certain aspects of the relationship are upheld ( VARStreet, 2017). Quotations should include the price that will be charged for the product/service being off ered, as well as a breakdown of any/all components that make up the total price. These components may include labour costs, raw materials and value added tax (VAT), as well as additional information such as lead times (the time from confi rming the order to receiving it), delivery dates, and any conditions to the sale ( Reviso, n.d.). Other important information to include could

be contact information and details about the product ( VARStreet, 2017). The presentation of the quotation can have a major impact on whether it is accepted or not, as well as on the perception of the company. For these reasons, the quote should look professional, and should stand out from the competition. It should be clear, simple to understand, and follow a logical order. Often a company letterhead is used to make the quotation look professional and to make it easily identifi able. Many companies use Excel spreadsheets to create quotations ( VARStreet, 2017). Once the potential customer receives the quotation, a member of the sales team should follow up. This strategy helps to close deals faster and more cost eff ectively than advertising to people who are not yet aware of the business, or who do not have any interest in what the company off ers. By following up after a quotation has been submitted, either by telephone or email, a company’s chance of acceptance is increased by approximately four times. If the quote is rejected, there is the option of submitting a revised quotation, ensuring that it is feasible to off er a discounted price/ revised terms before doing so. Salespeople do not want to win a deal for the sake of winning if it is not going to be profi table or worth the time. However, if it is accepted, the business needs confi rmation, either in the form of a deposit and signed quotation or, if selling to a business, an order number ( VARStreet, 2017). 6.5.4 Follow-up Once a pitch has been made and/or a quotation has been submitted, follow-up is required. The sooner this happens, the sooner a sale will be made and the faster money is made (Kennedy, 2015). In addition, following up indicates interest in the prospect and an investment in their decision. It also keeps the company at the

forefront of their minds, should the competition approach them (Tucker, 2018). Kennedy (2015) suggests that, following a sales pitch, potential customers can be divided into three groups: 1. The lead that is ‘hot’ (ready to buy now) 2. The lead that is ‘warm’ (will be ready soon) 3. Leads that are cold (people who will never buy) 212 CHAPTER 6 It is not always obvious as to which of these groups a prospect falls into – this is why the follow-up is so important. You do not want a hot lead to go cold, or go elsewhere, and you want to try to turn a warm lead hot, which may take some time. According to a study cited by Tucker (2018), it takes, on average, 18 telephone calls to connect with a buyer, and less than 24 per cent of sales emails are opened. This means that, in order to make a deal, a salesperson needs to be persistent. People do not necessarily buy when you want them to; they buy when they are ready to, when they need to, or when they have money to. This means that you need to remind them that you are waiting for them when they are ready, without making them feel that you are pushing them and are desperate to make the sale (Kennedy, 2015).

Tucker (2018) suggests contacting the prospect, or customer, at various intervals. This contact includes the following: • Contact the prospect or customer 24 hours after the meeting to thank them for taking time to meet. Ask if they require any further information. This shows that you respect their time and that you are interested in doing business with them. • If you have not yet heard from the prospects, send a follow-up email one to two weeks after the meeting. In this email, ask if they would like to set up another meeting, if they require any additional information or if they are ready to make a purchase. Alternatively, if the prospect made a purchase, send an email to find out whether they are enjoying the product/service they bought. This will show that you are interested in building a relationship with them, rather than just making a sale – it is far cheaper and less time-consuming to keep a customer than to find a new one. • Three months after the initial contact, reconnect with customers who made a purchase to determine their satisfaction, and to assess whether they have any additional requirements. This could result in more sales. This time frame also applies to connecting with prospects who were originally undecided: it serves to remind them that you are still around and that they are important to you. It also presents an opportunity to answer any questions which may be holding prospects back from making a purchase decision. Kennedy (2015) adds that the follow-up should be seen as a combined approach that consists of the following three elements. 1. Education: Follow-ups should provide information to the prospective customer that should earn you their trust. 2.

Repetition: As human beings, we sometimes need to hear a message several times, and in many ways, before we really ‘get it’. Be patient with prospective customers and be ready to repeat the same message several times. 3. Variety: Use a variety of ways to communicate with the leads, including email, telephone, face-to-face meetings and social media. Prospects will have different reactions to different forms of communication. Using a combination of these methods will ensure that you reach your target in a manner that will educate and remind them. Sales and marketing should be integrated into this process. Traditionally, the marketing department gets leads and the sales department calls on the leads and closes the sale. However, 213 SELLING there is often a large gap in time between fi nding the lead and closing the sale. Therefore, one of these departments needs to take responsibility for ‘warming the leads’. This can be done by regularly sending information to the leads via email, so that they do not feel harassed by phone calls (Kennedy, 2015). When sending these emails, Tucker (2018) suggests avoiding common subject lines such as ‘just checking in’ or ‘meeting request’, both of which are vague and likely to be ignored. Rather, the subject line should be creative and attention grabbing. This requires you to know your target market and the problems they would like solved; for example, ‘Do you fi nd writing business proposals challenging?’ To keep the receiver interested, the salesperson could consider including videos that show how the product or service works, blogs about new products/services, customer testimonials or any other information that may increase the receiver’s awareness and interest in the product/service (Tucker, 2018).

Lastly, Kennedy (2015) suggests that each lead be tracked so that the sales team knows the status of the lead and so that no potential customers are left feeling underwhelmed or ignored after sitting through a sales pitch. Leads should not be given time to forget any aspect of what was discussed. Tucker (2018) concludes by saying that no prospect should be forgotten until a fi nal decision has been made. 6.5.5 Closing Closing is the make or break moment for sales staff – it is the moment they fi nd out whether their eff orts have been in vain, or they were successful in assuring the prospective customer that their product was the best to suit their needs (Wiggins, 2018). Heitzman (2014) suggests the following strategies for closing sales: • Identify the decision maker: It is best to sit down with the person who will make the fi nal decision. If this is not possible, and they send someone else to the pitch, the salesperson should anticipate any questions/concerns this representative may have and be prepared to answer them. • Be real: Yes, the sale is important, but if the prospect feels that you are being calculating or that the sale is more important than they are, it may put them off . • Create a sense of urgency: This can be done by off ering a discount if they purchase by a certain date. This provides an incentive to make the purchase. • Overcome objections: As a salesperson, you should anticipate certain objections and pick up on common concerns. All sales staff should work as a team, sharing objections they anticipate or have experienced. Sales staff can then work together to come up with solutions for dealing with these. However, whether an ‘old’ objection or a new one, the salesperson cannot let the prospect see them become fl ustered.

• Know your competition: This will enable you to emphasise features that your product off ers that the competitor’s products do not. This requires that you research both what is important to the target audience and what the competitor is off ering so that you can identify gaps. • Be friendly, but professional: In order to close successfully, you need to be professional and to the point, while being friendly and personable. 214 CHAPTER 6 Wiggins (2018) suggests that there are two major approaches to closing: the traditional close and the modern close. Each of these consists of a number of techniques, which we will now discuss. Traditional techniques usually involve some psychological tricks, including the following: • The ‘now or never’ approach: For example, ‘If you sign up today you will get a free …’ or ‘This is the last one we have at this price’. This approach creates a sense of urgency, which may just be what an unsure customer needs in order to make a purchase decision. However, it can also make the customer decide not to make a purchase because they do not like feeling pressured. • The summary close: This involves the salesperson summarising the value and benefits of making the purchase. If they were listening to the prospect’s concerns, objections and comments during the pitch, they will know which benefits to stress during the close, while allowing the prospect to visualise what they will gain by making the purchase. • The sharp angle close: It is common for prospective customers to ask for add-ons or discounts during this stage. The salesperson should anticipate this and, if authorised, grant the discount or add-on on the condition that the customer signs up to make the purchase

immediately. It is likely this will catch them unawares and they may agree to the sale, feeling that they have made a small win by receiving what they requested. Modern techniques involve getting to know the prospect’s needs, and communicating how the product/service will best satisfy these. These include the following: • The question close: Getting to know the prospect requires the salesperson to ask probing questions that create interest in the client and address any concerns they may have. An example of such a question could be, ‘In your opinion, could this product solve your problem?’ The answer to this question will help you to determine if there are still any concerns that need to be addressed if the prospect is ready to make a purchase. • The assumptive close: This close is based on the belief of positive thinking. If salespersons truly believe from the start of the pitch that they will close the sale, their attitude will be confident and positive, and the prospect will feed off of that. • The takeaway close: If the prospect is concerned about the price, take away a feature of the product that they do not find important and offer them a discount for the product (without that feature). For example, if the person does not find an extended warranty necessary but is concerned about the cost of the product, offer a discount without the extended warranty. Although the prospect’s attitudes and opinions cannot be controlled, the way the salesperson reacts, can be. Wayshak (2018) has several suggestions for dealing with prospects who are bullies, who are noncommittal, or who are just plain difficult. Firstly, try not to display any feelings of anxiety and remain calm and ‘firm’. Where necessary, try to mirror the prospect’s responses and understand what their priorities are. Finally, try to maintain control over the conversation and

come across as being dominant. Remember not to take tough customers personally. Many of these tips are in line with the strategies and techniques suggested by Wiggins (2018) and Heitzman (2014) earlier. Wayshak (2018) eludes to the fact that the way a difficult prospect is dealt with is the same way any other potential customer is treated – professionally and with respect. 215 SELLING However, a diffi cult prospect should not be able to sense your concern or nervousness, or they will be even more inclined to push you around. Try not to become emotional – the prospect’s frustrations are probably not directed at you. Rather, stand your ground and stay committed to your pitch while making the prospect feel heard and respected. This approach is likely to strengthen your relationship. There may be times where a tough customer cannot be beaten with a soft approach. In this case, it is fi ne to increase your pitch and tone slightly, while ensuring that you maintain professionalism and do not become emotional. Very often, this is seen as taking control, and as a result, the customer may back down, and may even respect you more for taking control of the situation (Wayshak, 2018). It is common for diffi cult customers to want to take over the conversation and not listen to you. Use this as an opportunity to learn more about the prospect, including their concerns and needs. Then, when they do give you an opportunity to speak, you can address these issues. This may require that you steer the conversation back to the topic at hand. The prospect will appreciate that you respected them enough to listen and to ‘hear’ what they had to say (Wayshak, 2018).

It is likely that salespeople will have to deal with diff erent types of customers: tough customers, noncommittal customers, and friendly customers. Regardless of who is sitting opposite them, salespeople need to remain respectful and in control. Even the most diffi cult customers could be profi table, and it is often these customers who become the most loyal. ACTIVITY 6B (i) Explain the importance of lead generation. (ii) Briefl y explain the best way of dealing with a ‘tough customer’ during the selling process. (iii) In your own words, explain why it is important to follow-up on a sales pitch. 6.6 MANAGING SALESPEOPLE Luna-Osteseski (2017) suggests that, to have a successful sales team, entrepreneurs need to hire people who are driven and determined, and then to manage the company in a transparent way that allows these driven people to accomplish the goals. These goals should be challenging, yet achievable, so that team members neither feel demotivated when they continually fall short of achieving goals, nor easily achieve the goals before month-end. Hedges (2015) believes that people live up to expectations. Therefore, if the entrepreneur has high expectations of the sales team, the team is likely to meet these expectations. Motivating incentives can be linked to these goals. It is the opinion of the author, however, that these incentives should be team-oriented so as to avoid members working against each other or hiding information from each other in an attempt to ‘one up’ their colleagues.

216 CHAPTER 6 The team should always feel supported and positively reinforced (Hedges, 2015). These feelings derive from empowerment and constructive feedback. For example, the entrepreneur could ask a salesperson to do a demonstration for their product and then ask them how they feel the demonstration went. This could then be followed by feedback focused not only on the entrepreneur’s opinion on the demonstration, but also on the salesperson’s level of selfreflection. This may form the basis for identifying training needs. Continuous learning should be a priority of the organisation. The learning should include competitive intelligence, how to gather leads, and how to take advantage of opportunities and other product knowledge courses (Luna-Osteseski, 2017). According to a study of top performing and underperforming sales staff, underperforming staff valued product knowledge and industry expertise while top performers were more focused on practical experience and sales intuition. This highlights that underperforming sales staff may require training or mentorship to understand what to focus on and to build their confidence on the product they are selling, as well as the market they are selling into (Hedges, 2015). A sales team will consist of different personalities. It is the entrepreneur’s responsibility to mentor the team and to create an environment that fosters team work and camaraderie. In order to get the best results from the team, the entrepreneur should know his team members well, including what motivates each of them. The entrepreneur should know each member’s strengths and weaknesses, in order to understand whether they are better suited to creating leads or conducting sales pitches (Luna-Osteseski, 2017). Sales is a field that requires management to lead by example. While the sales team is accountable for achieving targets, management

needs to support them and provide the training and resources required to reach these goals. In addition, the entrepreneur should be patient and should consistently re-evaluate strategies and training requirements (Hedges, 2015). 6.6.1 Appointing the right people It is not uncommon for entrepreneurs to have to fulfil the human resource duties themselves. As the business grows, they may need to appoint more staff. This process involves recruiting and appointing the most suitable people for the position. These positions are often filled based on personal references. However, a more appropriate way to source staff is to advertise positions externally using newspapers, recruitment agents, the company’s website or online recruitment sites. The advertisement should specify the responsibilities of the position, the required qualifications and/or experience, the salary or range of pay, the location, whether the position requires travel, and any other pertinent information (Du Plessis, 2011). Before posting the job opening, make sure that the spelling and grammar is correct. It will be very difficult to attract star employees if the advertisement contains errors (Connick, 2018). Once the position has been advertised, the entrepreneur will likely be inundated with applications. Up to 90 per cent of these will be underqualified or unsuitable for the job (Connick, 2018). The entrepreneur will create a shortlist of people who will be invited for interviews from the remaining ten per cent (Du Plessis, 2011). 217 SELLING The entrepreneur then creates a list of important qualifi cations and experience/characteristics over and above those posted in the advertisement (Connick, 2018). These, along with the applicants’ curriculum vitae are then used to assess the following (Ward, 2018):

• The candidate’s ability to build meaningful and sustainable relationships with customers. This could be assessed through their experience and by the way they respond to real-world role play and situations in the interview. For example, someone applying to be a travel agent could be asked to sell a destination to the entrepreneur. Applicants could then be assessed on the way they tried to create a rapport with the ‘customer’ while selling the destination. • The ability to listen to the needs of the customer. While in an interview, it is normal to feel nervous and to perform below optimum. However, this is also a good indication of the way applicants will perform and conduct themselves during a pitch, which is similar to an interview scenario. Using the travel example above, the interviewer could interrupt by asking questions and making statements. This will indicate how the interviewee manages the situation, and if they really hear what the interviewer is asking and consider this during their simulated pitch. • Their level of self-motivation and their attitude. This is important in order to determine if applicants will need to be micromanaged and whether they are likely to blame external forces for any failures. Successful salespeople are constantly looking for new opportunities and see failures and setbacks as an opportunity to learn and grow. • The candidate’s attitude toward community. This is an indication of character. People often invest in people and businesses that they feel invest in them. Attitudes to community can be determined by checking the applicants’ curriculum vitae and questioning them on any charity/volunteer work they may have done. • The applicant’s level of tenacity. This is the ability to persevere until a sale is closed. It can be determined by asking open-ended questions that make it diffi cult for the applicant to determine what is being asked. For example, consider the entrepreneur asking the applicant how often the applicant closes a sale. It is then very easy for the applicant to simply respond with, ‘I close every sale’. If, however, they are asked, ‘What do you do, during a sales pitch?’, they are not as likely to give the answer they think the entrepreneur

wants to hear. This also requires the entrepreneur to listen carefully to what is said about closing. Connick (2018) suggests another element to the interview: a test of how the applicants handle themselves in a stressful and unusual situation. This could be as simple as objecting to something they say or acting very sceptical. For example, an interviewer could stand up in the middle of an interview and state, ‘This is not going to work – good luck to you’, simply to see the applicant’s reaction. The entrepreneur should also assess the applicant’s appearance, not only the way they are dressed, but also the way they are groomed, their body language, eye contact and posture. This is especially important in sales, where they will be dealing with the public, and are an ambassador for the entrepreneur’s company (Connick, 2018). A good salesperson will showcase their selling skills during the interview by asking intelligent questions that show they have done research into the entrepreneur’s company. They will ask for feedback in a manner that allows them to address any objections or concerns the entrepreneur 218 CHAPTER 6 may have. Lastly, the applicant should follow up the interview with a note or email thanking the entrepreneur for his time (Connick, 2018). 6.6.2 Providing product training While most companies are focused on building essential selling skills, this is only one part of successful sales – the other part is product knowledge. This knowledge is required so that the salesperson can effectively communicate the following (Schultz, n.d.): • How the product can solve consumer needs. • The value that the product/service/company can add for the customer.

• Current trends in the industry and any emerging trends that may result in a need for the product/service. Staff who illustrate in-depth knowledge of the products/services their company offers have the ability to make or break customer relationships, impact overall sales performance, help launch new products/services, and successfully cross-sell and upsell products (Schultz, n.d.). Additionally, salespeople who have knowledge of changing trends and market conditions, and who understand how they, and their products, fit into these shifts, create a sense of competence that results in customer relationships built on trust. Halsall (2014) states that a knowledgeable team can lead to: • increased customer trust; • empowered employees who feel able to solve problems; • faster resolution of consumer issues and complaints; • improved sales; and • positive customer reviews and word of mouth. Bearing this in mind, many companies have made product knowledge and training an integral part of their organisational culture (Halsall, 2014). After all, if the sales staff cannot speak fluently about the product and confidently answer questions, the company will lose out on many sales (Schultz, n.d.). Apple is a good example of a company that focuses on continuous learning by continually building on sales staff’s knowledge. They even have a ‘Genius Bar’ in each store, where customers can go for specialised technical help and advice (Halsall, 2014). Halsall (2014) suggests that all sales staff undergo the same training, to ensure that the same message is being communicated to all customers, regardless of who is delivering it. Product knowledge training should be consistent, engaging and customised. Staff should not repeatedly receive training for the same content; rather; content should be kept new and fresh.

One of the most effective ways to improve employee knowledge is to provide them with several opportunities to become familiar with the products/services they will be selling. This can be done through seminars, or by offering staff discounts or free samples of products, so that employees engage with the product and are able to provide first-hand knowledge and opinions. Staff should also be encouraged to share feedback with the company, on their experience with the product so that potential improvements can be identified (Halsall, 2014). 219 SELLING Role play can be used to test the product knowledge and selling skills of sales staff . Other members from the sales team could pose as potential customers and ask questions, or make objections that they themselves have had to deal with, to see how their colleagues deal with similar situations. This training method helps employees to test their product knowledge in a simulated, real-life situation (Halsall, 2014). Training can also be integrated into the company’s incentive programme. Staff can be awarded points for doing well in knowledge and training tests, and bonus points for completing each section of training. These points could be exchanged for prizes or perks, such as paid leave at the end of each month or quarter. Rewards are a good way to keep training fun, motivational and engaging (Halsall, 2014). The entrepreneur could consider taking training out of the offi ce; for example, by giving staff an opportunity to visit the factory where the products are manufactured (a car salesman could visit the Volkswagen factory to see a car being made). Alternatively, they could visit a place where the product is used (Halsall, 2014). For example, sales representatives of medical machinery could visit a hospital to witness the machinery operate in a simulated operation.

Sales staff could also visit trade shows or exhibitions to see what the competition has to off er, and to determine where their products fi t in. Regardless of the industry in which the entrepreneur operates, if the sales staff do not have suffi cient product knowledge, customer relations and the company reputation could suff er serious consequences. However, if sales staff are trained to be intimately familiar with the company’s products/services, they will naturally want to share that information with prospects, helping them to build customer relationships and take advantage of all opportunities available for conducting sales conversations (Halsall, 2014; and Schultz, n.d.). 6.6.3 Setting targets Many businesses set sales targets based on the previous year’s sales. However, this does not take external factors (such as market trends and the economy) into consideration. Consequently, targets are often unreasonable and/or unattainable, which can aff ect the sales team’s level of motivation (Krishnan, 2016). Furthermore, while it is common for salespeople or sales teams to have monthly goals, it is a good idea to have smaller, weekly goals that help build confi dence through incremental wins. These weekly goals can provide the salesperson with feedback in terms of whether they are on track to reach their goal (Prater, 2018). So, how should an entrepreneur set sales goals? Prater (2018) suggests the entrepreneur should do the following: • Calculate monthly sales goals: This can be done by working backward from the annual target. This is not as simple as dividing the annual target by the number of sales staff and then by twelve months. The entrepreneur needs to consider seasons; the size of each salesperson’s accounts and any staff fl uctuations. 220

CHAPTER 6 • Set waterfall goals: This means increasing goals in increments that are doable and motivating rather than overwhelming. For example, if each sales member is currently bringing in an average of ten new leads a week and the entrepreneur wants them to bring in 20, targets should not be immediately doubled. Instead, the entrepreneur can set a target of 13 new leads in week one, 15 in week two, 17 in week three and 20 in week four. The sales staff will not feel burnt out after week one; they may be motivated by the new challenge set each week. • Prioritise goals: This involves identifying which goals will bring in the most revenue or quantity of sales and making these a priority. If there is a sales member who is underperforming, the goal could be linked to their performance. Prioritising goals means that although not all of the organisation’s goals are met; the most important goals will be. • Set activity goals: If a sales member needs to close R 10 000 this month, which equates to ten deals, convert the value into activity goals. This starts with evaluating their past performance – if this historical information tells you that this salesperson converts 50 per cent of their pitches, it means that they will need to conduct 20 pitches to reach their goal. If 25 per cent of their pitches lead to sales, they will need to call on 40 leads. Working backwards helps to turn a potentially intimidating goal into manageable metrics. • Incentivise goals: Instead of rewarding staff only at the end of the month or financial year for reaching their sales targets, consider small incentives for reaching weekly goals. This could be a day off, a round of golf, or a lunch on a Friday afternoon. Each time a small goal is met, the company is one step closer toward reaching their big goal. If these small wins are rewarded, the sales team will be more motivated to work toward the overall goal. In addition, they will have fun doing it, which will increase motivation and morale.

• Monitor progress: It is no use having goals if they are not monitored. If sales staff are not meeting targets, the entrepreneur should have a conversation with them while there is still time to rectify the situation: the entrepreneur should not wait until the end of the month, when it is too late to put any corrective measures in place. • Set challenging goals: Challenging goals can be set for those team members who are able to reach them. Do not set a ‘stretch’ goal for a sales member who is struggling to reach their usual targets. If sales staff constantly reaches their targets, set a challenging goal that will motivate them. • Have mentor programmes in place: This may help team members feel that they have someone to confide in when they go through sales slumps. It also provides a platform for idea sharing and team building. Prater (2018) suggests that organisations set individual and team goals. Individual goals should include personal development and improving sales skills; for example, if there is a member of the sales team that is really good at closing deals but not very successful at conducting pitches, a goal could be to conduct one sales pitch a week that results in a close. This sets them up for a challenge but with a component with which they are comfortable. Once individual goals are in place, team goals should be set; for example, give incentives if the entire team reaches their goals. This will result in team members pulling together and supporting each other. There could also be an additional reward for the top salesperson, so that individuals remain motivated as well (Prater, 2018). 221 SELLING In order to ensure that both individual and team sales targets are accurate and realistic, Krishnan (2016) suggests the following factors be considered:

• Since every business is diff erent, the factors that aff ect each individual organisation should be considered. These factors may include seasonality, changing strategies, recurring revenue streams and the life-cycle stage. • Economic factors may include considerations in terms of competitors, the market and the wider economy. • Individual sales staff performance may include thorough market segmentation and scoring, in order to determine which sales team members service the more profi table markets. Targets should be set accordingly. • Solicit feedback before and during the sales forecasting and target setting process. It is a good idea to involve staff in this process as they can provide insights that you, as the entrepreneur, may not have considered. According to a study conducted at Harvard University, setting specific goals increases motivation. The study showed that people who adhered to a goal-orientated plan performed 30 per cent better than those who did not (Prater, 2018). However, if the sales expectations are not in line with what can reasonably be expected from the sales team or what is happening in the environment, it will have a negative eff ect on employee engagement and morale. This will, in turn, aff ect turnover and profi t (Krishnan, 2016). When setting or revising goals, the entrepreneur should check in with their sales staff to fi nd out how they are feeling and to determine if the goals are still realistic, challenging and attainable. If sales staff feel they have a say, they will be more motivated, more committed and happier in their work positions (Prater, 2018). 6.6.4 Motivating sales teams There are only two things that a manager can infl uence: the sales staff ’s skills and their motivation.

Improving their skills is largely objective and involves evaluating their current performance, comparing it to expected results, and then identifying areas needing improvement. It is far more diffi cult to infl uence their level of motivation as each person is motivated by diff erent factors. Some team members may be internally motivated, others may require extrinsic motivation, which may be in the form of reassurance, monetary rewards, or recognition; for example, by an award of a certifi cate or trophy (Tyre, 2018). It is not uncommon for management to go to extreme measures to motivate their sales staff , such as expensive product launches, incentive trips to exotic locations or huge commissions. However, it can be very diffi cult to motivate staff who are already demotivated (Patel, 2017). Tyre (2018) suggests the following methods for motivating sales staff : • Build trust through an open, consistent and nurturing relationship with staff . If staff feel they cannot trust the intentions of the entrepreneur, it will be almost impossible for them to feel inspired to reach their goals. It will be almost impossible to inspire unmotivated sales staff without having an honest conversation about their challenges and personal goals – a task that will be very diffi cult without trust. 222 CHAPTER 6 • Ask each person how they like to be managed. Everyone is different, and to manage staff effectively the entrepreneur needs to understand what management style best motivates them. The entrepreneur should determine this by asking questions such as how often the salesperson would like to meet with the entrepreneur (twice a week, weekly, fortnightly or monthly), and how they prefer to receive feedback (publicly or privately, in writing or in person). After all,

people who enjoy their jobs and feel recognised tend to achieve better (Patel, 2017). • Understand each salesperson’s personal and professional goals. This will help the entrepreneur to understand what type of person each member of the team is, as well as what motivates them. Once their goals are understood, the entrepreneur could ask how motivated they currently are, what motivates them in the long term, how they self-motivate and how they could pick up if they feel demotivated. Forcing sales staff to be reflective will provide answers that will benefit both parties. According to a study cited by Patel (2017), 60 per cent of millennials state that the reason they work for their current employer is a ‘sense of purpose’. An entrepreneur who forces staff to reflect, and then acknowledges the importance of the goals they have set, will reinforce this sense. • Make sure your sales staff are taking care of themselves, both mind and body. Their results will be influenced by their energy and enthusiasm, which is a direct reflection of how they are feeling. It may be a good idea to let staff go home early one day of the month, or to encourage fun workout sessions (for example dedicating one afternoon a month to a different form of exercise and bringing in a professional to train them). Other ideas may be having a healthy meal together as a team once a month or allowing time off to watch their children’s sport or attend family events. This is not to say that the entrepreneur should create a ‘come and go as you please’ environment, but rather, one that is centred around the well-being of the sales staff, allowing time for fun so that staff remain motivated and committed to the company. • Set daily, weekly and monthly goals that members are rewarded for reaching. These should be challenging but achievable (Patel, 2017). • Let people choose their own rewards: they will be motivated more by something that has personal meaning. For example, some people are motivated by time off, others prefer extra pay. Some may choose a trip to the spa, while others may enjoy a voucher for a meal with their partner.

Patel (2017) suggests that motivation should be a priority. He suggests that another tactic for increasing motivation may include getting various departments to brainstorm together: if the salesperson sees the bigger picture, they may understand the importance of their contribution, which may further inspire them. Ultimately, motivating staff is about finding what makes them want to go the extra mile (Tyre, 2018). 6.7 SELLING THROUGH A THIRD PARTY When a buyer and seller enter into a business deal, they may choose to use the services of a third party to handle the transaction. This third party, or intermediary, may bring the two parties together, or may receive the money from the buyer and pass it on to the seller. For example, a travel agent acts as a third party on behalf of hotels, airlines and other travel-related principles, by 223 SELLING marketing their products to potential guests and passengers, making the bookings, collecting the payment and making payments on behalf of the tourists ( Investopedia, n.d.). As technology evolves and changes the way things get done, more people, and organisations, are performing third-party transactions through digital payment platforms. Customers can buy products/services and pay for them through a digital platform. The third party will receive this payment, verify that funds are available and debit the buyer’s account. The third party then forwards the money to the seller’s account, usually using the same online portal. PayPal is an example of such a platform: a buyer enters their credit card details through the PayPal service, PayPal verifi es the money is available and makes the payment to the seller. PayPal, like any other third-party payment platform, is not affi liated with either party ( Investopedia, n.d.). To stay competitive, many companies consider selling their products through third-party channels, especially those that are popular,

established, credible and that stock competitors’ products. If your target audience goes to a store or a site to do price comparisons, check consumer ratings or fi nd new products and your product/service is not there, your product/service will be overlooked. People tend to trust big names (Broman, 2018). For example, consider Wish, an online store that sells a variety of products on behalf of smaller retailers that do not have an online presence. Consumers from anywhere on the globe can visit the Wish website, order items from a variety of sellers, make a single payment and have the goods shipped to them. Wish posts pictures on their site, receives all the orders and payments from the consumer, passes them on to the retailer and keeps the consumer up to date with shipping information once the order is placed. Wish never takes physical ownership of the goods, but they facilitate the entire purchase procedure. A local example of such a company is Takealot. In the next sections, we will explore the reasons an entrepreneur may make use of a third party, as well as the advantages and disadvantages of doing so. 6.7.1 Using a third party Third parties, including retailers, agents, distributors and online marketplaces, bridge the gap between the producer of a product/service and the customer. Because of the vital role they play in this relationship, they should be seen as partners, capable of sharing the company’s values and features with potential customers. The third-party’s sales staff should be confi dent in their product knowledge so that they can answer consumer questions (Coff man, 2018). A key to a successful relationship between the entrepreneur’s organisation and third parties is open, regular communication. Without this, their strategies will not be aligned; for example, the third party may not be told about new products or improvements that they should be communicating to the consumers. Coff man (2018)

suggests that companies and their third parties share many goals; they both want increased sales and profi ts and satisfi ed customers. Both parties should discuss ways to ensure that these goals are reached. Even when selling through a third party, the entrepreneur should still communicate with the public, making them aware of product developments and where to get the products from 224 CHAPTER 6 (Broman, 2018). Let’s look at the example of Lovisa Skin, a beauty house. They sell their products through many retailers throughout the country, but the owner still travels, giving demonstrations and making the retailers aware of product developments and new products on offer. The owner maintains several social media pages on which she shares success stories and the company’s values. This approach means that the entrepreneur keeps a connection with the public and does not rely solely on third parties for her company’s success. However, it is important to note that the owner does not undercut the retailers on price: the price they charge in their stores is the same price charged if you buy directly from Lovisa Skin . This ensures transparency and builds trust between the company and their distributors. Both parties benefit from conducting demonstrations at the retailer’s stores: Lovisa benefits from the retailer’s existing client base and the retailer benefits from having a ‘professional’ conduct a demonstration, strengthening the credibility of the product. This also provides an opportunity for both parties to build on their relationship and to open communication channels so that the retailer feels comfortable sharing suggestions and/or dissatisfaction with the entrepreneur (both theirs and the end consumers) (Coffman, 2018). 6.7.2 Advantages and disadvantages According to findings by Miller (2013), approximately half of daily Internet searches are for product/

service information, and more than a quarter of first page listings are third-party marketplace listings. This means that organisations, especially start-ups, that are not yet established can piggyback on the reputation of these marketplaces, gaining exposure for their products. Whether choosing to use an online third party (such as Amazon or bidorbuy) or a real-life third party (such as an insurance agent), there are many advantages and disadvantages that the entrepreneur should be aware of. These are listed in the following table (Miller, 2013). Advantages Disadvantages There is an established consumer base that the Competition is right there: customers can easily third party works to attract and maintain. compare your product and prices with the competition without ever having to leave the store. There is access to new target markets that visit You do not have control over the page on which the third party without knowing your products your products are advertised or where they are exist. placed in-store. It saves costs as the third party trains the sales The company can lose their identity, with the third staff and advertises to get customers in the door/ party dictating which products they will stock traffic to the website. and dealing with the customers (possibly even recommending other products and services).

You benefit from established services and When selling via an online third party, you need structures, such as shipping to the end consumer, to conform to their standards and descriptions: online payment systems and customer service each site has different requirements. This is departments. time-consuming and requires a lot attention to detail. It may also require that photographs and descriptions be redone for each site. 225 SELLING There is reduced risk as you can sell products Selling products through online third parties through more than one third party, spreading the requires that you pay commission and additional risk rather than being personally responsible for payment services, listings and other costs. the success of all sales. You can sell new products through the If the third party receives negative publicity, your established third party to test consumer reactions brand may suff er as a consequence. with limited risk. Third parties take care of technical and web Third parties usually give preference to their best-development activities. selling partners, which could mean your products do not receive much attention. A consumer may fi nd your products through a

third party and then search for your company to see what else you have on off er. The third party may have access to distribution channels that you do not, such as selling abroad or supplying to government offi ces. Third-party marketplaces are a good way to test the international marketplace, for those entrepreneurs considering going global. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Miller, 2013; Tenant, n.d.; and Broman, 2018) Table 6.2: Advantages and disadvantages of using third parties The list in the table is not complete; there are several other advantages and disadvantages to using third parties. Entrepreneurs need to analyse their goals and decide whether they can successfully reach all potential customers with the current sales force or, whether having access to third-party consumers will help to reach these organisational goals (Miller, 2013). Tennant (n.d.) suggests not handing over complete control to a third party, but rather, to grow the company’s online presence so that they, too, can reach a wide target audience. 6.7.3 Things to consider There are a few questions the entrepreneur can ask when choosing a third party. We now look at these in more detail (Broman, 2018). Does this third party share a target audience with my company? A third party may have a large customer base, a great reputation and an established online presence.

However, if their target market is not the same as the entrepreneur’s, then the only thing that will be achieved by doing business together is confusing the market and losing the business’s identity. To illustrate this point, think of a fashion designer – someone who has taken years to establish themselves as a high-end, one-of-a-kind designer – designing and making dresses for the more 226 CHAPTER 6 affluent market. If it is part of the designer’s strategy to grow sales, the designer could consider selling the designs online. However, choosing to do this through Takealot could seriously damage the designer’s reputation as people visiting this site do so to find products at discounted prices, which is not the image the designer has spent years building. Does the third party allow me the freedom to communicate with my target audience? Some third parties want the manufacturer to sign exclusivity agreements. This means that the third party will be the only seller of the entrepreneur’s products. To understand this, think of an estate agent: when someone wants to sell their house, they may want to list it through several agents in order to reach as many potential buyers as possible. However, an estate agent wants to be the only person able to sell the house, which will mean that they are guaranteed of the commission when the house sells. This is understandable, as they spend money advertising the house, and spend time taking people to see the house. The agents do not want to spend time and money in vain. Similarly, a middleman selling products may want to be the only business allowed to sell that company’s products. The benefit is that they may spend more time and effort selling the product as they feel the manufacturer has entrusted them with the task. However, it is a risk for the entrepreneur as if the middleman does not keep their side of the deal, the entrepreneur’s products will not sell and there is nothing that can be done about it as the middleman is the single distributor for his product.

Will my products get the attention (advertising / shelf space) that I need? Established products and top-selling products usually get the ‘eyelevel’ shelf space. This also applies to preferences given online. This is because the store wants to attract customers and it is often established brands that do this, even if it is not the product that customers eventually buy. If someone lands on a site and they see only unknown brands, they may exit the site. For this reason, thirdparty marketplaces may place the less popular/known brands further back in their online catalogues. Are the fees and commissions worth the exposure my products/brand will receive? In addition to paying commissions, some stores charge for shelf space. Online stores may charge additional fees for handling payments. The entrepreneur may need to offer steep discounts to middlemen. All of this cuts into their profit. Entrepreneurs therefore need to weigh up whether the potential for increased sales justifies the smaller profit per item. 6.8 AM I READY TO SELL? According to Smith (2013), entrepreneurs need to consider each of the following when deciding if their companies are ready to start selling their products/services: • The uniqueness of the product needs to be considered. The sales team may be wonderful, but if the product they are expected to sell is something that is already flooded in the market, they are not going to be much success. 227 SELLING • The entrepreneur, and his salespeople need to thoroughly understand the market. They need to ask questions such as: What

drives the market? Where is the market located? How much are people willing to spend and what, exactly, do they want? • The entrepreneur needs to determine the best marketing mix for his business. Therefore, they need to determine where the customers want to buy (directly through the entrepreneur’s business or through a middleman, online or physical), how to reach the customers through a promotional mix that is meaningful to them, and how much money customers want to spend. • Is it feasible to sell through a third party or is it better to start selling online and gradually open physical stores? • What is the potential for profi t? • What resources do I have and what additional resources do I need in terms of things like staff ; physical and fi nancial resources, and equipment and machinery. Entrepreneurs need to ensure their sales teams are experienced, skilled and motivated and that they themselves are ready for the challenges of sales. The sales team will take their cues from the way the entrepreneur behaves and manages confl ict, sets challenges and goals, and manages available resources. If entrepreneurs are not ready for the challenges of sales, their teams will not be either. ACTIVITY 6C (i) In your own words, explain the basics of managing salespeople. (ii) Summarise the advantages that a car manufacturer may enjoy by selling their vehicles through a third-party dealership. 6.9 SUMMARY

This chapter has provided with you with knowledge on selling in the entrepreneurial world: the role that sales plays in a business, how to develop a concise sales strategy, and the various stages leading up to making a sale. After studying this chapter, you should know how to eff ectively manage salespeople and what it means to sell your product or service through a third party. This chapter has equipped you with sales skills that will prove invaluable when starting up and running a business. 228 CHAPTER 7 CASH IS KING 7 7.1 Introduction 230 7.2 Life lesson 230 7.3 What is cash flow? 231 7.4 Why cash is king 232 7.5

Understanding a statement of cash flows 234 7.6 Managing cash flow 247 7.7 Where is my cash? 253 7.8 Summary 258 229 CASH IS KING Case studies – myths, leaders and Online inspiration Cash is king start-ups Boring but Growing the Making important business

it run stuff smoothly Building a It is in the team numbers Developing Selling products Spreading and the word Getting out of Forming a services What is the starting business entrepreblocks neurship? 7.1 INTRODUCTION In this chapter, we shall defi ne cash fl ow, explain the meaning of the phrase ‘cash is king’, and introduce a statement of cash fl ows and

outline its components. Additionally, we shall explain the importance of managing cash fl ows eff ectively and discuss ways of managing your cash fl ows. Throughout the chapter, we shall provide examples and activities to reinforce your understanding. After studying this chapter, you should be able to: • defi ne cash fl ow; • explain what is meant by ‘cash is king’; • outline the components of the statement of cash fl ows; • explain the importance of managing cash fl ows; and • discuss eff ective ways of managing your cash fl ows. 7.2 LIFE LESSON Upon graduating from university, Johanna and Rajesh started a music production company which they named JR Records. In less than a year, their production company has taken South Africa by storm, given them a string of number-one hits, and launched a new genre of house music referred to as ‘Gqom’. Apart from producing their own music, Johanna and Rajesh have risen to become the most sought-after record producers for other artists. With their new-found fame, their company is now commanding a performance fee of R 100 000 per show. Despite their instant success and new-found celebrity status, their business has a problem. They are struggling to pay their creditors. A closer look at their business suggests that they are not able to raise the working capital needed in their day-to-day operations. Often, they have had to pay creditors before they collect payment from their debtors. Additionally, they have incurred penalties 230 CHAPTER 7

and interest charges for late payments, while they have been forced to write-off a number of bad debts. Furthermore, they claim to be too busy to regularly monitor their cash flow. Not only do they not prepare a cash budget, but they also do not prepare a statement of cash flows. Besides, they do not distinguish between revenue and cash, insisting that since their revenue is high, their cash balance will automatically also be high regardless of whether the debtors pay or not. Johanna and Rajesh are also of the view that, as upcoming artists, they do not have to worry about monitoring the cash spend. Instead, they are buying designer label clothes and shoes, cell phones and other accessories, all of which they pay for in cash. They have recently acquired a BMW 325i, which they regard as their greatest asset. Furthermore, three months ago they moved to a high-end suburb, into a house that befits their new-found status. However, last month they were kicked out of the house by the landlord for failing to pay rent for two consecutive months. They have recently sought professional advice and have been advised by a financial planner that it is important to plan for cash flows. The planner says that ‘cash is king’, as it is required to pay creditors as the payment date falls due. She also explained the difference between revenue and cash. High revenue is good, but the business requires that they be able to pay cash for expenses when they arise. They have also been advised to only accept a booking if payment is made up front, to cut down on their unnecessary expenses, to lease vehicles instead of buying them, and to collect from debtors before paying creditors. They have further been advised to move back to the township and to save as much cash as they can. Most importantly, they have been advised to manage their cash flow carefully. Having heeded the advice, they seem to be back on track and have recently been given a line of credit by a local bank. They have also attracted an international investor who has agreed to invest R 10 million in their business. ACTIVITY 7A

(i) Differentiate between ‘cash’ and ‘revenues’. (ii) From the previous example, explain why Johanna and Rajesh should consider attempting to manage their cash situation more effectively. (iii) Evaluate the advice given by the financial planner. Do you agree with the advice? Provide reasons for your answer. 7.3 WHAT IS CASH FLOW? Cash flow refers to the money that is either moving into the business – cash inflow – or out of the business – cash outflow ( Business Dictionary, n.d.). Examples of cash inflow include: • cash received from debtors; • cash sales; • commission received; • interest; • rent received; and • tax refunds. 231 CASH IS KING Examples of cash outfl ow include:

• payments to creditors; • salaries paid; • rent paid; • general expenses; • taxes paid; and • refunds to customers. Note that some expenses incurred are not actually paid for, and thus they do not amount to cash outfl ows. A good example is depreciation, which is the loss of value of an asset through its use or passage of time ( Accounting Weekly, 2018). Although depreciation is treated as an expense, we do not pay for it. Rather, we just calculate it using various methods of accounting that are outside the scope of this chapter. If more cash is coming in than going out, a business is said to have a positive cash fl ow. By contrast, if more cash is going out than coming in, the business is said to have a negative cash fl ow. Obviously, businesses would rather have a positive cash fl ow than a negative cash fl ow. Having a positive cash fl ow allows the business to concentrate on growth, attracting customers, and developing products and processes (Reider and Heyler, 2003: 9), as well as making short-term investments and paying creditors. On the other hand, a negative cash fl ow limits what the business can focus on, as the business must prioritise getting enough cash rather than on strategic growth and long-term planning (Reider and Heyler, 2003: 9). This may mean that funds must be borrowed (e.g. through an overdraft) to ensure that a business is able to pay salaries and creditors as they fall due. Simply put, having a positive cash fl ow means that a business’s cash balance is increasing, an aspect that enables it to pay debt, reinvest in the business, reward shareholders and protect itself from future fi nancial challenges by creating reserves ( Investopedia 1 , n.d.). By

contrast, having a negative cash fl ow threatens the solvency of a business, as it may result in a situation where the business becomes unable to pay creditors when they fall due. 7.4 WHY CASH IS KING The previous discussion shows the benefi ts of having a positive cash fl ow. In business there is a common phrase: ‘cash is king’ ( Investopedia 2, n.d.). It simply emphasises the notion that cash is the most important form of an asset of a business, as it provides fl exibility and resilience for business decision-making ( Investopedia 2, n.d.). A business can be profi table on paper, but without generating cash it is doomed to fail. Cash does not only enable a business to pay its creditors and salaries when they fall due, but it also enables a business to take advantage of opportunities at short notice. Additionally, having cash enables a business to acquire property, plant and equipment at more favourable terms. Furthermore, having cash enables a business to have more fl exibility in expenditure and operations than a business that lacks cash. Indeed, a lack of cash is deemed to be a more common cause of collapse of businesses than a lack of profi t (Allen, 2018). Many businesses can operate in the short term at a loss; however, no business can survive in the short term without having cash to pay off its immediate obligations. As Allen (2018) argues, having potential revenues or investments cannot off set the cost of supplies, rent and salaries. 232 CHAPTER 7 (Importance of cash) EXAMPLE 7 A Mr Shenxane was recently retrenched from a large multinational company where he had worked as a machine operator for more than 20 years. He received R 500 000 as a retrenchment package owing to his many years of service, and has been exploring various

business opportunities. One of the opportunities that has arisen is a shisa nyama (braai meat) business at the local taxi rank which recently closed down despite the high demand for its products. Keen to take advantage of the business opportunity, Mr Shenxane has decided to investigate it by establishing why the business closed down. He discovers that although the business was profi table, it was not generating adequate cash because most customers were buying on credit, many of whom had defaulted on payment. Consequently, the business was struggling to pay its creditors and could not aff ord to take advantage of other opportunities that arose in the taxi rank. One of these opportunities was to take over better equipment and the building from a fi sh-and-chips outlet next door, which had also closed down due to mismanagement. Mr Shenxane also establishes that the shisa nyama business was using outdated kitchen equipment as it lacked the cash required to buy new modern equipment on more favourable terms. The business was unable to take advantage of the high demand of its products, particularly during lunch time, as it lacked the cash to scale up its operations when it needed to. Having learned this, Mr Shenxane has approached you to advise him on the importance of cash to a small business, so that he does not make the same mistakes if he starts a new shisa nyama business at the taxi rank. Imagine that you were asked to advise Mr Shenxane on why cash is important for the survival of a small business. What would you say? The following points would be important in this regard. • Without generating cash, a business is doomed to fail. • Cash does not only enable a business to pay its creditors and salaries when they fall due, but it also enables them to take advantage of opportunities at short notice – e.g. taking over the building from the fi sh-and-chips shop that closed down. • Having cash enables a business to acquire property, plant and equipment at more favourable terms – e.g. better cooking equipment

for the shisa nyama kitchen. • Having cash enables a business to have fl exibility in expenditure and operations – e.g. having more cash on hand can allow the business to quickly scale up production during the lunchtime rush. • A business can operate in the short term at a loss (i.e. lack of profi t), but it cannot survive in the short term without the cash to pay its immediate obligations. 233 CASH IS KING ACTIVITY 7B Three years ago, Mr Themba Dube quit his day job as a salesman to focus on the home appliance business he had started three months earlier. On the surface, his business seems to be booming, with sales revenues of R 4 million, 35 employees and two new operating branches. Unfortunately, this fast-paced growth is beginning to have a negative impact on the fi nances of Themba’s business. To start with, the salaries bill has more than tripled in the last year. Additionally, the running expenses of the two new branches are growing signifi cantly, but he has not seen a similar growth in cash from their sales. In fact, more than 85 per cent of Themba’s customers have purchased home appliances from him on credit terms. At his new branches, these terms only require customers to pay after three months. By contrast, Themba’s creditors require upfront payment for any inventory delivered to his business. As a new customer, he has not yet established favourable trading terms with them. Other incidental expenses such as rent, delivery costs, marketing costs, security costs and so on are also growing rapidly. Worse still, some customers have started defaulting on payment, while others seem to have colluded with employees to take out appliances without making any payment. Furthermore, while

trying to choose good locations for the new branches, Themba was fl ying around the country, and his travel agent has charged him a fee of R 150 000. Themba also has a hard time keeping track of the cash deposited in the bank account, as he is not set up for online banking, nor does he receive SMS notifi cations of any transactions. Instead, he uses monthly bank statements. His business lacks an accounting system, but he employs Ms Singh – a retired former secondary school accounting teacher working for him as a part-time accountant. Themba is aware of Ms Singh’s lack of experience as a business accountant, but he feels that all he needs is simple bookkeeping (not professional services) to manage his money. Themba is aware that his cash reserves are depleting fast. He has tried to arrange for a bank overdraft but has been declined by the bank. He is of the opinion that if the inventory is moving, there should be no worry about the worsening cash situation in his business. However, his creditors are now threatening to repossess the inventory supplied, while the workers have not been paid for two consecutive months. Required: (i) Describe the concept of ‘cash is king’ to illustrate to Themba the importance of cash. (ii) Using the information provided, explain methods Themba could use to improve his cash situation. (iii) Explain how a business may be profi table yet go bankrupt.

7.5 UNDERSTANDING A STATEMENT OF CASH FLOWS Having discussed the importance of cash, we now turn our focus to a statement of cash fl ows. As the name suggests, it is a summary of all cash infl ows and outfl ows from a business ( IASPlus, n.d.). The cash infl ows and outfl ows arise from the normal operating activities of the business, 234 CHAPTER 7 as well as the financing and investing activities of a business. Accordingly, a statement of cash flows comprises three components, namely cash flow from operating activities, cash flow from investing activities and cash flow from financing activities ( IASPlus, n.d.). Each will be discussed in detail as follows. Cash flow from operating activities As the name suggests, cash flows from operating activities comprise cash inflows and outflows arising from the ordinary or day-to-day activities of a business ( IASPlus, n.d.). The cash inflows that arise from operating activities include: • cash receipts from sales; • cash receipts from customers; • interest received; and • commission received. The cash outflows that arise from operating activities include: • cash paid to suppliers of inventory or services; • cash paid to employees; • cash paid on behalf of employees;

• interest paid; and • taxation paid. Cash flow from investing activities Cash flows from investing activities are cash inflows and outflows arising from either an acquisition or disposal of a non-current asset or investment ( IASPlus, n.d.). These are not part of the ordinary operating transactions of a business. The cash inflows that arise from investing activities include: • proceeds of disposal of property, plant and equipment; and • dividends received. By contrast, cash outflows from investing activities include: • payments for acquisition of property, plant and equipment; and • payments for mergers and acquisition of other companies. Cash flow from financing activities Cash flows from financing activities include cash inflows and outflows arising from raising capital ( IASPlus, n.d.). The cash inflows that arise from financing activities include: • cash received from investors; 235 CASH IS KING • debt capital received from lenders; and • amounts received from issuing shares to shareholders. The cash outfl ows that arise from fi nancing activities include:

• repayment of company debt (principal amount); • payment of dividends; and • repurchase of a company’s own shares from shareholders. The preparation of a statement of cash fl ows is prescribed by the International Accounting Standard (IAS) 7, which provides a guideline on how exactly to prepare the statement. According to the standard, it can be prepared using a direct or an indirect approach ( IASPlus, n.d.). The diff erence between the two approaches lies in how the cash from the operating activities is calculated and presented. Cash fl ows from operating activities Cash receipts from customers XX Cash paid to suppliers and employees (XX) Cash generated from operations XX Interest paid (XX) Income taxes paid (XX) Net cash fl ows from operating activities XX Cash fl ows from investing activities

Proceeds from the sale of property plant and equipment xx Dividends received xx Purchase of property plant and equipment (xx) Net cash fl ows from investing activities XX Cash fl ows from (used in) fi nancing activities Cash received from issue of shares or raising debt XX Repayment of debt or repurchase of shares (XX) Dividends paid (XX) Net cash fl ows used in fi nancing activities (XX) Net increase (decrease) in cash and cash equivalents XX (XX) Cash and cash equivalents, beginning of year XX (XX)

Cash and cash equivalents, end of year XX (XX) (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from IAPlus, n.d.) Table 7.1: Direct approach to a statement of cash flows 236 CHAPTER 7 According to the direct approach shown here, the cash from the operating activities is calculated and presented by subtracting the cash paid to suppliers and employees from the cash received from customers. Subsequently, the interest paid and dividends paid are subtracted to arrive at net cash flows from operating activities. The cash flows from investing and financing are calculated in exactly the same way as done in the indirect approach that follows. Cash flows from operating activities Net profit before tax XX Add back depreciation/amortisation XX Add back provision for loss on accounts receivable XX Add loss on disposal of property plant and equipment XX Less gain on disposal of property plant and equipment (XX) Add increase in payables

XX Less decrease in payables (XX) Add decrease in receivables XX Less increase in receivables (XX) Add decrease in inventories XX Less increase in inventories (XX) Interest paid (XX) Income taxes paid (xx) Net cash flows from operating activities XX Cash flows from investing activities Proceeds from the sale of property, plant and equipment XX Dividends received

XX Purchase of property, plant and equipment (XX) Net cash flows from investing activities XX Cash flows from (used in) financing activities Cash received from issue of shares or raising debt XX Repayment of debt or repurchase of shares (XX) Dividends paid (XX) Net cash flows used in financing activities (XX) Net increase (decrease) in cash and cash equivalents XX (XX) Cash and cash equivalents, beginning of year XX (XX) Cash and cash equivalents, end of year XX (XX)

(Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from IAPlus, n.d.) Table 7.2: Indirect approach to a statement of cash flows 237 CASH IS KING As can be seen in the second table, according to the indirect approach, the operating activities section always begins with the net income, which is then adjusted to eliminate any non-cash items such as depreciation and amortisation, gain or loss on disposal of nonassets. The net income is then adjusted with the increases or decreases in current assets, other than cash, and increases or decreases in current liabilities. Increases in current assets other than cash are deemed to result in outfl ow of cash and are thus subtracted, while decreases in current assets are deemed to result in cash infl ow and are thus added to the net income. The logic behind this is that increases in current assets such as inventories result in cash outfl ow, as they have to be paid for at some point, while decreases result in cash infl ows as the buyers have to pay for the inventories at some point. By contrast, increases in current liabilities are deemed to result in cash infl ows and are thus added, while decreases in current liabilities are deemed to result in cash outfl ows. The logic here is that an increase in liabilities such as creditors avails more funds, while a reduction suggests a cash outfl ow in terms of payment to creditors. After all these adjustments are made, the net operating cash fl ow obtained under the indirect method should equal that which was arrived at using the direct approach. As already mentioned, the cash fl ow from investing and fi nancing activities remains the same regardless of whether the indirect or the direct approach is used. Comparing the previous two tables, it is clear that the calculation of cash from operating activities using the direct approach is straightforward and provides the readers of the statement with clear information on where the operating cash fl ow is coming from and where it is going. The indirect approach does not indicate these fl ows of cash in this way, and this is the reason accounting professional bodies such as the International Accounting Standards Board (IASB)

and the Financial Accounting Standards Board recommend using the direct approach. However, the indirect method is advantageous as it reconciles a company’s net profi t before tax to its net cash fl ows from operating activities. It thus enables a reader to see how the profi ts have converted into cash. Regardless of the approach used, the cash and cash equivalents balance at the beginning of the period are reconciled to the cash and cash equivalents at the end of the period by adding (or subtracting) the cash infl ow of the period to the opening balance. This information is provided in the last three lines of the tables. 238 CHAPTER 7 (Determining net cash fl ows of operating activities using direct and EXAMPLE 7 B indirect approaches of preparing statements of cash fl ows) PK Limited has prepared the following extracts of statement of comprehensive income (income statement) and statement of fi nancial position (balance sheet) for 20.8. Extract of statement of comprehensive income for the year ended 31 December 20.8 Rands Operating profi t 160 000 Investment income 24 000 Finance costs

(20 000) Profi t before tax 164 000 Tax (64 000) Profi t for the year 100 000 Other comprehensive income: Revaluation gain 80 000 Total comprehensive income 180 000 Extract of statement of fi nancial position as at 31 December 20.8 Rands Rands Balance as at Balance as at 31 December 20.8 31 December 20.7 Current assets

Inventories 60 000 50 000 Receivables 40 000 52 000 Current liabilities Trade payables 28 000 22 000 239 CASH IS KING Additional information In the year 20.8, amortisation amounted to R 80 000, while depreciation amounted to R 100 000. The cash receipts from customers from both cash sales and credit sales amounted to R 1 600 000, while payments to suppliers amounted to R 800 000. Payment to and on behalf of employees amounted to R 252 000. Additional operating cash payments were R 200 000. Taxation paid amounted to R 26 000, while the interest paid amounted to R 24 000. Imagine that you are required to do the following. (i)

Prepare the operating activities section of the statement of cash fl ows of PK Limited using the direct approach for the year ended 31 December 20.8. (ii) Prepare the operating activities section of the statement of cash fl ows of PK Limited using the indirect approach for the year ended 31 December 20.8. (iii) Comment on the net cash fl ow from operating activities found using both approaches. The solutions are presented as follows. (i) Operating activities section of the statement of cash fl ows of PK Limited for the year ended 31 December 20.8 (using the direct approach) Cash fl ows from operating activities Rands Rands Cash receipts from customers 1 600 000 Cash paid to suppliers (800 000) Cash paid to and on behalf of employees (252 000)

Additional operating cash payments (200 000) Cash generated from operations 348 000 Interest paid (24 000) Income taxes paid (26 000) Net cash fl ows from operating activities 298 000 240 CHAPTER 7 (ii) Operating activities section of the statement of cash fl ows of PK Limited for the year ended 31 December 20.8 (using the indirect approach) Cash fl ows from operating activities Rands Rands Net profi t before tax 164 000

Add fi nance costs 20 000 Less investment income (24 000) Add back depreciation 100 000 Add back amortisation 80 000 Add increase in payables 6 000 Add decrease in receivables 12 000 Less increase in inventories (10 000) Cash generated 348 000 Less interest paid (24 000) Less taxation paid (26 000)

Net cash fl ows from operating activities 298 000 (iii) The net cash fl ows from operating activities are equal at R 298 000, as should be the case. (Preparing statement of cash fl ows using direct and indirect approaches) EXAMPLE 7 C Imagine that you are provided with the following information of cash receipts and payments of TT Ltd. TT Ltd Cash receipts and payments for the year ended 31 December 20.5 Cash receipts Rands Balance at the beginning on 1 January 20.5 100 000 Issue of shares 600 000 Receipts from cash and credit customers 5 600 000 Disposal of property, plant and equipment 200 000 241

CASH IS KING Cash payments Rands Payment to suppliers 4 000 000 Acquisition of property, plant and equipment 400 000 Other operating expenses 400 000 Salaries 200 000 Tax paid 200 000 Dividends paid 100 000 Loan repayment 600 000 You are then asked to do the following. (i) Calculate the cash balance as at 31 December 20.5.

(ii) Prepare a statement of cash fl ows for TT Ltd for the year ended 31 December 20.5, using the direct approach. The solutions are presented as follows. (i) Calculation of the closing cash balance as at 31 December 20.5. Cash receipts Rands Balance at the beginning on 1 January 20.5 100 000 Issue of shares 600 000 Receipts from cash and credit customers 5 600 000 Disposal of property, plant and equipment 200 000 Opening cash balance + total cash receipts 6 500 000 Less total cash payments (6 000 000) Payment to suppliers

4 000 000 Acquisition of property, plant and equipment 400 000 Other operating expenses 400 000 242 CHAPTER 7 Salaries 200 000 Tax paid 200 000 Dividends paid 200 000 Loan repayment 600 000 Closing cash balance as at 31 December 20.5 500 000 (ii) Statement of cash flows for TT Ltd for the year ended 31 December 20.5 (using the direct approach) Cash flows from operating activities

Rands Rands Receipts from cash and credit customers 5 600 000 Payment to suppliers (4 000 000) Salaries (200 000) Other operating expenses (400 000) Cash generated from operations 1 000 000 Income taxes paid (200 000) Net cash flows from operating activities 800 000 Cash flows from investing activities Disposal of property plant and equipment 200 000 Acquisition of property plant and equipment

(400 000) Net cash flows from investing activities (200 000) Cash flows from (used in) financing activities Cash received from issue of shares 600 000 Loan repayment (600 000) Dividends paid (200 000) Net cash flows used in financing activities (200 000) Net increase (decrease) in cash and cash equivalents 400 000 Cash and cash equivalents, beginning of year 100 000 Cash and cash equivalents, end of year 0 In addition, you are asked to do the following. (iii)

From the following information of DMX Ltd, use the indirect approach to prepare a statement of cash flows of the company. 243 CASH IS KING DMX Ltd Statement of comprehensive income for the year ended 31 December 20.7 Rands Rands Sales 1 800 000 Cost of goods sold (786 000) Gross profi t 1 014 000 Operating expenses excluding depreciation 522 000 Depreciation 30 000 Loss on disposal of equipment 6 000

(558 000) Net income before tax 456 000 Income tax expense (178 000) Net income after tax 278 000 DMX Ltd Statement of fi nancial position as at 31 December 20.7 Rands Rands 20.7 20.6 Assets Land 260 000 0 Building (cost R 320 000 less accumulated depreciation R 22 000) 298 000 0

Equipment (cost R 54 000 less accumulated depreciation R 6000) 48 000 20 000 Inventory 150 000 50 000 Accounts receivable 40 000 60 000 Cash 120 000 68 000 Total 916 000 198 000 Liabilities Equity shares 120 000 120 000 Retained earnings 288 000

40 000 Bond payable 260 000 0 Accrued expenses payable 18 000 8 000 Accounts payable 230 000 30 000 Total 916 000 198 000 244 CHAPTER 7 Additional information: • DMX Ltd declared and paid R 30 000 dividend in cash. • DMX Ltd acquired land by issuing R 260 000 long-term bond. • A building and equipment were acquired for R 320 000 and R 50 000 in cash, respectively.

• DMX Ltd disposed of equipment with a book value of R 14 000 (cost was R 16 000, accumulated depreciation is R 2 000) for R 8 000 cash. The solution is presented as follows. (iii) Statement of cash flows for DMX Ltd for the year ended 31 December 20.7 (using the indirect approach) Cash flows from operating activities Rands Rands Net income after tax 278 000 Adjustments to reconcile net income to net cash: Add depreciation 30 000 Add loss on disposal of Equipment 6 000 Add decrease in accounts receivable 20 000 Add increase in accounts payable 200 000 Add increase in accrued expenses payable

10 000 Less increase in inventory (100 000) 166 000 Net cash flows from operating activities 444 000 Cash flows from investing activities Acquisition of a building (320 000) Acquisition of equipment (50 000) Disposal of equipment 8 000 Net cash flows from investing activities (362 000) Cash flows from (used in) financing activities Dividends paid (30 000) Net cash flows used in financing activities (30 000)

Net increase (decrease) in cash and cash equivalents 52 000 Cash and cash equivalents, beginning of year 68 000 Cash and cash equivalents, end of year 120 000 245 CASH IS KING Importance of a statement of cash fl ows With these examples of indirect and direct approaches to statements of cash fl ows in mind, we can look at the various reasons why it is important. Firstly, a statement of cash fl ows allows users of a company’s fi nancial reports to examine its cash position, enabling them to determine whether it is in a position to pay expenses, taxes, creditors and lenders. It is thus an important statement for creditors and lenders to assess whether or not a company is creditworthy, and is often used when deciding whether or not to extend credit to a company or advance money. In other words, it presents information about the business situation that can be measured, quantifi ed, and compared regarding an aspect of the business that is seen by everyone as valuable (Periu, 2016; and Centage, 2012: 2). Secondly, a statement of cash fl ows enables a company to know where its cash has come from and where it was spent. Unlike individuals, a company cannot second-guess where its cash has come from and where it has gone. It has to know its exact sources of cash and how that cash has been used, so it can make better decisions on how to manage cash fl ow. It is worth noting that the businesses that thrive in the long term rely more on operating cash fl ows than on cash from investing and fi nancing activities, as the cash

fl ows from these should remain consistent and conservative (Keythman, n.d.). Therefore, the viability of a business can be gauged by whether it relies on operating activities to obtain cash or whether it depends on investing or fi nancing activities. For example, a business that relies on borrowings as its main source of cash surely cannot be viable in the long term, as it will eventually have to pay these liabilities off . Thirdly, as suggested, a statement of cash fl ows provides an indication of the health of a business. More specifi cally, a healthy business is one that generates positive cash fl ows, particularly from operating activities, while an unhealthy one generates negative cash fl ows from operating activities (Keythman, n.d.). Since a statement of cash fl ows indicates whether or not a business generates positive cash fl ow from the operating activities, as well as investing and fi nancing activities, it serves as a source of information that indicates the health of a business. Fourthly, a statement of cash fl ows can inform the decisions to be undertaken by a business. For instance, if it reveals a dramatic increase in cash from operating activities, then the extra cash may be invested in short-term investments or in the expansion of the business ( ConnectAmericas, n.d.). By contrast, if the statement of cash fl ows reveals inadequate cash arising from operating activities, then the business can opt to borrow funds to cater for the shortage in cash or to dispose of some non-current assets ( ConnectAmericas, n.d.). Fifthly, for small businesses that are unable to borrow cash at short notice, or for all businesses operating in a recession when banks are reluctant to lend money, a statement of cash fl ows is important as it can reveal whether or not a business is able to survive on its operating activities ( Centage, 2012: 2). A business with a positive operating net cash infl ow will not only be able to survive, but it will also enjoy some level of fl exibility which enables it to take advantage of a window of opportunity. However, it may only do so if it can

determine its cash from the operating activities as provided by a statement of cash fl ows. 246 CHAPTER 7 7.6 MANAGING CASH FLOW A business needs to manage its cash flow effectively to ensure that it has adequate funds to pay creditors and employees, as well as to meet other obligations as they fall due. Failure to do so may lead to a business being declared insolvent, and subsequently being shut down. So how can you manage the cash flow of your business effectively? Let’s discuss some of the various measures that a business can undertake. Monitoring the cash flow of your business regularly Because cash flow is so important, a key aspect of managing it is knowing fully what the cash balance is now, and to always consider how it could change in the near future (Campbell, 2004: 16–17). This involves regular monitoring of your books and cash transactions. This is now very simple, given the advancement of technology, particularly with regard to online banking and cell phone banking. You are able to monitor any deposits and withdrawals from your business’s bank account as frequently as you wish, at any time and from anywhere. In fact, for every transaction that goes through your account, you can receive an SMS update. Therefore, one of the ways to manage your cash flow effectively is by using your online and cell phone banking to keep track of any movement in your business’s bank account. You can also use software to easily reconcile the accounts for your business regularly (Lesonsky, 2014). Cutting the costs of your business One of the biggest problems facing businesses is the constantly rising costs that jeopardise their viability. For a business to survive, it has to be able to cut costs. This means that all non-essential

expenditure has to be avoided. Fruitless activities and payments also have to be eliminated (Lesonsky, 2014). One of the key costs that all businesses grapple with is salaries. To cut costs on this item, it is important that the business only retains the services of the employees that are required. The business may also opt to outsource some activities to reduce salary and other related costs. Disposing unwanted assets When your business no longer requires an asset, there is no use in keeping it and incurring unnecessary maintenance and insurance costs. You are better off disposing of unneeded assets when they still have some value to receive some cash flow, instead of clinging on to them long after they are no longer needed ( Profit Books, n.d.). This can result in a rapid inflow of cash (Lesonsky, 2014). In the same vein, you must also avoid buying unneeded assets simply because your business has idle cash or the price is very low, unless you are sure of how you will make money using these assets. Obtaining a credit line before it is needed Business managers should not wait until the business is in a desperate situation to seek a line of credit. You should be proactive and anticipate the need for a credit line before it is required, as 247 CASH IS KING this is a kind of insurance against future cash fl ow issues (Lesonsky, 2014). This will ensure that your business always has access to cash if and when needed, even at short notice. By so doing, your business is not only able to meet its obligations as they fall due, but it is also able to take advantage of investment opportunities that could arise at short notice. Leasing non-current assets instead of buying them outright You should consider leasing depreciating non-current assets such as plant and equipment, vehicles and computers instead of buying them outright. By doing so, you will not only reduce your cash outfl ow and

cash tied up in assets (Lesonsky, 2014), but you will also shield the business from the related risks of ownership and depreciation. Leasing these assets will also free the business from any maintenance and management required, thus you can focus on your core business activity. However, you will need to prepare for the expense of the lease itself (Lesonsky, 2014). Speeding up collections from debtors by off ering discounts and other deals Intense competition in almost all spheres of business compels businesses to sell on credit. This means that the cash of the business gets tied up in receivables, especially if the inventory sold in a credit transaction was paid for up front. Measures should thus be taken to ensure that such receivables are collected promptly. You could achieve this, for instance, by sending prompt invoices and statements to the debtors ( Profit Books, n.d.). More importantly, you could off er discounts to encourage prompt payment and charge interest for delayed payment, as well as strive to make paying as easy as possible for your customers ( Profit Books, n.d.; and Lesonsky, 2014). Additionally, requesting deposits and partial payment for large orders received can improve cash infl ow (Lesonsky, 2014). Likewise, you have to have a clear credit policy and well-defi ned methods of evaluating the creditworthiness of potential customers before advancing credit to them. Eff ective management of working capital Management of working capital refers to the management of current assets and current liabilities. Eff ective management of working capital can result in positive cash infl ow which will ensure the solvency and liquidity of a business. This entails paying creditors only after collecting payment from debtors. A business should delay payment to creditors to exploit the credit facility to the fullest, while at the same time ensuring that prompt payment is made to take advantage of any discounts provided ( Profit

Books, n.d.). Additionally, companies can use modern technology to provide multiple electronic platforms for payment by customers; for example, by enabling your customers to swipe their debit or credit card. This will aid in the collection of monies from customers. Other ways of managing working capital include the following (adapted from Profit Books, n.d.): • Banking cash received promptly • Separating personal and business bank accounts for small businesses • Investing surplus cash in short-term investments • Anticipating and planning for a shortage of cash (e.g. by borrowing) • Reducing inventory and the amounts tied therein 248 CHAPTER 7 These means of managing cash are not exhaustive. Preparing a cash budget A cash budget is a projection or estimation, using sales and production forecasts, of future cash inflows and outflows over a defined time period ( Investopedia 3, n.d.). Preparing a cash budget for your business is important for various reasons: • A cash budget enables you to assess whether your business will have adequate cash to operate. • It can enable your business to determine the credit that it can extend to debtors without facing liquidity problems. • It can aid in avoiding cash shortages, particularly during periods of rising expenses. This is because a cash budget enables you to

anticipate cash shortages, and make alternative plans to cater for them. • It can help you ensure that cash is managed effectively by enabling you to anticipate a cash surplus, which you can then invest in shortterm investments. • It can enable you to control your business’s cash expenditure by comparing actual expenses to the budgeted expenses and taking corrective action where the actual expenses either exceed or fall below the budgeted amount. • It can be used to demonstrate to potential investors, lenders and suppliers your business’s forecasted cash inflows and outflows, which enables them to assess your anticipated liquidity position. Managing liquidity ratios One way to manage cash is by monitoring liquidity ratios, which indicate the ability of your business to meet its short-term debts if they were to fall due (Folger, 2018). Two ratios are typically used, namely current ratio and acid-test ratio. Current ratio is the ratio of current assets (assets that will be converted into cash in less than 12 months) to current liabilities (obligations that must be settled in less than 12 months) (Folger, 2018). The formula for calculating current ratio is as follows: Current assets Current ratio = Current liabilities A current ratio of 2:1 or higher indicates that a business is liquid, and thus should be able to meet its obligations as they fall due. The current ratio has to be compared to the past performance as well as to the industry averages to assess relative liquidity of a business. An acid-test ratio, on the other hand, is the ratio of current assets excluding inventory (current assets minus inventory) to current liabilities (Folger, 2018). This ratio considers the notion that inventory sometimes takes long to sell, and thus may not be that liquid. The formula for calculating acid-test ratio is as follows:

249 CASH IS KING Current assets – inventory Acid-test ratio = Current liabilities An acid-test ratio of 1:1 or higher indicates that a business is liquid, and thus should be able to meet its obligations as they fall due. Again, the acid-test ratio has to be compared to past performance as well as to industry averages to assess the relative liquidity of a business. (Calculation of current and acid-test ratios) EXAMPLE 7 D The following trial balance relates to Goodness Traders as at 28 February 20.8, the last day of the fi nancial year of the business. Extract of trial balance of Goodness Traders for the year ended 28 February 20.8 Fol. Debit (R) Credit (R) Balance sheet section Bank B7 10 800 Debtors control

B8 18 700 Trading inventory B10 14 500 Creditors control B12 22 000 Nominal accounts section Sales N1 623 000 Sales returns N2 49 000 Cost of sales N3 249 000 Imagine that you are required to do the following. (i)

Using the information in the extract, calculate the current ratio of the business and explain what your answer implies about the liquidity of the business. (ii) Using the information in the extract, calculate the acid-test ratio of the business and explain what your answer implies about the liquidity of the business. The solutions are presented as follows. (i) Current ratio = Current assets Current liabilities = R 10 800 + R 18 700 + R 15 500 R 22 000 = R 45 000 R 22 000 = 2.05:1 250 CHAPTER 7 Generally, a ratio of 2:1 is a good indication of the ability of the business to meet its current obligations using its current assets. This can vary from industry to industry; however, in this case, and given the limited information on the business, this ratio of 2.05:1 indicates that the business is in a good liquidity position and will be able to meet current obligations as they become due.

(ii) Acid-test ratio = Current assets – inventory Current liabilities = (R 10 800 + R 18 700 + R 15 500) – R 15 500 R 22 000 = R 29 500 R 22 000 = 1.34:1 This acid-test ratio indicates that the business is liquid and thus will be able to meets it current obligations as they fall due. Shortening the cash conversion cycle A cash conversion cycle refers to how long it takes for a business to convert cash into inventory by purchasing material, to sales and receivables, and then back to cash (Reider and Heyler, 2003: 15). In other words, how quickly can a business that spends its cash today receive it back? A simplified view of this process is illustrated in the following figure. Effective cash management comes from getting cash back faster. Therefore, if you are to increase the effectiveness of your business in managing cash, you have to shorten the cash conversion cycle (Reider and Heyler, 2003: 15). Cash Purchasing tions Collec

Accounts Purchased receivable material ing Sales tur Inventory Manufac over as long a period as possible over as short a period as possible (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Reider and Heyler, 2003: 15) Figure 7.1: Cash conversion cycle 251 CASH IS KING If your business is a manufacturing concern, the cash conversion cycle could be longer because such a business will typically purchase raw materials on credit. It then converts them into work-in-progress and then into fi nished products. The fi nished products are then sold, typically on credit, and the business later collects payments from these debtors. The cycle is then repeated over and over again. Each of these stages may take days, if not months. It is the role of an eff ective manager to try to shorten the period taken (as shown in the diagram) as this ensures that cash is always available to meet obligations as they fall due and to take advantage of any business

opportunities that could arise at short notice (Reider and Heyler, 2003: 15). How can a business shorten a cash conversion cycle? Assuming that the business in question is a manufacturing business, such a business may shorten its cash conversion cycle by adopting a ‘just-in-time’ approach when purchasing raw materials (Hunt, n.d.). This approach ensures that the material is bought just before production commences to avoid tying up cash in inventory, holding it for long periods and incurring related storage costs (Hunt, n.d.). Such purchases should always be on credit. As shown in the following table, this credit period should stretch to its full extent before the business pays it off . This ensures that the business does not use its own fi nancing; rather, it relies on the creditor’s fi nancing when purchasing raw materials (Erhardt and Brigham, 2009: 550). A business can also shorten its cash conversion cycle by using eff ective and effi cient production techniques which limit the time period that work is in progress. As far as the fi nished inventory holding period is concerned, the cash conversion cycle can also be reduced by using a just-in-time system. Upon completion, the inventory should be immediately shipped to customers to once again avoid related inventory storage costs. Where the customers buy the inventory on credit, the cash conversion cycle can be reduced by off ering cash discounts to encourage prompt payment, as discussed previously. A cash conversion cycle can be calculated using the format provided in the following table. Average time of holding raw material in inventory XX Less the time period it takes to pay creditors (creditors payment period) (XX) Add work-in-progress holding period (time it takes to manufacture the inventory) XX

Add fi nished goods holding period (time fi nished goods remain in inventory) XX Add time it takes to collect payment from the debtors (receivables collection period) XX Cash conversion cycle XX (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Erhardt and Brigham, 2009: 550) Table 7.3: Calculating a cash conversion cycle 252 CHAPTER 7 7.7 WHERE IS MY CASH? We have seen how important cash flow is to a business. Let’s now consider whether cash is king at the individual level as well. As with a business, people can also manage their personal cash so that they are not left wondering where their cash is. Often as individuals we do not give a second thought when we spend cash. At the end of the month when we look at our bank accounts, we discover that we have drained them. Can approaches similar to those discussed previously be used for managing personal cash flow? Let’s consider how you can manage personal cash flow. Perhaps you could start by preparing a cash budget of all your projected cash receipts and cash payments. You can then proceed to compare your actual cash receipts and expenditures against the amounts in the cash budgets, and take corrective action in case of any deviations. To manage your cash effectively, you should monitor any movements in your bank account regularly. Just as with a business, this can be done at any time via online banking and cell phone banking. Receiving notifications for any transactions not only updates you on the balance remaining in your account, but it also alerts you in case

of any fraudulent activities that may take place to deprive you of your hard-earned cash. Like a business, individuals must also cut their personal costs by avoiding unnecessary expenditure and avoiding impulse buying. When making a purchase, it is important to consider whether it is to fulfil a want or a need. Additionally, you should dispose of any unwanted assets to generate some cash; for example, selling possessions second-hand through a garage sale. There are websites that allow you to advertise for free, thereby enabling you to reach many potential buyers. Furthermore, you should adopt good saving habits to ensure that you can survive during the times of unexpected challenges. You should maintain a good credit record to ensure that you can access credit when needed. Such credit, however, should not be used for consumption activities or to pay for another prior credit. You may also manage your cash effectively by leasing instead of buying depreciating assets. Additionally, you should avoid lending money to people if you are unfamiliar with their financial circumstances. This is to avoid consequences if they default, as this cannot only ruin your financial status, but also your personal relationships. You should also try to take advantage of discounts, and avoid penalty payments that arise as a result of extended delay in payment. As an individual, you are better off buying your personal items and groceries cash, as buying on credit may often cost significantly more than the cash price. From this, it is clear that managing personal cash flows follows a very similar pattern to managing the cash flow situation of a business. This shows the importance of cash in our personal lives, especially as entrepreneurs. Consider the case study in the Life lesson section again to see how cash flow in a business and in your personal life is important. 253

CASH IS KING ACTIVITY 7C (i) You are provided with the following information of cash receipts and cash payments of PK Ltd for the year ended 28 February 20.7. PK Ltd Cash receipts and payments for the year ended 28 February 20.7. Cash receipts Rands Balance at the beginning on 1 March 20.6 200 000 Issue of shares 1 200 000 Receipts from cash and credit customers 11 200 000 Disposal of property, plant and equipment 400 000 Cash payments Rands Payment to suppliers 8 000 000

Acquisition of property, plant and equipment 800 000 Other operating expenses 800 000 Salaries 400 000 Tax paid 400 000 Dividends paid 200 000 Loan repayment 1 200 000 Required: a. Calculate the cash balance of PK Ltd as at 28 February 20.7. b. Prepare a statement of cash fl ows for PK Ltd for the year ended 28 February 20.7, using the direct approach 254 CHAPTER 7 (ii)

From the following information of DD Ltd, use the indirect approach to prepare a complete statement of cash flows of the company. DD Ltd Cash receipts and payments for the year ended 28 February 20.7 Rands Rands Sales 3 600 000 Cost of goods sold (1 572 000) Gross profit 2 028 000 Operating expenses excluding depreciation 1 044 000 Depreciation 60 000 Loss on disposal of equipment 12 000 (1 116 000) Net income before tax 912 000 Income tax expense

(356 000) Net income after tax 556 000 DD Ltd Statement of financial position as at 31 December 20.7 Rands Rands 20.7 20.6 Assets Land 520 000 0 Building (cost R 640 000 less accumulated 596 000 0 depreciation R 44 000) Equipment (cost R 108 000 less accumulated 96 000 40 000

depreciation R 12000) Inventory 300 000 100 000 Accounts receivable 80 000 120 000 Cash 240 000 136 000 Total 1 832 000 396 000 Equity and liabilities Equity shares 240 000 240 000 Retained earnings 576 000 80 000

Bond payable 520 000 0 Accrued expenses payable 36 000 16 000 Accounts payable 460 000 60 000 Total 1 832 000 396 000 255 CASH IS KING Additional information: • DD Ltd declared and paid R 60 000 dividend in cash. • DD Ltd acquired land by issuing R 520 000 long-term bond. • A building and equipment were acquired for R 640 000 and R 100 000 in cash, respectively. • DD Ltd disposed of equipment with a book value of R 28 000 (cost was R 32 000, accumulated depreciation is R 4000) for R 16 000 cash.

(iii) Sibodo Limited has been experiencing an acute shortage of cash in recent months. The chief accountant of the company has provided the following information to you as a consultant to advise the company on how to improve its fi nancial situation. List four methods that could be used to reduce the cash conversion cycle of Sibodo Limited. Sibodo Limited cash conversion cycle. Average time of holding raw material in inventory 55 Less the time period it takes to pay creditors (creditors payment (30) period) Add work in progress holding period (time it takes to manufacture 25 the inventory) Add fi nished goods holding period (time fi nished goods remain in 35 inventory) Add time it takes to collect payment from the debtors (receivables 60 collection period) Cash conversion cycle 145 (iv)

ASR Limited provides you with the following statements of fi nancial position for the years 20.2 and 20.1. ASR Limited Statement of fi nancial position for the years ended 20.2 and 20.1 Rands Rands 20.2 20.1 Assets Land 1 120 000 600 000 Property, plant and equipment 4 000 000 3 800 000 Accumulated depreciation on property, plant and (1 600 000) (1 540 000) equipment Long-term investments 100 000 50 000 256

CHAPTER 7 Inventory 600 000 640 000 Accounts receivable 820 000 920 000 Prepaid expenses 40 000 30 000 Cash 60 000 100 000 Total 5 140 000 4 600 000 Equity and liabilities Preference shares 1 420 000 1 100 000

Ordinary shares 400 000 320 000 Retained earnings 1 340 000 1 240 000 Bonds payable 1 000 000 1 600 000 Long-term note payable 300 000 0 Accrued expenses payable 80 000 100 000 Accounts payable 600 000 240 000 Total 5 140 000

4 600 000 Additional information: • Net income for the year ended 31 December 20.2 was R 220 000 • Depreciation on property, plant and equipment R 120 000 • Disposal of equipment costing R 100 000 and accumulated depreciation of R 60 000 for cash amounting R 34 000 • Dividend declared and paid in cash R 120 000 • Issued long-term note payable for R 300 000 • Acquired investments for R 50 000 cash • Repaid R 600 000 on bonds payable • Issued ordinary shares valued at R 400 000 • Acquired land for R 520 000 Required: Prepare a statement of cash flows for ASR Limited for the year ended 31 December 20.2, using the indirect approach. 257 CASH IS KING 7.8 SUMMARY Cash is one of the most important assets a business has, as even a business with good revenues or profi ts may fail with poor cash management. It is used to pay operating expenses and short-term liabilities, and therefore good cash fl ows are required for the business to operate short-term. This is why the phrase ‘cash is king’ is so frequently used.

Cash fl ow management requires an awareness of cash infl ow, which is money coming into the business, and cash outfl ow, which is money spent by the business. This information can be used to compile a statement of cash fl ows, which lists cash infl ows and outfl ows in three areas: operations, investing and fi nancing. There are two methods for doing so, the direct and indirect methods. Most accounting professional bodies favour the direct method. From the statement of cash fl ows, it is clear that businesses must manage their cash fl ow carefully, to ensure this useful measure provides a positive view of the business. This can be done in a number of ways, such as cutting costs down, ensuring prompt collections from debtors, selling unneeded assets, leasing assets where suitable, and taking good advantage of credit periods. Furthermore, drawing up a cash budget is vital to good cash fl ow management and provides useful information for planning. Doing these activities will improve the cash conversion cycle, and ensure that the business remains liquid. 258 CHAPTER 8 IT IS IN THE NUMBERS 8 8.1 Introduction 260 8.2 Life lesson 260 8.3 Role of accounting and finance for an entrepreneur 261

8.4 Financial accounts vs. management accounts 263 8.5 Key accounting terms for an entrepreneur 263 8.5.1 | Assets and liabilities 264 8.5.2 | Profit and loss: gross and net 265 8.5.3 | Revenue 265 8.5.4 | Cost: fixed, variable, capital and operating 265 8.5.5 | Debtors 266 8.5.6 | Creditors 266 8.5.7 | Margins and markups 266 8.6 Working with an accountant or bookkeeper 271 8.6.1 | Why work with an accountant? 272

8.6.2 | Selecting an accountant 274 8.6.3 | Key questions to ask your accountant 276 8.7 Basics of a statement of profit or loss and other comprehensive income 278 8.8 Basics of a statement of financial position 280 8.9 Do you know your numbers? 285 8.10 Summary 287 259 IT IS IN THE NUMBERS Case studies – myths, It is in leaders and the numbers Online inspiration start-ups

Boring but Growing the Making important business it run stuff smoothly Building a team Cash is king Developing Selling products Spreading and the word Getting out of Forming a services What is the starting business entrepreblocks neurship? 8.1 INTRODUCTION

In this chapter, we will explain the role of accounting and fi nance for an entrepreneur, diff erentiate between fi nancial accounts and management accounts, and explain key accounting terms. We will also discuss the importance of working with a bookkeeper or accountant, outline the process of selecting an accountant for your business, and identify the key questions you need to ask your accountant. Finally, we will look at the basics of a statement of profi t or loss and other comprehensive income, as well as for a statement of fi nancial position. We will provide examples and activities to reinforce your understanding throughout the chapter. After studying this chapter, you should be able to: • describe the role of accounting and fi nance for an entrepreneur; • diff erentiate between fi nancial accounts and management accounts; • explain key accounting terms; • discuss the importance of working with a bookkeeper or accountant; • outline the process of selecting an accountant for your business; • identify the key questions you need to ask your accountant; • describe the basics of a statement of profi t or loss and other comprehensive income; and • describe the basics of a statement of fi nancial position. 8.2 LIFE LESSON In 2014, Facebook acquired WhatsApp for $ 19 billion – equivalent to R 207 billion at the time (Constine, 2015). One question you may be asking yourself is how Facebook settled on such a high purchase price. Another is how it could justify spending such a large sum. The

answers to these questions lie in the numbers. Facebook would have reviewed WhatsApp’s fi nancial statements 260 CHAPTER 8 alongside other documents, and would have decided whether or not WhatsApp was worth the acquisition price. What are the numbers a company considers when deciding how much to pay for a business it plans to buy? These metrics are numerous and diverse, but commonly include: • revenues, expenses, and gross and net profit from the statement of profit or loss and other comprehensive income; • cash flows from the statement of cash flows, especially those operating activities; • assets, liabilities, issued share capital and reserves from the statement of financial position; • projected growth as found in the business plan; • projected revenues and expenses from the financial plans and budgets; • share valuation of the company (if the shares are traded in an open market); • liquidity and solvency of the business; and • number of customers. By understanding these numbers, a company is in a better position to evaluate the performance of a company that it wishes to acquire. This will enable the buyer to decide whether to purchase a company, and to determine the correct purchase price. The accounting numbers may also enable a company to determine what strategy to adopt

when they acquire a business, as well as anticipate and overcome any potential future challenges. While accounting numbers are useful tools in making decisions about acquisitions, you will see in the following sections that this is not their only application. 8.3 ROLE OF ACCOUNTING AND FINANCE FOR AN ENTREPRENEUR What is the role of accounting and finance for an entrepreneur? Accounting and finance play various roles in aiding an entrepreneur to run their business. Accounting and finance provide the numbers that summarise the performance of a business. These numbers are a hard measure that allow an entrepreneur to gauge, at a glance, how well or poorly a business is performing, enabling them to make calculated business decisions. For example, the entrepreneur would take corrective action where business performance deviates from the expectation. Entrepreneurs are often required to provide financial forecasts to investors and lenders. This enables lenders and investors to decide whether or not to lend to or invest in a new venture. Entrepreneurs are usually required to prepare a business plan containing a clear forecast of income and expenditure, generally in the form of pro forma financial statements, as well as other relevant information. An entrepreneur will need either to have accounting and financial knowledge, or to hire an accountant if they do not have such a background. 261 IT IS IN THE NUMBERS

Entrepreneurs need to control expenditure. This is done by using budgets, which enable them to monitor performance, control expenditure and reduce or avoid wastage of scarce resources, and compare actual performance against budgeted performance. If there is a deviation from the budgeted performance, prompt action must be taken to correct the business’s course. Again, entrepreneurs will need either accounting knowledge or an accountant who will help them prepare budgets. Once a business is established, stakeholders such as lenders, creditors, employees and government require a business to furnish fi nancial statements. This enables the stakeholders to make informed decisions pertaining to the business. The government may, for instance, require income statements to assess a business’s tax liability. Likewise, the lenders may need these statements to decide whether to advance money to a business or recall a loan. Employees, particularly those who are members of trade unions, may need fi nancial statements to decide on whether to ask for a raise as well as the percentage increase. It is imperative that an entrepreneur measures the performance of a business and compares this to its goals. Accounting and fi nance are vital for this purpose, as they enable the entrepreneur to quantify business processes and transactions to be achieved. Again, if there are any deviations, corrective measures can be implemented to ensure the business goals are achieved. Accounting and fi nance make up the standard language of business. They help entrepreneurs to translate raw fi nancial data into understandable and useful information that can be communicated to stakeholders. Given that accounting and fi nance enable an entrepreneur to provide standardised fi nancial information, they facilitate comparison of performance of an entrepreneur’s business to others. Such a comparison can help an entrepreneur to gauge performance against competitors, with a view to improve the performance.

Accounting and fi nance information is useful in enabling an entrepreneur to make informed business decisions that would otherwise be made without any information. For instance, an entrepreneur could use accounting information to conduct an investment appraisal to determine whether or not to invest, or to choose between two competing investment opportunities. ACTIVITY 8A (i) Outline four roles accounting plays in ensuring eff ective management of a business by an entrepreneur. (ii) Consider the information in the previous life lesson. Then, briefl y explain how accounting data can inform an entrepreneur’s decision about whether or not to buy (acquire) a business. List at least four fi nancial metrics (numbers) that might be considered. (iii) Use a paragraph to explain how having proper accounting r ecords aids an entrepreneur’s business in obtaining fi nance. 262 CHAPTER 8 8.4 FINANCIAL ACCOUNTS VS. MANAGEMENT ACCOUNTS Financial accounts and management accounts are often treated as though they serve the same purpose under the umbrella of accounting. There is, however, a difference between the two sets of accounts. Management accounts provide information for decisionmaking; the intended user of the management accounts is the management team of a business. Financial accounts, on the other hand, provide information for use in decision-making by those outside

the business, such as shareholders, lenders, creditors and other types of investors. The other differences between management accounts and financial accounts are summarised in the following table. Financial accounts Management accounts It is a legal requirement for companies to prepare It is not a legal requirement for companies to financial accounts (statements). prepare management accounts. It is mandatory for financial accounts of listed It is not mandatory for management accounts companies and related financial statements to of listed companies to be audited by an be audited by an independent and registered independent and registered auditor. auditor. Financial accounts contain only historical Management accounts may contain both information. In addition, the financial statements historical and forward-looking information. In and reports emanating from these accounts are addition, the management accounting reports generally required to be prepared annually, for emanating from management accounts can be the preceding 12 months. prepared as frequently as deemed necessary, and may cover any time period. Financial accounts are required to be prepared Management accounts are not required to be according to International Financial Reporting prepared according to any standards and are thus Standards (IFRS) as set by the International not regulated by any professional accounting Accounting Standard Board (IASB). bodies.

Financial accounting produces statements and Management accounting produces reports reports that relate to all business operations. that typically only cover a part of the business operations and may focus on particular products or cost centres. For example, they may analyse profits by products, geographical location, customers and so on. (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 8.1: The difference between financial accounts and management accounts 8.5 KEY ACCOUNTING TERMS FOR AN ENTREPRENEUR The following are some of the key accounting terms every entrepreneur should be familiar with, if they are to master the language of business. 263 IT IS IN THE NUMBERS 8.5.1 Assets and liabilities An asset is defi ned as ‘a resource controlled by the entity as a result of past events and from which future economic benefi ts are expected to fl ow to the entity’ ( International Accounting Standards Board, n.d.: 26). According to the International Accounting Standards Board (n.d.: 33), assets should be recognised in the statement of fi nancial position only when the following two conditions (recognition criteria) are met: 1.

It is probable that any future economic benefi t associated with the item will fl ow to or from the entity. 2. The item has a cost or value that can be measured with reliability. In simple terms, an asset is a resource controlled by the business that is expected to create future economic benefi ts. An asset may be tangible (physical), such as land, property and equipment. It may also be intangible; for example, goodwill, a trademark, brand or patent. Assets are normally recorded in the statement of fi nancial position and are either classifi ed as non-current or current. Non-current assets are held for use in the business for more than one year. Current assets are expected to be converted into cash in less than one year. For a typical business, non-current assets include land, property, equipment and business vehicles – provided these are not the inventory the entity sells in its ordinary course of business. On the other hand, current assets include inventories, receivables, as well as cash in bank accounts and on hand. The International Accounting Standards Board (n.d.: 26) defi nes a liability as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outfl ow from the entity of resources embodying economic benefi ts’. A liability should be recognised in the statement of fi nancial position only when the following two conditions (recognition criteria) are met ( International Accounting Standards Board, n.d.: 33): 1. It is probable that an outfl ow of resources embodying economic benefi ts will result from the settlement of a present obligation; and 2. The amount at which the settlement will take place can be measured reliably.

Simply put, a liability is an amount owed to a third party. As is the case with assets, liabilities are normally recorded in the statement of fi nancial position and classifi ed as either non-current or current. Non-current liabilities are those obligations that are to be settled over a period of more than one year. Current liabilities are expected to be settled within one year. Examples of non-current liabilities include long-term loans and debentures, while current liabilities include trade payables and accrued expenses. 264 CHAPTER 8 8.5.2 Profit and loss: gross and net Profit refers to the excess of revenue over expenses. Profit can be classified as ether gross or net profit. Gross profit is the excess of revenue over the cost of sales. Net profit is the excess of revenue over cost of sales and all other expenses. These two concepts can be calculated as follows: Gross profit = Revenue – cost of sales Net profit = Revenue – (cost of sales + all other expenses) A loss refers to the excess of expenses over revenue. A gross loss arises when the cost of sales exceeds the revenue; however, this is unlikely. A net loss arises when cost of sales and all other expenses combined exceed the revenue. 8.5.3 Revenue Revenues are inflows or other enhancements of future economic benefits or savings in outflows ( International Accounting Standards Board, n.d.: 99). Also known as turnover or sales, these revenues can be in the form of increases in assets or reductions in liabilities of the entity – other than those relating to contributions by owners – that result in an increase in equity during the reporting period ( International Accounting Standards Board, n.d.: 99). In simple terms, revenue refers to selling price multiplied by the number of units sold. It can also be defined as the income earned

from the ordinary activities of a business in a given period of time. Revenue is typically recorded as the first line item in the income statement. Cost of sales is subtracted from this amount to arrive at the gross profit. 8.5.4 Cost: fixed, variable, capital and operating Cost refers to the amount of money or its equivalent required to do, make or buy something. For example, the cost of an asset is the amount required to acquire an asset and get it ready for use. It can be measured in monetary terms or in terms of time, energy and sacrifice made to do, make or buy something. A cost can be classified as fixed or variable, and it can also be classified as a capital or operating cost. A fixed cost refers to a cost that remains constant, regardless of the level of activity. For example, if a company manufactures fridges and pays the same amount of rent regardless of the number of fridges produced, be it 50 or 500, the rent would be a fixed cost. A variable cost refers to a cost that changes depending on the level of activity of a business. For example, a key component of a fridge is a condenser, which changes gas to a liquid. Since every fridge requires its own condenser, the cost of condensers will increase with the number of fridges produced. As a result, the cost of condensers can be regarded as variable. Costs incurred for the ordinary course of business are referred to as operational costs, like salaries paid to employees, rent and business transport costs. In contrast, costs incurred to acquire assets 265 IT IS IN THE NUMBERS for long-term use in the business are referred to as capital costs. Examples include expenditure incurred in acquiring property, plant and equipment for use within the business. 8.5.5 Debtors

Debtors are the entities or individuals that owe a business money as a result of purchases made or services provided on credit. The amounts owed to the business are recorded in the trade receivables account. This account is presented as a current asset in the statement of fi nancial position, as the amounts owing to the business are expected to be received in less than one year. If trade receivables are not settled, they must be written off as a credit loss. To avoid the problem of a credit loss, businesses establish stringent credit policies specifying requirements customers must meet before they qualify for credit. Businesses typically monitor debtors by preparing a schedule for the amounts due as well as the payment period – a process referred to as aging of debtors. A business may encourage its debtors to pay on time by providing cash discounts. 8.5.6 Creditors Creditors are the entities or individuals the business owes money as a result of buying inventory or receiving a service on credit. The amounts owed by the business are recorded in an account called trade payables. This account is presented as a current liability in the statement of fi nancial position, as the amounts owed by the business are expected to be settled in less than one year. If trade payables are not settled, the business risks being forced to pay cash upfront or being provided with unfavourable terms and conditions. A business that prolongs payment also foregoes the cash discounts usually given for prompt payment. 8.5.7 Margins and markups As with profi ts and losses, margins can be classifi ed as either a net or gross profi t margin. A net profi t margin refers to a ratio in which net profi t or net income is expressed as a percentage of net revenue or sales ( Investopedia, n.d.). The following formulae are typically used to calculate the net profi t margin: (Net profi t × 100)

Net profi t margin = (Net sales) Or (Net income × 100) Net profi t margin = (Net revenue) As net profi t margins are expressed as percentages of sales, they measure the amount of each rand of sales a business keeps as earnings. For example, a 30 per cent net profi t margin means that 266 CHAPTER 8 for every rand of sales, 30 cents is retained as earnings in the business. The higher the percentage, the more profi table a business is deemed to be. A gross profi t margin, on the other hand, refers to a ratio in which gross profi t is expressed as a percentage of net sales (Wilkinson, 2013). The following formula is typically used to calculate a gross profi t margin. (Gross profi t × 100) Gross profi t margin = (Net sales) From this, we can calculate that a gross profi t margin of 50 per cent means that for every rand of sales, a gross profi t of 50 cents is made. (Simplifying accounting)

EXAMPLE 8 A Ms Anathi has been running a popular restaurant in Gugulethu, Cape Town, for more than 25 years. The restaurant was established when Ms Anathi started selling barbequed (braaied) meat from her garage. Since then, the restaurant, commonly referred to as Shisa Nyama, has grown in popularity and been endorsed by celebrities and politicians alike. As a result, Shisa Nyama has become a must-visit place for tourists and other international visitors to Cape Town. Despite the overwhelming popularity of Ms Anathi’s restaurant, she does not have any formal education and has never attended any management or accounting course. She does not maintain any accounting records, but rather, relies on her diary, in which she records the total cash collected at the end of the day, and compares it to the expenditure of the day. She does not sell on credit, but rather, buys her inputs on credit from a wholesale butchery. Ms Anathi has ambitions of expanding her premises, as well as launching outlets in other towns and provinces. To fi nd out how she can go about achieving this dream, she attended a seminar. She was advised that she should gain an understanding of the language of business if she is to expand her business and be successful. This sentiment was repeated by three speakers at the seminar. The restaurant owner has been made aware that accounting is the language of business. In addition, she has been introduced to new terms such as assets, liabilities, revenue, fi xed and variable costs, inventories, trade receivables and trade payables, and profi t margin – all of which were explained in a complex manner that she did not understand. 267 IT IS IN THE NUMBERS

Ms Anathi has now approached you, an accounting expert, to explain to her what these terms mean in a simple manner, as well as to advise her on how proper accounting can be benefi cial to her business. Required: (i) Using examples, explain what the terms assets, liabilities, revenue, fi xed and variable costs, trade receivables, trade payables, and profi t margin mean. (ii) Tell Ms Anathi how accounting can be benefi cial to her business. Solution: (i) The following is a list of accounting terms with simplifi ed defi nitions. Asset An asset is a resource of value that is controlled by the business from which future economic benefi ts are expected to fl ow to the entity. In the case of Ms Anathi, these would include the premises from which her restaurant is operating, vehicles used by the business as well as her braai equipment. Given that these items would be expected to be held for use in the business for more than one year, they would be classifi ed as non-current assets. Any stock of meat or cash would be regarded as a current asset as they are held for less than one year. The assets are usually summarised in the statement of fi nancial position at the end of the year. Liability

A liability refers to an amount owed to a third party. In the case of Ms Anathi, the liability would be any amount owed to the wholesale butchery from which she buys her meat on credit. The amount owed to the butchery is likely to be payable in less than one year and can therefore be referred to as a current liability. The liabilities are usually summarised in a statement of fi nancial position at the end of the year. Revenue Revenue is defi ned as the income earned from the ordinary activities of a business of selling products or services to customers in a given period of time. In the case of Ms Anathi, revenue refers to the income earned from selling braaied meat and any other related products, such as drinks, to customers. The total revenue received in a year is usually the fi rst line item in the statement of profi t or loss and other comprehensive income at the end of the year. 268 CHAPTER 8 Fixed and variable costs Fixed cost refers to the cost that remains constant regardless of the level of activity. For instance, if the premises from which Ms Anathi operates have been rented, the rent incurred on a monthly basis would be regarded as a fixed cost as it would not vary with the number of customers served. Variable cost, on the other hand, refers to cost that changes depending on the level of activity. In the context of the case study, the cost of the kilograms of braaied meat will vary according to the quantity that is consumed by the customers, and can be regarded as a variable cost. Trade receivables

Trade receivables are the amounts owed to the business that arise as a result of selling inventory or rendering a service on credit. Trade receivables are current assets, as the amounts owed to the business are expected to be received within one year. Ms Anathi’s business does not sell any of its meat on credit and thus will not have trade receivables. Trade payables Trade payables are amounts that the business owes to third parties as a result of buying inventory or receiving a service on credit. Ms Anathi’s trade payables are any amounts owed to the wholesale butchery from which she buys her meat on credit. The trade payables are recorded as current liabilities in the statement of financial position, as they are expected to be settled in less than one year. (i ) Given Ms Anathi’s ambitions of expanding her premises in size, as well as launching outlets in other towns and provinces, it is imperative that she learns and understands accounting. The following are some of the benefits that she will derive from doing so. Accounting provides the numbers that summarise the performance of the business. As a result, it can enable Ms Anathi to gauge the performance of her business at a glance and determine how well or poorly the business is performing. This way, Ms Anathi can take corrective action where the business performance deviates from the expectation. In addition, she can hire an auditor to verify the accounting figures, which will ensure decisions are based on accurate numbers, improving their effectiveness. Accounting benefits businesses by enabling them to access finance from investors or lenders. Ms Anathi has ambitions of expanding her premises as well as launching outlets in other towns and provinces. It

is likely that she will require external funding from investors and lenders to do this. Investors and lenders require businesses to 269 IT IS IN THE NUMBERS provide a realistic fi nancial forecast to enable them to decide whether or not to invest or lend money to a business. Ms Anathi would therefore be required to prepare a business plan with pro forma fi nancial statements and other relevant information showing a clear forecast of income and expenditure. To furnish investors and lenders with this information, she will need either accounting knowledge or the services of an accountant. One of the biggest problems businesses face as they expand is uncontrolled expenditure. Budgets allow business owners to compare actual and projected performance and ensure that they take prompt corrective action when necessary. By using budgets, Ms Anathi will be able to monitor performance, control expenditure and reduce or avoid wastage of scarce resources. Accounting information will also enable Ms Anathi to furnish fi nancial statements and reports to various stakeholders. Stakeholders such as lenders, creditors, employees and government require fi nancial statements to make decisions pertaining to the business. For example, the government may require a statement of profi t or loss and other comprehensive income to assess the tax that should be levied on a business. Likewise, creditors may need these statements to decide whether to grant credit or not. Employees, particularly the unionised ones, may need fi nancial statements to decide on whether to ask for a raise as well as the percentage increase. If Ms Anathi cannot provide this information, it may aff ect her business; for example, the government has power to revoke her operating license if she does not provide the desired fi nancial statements. Accounting will enable Ms Anathi to quantify her business processes and transactions, which can then be translated to goals to be achieved. This will enable her to measure and compare her business’s actual performance against the set goals, putting her in a

position to make corrective decisions to ensure that the business goals are achieved. Accounting will provide Ms Anathi, with standardised fi nancial information. She can use this information to benchmark the performance of her business against that of her competitors and identify areas for improvement. This will enable her not only to improve the performance of her business, but also to have the information required to remain competitive. Accounting can provide Ms Anathi with useful information that will enable her to make informed business decisions. For example, she could use accounting information to expand her premises and launch outlets in other towns and provinces. Ms Anathi could use investment appraisal techniques to determine whether setting up new restaurants or buying existing ones would be the best option. Equally, she could use investment appraisal techniques to decide between two competing investment opportunities. 270 CHAPTER 8 ACTIVITY 8B XYZ (Pty) Ltd was established in 1977 by Mr Sibodo as a small, single-branch hardware store catering for residents of Observatory, Cape Town. In the last four decades, the company has expanded dramatically, and now has over 100 branches across South Africa. During the four decades, Mr Sibodo has relied on his accountant, Mr Bingotho, who is also his friend. Mr Bingotho is a self-trained accountant with 30 years’ experience who, despite having only primary education, has been able to train all the accountants of XYZ (Pty) Ltd. Recently, however, XYZ (Pty) Ltd has experienced a dramatic decline in sales and profits. As a result, Mr Sibodo has hired you as a consultant to investigate the performance of XYZ (Pty) Ltd and to uncover the underlying reasons for the decline in performance. Your preliminary investigation has revealed the following:

• A lack of responsiveness to customers’ needs • A lack of alignment between strategic plans and operational plans • Cross-subsidisation of unprofitable products by more profitable products • A defective budgetary system that is counterproductive as it is based on ideal targets • A defective cost control system • Mr Bingotho relies on his former teacher who retired 20 years ago for technical support on accounting matters • Mr Bingotho performs both management accounting tasks and financial accounting tasks, and feels overloaded with work • Escalating costs of operation • Delayed preparation of annual reports Required: (i) Provide Mr Sibodo and Bingotho with a detailed description of the difference between financial accounting and management accounting. (ii) Explain the role of a strong financial accounting and management accounting function to Mr Sibodo and Mr Bingotho, in a paragraph. (iii) Advise Mr Sibodo and Mr Bingotho on how to address the problems cited in the case study. Your answer should provide at least five

suggestions. 8.6 WORKING WITH AN ACCOUNTANT OR BOOKKEEPER Maintaining accounting records and preparing financial reports and statements is extremely important. However, not all entrepreneurs have the accounting knowledge and time required to maintain accounting records and prepare financial reports and statements. As a result, many entrepreneurs either hire an accountant as an employee or outsource an external accountant. This section assumes the latter, given the limited resources that emerging entrepreneurs have. 271 IT IS IN THE NUMBERS 8.6.1 Why work with an accountant? There are many reasons for working with an accountant; these vary depending on the stage of the business’s development. Let’s consider some of these reasons. At the inception stage, an accountant can provide expert advice on the preparation of a business plan. Using state-of-the-art accounting software, they can make projections that are not only realistic, but also professional. In addition, engaging an accountant at an early stage ensures they are able to avoid many fi nancial mistakes usually made by fi nancially inexperienced startup entrepreneurs, which could save money and time. In fact, entrepreneurs are encouraged to engage accountants as early as possible to benefi t from expert fi nancial knowledge. For an entrepreneur who is just about to start a business, the decision regarding the legal structure of the entity is of critical importance. It has far-reaching implications once the business is established. The various legal forms available to entrepreneurs include private companies, public companies, sole proprietorships

and partnerships. These forms of business have diff erent legal implications. In a sole proprietorship, the owner is personally liable for the obligations of the business. In other words, should the business fail to meet its obligations to creditors, the owner’s personal belongings can be auctioned to recover the amounts owed. In the case of a partnership, the partners are jointly and severally liable for the obligations of the partnership. This means that if one partner borrows money on behalf of the partnership, the lender can recover the money from any of the partners in case of default in payment. Companies provide the most protection for owners. The owners and the business are separate legal entities and the personal property of the owners cannot be auctioned if the company defaults on payment. The legal structure also has implications on the various regulatory requirements that must be fulfi lled. For example, a private company has minimal requirements, whereas a listed company will have to comply with complex and extensive regulatory requirements. An accountant can help an entrepreneur to select the most appropriate legal form for their business, which may save time and money. Many entrepreneurs are pursuing their passion or want to become their own boss to ensure fl exible working hours. Accounting tasks such as fi ling tax returns, maintaining a payroll, maintaining a proper set of accounting records, preparing fi nancial reports and complying with the numerous regulations that govern any business are timeconsuming and may also divert an entrepreneur’s focus from more strategic objectives. Such an entrepreneur is better off outsourcing these tasks to a professional accountant. This can increase productivity due to specialisation, reduce stress and ensure the entrepreneur benefi ts from the expertise an accountant brings. Given their professional expertise, accountants can help an entrepreneur to identify cost-saving opportunities, as well as areas for improvement to maximise effi ciency. Accountants can also advise a

business on how to reduce its tax burden to save money; for example, by claiming valid expenses, which can save the entity much-needed cash. Accountants can also advise an entrepreneur on the most suitable and cost-eff ective source of fi nance, thus saving money for the business. 272 CHAPTER 8 Working with an accountant will ensure business decisions are based on reliable information. It will also mean accounting processes – such as debt collection, sending of invoices and payment to creditors to take advantage of cash discount – are optimised to the benefit of the business. As a business grows, its accounting requirements become more complex and more critical for decision-making. An entrepreneur who maintains their own books will find it increasingly necessary to seek expertise from a professional accountant. The entrepreneur can benefit by working with an accountant to avoid making mistakes that could arise if the entrepreneur is unable to cope with the requirements of an expanding business. Entrepreneurs who personally maintain their accounting and financial records run the risk of doing so without the time or resources to make sure this is done properly. They often face problems such as errors in data entry, loss of vital source documents, inability to update accounts, lost tax break opportunities, delayed tax filing, and delays in invoicing and sending statements to debtors. Working with an accountant can ensure these issues are avoided. Every now and then, most entrepreneurs need external finance in the form of investments or bank loans. To convince the investors or banks to provide this finance, a business not only needs a realistic forecast, but also up-to-date accounting records. Guidance from accountants is therefore critical in ensuring the entrepreneur has

access to suitable sources of finance, depending on their needs and circumstances. One of the main causes of the high rate of failure of small businesses in South Africa is financial mismanagement (PricewaterhouseCoopers, 2015: 32). Often, entrepreneurs do not separate their personal transactions from those of their businesses; they overspend and fail to distinguish between revenue and profit, and they rely too heavily on costly loans from banks and similar institutions. In addition, small businesses often have poor stock control and pricing models, and poor planning that leads to cash-flow problems (PricewaterhouseCoopers, 2015: 32). They over-commit themselves, provide credit recklessly and are unable to meet their obligations as they become due. Ultimately, they have no choice but to close down. Working with an accountant can help an entrepreneur avoid such a predicament by ensuring the finances of a business are properly managed and accounted for. When an entrepreneur is about to make a major decision – e.g. to expand their business, acquire a new business, drop an old product line or launch a new one, start a new branch, or even hire new employees – it is critical that they work with an accountant. An accountant can aid the entrepreneur in understanding the full implications of the decision, ensuring that only informed decisions based on calculated risks are undertaken. Entrepreneurs are often too preoccupied with the day-to-day operations of the business to plan for the future. An accountant can help an entrepreneur by providing an objective, broad outlook of the future and enabling the entrepreneur to see the big picture, as they are not embroiled in the daily running of the business. 273 IT IS IN THE NUMBERS 8.6.2 Selecting an accountant

Suppose you are seeking to outsource your accounting function. How would you go about selecting the right person? Let’s consider some of the key factors when answering this question. Qualifi cation or certifi cation Across the world, accountants are regulated by professional bodies. In the South African context, the two main professional bodies are the South African Institute of Chartered Accountants (SAICA) and the South African Institute of Professional Accountants (SAIPA). These institutions require their members to maintain high professional standards. Not only are the members required to have completed an accounting degree, but they are also required to gain workplace experience – popularly referred to as articles. In addition, members are expected to keep abreast of the latest developments in the accounting fi eld by attending continuing professional development (CPD) courses. If chartered or certifi ed accountants breach their professional codes of conduct, they risk losing their professional status. South African laws stipulate some functions that can only be executed by chartered or professional accountants who are members of SAICA or SAIPA. For example, external audit reports of fi nancial statements of a listed company can only be signed off by a chartered accountant. As a result, certifi cation provides some form of assurance that an accountant has expertise in the fi eld, something that should be considered when selecting an accountant. Location With the advent of the Internet and advancements in communication technology, it is possible for a business to outsource its accounting function to an accountant that is located anywhere in the world. However, businesses can benefi t from a local accountant. This allows the entrepreneur to have regular face-to-face meetings with the accountant, which builds trust and confi dence.

In addition, an accountant who is located in the same area where the business operates is more likely to be familiar with the regulatory requirements, taxation regimes and other local factors that inform the advice they will provide. Relevant expertise The accountancy fi eld is broad, and accountants specialise in certain disciplines. Some may specialise in manufacturing enterprises, while others may specialise in a service sector, such as banking. Some focus on taxation matters, whereas others focus on external auditing. Some may help small businesses, while others work with large multinationals reporting across several countries. It is therefore critical to select an accountant who has relevant expertise based on their experience. This may require the use of references to ensure that a suitable accountant is selected. References Competent accountants are bound to have reliable referees who can vouch for their expertise. These may include former and current clients, government or business associates, former 274 CHAPTER 8 employers and professional networks. An entrepreneur should seek recommendations from these referees to ensure the accountant has a good standing in the business community and is competent and trustworthy. Experience When selecting an accountant, an entrepreneur must consider the accountant’s experience as well as the relevance of the experience to the business’s needs. This may require a background check, which could initially involve inspecting the accountant’s online presence. For example, looking them up on LinkedIn could reveal some basic yet

critical information, such as their connections, how they describe their services and areas of expertise, any reviews and recommendations from clients, as well as their description and years of experience. The entrepreneur may request an interview with the accountant for the latter to elaborate on their experience and on how they could add value to the entrepreneur’s business. The entrepreneur should interview several candidates before settling on one. The interviews will enable the entrepreneur to compare various accountants and will, aid the entrepreneur in determining which one is best suited for the business. Proactiveness of the accountant in saving money An entrepreneur should focus on how the accountant will add value to the business, particularly with regard to saving the business money. This could be done by enquiring how the potential accountant has saved money for other clients the past; for example, by reducing the tax burden by claiming legitimate deductible expenses or providing advice relating to improving operational efficiencies. The compatibility of the accountant’s software and that of the entrepreneur An entrepreneur should ensure that the accounting software used by the accountant is compatible with what the business uses. This will ensure that data can be shared between them without leading to time-consuming errors that arise when data is exported or imported for transfer between incompatible software. In addition to this, the software used by the accountant could also affect the data integrity of an entrepreneur’s business. As a result, it is crucial that the entrepreneur selects an accountant with similar software to their own or one who is willing to cater to the entrepreneur’s needs by adopting similar software. It is equally important that the entrepreneur selects an accountant with vast knowledge in user-friendly market-leading accounting software that allows encrypted files to be exchanged between the two parties. This could be cloud-based accounting software with built-in

encryption that ensures the entrepreneur does not have to worry about risks involving the exchange of data. Fees The entrepreneur should select an accountant who charges reasonable fees and is open to negotiation of fees. They should be flexible with regard to the fees charged depending on the 275 IT IS IN THE NUMBERS nature of the work to be performed. Accountants use various methods to calculate the fees for services rendered, including on an hourly basis, monthly retainer, percentage of revenues and a percentage of savings. Depending on the method used, the entrepreneur should negotiate to ensure that they pay reasonable fees for services rendered. For example, if the accountant charges per hour, the entrepreneur could negotiate for the basic recordkeeping tasks to be performed in-house by a junior employee. Then only the advanced activities are outsourced to the accountant, to minimise the time required for these tasks. Several quotes should be obtained from various accountants to determine a reasonable fee for the proposed services. A range of scenarios should be considered when choosing the suitable candidate. The entrepreneur should also enquire about the various fee structures employed by a number of accountants before settling for one structure. Size of the accounting fi rm The larger the accounting fi rm, the more unlikely it is that an entrepreneur will interact with the top management. Accordingly, an entrepreneur may decide they want to deal with a small accounting fi rm in order to directly interact with the decision-makers of the fi rm – i.e. the owner-managers. This could ensure the entrepreneur receives personalised attention, unlike dealing with a large

accounting fi rm that has hundreds of employees, most of whom are not the main decision-makers. 8.6.3 Key questions to ask your accountant As indicated previously, it is important for an entrepreneur to meet face-to-face with a prospective accountant for an interview. The following are some of the common questions an entrepreneur is expected to ask the prospective accountant. There are a wide range of questions that can be asked, and the accountant’s answers to these will determine whether the entrepreneur will hire the accountant. Do you have professional qualifi cation or certifi cation in accounting? While not all services in the accounting fi eld require professional certifi cation or qualifi cation, it is important for an entrepreneur to confi rm that the accountant has professional qualifi cations from a recognised body. This guarantees that the accountant is professionally trained and that their work is regulated by the professional body. Certifi cation also aids in sieving out unscrupulous people who may masquerade as accountants with the aim of defrauding unsuspecting entrepreneurs. In the event of professional misconduct, the entrepreneur can submit their complaints to the professional body with which the accountant is registered to take action against the accountant. This is a deterrent to professional misconduct. What is your area of expertise? It important to ensure that the entrepreneur selects the appropriate accountant for the needs of their business. Diff erent sectors operate diff erently. As a result, an entrepreneur who is seeking 276 CHAPTER 8

to venture in financial services will need an accountant with experience in that sector, whereas one venturing in manufacturing will require an accountant with different skills to ensure that appropriate and useful advice is provided by the accountant. Equally, an accountant that has experience only in dealing with large entities may not be suitable for small and medium enterprises, and vice versa. An accountant may also have expertise in a few different areas; for example, business advisory, accounting and bookkeeping, tax, and auditing. Accordingly, it is important for an entrepreneur to ask the accountant to indicate their area of expertise. How do you determine your fees? It is imperative that an entrepreneur asks a prospective accountant how they determine their fees. We have already discussed the different fee structures. Based on the method indicated, the entrepreneur will decide whether or not to engage the accountant, or how to negotiate more reasonable fees. An entrepreneur may be compelled to agree to premium fees if they are to access the accountant’s services at short notice. Who is your contact person? If an entrepreneur is considering engaging a large accounting firm, it is important for them to understand that such a firm is likely to have many employees. Accordingly, it is vital for the entrepreneur to determine who the contact person will be, the seniority of this person and how accessible they will be to the entrepreneur. It is worth noting that a partner, though likely to have vast expertise, may not be as readily available for consultation as a junior manager would. Who are some of your previous clients? We have seen that it is key for an entrepreneur to check the accountant’s references to verify their competence and reputation, and to gauge the referees’ level of satisfaction with their services.

This can be done only if the prospective accountant is asked to indicate some of their previous clients, the type of work done and whether the entrepreneur can contact them to verify the information provided. Reluctance by the prospective accountant should be seen as a red flag. How would the prospective accountant handle practical situations relevant to the business? An entrepreneur should ask the prospective accountant how they would handle situations relevant to the entrepreneur. For instance, if the South African Revenue Services (SARS) was to seek an audit to verify expenses claimed, how would they manage this? Other questions that could be asked are: ‘How can you help me manage my business better?’, ‘How can you help me improve the cash flows of my business?’, ‘What are the recent developments and changes in tax laws?’, or ‘How can you help me to achieve my targeted tax savings?’ The answers provided will not only indicate the competence of the accountant, but also their compatibility with the entrepreneur’s approach to solving problems. However, a different approach to solving problems is not necessarily a bad thing, as it may reflect insights held by the prospective accountant that the prospective entrepreneur may not have. 277 IT IS IN THE NUMBERS How can I help you to do a good job for my business? Regardless of how skilled your accountant is, they can only be as good as the information they receive from you. Accordingly, it is imperative for the entrepreneur to enquire how they may help the accountant do a good job. This could be achieved by preparing and organising the documents that the accountant requires or ensuring that all the necessary information and source documents needed are readily available.

What are some of the most common mistakes I should avoid in my business? An accountant should be able to advise an entrepreneur about the common mistakes that fellow entrepreneurs make. These may include disregard for expert advice or choosing the accountant based only on low fees. Depending on how candid and insightful the answers provided are, an entrepreneur may decide which accountant to select. What accounting software does the accountant use? As indicated earlier, compatibility of the accountant’s software with the software of the business is critical. It is thus essential that the entrepreneur asks the prospective accountant which accounting software they use to avoid the challenges associated with incompatible software. These questions are by no means exhaustive. Many others may be of equal importance when interviewing a prospective accountant. Once an accountant has been hired, they could be asked a new set of questions; for example: • How is my business doing? • What is my breaking point? • What am I doing wrong? • What are some of my successful competitors doing that I am not doing? • What is wrong with the fi nances of my business? • In which areas should I improve? • What are the drivers of my revenue? • How can I cut costs?

8.7 BASICS OF A STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME A statement of profi t or loss and other comprehensive income is one of the four fi nancial statements that a business is required to prepare according to the International Accounting Standard (IAS) 1. The other three include the: • statement of fi nancial position; • statement of changes in equity; and • cash fl ow statement. 278 CHAPTER 8 In Chapter 7, we discussed the cash flow statement; in this section, we will discuss the statement of profit or loss and other comprehensive income, followed by the statement of financial position in the subsequent section. The statement of profit or loss and other comprehensive income matches a business’s revenues to its expenses in a given period, which is typically one year. It subtracts the expenses from revenues to arrive at either a profit or loss. The following table sets out the format of a statement of profit or loss and other comprehensive income using a hypothetical company, ABC Limited. ABC Limited Statement of profit or loss and other comprehensive income for the year ended 28 February 20.7 Rand Revenue

XX Cost of sales (XX) Gross profit XX Distribution costs (XX) Administration costs (XX) Profit from operations XX Finance costs (XX) Investment income XX Profit before tax XX Income tax expense (XX) Profit for the year

XX Other comprehensive income Gain or loss on revaluation XX / (XX) Gain/loss on fair value through other comprehensive income financial assets XX / (XX) Total comprehensive income for the year XX (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 8.2: Format of a statement of profit or loss and other comprehensive income As can be seen from this table, the first line item is revenue or net sales. It is calculated as gross sales less the returns or allowances. The second line item is the cost of sales, which varies depending on the nature of business. For example, the cost of sales for a manufacturer will be determined by taking the opening inventory, adding the cost of raw material used in production as well as the cost of labour and the overheads incurred, before subtracting the closing inventory. The difference between the revenue and cost of sales is referred to as the gross profit. Other operational expenses such as distribution costs and administrative costs are taken away from the gross profit, resulting in profit from operations. Other items not arising from the day-to-279 IT IS IN THE NUMBERS day operations of the business are then included in the statement of profi t or loss and other comprehensive income, namely: fi nance costs or interest, which is subtracted, and investment income, which

is added, to arrive at profi t before tax. Following this, income tax is subtracted to arrive at the profi t of the year. Lastly, gain or loss on revaluation as well as gain or loss on fair value through other comprehensive income fi nancial assets are adjusted, resulting in total comprehensive income for the year. 8.8 BASICS OF A STATEMENT OF FINANCIAL POSITION A statement of fi nancial position is based on the notion that the total value of assets at the fi nancial position date should be equal to the total of liabilities and equity at the same date. It shows the closing balances of assets and how these assets have been fi nanced using liabilities and equity, indicating the business’s fi nancial position at a given date. Accordingly, the statement of fi nancial position is based on an accounting equation that can be expressed as follows. Total assets = Total liabilities + Total owner’s equity Or Owner’s equity = Total assets – Total liabilities Based on these equations, the statement of fi nancial position represents the net asset value of the business at a point in time. The following table sets out the format of a statement of fi nancial position using a hypothetical company, ABC Limited. ABC Limited Statement of fi nancial position as at 28 February 20.7 Assets Rand Rand Non-current assets Property plant and equipment

XX Investments XX Intangible assets XX XX Current assets Inventory XX Trade receivables XX Prepaid expenses XX Cash and cash equivalents XX XX Total assets XX 280 CHAPTER 8

Equity and liabilities Equity Share capital XX Retained earnings XX Revaluation reserve XX Investment reserve XX XX Total equity XX Non-current liabilities Long-term borrowings XX Deferred tax XX XX Current liabilities

Trade payables XX Short-term borrowings XX Tax payables XX Accrued expenses XX XX Total equity and liabilities XX (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 8.3: Format of a statement of financial position As can be seen in this table, the assets are arranged by order of liquidity. This could be from most illiquid (least liquid) to the most liquid – as is the case of ABC limited – or from most liquid to the most illiquid. The non-current assets are separated from current assets. Similarly, the liabilities are classified as non-current and current. Noncurrent liabilities are expected to be settled in more than one year (12 months), while current liabilities are expected to be settled in less than one year (12 months). Owner’s equity comprises of share capital, retained earnings and other forms of equity such as revaluation reserves and investment reserves. The total of all assets should equal the total of the owner’s equity and liabilities as per the basic accounting equation.

281 IT IS IN THE NUMBERS (Preparing statements for Belville Limited) EXAMPLE 8 B As a newly employed accountant of Bellville Limited, you are provided with the following information extracted from the records of the company for the year ended 28 February 20.7. Rand Rand Interest paid 10 000 Administration expenses 340 000 Income tax (prepaid in the prior year) 20 000 Ordinary share capital (called up R 1 each) 400 000 Dividends 12 000 Cash in hand and at bank 18 000 Provision for warranty

180 000 Distribution expenses 480 000 Land and buildings (cost of land and buildings, R 220 000 and 420 000 R 200 000, respectively) Accumulated depreciation on buildings as at 1 Mar. 20.6 96 000 Plant and equipment at cost 250 000 Accumulated depreciation on plant and equipment as at 1 Mar. 150 000 20.6 Retained earnings as at 1 Mar. 20.6 540 000 Ten per cent loan (received in 20.7) 160 000 Sales 2 600 000 Purchases 940 000

Inventory as at 1 Mar. 20.6 300 000 Trade receivables 1 456 000 Trade payables 120 000 Total 4 246 000 4 246 000 Additional information: 1. As at 28 February 20.7, inventory was valued at R 500 000. 2. Depreciation of buildings, plant and equipment is as follows: • Five per cent on the cost of the of the buildings; and • Twenty per cent on the cost of plant and equipment. 282 CHAPTER 8 3. Depreciation is treated as an administration expense in the statement of profit or loss and other comprehensive income.

4. No buildings, plant or equipment were acquired or disposed of during the year ended 28 February 20.7. 5. Income tax for the year ended 28 February 20.7 is estimated to be R 270 000 (at a rate of 30 per cent). 6. The loan is repayable over five years. 7. Warranty provision at year end is estimated to be R 150 000. It is treated as an administration expense. Required: (i) Prepare the statement of profit or loss and other comprehensive income for Bellville Limited for the year ended 28 February 20.7. (ii) Prepare the statement of financial position for Bellville Limited as at 28 February 20.7. Solution: (i) Statement of profit or loss and other comprehensive income for Bellville Limited for the year ended 28 February 20.7 Rand

Revenue 2 600 000 Cost of sales (300 000 + 940 000 – 500 000) (740 000) Gross profit 1 860 000 Distribution costs (480 000) Administration costs (340 000 + 60 000 – 30 000) (370 000) Profit from operations 1 010 000 Finance costs (16 000) Investment income 0 Profit before tax 994 000 Income tax expense (270 000 + 20 000) (290 000)

Profit for the year 704 000 Other comprehensive income Gain or loss on revaluation 0 Gain or loss on fair value through other comprehensive income financial 0 assets Total comprehensive income for the year 704 000 283 IT IS IN THE NUMBERS (ii) Statement of fi nancial position for Bellville Limited as at 28 February 20.7 Rand Rand Assets Non-current assets Property plant and equipment (W 1) 364 000

Investments 0 Intangible assets 0 364 000 Current assets Inventories 500 000 Trade receivables 1 456 000 Prepaid expenses 0 Cash and cash equivalents 18 000 1 974 000 Total assets 2 338 000 Equity and liabilities Equity Share capital

400 000 Retained earnings (W 2) 1 232 000 Revaluation reserve 0 Investment reserve 0 Total equity 1 632 000 Non-current liabilities Long-term loan 160 000 Provision for warranties 150 000 Deferred tax 0 310 000 Current liabilities Trade and other payables 120 000

Short-term borrowings 0 Tax payables 270 000 Accrued expenses (interest) ((10% × 160 000) – 10 000) 6 000 396 000 Total equity and liabilities 2 338 000 284 CHAPTER 8 Land and Plant and Total buildings equipment Cost R 420 000 R 250 000 R 670 000 Accumulated depreciation

R 96 000 R 150 000 R 246 000 as at 1 Mar. 20.6 Depreciation R 10 000 R 50 000 R 60 000 Accumulated depreciation R 106 000 R 200 000 R 306 000 as at 28 Feb. 20.7 Balance as at 28 Feb. 20.7 R 314 000 R 50 000 R 364 000 Total Profits for year R 704 000

Less dividends (R 12 000) R 692 000 Retained earnings as at 1 Mar. 20.6 R 540 000 Retained earnings as at 28 Feb. 20.7 R 1 232 000 8.9 DO YOU KNOW YOUR NUMBERS? By now, having learnt about three of the four financial statements businesses are expected to prepare, we have seen the importance of accounting numbers and how they aid in informed decision-making. Let’s recap the important numbers that every entrepreneur should know: • Cash flows and cash balances • Revenue • Net income or loss • Cost price of the products supplied • Other operating expenses • Gross profit margin • Inventory on hand Any entrepreneur should know what each of these numbers mean, as well as how they can be applied to ensure that the entrepreneur understands their business and how to ensure it thrives.

285 IT IS IN THE NUMBERS ACTIVITY 8C The following pre-adjustment trial balance was extracted from the accounting records of Nyanga Suppliers Limited as of 28 February 20.5. Rand Rand Distribution expenses 590 000 Administration costs 500 000 Share capital (ordinary shares of R 1 each) 540 000 Share premium 160 000 Revaluation surplus 40 000 Dividends paid 54 000 Cash and cash equivalents

6 000 Trade receivables 466 000 Interest paid 50 000 Interest received 2 000 Dividends received 30 000 Land and buildings (cost of land and buildings R 760 000 960 000 and R 200 000, respectively) Accumulated depreciation on buildings as at 1 Mar. 20.4 60 000 Plant and equipment at cost 8 00 000 Accumulated depreciation on plant and equipment as at 340 000 1 Mar. 20.4 Retained earnings as at 1 Mar. 20.4

470 000 Sales 4 330 000 Purchases 2 520 000 Inventory as at 1 Mar. 20.4 280 000 Trade payables 54 000 Bank loan 200 000 Totals 6 226 000 6 226 000 Additional information: • Inventory as of 28 February 20.5 was valued at a cost of R 190 000. This amount includes damaged goods which cost R 30 000. It has been assessed that the damaged goods can be disposed of at R 10 000. 286 CHAPTER 8

• Depreciation of buildings, plant and equipment is to be determined as follows: §§ Five per cent on the cost of the of the buildings using fixed instalment method (straight line method); and §§ Thirty per cent on the carrying amount of plant and equipment (reducing balance method). • A provision for income tax of R 330 000 should be made for the year ended 28 February 20.5. • A revaluation of the land resulted in an increase in value by R 200 000. Required: (i) Prepare a statement of profit or loss for Nyanga Suppliers Limited for the year ended 28 February 20.5. (iI) Prepare a statement of financial position for Nyanga Suppliers Limited as at 28 February 20.5. (iII) Calculate the gross profit margin for Nyanga Suppliers Limited for the year ended 28 February 20.5 and provide an interpretation of what this means, in a sentence. 8.10 SUMMARY In this chapter, we have discussed the importance of accounting numbers. We touched on various topics to strengthen your understanding of these numbers. These topics include:

• the difference between financial accounts and management accounts; • key accounting terms; • the importance of working with an accountant or a bookkeeper; • the key questions an entrepreneur should ask an accountant; • the basics of a statement of profit or loss and other comprehensive income; and • the basics of a statement of financial position. Having a good understanding of these topics is vital for any entrepreneur as it may determine the success or failure of a business venture. 287 BUILDING A TEAM BUILDING A TEAM 9 9.1 Introduction 289 9.2 Life lessons 290 9.3 Entrepreneurs as employers 292 9.4 Company culture

293 9.5 Recruiting staff 297 9.5.1 | Job specification and job description 299 9.5.2 | Selecting the right people 302 9.5.3 | Interviewing and appointing 306 9.5.4 | What to pay staff 310 9.5.5 | Employment contracts 315 9.6 Managing people 317 9.6.1 | Assigning work 317 9.6.2 | Managing performance 318 9.6.3 | Training staff

321 9.6.4 | Motivating staff 324 9.7 Building teams 325 9.7.1 | Forming, storming, norming and performing 325 9.7.2 | Team dynamics 326 9.8 Employment and the law 327 9.8.1 | The Basic Conditions of Employment Act 75 of 1997 (BCEA) 327 9.8.2 | Commission for Conciliation, Mediation and Arbitration (CCMA) 329 9.9 How is your team doing? 329 9.10 Summary 330 288 CHAPTER 9

Building Case studies – a team myths, leaders and Online inspiration start-ups Boring but Growing the Making important business it run stuff smoothly It is in the numbers Cash is king Developing Selling products Spreading and

the word Getting out of Forming a services What is the starting business entrepreblocks neurship? 9.1 INTRODUCTION Often, the staff working within an organisation represent its most valuable assets, as well as its most important resources, since they encapsulate the core competencies that help the business to be productive and profitable. Employees are a businesses’s greatest opportunity of sustaining a competitive advantage, owing to the unique value that they provide to the business (Phillips and Gully, 2012). This is because when compared to other resources within an organisation (such as financial, technological or inventory resources), human resources are the rarest type of resource, which cannot be easily imitated or substituted by other companies, as can be done with machinery or computer systems (Phillips and Gully, 2012). The opportunities for capitalising on the intellect, skills and abilities of a workforce are limitless – making the function of human resource management (HRM) within a business one of the most interesting, yet challenging, areas of a business to study. For the purposes of this unit, we will focus on human resources within small, medium and micro enterprises (SMMEs), as such organisations are those typically run by entrepreneurs. Note that the terms ‘staff’, ‘employees’ and ‘human resources’ will be utilised interchangeably throughout this unit. After studying this chapter, you should be able to:

• discuss the role of the entrepreneur as an employer; • assess the role of the entrepreneur in establishing company culture, with reference to a hypothetical scenario; • outline the process of recruiting staff; • explain the importance of employment contracts; • describe the basic functions of managing staff; 289 BUILDING A TEAM • identify the stages of team development; • discuss factors of team dynamics; • list items covered in the Basic Conditions of Employment Act 75 of 1997 (BCEA); • evaluate the extent to which a hypothetical entrepreneur adheres to the Basic Conditions of Employment Act; and • explain the role of the Commission for Conciliation, Mediation and Arbitration (CCMA) in South Africa. 9.2 LIFE LESSONS The following case study provides some insight into the HRM decisions that need to be made by a typical small business. EXA MPLE 9 A (Littlewood produce)

Candice Barker is the founder and CEO of Littlewood Produce, a local food retailer in the Eastern Cape in South Africa. Candice founded her company in 1991 with 20 staff and one store; to date, it has grown to 150 staff members operating across seven stores in Port Elizabeth, Jeff rey’s Bay and Port Alfred. She employs both permanent and contract staff members depending on seasonal fl uctuations; for example, more cashiers and packers are needed in November through to January. Her core permanent staff include an operations director, marketing manager and human resource director – who are all responsible for operations across all seven branches of the company – as well as general managers at each store. All these managers have proven to be loyal to the company, owing to the family work environment, work-life balance and competitive non-fi nancial benefi ts that Littlewood Produce provides (i.e. benefi ts that are not directly related to fi nancial rewards, such as medical aid, pension fund subsidies and employee recognition). Candice’s retention rate of higher-level permanent staff is also positive across the branches, in terms of her deli general assistants, bakery supervisors, merchandisers and butchery managers. All these employees have noted that they appreciate the genuine care that the management team show to them, as well as the enjoyable training opportunities that they are off ered during each performance cycle. However, they are regularly expected to work six days a week, beginning at 07h00 and ending at 17h30. They are given half an hour as a lunch break, are not paid overtime and are only allowed four days of sick leave a year. Candice notes that each employee agreed to the conditions when they signed their employment contracts. Candice has noticed concerns with her lower-level staff , particularly her fruit and vegetable assistants, confectioners, packers and trolley collectors. These staff generally 290 CHAPTER 9 do not remain working at the firm for long periods, resulting in high turnover, which is costly for the company. They complain of the long working hours required of them, their weekly wages which are less

than those received at national retail stores, and the fact that they are on fixed-term contracts rather than permanent contracts. Candice has also been informed that the quality of their performance is lacking. These employees have been seen being rude to customers, which Littlewood Produce deems to be unacceptable. These staff lack formal qualifications, often being hired without Matric qualifications. They are disinterested in being exposed to new challenges at work, take short-cuts when completing their work, struggle to communicate effectively to customers in English and have been caught spending time on their cell phones during work hours. Imagine that you are the human resource director that Candice has asked to investigate these problem areas. You realise that there are some areas that could be reasons for the poor performance and turnover of these staff members. You note that all of these staff were recruited externally, using walk-in applications or Gumtree advertisements. Staff at this level are never assessed using valid selection tools; instead, they are hired after a brief five-minute interview on a reactive-needs-basis, usually when urgent vacancies exist and time is of the essence in gaining new staff. None of these employees are formally appraised for their performance, and none are offered any training programmes, since they are on contract and thus seen to be less of an investment for the firm. Since Littlewood Produce is a relatively small local store in relation to national retailers, their budget is too limited to spend money on human resources practices. Consider the following think points relating to this scenario. You do not have to answer these questions formally – they are here to give you an opportunity to consider different aspects of HRM prior to delving deeper into this topic in this unit: • Would you recommend external or internal recruitment for these contract positions?

What recruitment methods could you use to attract more high-quality, lower-level staff? • What selection methods would you suggest that the firm use when choosing the best staff for these lower-level positions? • Should the performance of these contract staff be formally appraised, given the low level of their jobs? Would formal performance appraisals hold any benefit for them or the business? • Should these contract staff be considered for training programmes each year? Would any developmental activities (such as mentoring) benefit them? • Should both financial and non-financial rewards/remuneration be emphasised for these staff members? Could employee benefits be considered to help retain and motivate higher levels of their performance? • Does Littlewood Produce comply with the Basic Conditions of Employment Act? Why or why not? 291 BUILDING A TEAM As we progress through this unit, you will learn how to evaluate these HRM decisions more eff ectively, and will learn about eff ective HRM practices that you could use to help solve these problem areas. 9.3 ENTREPRENEURS AS EMPLOYERS According to Harrison (2013), small businesses create a large number of jobs every year. Entrepreneurs are most likely to hire their fi rst workers within their fi rst two years of opening. The manner in which employees are managed in small businesses diff ers, to some extent, from HRM in larger fi rms. Owing to entrepreneurs typically running smaller

organisations with less hierarchical (bureaucratic) layers, they need employees who can multitask and fulfi l multiple roles because they have fewer employees at their disposal. The roles that employees play in entrepreneurial businesses are therefore often broad in nature. Small businesses run by entrepreneurs often focus on hiring generalists who can ‘wear many hats’ (i.e. do multiple tasks), since such employees can fulfi l many job roles for one salary, making them more fi nancially viable. Therefore, fewer specialists are employed; if specialised skills are needed, small businesses may outsource such functions, or hire a consultant to assist on a temporary basis. Some entrepreneurs need to play the role of human resource manager themselves, as they cannot aff ord to hire someone to fi ll this role (or do not have a need to do so). Consequently, entrepreneurs might fi nd themselves not only managing day-to-day operations, but also making hiring and fi ring decisions, setting pay grades, training new staff members and designing their own policies. Additionally, since the managers in entrepreneurial businesses are usually not trained in human resources, this can aff ect the professionalism with which this role is performed. Entrepreneurs might be so focused on running the operations of their businesses that they fail to predict changes in their workforce, such as voluntary turnover (i.e. when employees resign from the business due to dissatisfaction or a better employment opportunity elsewhere) or a need for mentoring/employee development. This might result in them reactively fi xing staff issues rather than preempting their occurrence. Reactively fi xing issues should be avoided, as poor decisions are usually made in haste, which can cause further problems at a later stage. For example, if an employee resigns unexpectedly, then an entrepreneur might be tempted to quickly hire someone else without conducting a thorough selection testing process. The new hire therefore might not be a good fi t for the position, so they might demonstrate subpar performance and be dismissed in the future as a

result. This will lead to more time and money being wasted, which should have been avoided had the proper, detailed selection process been followed. The level of emotional and fi nancial support provided to entrepreneurs from an employment perspective might be limited, and the heavy workloads and amount of expertise needed to successfully run a small business might be daunting. Thankfully, in South Africa, there are some 292 CHAPTER 9 avenues for entrepreneurial support in this regard. For example, the Cyril Ramaphosa Foundation (2017) is a public benefit organisation that exists to create economic and social development opportunities for the previously disadvantaged by providing mentoring opportunities to black entrepreneurs through their Black Umbrellas programme. 9.4 COMPANY CULTURE Company culture (also known as corporate culture, organisational culture or institutional culture) is the overall beliefs, systems and ways of doing things within an organisation (Schein, 2004). Any collective body – such as a school, a non-profit organisation, a business or an SMME – would have a culture that indirectly or directly defines, influences and affects the behaviours of the people who work or volunteer there. This culture would be fairly unique to the organisation, and is shaped by events of the company (e.g. retrenchments, mergers), the company’s successes and failures (e.g. being one of South Africa’s top 100 employers, or surviving a recession that affects sales), as well as strong personalities who define the climate of the firm (e.g. current or past leaders). According to Schein (2004), organisational culture is a pattern or system of shared basic assumptions or beliefs that are learned by a group and influence how it solves its problems. Such a culture is passed on to new team members as the correct way that employees

should think and feel in relation to such problems. This culture can also result in norms being developed – i.e. it defines what is perceived as normal behaviour in the firm. Organisational culture can further be explained as the system of a company’s knowledge, as well as the staff’s own perception of the company processes and their standards of believing and evaluating what happens there, in line with the environmental or contextual setting. For example, if the initial reaction of employees when they find out that an employee has been stealing from the business is to shame the employee and ostracise them, then it could be said that their ethical culture is strong. This is because the group’s overall general reaction to the theft was to make known that they do not approve of the unethical behaviour. This could be because they were trained to be ethical, or they have learnt over time that high ethics and morals are valued by the business. Regardless of whether their response was learned formally or informally, it still represents the culture of the business, because it influenced the behaviours of the staff working there. An example of an accounting business that fell prey to weak ethical standards is KPMG’s South African branch that participated in and fostered corruption – i.e. when they helped the Gupta family, a powerful Indian family living in South Africa, in their tax evasion (Shoaib, 2017). Organisational culture is usually very deeply rooted. It does not easily change as different employees enter and leave the business. Rather, it tends to stay constant over many years. Culture represents the identity of a business, and therefore helps shape the identity of the employees who work in the organisation, too. 293 BUILDING A TEAM According to Forbes Coaches Council (2018), there are 15 ways to develop a thriving company culture. The following may serve as a helpful guideline on how an entrepreneur can help develop a positive company culture:

1. Enlist, empower and encourage employees, in order to intentionally shape their thoughts and beliefs to be proud and appreciative of the organisation. 2. Create a respectful workplace, by treating employees as one deserves to be treated, regardless of diff ering personal values. 3. Care about one’s fellow employees, including their well-being and personal lives, to create trust and improve teamwork. 4. Live by the culture one wishes to create, such as by positioning oneself to be a supportive leader. 5. Be inclusive of all employees, regardless of gender, race, religion, age and/or sexual orientation, for example. This is particularly important in South Africa, as the Employment Equity Act 55 of 1998 (EEA) dictates that all employees be treated fairly, regardless of personal characteristics unrelated to their performance. 6. Be the example, by creating a healthy environment for employees to fl ourish within. This should include setting high standards for performance as well as a culture of positivity. 7. Communicate properly with one’s employees, through creating mutual understanding as well as respect for the organisation’s

mission, vision and values. This can be done by disseminating information intentionally with staff , including news, goals and successes. This will aid in creating a shared connection with one’s staff . 8. Repeat the company’s message and goals via the senior leadership team, to ensure that the company brand is regularly communicated and celebrated, with employees being encouraged to speak up about what they are happy with. 9. Remember the purpose of the company, through creating a vision statement and writing down clear goals that are communicated to employees. This will remind employees why the company exists, ensuring that suffi cient passion is stirred to help employees through tough times. 10. Establish trust with all employees, to ensure commitment, buy-in and ownership from staff relating to company goals and objectives. 11. Ensure that humanity is emphasised, since all people working at the company form its centre. For example, when employees are happy and supported, then they will be productive in return. 12. Create a core values statement, which emphasises both the rules and values of the organisation. This will ensure order and good behaviour.

13. Focus on what is going right in the company, rather than its failures, so that positive behaviours are celebrated and encouraged. 14. Ensure that the same vision is shared, so that all employees know how they can contribute to making the vision a reality. This will create a sense of purpose and mission. 15. Create a common story of the organisation and its products, services and customers, so that employees become emotionally connected to these stories. Often people become easily attached to stories and would like to think that they helped play a part in a good success story for a company. Entrepreneurs can encourage their employees to play key roles in the story. This will spur them on to greater success and ensure that the culture that is created is truly authentic. 294 CHAPTER 9 We will now briefl y discuss an example based on an innovative South African entrepreneur’s business, Eveready, and how the business has grown and changed over the years. Moreover, we will discuss Eveready’s company culture and how this culture is maintained by management. (Positive company culture) EXAMPLE 9 B Eveready is an iconic brand in South Africa, established in Port Elizabeth in 1937. In 1996, Eveready was acquired by Duracell Inc., which later that year became part of Gillette, a multinational company listed in the top 100 companies on the New York Stock Exchange.

The acquisition fi rmly established Eveready’s battery position within the South African market; yet despite Gillette investing extensively in their plant and equipment and raising their infrastructure and technology to world-class levels, Eveready remained a small company whose core product was the layer cell battery ( Eveready 2, n.d.; and Grimond, 1996). In 2002, Gillette took a strategic decision to exit all non-core battery brands across the world. This impacted on several businesses including Eveready, which, through a combination of sale-of-brand processes, became a fully South African consortium. As a group of South African companies such as Nedbank, Fenchurch and Buff et Collins came together to buy Eveready, this marked a new chapter in Eveready’s history. The ‘new’ Eveready had no corporate head offi ce; all that was left after the sale was a manufacturing facility and a brand. They did, however, have the resultant ability to operate as a quick, independent and tight management team ( Eveready 1, n.d.; Eveready 2, n.d.; and Grimond, 1996). The change injected new life and vision into the organisation. Eveready began embarking on a process of product diversifi cation, and introduced an outlying product (batteries) in direct competition with Duracell. They extended the Eveready brand to lighting products and established an ‘eco cell’ for export purposes. Further diversifi cation occurred when they acquired and began manufacturing Kestrel Renewable Energy wind turbines. This moved them from traditional energy as their primary function to a focus on alternative energy sources. Eveready also acquired House of York, a non-energy related product that leveraged their brand, marketing presence and distribution processes. Eveready’s transition from being part of a multinational company to having a locally owned management team resulted in a major transformation. They moved from operating within a bureaucracy where decisions took lengthy periods to be fi nalised, to being in a

position to rapidly transform and introduce new products. A signifi cant degree of fl exibility, risk-295 BUILDING A TEAM taking and quick decision-making was needed for them to remain competitive, and a diff erent culture and vision was required. Their new culture emphasised the growth of their people, products, brand, markets and sales. According to Charles du Toit, HR director at Eveready, their ability to transform in such a way was underpinned by their ability to promote a positive company culture. Their culture was created by ( Eveready 3, 2007): • their culture of strong ethics, based on Eveready best behaviours; • holding one another accountable in practical ways, such as through 360º assessments (this refers to a holistic assessment method where an employee assesses their own work and receives feedback from their boss, colleagues, subordinates and/or customers); • a leadership culture, requiring leaders to provide strong direction, demonstrate good judgement, be ethical, have a passion for talent, be passionate about success and actively address weaknesses; • their culture of eff ective communication, with strong communication channels in all directions; • their apolitical culture, which does not tolerate positional power – performance is the measure of success, and culture is lived rather than spoken about; • a management style with an authentic open-door policy (encouraging employees to openly communicate to their superiors by popping into their offi ce unannounced to discuss a matter); • a high level of individual empowerment and accountability; and

• a fl ourishing learning environment in which growth and development opportunities are available to employees at every level in the organisation – Eveready believe that education results in an empowered workforce who are able to thrive in a competitive global environment of world-class work. Eveready has made a commitment to their people. Their work environment is characterised by innovation, a continuous learning culture, environmental consciousness, and strong business values and ethics. Employees enjoy a supportive, highly energetic environment with wide exposure and development in multiple areas. Their culture fl ows from their corporate vision of growth, and can be summarised by a focus on strong leadership, teamwork, personal mastery and organisational excellence. Eveready, today, continue to be ‘the’ battery manufacturer in South Africa, remaining a ‘Proudly South African brand’ and the only manufacturer of dry cell batteries, energy saving light bulbs and micro-wind turbines in the country. 296 CHAPTER 9 ACTIVITY 9 A (i) Explain the type of employees that entrepreneurs often hire when starting their small-business entrepreneurship ventures. (ii) Briefly describe the role between human resource management and entrepreneurs. (iii)

Differentiate between entrepreneurs running small to medium businesses and employers who run large companies, using the following table: Entrepreneurs in small/medium Employers who run large companies businesses (iv) List the 15 ways to develop a positive company culture. (v) Refer to Example 9 B and explain where Eveready has and has not applied the 15 guidelines of promoting positive company culture. 9.5 RECRUITING STAFF Recruitment is the process of searching for candidates to employ to fill vacancies in an organisation ( Cambridge Dictionary, n.d.). Once these candidates are ‘reached’ (often through job advertisements), they are encouraged to apply for the jobs being advertised. On the other hand, selection involves the steps by which the candidates are screened and shortlisted, so that the most suitable persons for the vacant posts can be hired ( Australian HR Institute, n.d.). The best candidates are offered a job and assigned to relevant positions, based on their experience, knowledge and skills. Selection as well as job assignments will be discussed later in this unit. The HRM function in all businesses is responsible for recruitment and selection. They need to ensure that an adequate number of staff members work in the company (i.e. avoid labour shortages and surpluses), and ensure that sufficiently talented employees are hired (Huntington, 2018). These are two broad goals of the staffing department within an HRM function. According to Phillips and Gully (2012), recruitment is all activities that convert potential employees into actual job applicants when they

formally apply for a job vacancy. It elicits their interest in the company and/or its available jobs, thus persuading potential employees to apply for positions and eventually accept the job offers extended to them. Recruitment involves key aspects such as sourcing appropriate job applicants. Sourcing ‘happens early in the overall recruiting process. Sourcers search for passive candidates. They might also work with referrals. The sourcer’s job is to create interest in an open position and convince people to apply’ (DeWitt, 2017). After possible candidates have been identified, the recruiter will engage in a discussion with the candidates about the job vacancy and try to encourage them to apply and become an employee. 297 BUILDING A TEAM The process of sourcing involves identifying where the best potential employees are located, so that human resource managers know where to recruit them. This is best understood through an example: suppose a small business in Nelspruit wishes to hire a junior-level secretary. This position requires only one year of previous secretarial experience, no formal qualifi cations, and basic computer and telephonic skills. The human resource department has multiple recruitment options by which to access potential job candidates, but they need to choose the best one or two sources for this position. It would not make business sense to email a university requesting graduates to apply for the job, as this position requires no formal qualifi cations. It also would not be logical to place an advertisement for a secretary within the Sunday Times, which will cost a large amount of money in relation to the low salary level of this job. Based on the job specifi cation for this position, the two best options would most likely be an advertisement in a local newspaper, or an online job advertisement via an electronic job platform such as PNet or Gumtree. This should help you understand why it is important to fi rstly choose a recruitment source, and then design the advertisement that will be used to advertise the position within this source.

Designing job advertisements (i.e. recruitment advertisements) is another key aspect of the recruitment process, as it allows the recruiter to ‘reach’ these job applicants and encourages them to apply for a vacant position. Recruiters can make use of external or internal sources to access potential job candidates. External sources have been used in the previous example – i.e. a company encourages individuals to apply who do not presently work in a company. Such sources are used when organisations need to hire in new talent, rather than promote or transfer current employees. The most common examples of external recruitment sources are as follows (Phillips and Gully, 2012): • Newspaper or magazine advertisements • Online/Internet job advertisements (such as Career Junction, PNet, Gumtree and Careers24 to name a few popular South African sites) • Career links via company web pages, also known as career websites • Social networks, such as LinkedIn, Facebook or Twitter • Employee referrals • Networking • Campus recruiting • Walk-ins/direct job applications • Direct observations • Poaching or pirating staff , or raiding competitors • Professional associations such as the SA Board for People Practices when seeking human resource professionals • Acquisitions and mergers

On the other hand, organisations can choose to use internal sources of recruitment, which target individuals working in organisations outside the business, or those who are currently unemployed. Examples of internal recruitment sources are as follows: • Internal job posting systems • Employee referrals 298 CHAPTER 9 • Job rotations or a job transfer • Succession management processes • Electronic talent inventories (also known as skills databases) • Employee development Insourcing is an important aspect of recruitment; however, there are many more processes of which we need to take note. This unit will now outline the following key processes and tasks that go hand-inhand with recruitment: • Defining job specification and job description for vacant positions • Selecting the right persons for the vacant positions • Interviewing and appointing candidates for vacant positions • Determining the rewards (financial and non-financial rewards) for vacant positions • Creating employment contracts for the new employee 9.5.1 Job specification and job description

When an employment need arises (i.e. there is a vacancy that needs to be filled), then the HRM function must plan to recruit someone to fill the employment gap. This process begins with conducting a job analysis, followed by writing a job description and job specification based on the information collected during the job analysis. A job analysis is the process of identifying key criteria of a job, which will aid in selecting the right person to fill that job (Phillips and Gully, 2012). Conducting a job analysis involves collecting all relevant information about what makes up a job. A job analysis helps the entrepreneur to write up the job specification and job description for the vacant position. What is the difference between a job description and a job specification? • The job’s duties, tasks and responsibilities are included in a job description; whereas • The experience, qualifications and skills needed by a person to effectively work in that position are included in a job specification. How do entrepreneurs collect information for specific job specifications and job descriptions? Typically, a structured questionnaire (i.e. a job analysis form) is used to collect this information. Employees currently occupying the position being analysed, as well as their managers, colleagues and/or subordinates, are interviewed with this form. The questions asked might include the following: • Job title: • Department: • Supervisor title: • Number of hours worked per week:

• Job summary: • Daily job duties: 299 BUILDING A TEAM • Education required to eff ectively complete this job: • Experience required to eff ectively complete this job: • Skills required to eff ectively complete this job: • Equipment utilised to eff ectively complete this job: • Physical demands of the job: • Mental/emotional demands of the job: • Description of job’s environmental conditions: As per Phillips and Gully (2012), this information is used to write a detailed job description (outlining the duties and responsibilities of a job as well as sequences/order of tasks) and job specifi cation (outlining the personal characteristics of the ideal employee who would be able to perform the duties and responsibilities of the job). Therefore, a job description describes the job itself, whereas a job specifi cation describes only the ideal job holder. Importantly, the information in a job specifi cation is categorised as follows: • Essential criteria: The minimum requirements that a potential candidate should have in order to be shortlisted and successfully perform the job, such as a Grade 12 senior certifi cate and three years’ work experience.

• Desirable criteria: The characteristics of the person doing the job, which help that person to perform the job more eff ectively, such as an individual with an Honours degree and six years’ work experience. An entrepreneur conducts a job analysis to assist them with recruitment. The job description and job specifi cation form the basis of the job advertisement used to advertise a vacant position. These documents also assist in managing the performance of the employee once hired, through evaluating whether they are meeting the minimum requirements of the job. Should the employee not adequately fulfi l the duties listed in the job description, then it serves as a reference document for their disciplinary hearing for misconduct or incapacity to perform the job, since it holds employees accountable for their job functions. Finally, the employee’s job grade will be based on the job description and job specifi cation, and thus, their pay scale will be linked to their duties, required work experience and so forth (as discussed later in this unit). It should thus be evident that a job description and job specifi cation are two of the most important HRM documents. 300 CHAPTER 9 (Job description and job specifi cation) EXAMPLE 9C The following example illustrates the typical format of both a job description and job specifi cation. JOB DESCRIPTION Job title Date written

Operations Manager 18 January 2019 Name of employee Name of organisation Kurt Ntsiki Littlewood Produce Summary of job Supervise and perform various duties related to operations and staff management. Job duties Store duties 1. Manage and oversee store managers and casuals, including developing their shift rosters. 2. Visit stores around the Eastern Cape for quality control purposes. 3. Report on the progress from store audits. 4. Develop strategies to address store-related issues, such as underperformance. 5.

Conduct weekly stock counts and replenish stock on a weekly basis. 6. Launch all store promotions. 7. Monitor the performance of promotional stock. 8. Liaise with relevant departments to ensure that stock levels are suitably maintained. 9. Ensure that employees meet their weekly sales targets. 10. Train and mentor staff in relevant operational duties. JOB SPECIFICATION Essential qualities Education Matric (grade 12 senior certifi cate) and a relevant bachelor’s degree Experience Five to ten years’ retail experience in operations management 301 BUILDING A TEAM Skills Time management skills; confl ict-resolution skills; customer management skills; administrative skills; ability to work under intense

pressure Knowledge Understand wholesale and retail operations Desirable qualities Skills Good people skills ; effi cient shop management skills Abilities Capable of working with money and problem-solving Working conditions Work for approximately 9 hours a day and overtime when required, in a retail capcity; be willing to travel frequently and for long periods. (Source: EDGE Learning Media (Pty) Ltd, 2018) Figure 9.1: Example of the format of a job description and job specifi cation 9.5.2 Selecting the right people The selection process only starts after an entrepreneur has defi ned the job specifi cation and job description for the vacant position and sourced job applicants (through external or internal sources). Once suitable job applicants have applied to a business, it is the responsibility of the HRM function to screen these applications, and create a shortlist of job candidates to be considered to fi ll the vacancy. This leads to the second stage of selection, with a smaller number of candidates who are more thoroughly assessed to determine their suitability for the vacant position. Upon completion of the selection process, the job will be off ered to the fi nalist who is viewed as showing the greatest potential for successfully performing the job. 302

CHAPTER 9 This process is not an exact science – it is impossible to predict with 100 per cent accuracy which job applicant will prove to be a hard worker for the rest of their tenure working at the company. However, by using advanced selection tools, discussed here, human resource professionals can improve their ability to make good selection decisions, by aiming to make a non-biased, objective and thorough decision. The aim of the selection process is to hire candidates who best fit the job. They should also fit with their new supervisor, the organisation and the department/team within which they will be working. Ensuring all of these criteria are met is crucial for new employees to be satisfied in their positions and in the organisation. This will result in retaining the employee in the long term, as well as causing higher levels of productivity, and therefore profitability, for the business. Effectively administered selection processes will also identify development needs of new hires, which will help the human resource department to identify in what areas they will need to be trained (either during induction or during the first few months of working at the business). Prior to discussing the selection tools needed to improve candidate fit, it is important to note some practical South African aspects related to selection. The Employment Equity Act governs the selection of previously disadvantaged groups into employment, through the application of Affirmative Action measures. Affirmative Action principles are not unfair discrimination because they seek to repair a previous injustice. Likewise, distinguishing between job candidates can be done based on the requirements of the job itself, and these criteria would apply to any applicant. This is why a thorough job description and job specification are so important within South Africa: they document the inherent requirements of a job, thus making selection decisions legally defensible.

For example, assume a coloured female with two years’ work experience in software design but no formal tertiary qualification applies for a vacancy together with a white male with five years’ work experience and a university diploma. A tertiary qualification and many years of work experience might not be inherent requirements of the job. If the vacancy requires only hiring an applicant with one years’ working experience and a Grade 12 senior certificate, then we cannot exclude the coloured female, as she meets these minimum criteria. According to affirmative action, she would be a more ideal candidate, since she is a member of a previously disadvantaged designated group (coloured female). To limit potential lawsuits where job applicants file for unfair discrimination if not offered the job, it is recommended that South African human resource managers keep all necessary documentation at every stage of selection, to prove that no bias occurred. This includes checklists or selection forms that allow interviewers to rate the performance of job candidates for every selection test, which leads to scores that rate each job candidate. Such a process would provide support for why one candidate is offered a job over other candidates. This prevents situations of unfair discrimination where, for example, a job is offered to someone who did not perform well during the selection process but happened to be friends with the recruiter, or a male human resource professional offering a job to a female who he thinks is pretty, but who does not possess the necessary minimum requirements for the job. 303 BUILDING A TEAM Let us explore several selection tools that can be used to make a successful employment decision: • Curriculum vitae (CVs) and cover letters: In the fi rst stage of selection, human resource managers usually rely on CVs and cover letters to screen out (i.e. reject) job applicants when it is seen immediately that they do not meet the minimum requirements of the

job (i.e. they do not possess the inherent requirements of the position according to the job specifi cation). § A cover letter, sometimes in the form of an email, introduces job applicants through: w stipulating the job for which they are applying; w identifying where they heard of the vacancy; w briefl y highlighting the main skills, abilities, experience and qualifi cations that make them a suitable candidate for the job; and w mentioning how they can be contacted for an interview. Such a letter should be signed by the applicant. This letter demonstrates that the applicant can write eff ectively (a key business skill) in the language required for the position, demonstrating professionalism. § On the other hand, a CV is a full document detailing: w the applicant’s personal details; w their job and/or career objective; w

their school and university record, highlighting relevant subjects passed in relation to the position being applied for; w employment history, including reasons for leaving previous positions; w professional registrations; w awards received; w leadership roles occupied; w skills and competencies; and w contactable references who can attest to the work ethic of the applicant. • Application forms: Some companies use application forms rather than asking applicants to submit their CVs. Electronic application forms are sometimes used when job seekers apply for positions online. Such forms formally record a person’s application for employment, by collecting pre-employment information related to the minimum requirements of the position. Bear in mind that no questions should be asked that invade an applicant’s privacy, disqualify members of designated groups, are not needed to ascertain the applicant’s suitability for the position, do not relate in any way to their potential performance on the job and could discriminate against the applicant in any way (Grobler et al., 2011).

This could include asking them to reveal HIV status, marital status or number of dependents, as these areas create opportunities for discrimination according to the Employment Equity Act . • Telephone screening: This entails recruiters phoning job applicants to ask them initial questions, in order to initially determine whether they meet the basic requirements of the job, can handle immediate stress/pressure, speak the language required for the job fl uently and can communicate professionally. 304 CHAPTER 9 • Interviews: These are the most common form of selection tool utilised by businessess worldwide. This will be discussed in the next section. • Psychometric tests: These psychology-based tests measure the behavioural patterns, personality, mental aptitude, emotional stability, numerical and reasoning abilities, and/or competencies of job candidates – thus evaluating their suitability for the job if these are its requirements. According to the Employment Equity Act, no psychological tests can be utilised for selection purposes in South Africa, unless they have been scientifically proven to be reliable and valid, can be fairly applied to all employees and are not biased to any employee or group. This includes a lack of cultural bias, implying that irrelevant questions or exercises that may be unfamiliar to the racial majority of job applicants may not be used within our country to select staff members. This would unfairly discriminate against individuals who have, through no fault of their own, not been exposed to certain terminology or phrases. Reliability refers to the need for a test to consistently measure all job candidates in the same way (e.g. asking the same questions to everyone), whereas validity refers to the test measuring aspects that are relevant to the job being applied for (e.g. not testing a person’s emotional intelligence if they are is applying to

work as a credit controller who is not required to work in a team or group environment). • Skills/aptitude tests / job knowledge tests: These assessments are not psychological in nature. Rather, they measure basic criteria relevant to the job; for example, questions on how to operate tools or machinery, examinations for specialised job functions such as engineering or problem-solving, or essays written on how to handle customer complaints and queries. • Work samples/simulations: These tools give candidates the opportunity to demonstrate their skills practically; for example, evaluating whether candidates can utilise software programmes, interact effectively with customers, handle pressure in a real work environment, type a certain number of words per minute or handle the physical or emotional demands of a job. • Assessment centres: These might include any of the selection tools referred to above, in order to evaluate the suitability of candidates for stressful managerial positions. Assessment centres occur over a few hours or a few days, with candidates assessed both individually and in groups, by trained assessors taking note of their presentation skills, teamwork abilities, personality, leadership competencies, delegation and administrative skills and ability to work under pressure. Such centres can double as development tools. • Reference checks: These are conducted by recruitment agents, on a final shortlist of job candidates, to evaluate whether their previous managers, teachers/lecturers or colleagues can support the information gained about the candidate during the selection process. A reference can attest to whether the job candidate has a high moral character, is capable of performing the job and has an excellent work ethic. These reference checks usually occur telephonically rather than in person, due to time and financial constraints. • Medical testing: This is a sensitive topic, and may be used only when justifiable for the job in light of medical facts, employment

conditions or social policy, according to the Employment Equity Act. For example, it is justifiable for a pilot to be of excellent physical health in order to operate an airplane; however, it is not justifiable for an administrative assistant working in an office to be tested for HIV/AIDS. The results of these selection tests must be combined using a structured matrix or an evaluation form, with scores attached to the results, in order to objectively decide who the most suitable 305 BUILDING A TEAM fi nalist is. According to the Employment Equity Act, an employer is not obliged to appoint any candidate who has not shown through the selection process to be suitably qualifi ed for the job, referring to formal qualifi cations, prior learning, experience and/or capacity to acquire the ability to do the job within a reasonable period of time. If no suitable candidates are found after the recruitment and selection process, then companies reserve the right not to make an appointment – a clause usually included in their recruitment advertisements. Should a selection decision be made, it is best practice to make a telephone call or send a personal email or letter to the person, off ering them the job; and asking them to examine and sign the employment contract. At this stage, the fi nalist has not yet accepted the job off er. They could still negotiate the off ered terms of their contract; for example, negotiate a higher salary, better benefi ts, fl exible working hours etc. Only once a signed off er of employment is documented, should the human resource department send letters to the other fi nalists who have not been chosen, informing them that their applications were unsuccessful. This saves the embarrassment of rejecting fi nalists who then need to be contacted again if the chosen person declines the employment off er. 9.5.3 Interviewing and appointing

As mentioned before, interviewing candidates occurs during the recruitment (and selection) process. As discussed by Phillips and Gully (2012), an interview is a meeting between a job candidate who has applied for employment and been shortlisted, and the employer who needs to determine their suitability for the job. The purpose of interviewing is to appoint the best candidate for the job through a face-to-face meeting that allows the interviewer to get to know candidates better. The aim is therefore to establish their suitability for the job, through asking questions related to job criteria, and to give the candidates an opportunity to answer questions based on aspects highlighted in their CV. This gives candidates the chance to demonstrate in person what type of employee they would be if hired, which helps interviewers to determine whether candidates match the requirements of the job, and possess the skills, ability and motivation to perform the job eff ectively. The interview can also help to establish whether the candidate would fi t into the company culture, and whether their personality would suit that of the team and supervisor with whom they would be working. Interviews entail one recruiter, or a team of panellists, asking questions to a job candidate either in real life or electronically via Skype. Shortlisted candidates should be contacted in advance, notifying them of the date, time and venue of the interview. At least two days’ notice should be given to candidates, to ensure their availability for the interview. The interview room should be set up to be welcoming and comfortable, to avoid unnecessary nerves and stress for the candidates being interviewed. Comfortable chairs and a glass of water/tea/coff ee should be provided to help candidates to relax. The room should be private with a closed door, and should be free of any disturbances, excessive noise etc. Interviewers should make sure that they prepare thoroughly for the interview by reviewing the CVs of each candidate, and deciding on the type of interview that is going to be conducted. Once the interview begins, the interviewer should shake the candidate’s hand fi rmly with a warm smile, 306 CHAPTER 9

introduce the purpose of the interview and briefly explain the role of the job for which they are being interviewed. Once the interview is complete, the interviewer should give candidates an opportunity to ask any questions that they might have about the company, position and so forth. Interviewers can choose from a number of interview types. Some of these are as follows: • Structured interviews: These focus on asking questions that have been predetermined, on job-related aspects defined by the job description. This ensures fairness and standardisation across interviews. If the job requires specific experience and skills, then questions can be formulated to test the specific abilities required by the position. Examples of structured questions will be provided on the next page. • Unstructured interviews: These are conducted without a predetermined list of questions, which means each candidate is asked different questions. As the interview progresses, the candidate’s responses influence the next questions that the interviewer asks. This makes it difficult to compare answers across job candidates, and challenging to rate candidates fairly against one another. Consequently, this negatively affects the validity and reliability of such interviews. However, these interviews could be beneficial when interviewees need to analyse a candidate’s in-depth work experience, background, personality and so forth (such as for managerial positions). This is because they allow the opportunity for interviewers to evaluate the persona of a job candidate on a deeper level based on their CV and job history, compared to asking the same standardised questions (which are less personal) to every candidate interviewed. • Behavioural interviews: These ask questions that test how the candidate has previously behaved in employment-related situations, in order to predict how they would act in future situations if hired.

• Situational interviews: These ask questions that test how the candidate would act in hypothetical future employment-related situations if hired. • Stress interviews: These ask questions that place the candidate under pressure, to assess whether they are highly emotional and might ‘crack’ when stressed. • Informational interviews: These ask questions that merely collect information related to a specific job, career or industry. • Telephone interviews: These are conducted telephonically to save time and costs. They are quicker and more focused in nature, and usually form part of a company’s initial screening process. • Video interviews: These are used when candidates live further away and cannot travel to be physically present for the interview. Video software such as Skype is utilised, which requires a high line-speed Internet connection. • Group interviews: These allow for a number of candidates to be interviewed in the same room, at the same time. • Panel interviews: These take place when more than one interviewer is present to interview candidates, at the same time. This often occurs for management positions, in which more than one person needs to rate candidates due to the seniority or importance of the position undergoing recruitment. 307 BUILDING A TEAM • Lunch/dinner interviews: These occur when candidates are taken out to eat, so that their social skills can be tested, as well as their ability to handle themselves in public surroundings. • Final interviews: These are the last stage in the selection process, and might be the second or third interview that the candidate has had

with the company. This interview will determine whether the candidate is off ered the job or not. These interview types can overlap; for example, an unstructured interview can ask behavioural questions and can take place over the telephone, or video interviews can be conducted by a panel who ask stressful questions to the job candidate and so forth. All interviews should be designed to be systematic, through asking all job candidates the same questions. This makes sure that the process is thorough, fair and unbiased. Only questions that are relevant to assessing the candidate’s suitability for the job should be included. For example, the following questions should never be asked, because they might infringe on a person’s rights according to the Employment Equity Act55 of 1998. The interviewer might not like their answers, and therefore directly or indirectly discriminate against candidates by not shortlisting them, even though these answers have little to do with their suitability for the job: • Are you pregnant? • Are you planning to start a family in the next two years? • How many children/dependants do you have? • Where did you grow up? • What religion do you practice? • Are your parents supporting you fi nancially? Rather, the following questions are behavioural/situational in nature. They are fair questions that every job candidate who is interviewed can be asked, and would directly help to assess whether a person is suitable for a job or not: • Why should we consider you for this job? • What do you want to be doing ten years from now?

• What computer programmes do you use most often in your current job? What is your level of competency with them? • How do you generally handle confl ict? • Your supervisor tasked you with completing an assignment, and then left for a week. You do not fully understand the assignment, but now cannot reach her while she’s away. What would you do? • If your manager unfairly criticised you, what would you do? • Describe what ‘success’ means to you. • Give us an example of when you have demonstrated your time management skills. • What type of supervisory training have you completed in the last three years? To avoid discrimination, every candidate should be asked the same questions, and these questions should align with the requirements of the job as outlined in the job description and job specifi cation. This suggests that in the South African context, it is legally safer to make use of 308 CHAPTER 9 structured rather than unstructured interviews. This will help to ensure fairness, objectivity and consistency. It will allow interviewers the opportunity to compare the answers of all candidates, and thus shortlist the candidates who answered job-related questions in the best manner. The following steps can be followed to ensure consistency and standardisation: • Do not lead candidates on by helping them understand the question to the point where you suggest the appropriate answer. Only supplement their understanding of a question by rephrasing it in a clearer, simpler manner.

• Ask follow-up questions only if they will provide more insight into an aspect that demonstrates the candidate’s suitability for the job. • Avoid the discriminatory questions mentioned previously. • Avoid harassing candidates or making inappropriate comments about their personal or physical appearance. • Avoid intimidation, discrimination, bias and subjectivity based on personal feelings. • If interviewing disabled candidates, ensure that the interview room is accessible and that reasonable adjustments/accommodations have been made to ensure accessibility. • Keep all information obtained in the interview confidential. Share the insights gained in the interview only with those who will aid the interviewer in making a selection decision. • Justify the selection decisions made by providing reasons for shortlisting some candidates over others. This can be done by providing a rating for each candidate, according to each question or an overall impression rating. Some of the aspects that candidates could be rated on might include timeliness, problem-solving ability, communication skills, motivation for the job, competency to perform the job, ability to work in a team etc. • Once ratings have been provided, candidates can be ranked from highest to lowest based on these scores. This ensures that the most suitable candidates are shortlisted or offered the job. • Keep records of the interview and the candidates’ answers, including the score sheet showing the rating of candidates based on their answers. These records can be filed by the human resources department. This will help to avoid legal issues once a selection decision has been made. • Keep candidate information confidential and only discuss responses with those who are aiding in the selection decision being made.

It is essential that candidates arrive on time for their interviews, are well-prepared by researching the company prior to the interview and ensure they have an acceptable personal appearance and demeanour. Once the interview and all other selection methods have been finalised – and the best person for the job has been chosen and signed their job contract – then we can say that they have been formally appointed. Only once the employment contract has been signed is the appointment ‘official’. After this, the process of induction/orientation can take place. Induction is also known as onboarding. It involves three aspects: • Firstly, new hires go through the process of completing all their employment-related paperwork. 309 BUILDING A TEAM • Secondly, they are familiarised with the job and its responsibilities/duties; the company’s history, organisational charts, policies, procedures and codes of conduct; medical aid and pension fund information; the physical work environment including location of bathrooms and canteens; any tools and machinery that will be used on the job; their new co-workers and other staff such as the managerial team, subordinates, security personnel, cleaners, front-ofhouse staff and so forth. • Finally, new staff are provided with on-the-job training or formal training workshops to ensure they are equipped with the skills necessary to perform well in their new positions. This process could take anything from a few hours on the fi rst day of the new hire’s appointment, up to a few weeks or months of their starting to work at the company. It can depend on the level of the

position and the amount of familiarisation required of the job or the company’s processes. Importantly, it is a planned process by the HRM function which requires advance thought and eff ort. The induction process is planned prior to a new employee beginning work at the business. This process can be summarised in the following steps: • An induction plan should be developed, outlining each activity that the new employee will go through, together with the name/s of the relevant employees who will be guiding that part of the process. The date and time of each activity should be listed, and the plan should be sent to relevant staff in advance. For example, suitable trainers need to be made available should on-the-job training need to be conducted on the fi rst day of work. • All new hires should be contacted prior to beginning work, welcoming them to the business and notifying them of their starting time, date and location of work. This communication should include how they should dress for work, who they should report to on their fi rst day and whether they should bring anything with them. • A mentor should be allocated to each new hire if appropriate/necessary, and this person should be briefed of their duties prior to meeting the mentee. • All practicalities relating to new hires should be arranged, including ordering their staff /access cards, preparing their offi ce/desk/workspace, ordering their technology such as computer/ laptop/cell phone if required, notifying payroll of their particulars to avoid delays in wage/ salary payments, printing an information pack of company policies/procedures/maps, printing their business cards, ordering their personal protective equipment and so forth.

When the new employees arrive for their fi rst day, this preparation should ensure that the process of induction rolls out smoothly as per the induction steps discussed above. 9.5.4 What to pay staff Rewards at work are given to recognise an employee’s service, eff orts and/or achievements, including both pay and benefi ts that form an employee’s total rewards package (Corby et al., 2009). Rewards provide job security, which helps employees to meet their basic needs (i.e. rewards help to see to their fi nancial and psychological needs). They also serve to value employees and appreciate their contributions to the business. Finally, there are legal reasons for providing compensation to staff , according to the Basic Conditions of Employment Act. 310 CHAPTER 9 This aspect of HRM is important for recruiters because job candidates need to be informed of their salary and benefits packages prior to signing their employment contacts. In some cases, such rewards packages are negotiated and agreed to, prior to the individual accepting the position or not. Some job candidates also might not understand the rewards packages that are being offered to them (both financial and/or non-financial rewards), so recruiters must be able to explain these to the potential employee. The primary objectives of reward systems are therefore to: • attract talented employees to work at the business; • encourage them to stay working there in the long term; and • motivate them towards continuous high levels of performance. Compensation itself generally refers to financial ways of rewarding staff, also known as salary, pay or remuneration, which are terms

used interchangeably. However, many forms of non-financial rewards are used in companies throughout South Africa. A distinction can be made between financial and non-financial rewards. Financial rewards include an employee’s base pay as well as incentives, also known as performance-related pay, and any bonuses and other payments provided to the employee. Several types of financial rewards are described below: • Base pay is the amount agreed to as an employee’s set salary or wage, paid monthly or weekly, as a direct reimbursement for services rendered at a business. It does not fluctuate with performance. In a sense, base pay merely rewards an employee simply for being present at work and doing their job, according to set performance standards. • Employers can choose to provide incentives to employees in addition to base pay, to specifically reward them for meeting certain targets, such as reducing defects, running a special project successfully, gaining a tender, receiving high praise from a customer and so forth. It forms part of an employee’s total remuneration, but importantly, it fluctuates rather than being a consistent payment. Incentives must therefore be re-earned every performance cycle, and are therefore not ‘expected’ rewards. Incentives are designed to motivate employees to continue putting in high levels of performance, rather than only ‘showing up at work’ and meeting the minimum requirements of their jobs. Incentives reward exceptional performance, not standard performance. Both short-term and longterm incentives exist in South Africa. For instance, the latter being in the form of shares provided to employees. • Bonuses are similar to incentives in that they do not form part of an employee’s base pay package; however, they might be provided for reasons other than performance; for example, birthday-month bonuses or the traditional ‘13th cheque’ payouts. Consequently, they may come to be expected by employees, depending on the financial performance of the business rather than the individual performances of employees.

• Skills-based pay could be paid to employees after completing certain training courses or programmes. • In addition, inconvenience pay is a requirement in South Africa according to the Basic Conditions of Employment Act. Employees falling under a certain pay threshold are entitled to overtime 311 BUILDING A TEAM pay, and many employees are provided with at-risk pay, standby pay and/or shift payments depending on their job contract and nature of their work. Non-fi nancial rewards, in contrast, are desirable ‘extra’ rewards that attract employees to a particular job or company, but do not directly increase their fi nancial status. The primary form of non-fi nancial reward administered in South Africa is benefi ts. Benefi ts are indirect payments, with companies paying for a service rather than providing employees with cash itself. They fulfi l the moral obligation of employers to ensure that their employees are covered for: • their retirement; • any health risks and emergencies; and/or • any other insurances such as disability cover, life cover and/or income protection. Benefi ts might also include: • company-subsidised housing and/or loans; • the use of company vehicles; • the use of company technology such as laptops or cell phones; • car allowances; • petrol reimbursements;

• study benefi ts such as payment of tuition fees or time off to study; • payment of professional memberships or services; and • gym membership fees. Certain benefi ts are required by law in South Africa, such as unemployment insurance (as per the Unemployment Insurance Act 63 of 2001), as well as compensation for occupational injuries and diseases (as per the Compensation for Occupational Injuries and Diseases Act 130 of 1993). In addition to benefi ts, multiple other forms of non-fi nancial rewards can be administered, including: • job titles; • large, private offi ces; • designated parking spaces; • fl exible working hours; • subsidised meals; • training opportunities; • on-site gyms, cafeterias, canteens, childcare facilities and/or laundromats; • physical working conditions; • opportunities for promotion/advancement; • discounts on purchases; • work-life balance opportunities; • performance and career management;

• enjoyable work colleagues; and • a positive organisational culture. 312 CHAPTER 9 Both financial and non-financial forms of rewards can be classified as extrinsic in nature, since they are provided by external sources such as management, and fall outside the scope of the job itself. They are tangible, transactional rewards provided to employees for undertaking work within the context of employment (Perkins and White, 2009). In contrast, a final type of reward is intrinsic rewards. These are personal, internal, psychological responses to the work that employees perform, which stem from the manner in which their work is designed (Renard and Snelgar, 2016). Thus, intrinsic rewards arise from employees feeling rewarded by their work itself – i.e. how their job rewards them and how much personal satisfaction employees gain from being employed in their jobs. There are five forms of intrinsic rewards, (Renard and Snelgar, 2016): 1. Meaningfu l (working toward a higher purpose through one’s job) 2. Flexible (being provided with autonomy to make decisions at work) 3. Challenging (to grow and develop within one’s tasks) 4. Varied (rather than monotony in daily activities) 5. Enjoyable (to love one’s work and be passionate about it) There are two primary ways to determine compensation that is internally fair and externally equitable, namely through job evaluation and benchmarking. Job evaluation is the first process that must be conducted, as it determines whether salaries are fairly distributed within an organisation through developing a suitable structure of jobs within the business. According to Bussin (2011), job evaluation is the

systematic and objective process of comparing one job to another within an organisation, without looking at individual characteristics, personality or performance. It involves ranking job descriptions with one another. The purpose of job evaluations is to create a formal system that explains why employees earn what they do, thus providing a logical basis and consistent rational for pay structures, and allowing human resource professionals to be able to coordinate pay rates and ensure that remuneration is fair and equitable (Bussin, 2011). Job evaluation begins with comparing job descriptions with one another, known as the process of job grading. Both Bussin (2011) and Newman et al. (2017) describe the job grading process as investigating the tasks, duties and responsibilities of one position in comparison to another. In order to do so, point-methods of job evaluation rate each job in terms of how they score for certain compensable factors. Compensable factor s are aspects of a job that a company is willing to pay for because it helps the business realise its strategy and make a profit. The following are examples of compensable factors: • Level of decision-making • Problem-solving • Consequences of errors made • Pressure of work • Job impact • Accountability • Complexity of job • Number of routine tasks • Multinational responsibility

313 BUILDING A TEAM Jobs that are graded higher than others would comprise job tasks scoring higher in these types of factors. Scoring higher for compensable factors means that the company values this work more than lower-level jobs – i.e., such jobs hold more worth compared to other jobs. Owing to the fact that the business values certain jobs more highly because of these factors, it is willing to pay more to the employee in the form of their salary. This explains why job evaluation determines the fairness of salaries. All the scores obtained for each job in an organisation can be ranked to form a job structure, indicating lower-level jobs through to higherlevel jobs. Human resource professionals need to develop job grades (or salary bands) into which these jobs ‘fi t’ on a graph, thus forming a salary structure indicating job grades on the x-axis, and pay ranges on the y-axis. These grades and pay ranges are needed to track variations in pay among employees. For example, assume an employee enters a job that has been evaluated within ‘Grade 3’ in the company’s job structure. Suppose the company has set the pay range for Grade 3 as R 10 000 to 16 000 per month. This suggests that any person occupying a job in this grade would earn anything between R 10 000 to R 16 000 per month. Job holders in Grade 3 who earn around the minimum for that grade (R 10 000 to R 11 000 per month) would probably have: • limited time in the organisation (i.e. short company tenure); • the minimum-required work experience; • the minimum-required qualifi cations; • a poor or average performance record; and/or • limited skills.

On the other hand, an employee with more-than-required qualifi cations and work experience and an excellent record of performance would earn around the maximum for that grade (R 15 000 to R 16 000 per month). This explains why people working in the same company within the same types of jobs earn diff erent salaries, yet these diff erent salaries are still deemed to be fairly distributed. When salaries are determined in this manner, it is said that internal equity exists in the business. Thus, human resource professionals need to evaluate every new employee, and all current employees on an annual basis, to determine their salaries in line with their salary structure. Once a job structure exists after job evaluation, then benchmarking can occur. This is when human resource managers access market surveys from which they can compare their internal salaries with external salary data, to determine their competitiveness. In order to do so, companies must ensure that they ‘match’ their own jobs with the jobs of other companies. To match jobs with one another, job descriptions are used. For example, jobs that require the same level of responsibility, with similar tasks being conducted and a similar level of experience and qualifi cations needed to perform them, would be ideal to compare with one another. To match companies with one another for successful benchmarking, companies of the same size, working in the same industry, with a similar revenue/turnover and in the same geographical location must be chosen. 314 CHAPTER 9 In order to benchmark salaries, data from market surveys is needed. Companies such as 21st Century in South Africa, one of Africa’s largest remuneration consultancies, conducts these market surveys (also known as salary surveys) ( 21st Century, 2016). They correlate the positions in a client company with the jobs in their database, and produce reports detailing whether the client company is paying their

staff above or below the average rate in the market. Such surveys provide insight into the annual pay or total earnings levels of organisations in similar industries at a given point in time, which allows organisations to compare their pay and benefits to similar organisations. This ensures they can keep record of market movements in pay levels within their industry (Bussin, 2011). When salaries from one job are compared to another from a different company, it is said that external equity exists. The goal is to ensure that employees in a company are neither overpaid (which would dig into the company’s profits unnecessarily), nor underpaid (which will cause valuable employees to leave the company and work elsewhere). Potential employees are more likely to accept job offers when the rewards packages they are being offered are both internally and externally equitable. It is important for recruiters to have this knowledge, should job candidates not understand the financial and/or non-financial rewards being offered to them. As mentioned earlier, negotiation of rewards packages might occur if job candidates believe what is being offered by the company is not competitive enough, or does not reflect their true worth. This process of negotiation needs to be finalised prior to an employment contract being signed. 9.5.5 Employment contracts Lastly, employment contracts go hand-in-hand with the recruitment process because when a top candidate becomes an official employee at a company, they accept the job offer by signing an employment contract. Employment contracts are the basis of an employment relationship, which exists between each employee and their specific employer. This contract is vital as it legalises their terms and conditions of employment, governing what is expected between the employer and the employee. In this way, it regulates expected behaviours, pay, hours of work and so forth. There are always two parties in any contract; for a contract of employment, it is the employer and the employee. The employee

makes themselves available to work for the employer either for an indefinite or predetermined period of time (i.e. the employee provides services to the employer as determined by the job description). In return, the employee expects a fixed or variable wage/salary if they perform as determined. In this way, the relationship between employer and employee is clear, controlled and defined. Every employment contract has certain essential elements. Firstly, such contracts are always voluntary in nature ( The South African Labour Guide, n.d.). Two parties must comprise the contract, and the terms must be agreed to by both parties. Each party to the agreement has specified duties. The contract is either for an indefinite period or for a specified period in the case of a fixed-term contract. Finally, employers agree to pay the employee for their duties, and the employer is allowed to determine how the employee will perform their duties. 315 BUILDING A TEAM According to Section 29 of the Basic Conditions of Employment Act ( Department of Labour, 2012), at the start of employment, employers must give all employees a document containing the following information in writing (but not limited to these aspects): • Employer and worker details • Employer’s full name • Employer’s address • Worker’s name • Worker’s occupation, or a brief description of the work • Employment details • Place(s) of work

• Date of employment • Working hours and days of work • Payment details • Salary or wage, or the rate and method of calculating wages • Rate for overtime • Any other cash payments • Any payments in kind and their value • Frequency of payment • Any deductions • Leave details • Period of notice required for termination • Period of contract Independent contractors are excluded from the above in terms of employment contracts. The details specifi ed can be provided to employees in the form of their employment contract, which must be signed by both parties. Alternatively, an employer can provide an employee with an appointment letter, which is signed upon the employee accepting the job. Finally, the employer could detail these aspects in a handbook given to employees when they commence employment. This handbook details their policies and procedures, as well as terms and conditions of employment. The Basic Conditions of Employment Act forms the foundation of employment contracts, together with the Labour Relations Act 66 of 1995 (LRA). In addition to these pieces of legislation, employment

contracts are defi ned by the specifi c terms and conditions relevant to the workplace in which an employee operates, such as specifi c working hours, annual leave allowances, ability to work from home and so forth. These terms and conditions can never be less favourable than those prescribed in the Basic Conditions of Employment Act. For example, if by law an employee is entitled to one day’s leave for every 17 days worked, then it is illegal to provide employees with a day’s leave after working for longer than this – e.g. 25 days. It is acceptable, though, to give the employee a day’s leave after working for every 13 days, as this is more favourable than what is required by law. It is apparent, therefore, that labour laws apply to employees and employers operating in South Africa in general, whereas employment contracts are specifi c agreements that diff er from employee to employee in each organisation. 316 CHAPTER 9 ACTIVITY 9 B (i) Explain the difference between recruitment and selection of staff. (ii) Briefly discuss why employment contracts are necessary at work. (iii) Differentiate between job description and job specification. Provide a brief example for each. (iv) List the two types of job specification criteria that are used in recruitment.

(v) Imagine you are a recruitment consultant, and you are approached by an entrepreneur who wants to hire waitrons for their new coffee shop in Cape Town. The entrepreneur does not know anything about recruitment. Help the client by summarising the basic processes that are necessary to recruit the waitrons. 9.6 MANAGING PEOPLE Up to this point in the unit, we have discussed how to essentially ‘build a team’ of employees for the company by outlining how to hire the most suitable employees for a job, and how to pay them fairly as well as provide them with the correct employment contracts. After an employee is hired, an entrepreneur should ensure that they are properly managed. In other words, after an entrepreneur has assembled ‘a team’ of employees, they need to ensure that the team knows what they are doing and that they are fulfilling their duties well. We now turn attention to managing their work and performance once they have been hired. 9.6.1 Assigning work Assigning work to employees is usually aligned with the job description that was used to hire each individual employee, since the employee was recruited with this purpose in mind. That is, if an employee is applying for the job of ‘contracts administrator’, then they would most likely be assigned to that job if hired. However, in some cases, recruiters consider placing job applicants in other positions for which they are better suited, upon reviewing their CVs and interviewing them. Their skills, knowledge, expertise and abilities might be more in line with an alternative position, not the job for which they applied. Additionally, once employees are working for a company, their supervisors might observe their performance, work ethics and display

of skills, and request that they be moved to an alternative job (sometimes this involves a promotion). In essence, in both situations, what is happening is that an employer is placing an employee into a role that better suits them as well as the organisation and work team. Imagine that the process of hiring is like completing a puzzle: you need to find the position that best fits the skills and personality of each employee. Every employee also needs to fit with the other employees to ensure that the puzzle is built correctly, with all employees working productively together. Many employees are also hired to complete specific project-related work, for internal or external clients. Placing employees in the correct projects is also known as the process of assigning work. 317 BUILDING A TEAM For example, when an auditor is placed on a job, they are expected to possess the necessary skills and knowledge to complete the project with a high degree of excellence. Brenner (n.d.) highlights that in order to do so, a good manager must be aware of the strengths and weaknesses of every employee in their department. Clear and concise communication is needed to ensure that employees are given the correct work assignments, doing jobs that they are able to perform and that they enjoy. Huhman (2015) provides some guidelines to eff ectively assign work to employees. Firstly, managers must evaluate where the strengths of each employee lie, so that they can be assigned work within their competency level. This will lead to employees feeling more engaged within their work, which is linked to being more committed and dedicated to one’s tasks. Additionally, when employees use their strengths, then they produce better work results, exhibit more vitality at work, concentrate better and demonstrate more passion for their jobs.

Moreover, when employees are in jobs that capitalise on their strengths, then employers benefi t through running more successful businesses (Huhman, 2015). The key is to let employees do whatever they do best – be it sales, report writing, training and so forth. Training might be necessary for employees to be able to develop their strengths so that they become excellent at doing certain tasks. Such training is worthwhile despite its expense, because it will create employees who can do their jobs more eff ectively, which also means less costly mistakes at a later stage. Huhman (2015) also suggests that mentoring can be used to ensure that skills and knowledge are transferred between employees. Not only can junior staff learn from their mentors, but they can also teach their mentors about their own areas of expertise, as they might have new or better ways to consider performing tasks at work. This also leads to mutual respect for one another’s strengths. Finally, managers can provide regular feedback to their employees relating to their job performance (Huhman, 2015). In this way, performance can be regularly reviewed, and employees can be reassigned to diff erent jobs, tasks or departments before areas of concern grow larger. This leads to our next section, which details how performance can be managed at work. 9.6.2 Managing performance Performance management is an ongoing process of communication that takes place between a manager and an employee throughout the course of a year, involving coaching, feedback, engagement, motivation and improvement. One element of performance management is conducting regular performance appraisals for employees, also known as performance reviews, conducted on a sixmonthly or yearly basis. Thus, performance management broadly includes the creation of an optimal work environment for employee performance to be stimulated on an ongoing basis. Performance appraisal, on the other hand, refers to the specifi c act of reviewing the individual performance of every employee, usually by their

manager, superior or supervisor, in relation to predetermined and recorded performance standards. 318 CHAPTER 9 Several core areas need to be considered when conducting a performance appraisal. These are discussed as follows: • Regular reviews should take place rather than once or twice a year, since early detection of performance issues need to be identified. This will ensure that small issues do not become more ingrained habits, such as arriving late for work or producing work of a poor quality. Small issues become larger issues over time, resulting in counterproductive work behaviours, which are more difficult to fix at a later stage. This is where training and mentoring are beneficial, as they attempt to eradicate performance issues in a proactive manner before further issues develop. This aims to avoid disciplinary procedures, and eventually the dismissal of employees who fall below required performance standards in the long run. • It should be very clear what behaviours, skills, competencies or productivity outcomes are being assessed during a performance appraisal. Managers should decide on the most important areas of an employee’s job, and ensure that these elements are isolated and assessed within a performance appraisal form. This is called setting performance standards, and is a key managerial role. • Performance appraisals involve managers not only knowing what performance to measure, but also how to measure such performance effectively. Performance standards should be quantified through measurement on some form of a rating scale, to ensure objectivity and avoid biased reviews of performance. It is also easier to complete quantitative performance appraisal forms compared to forms requiring managers to write paragraphs about their employees’ behaviours at work.

• Once performance standards have been set and it is clear that performance can be objectively measured, numerical values are assigned to performance standards through the use of a rating scale, which is then developed into a performance appraisal form. Rating scales provide an opportunity for managers to indicate the frequency with which they have observed behaviours of employees at work. Various adaptations of rating scales can be utilised for the purposes of performance appraisal, as indicated in the following table. This uses ‘punctuality’ as an example of a performance standard and shows seven different ways of assessing this same dimension, using different wording and rating scale options. Such scales should be kept simple and understandable, so that lower-level employees with limited reading skills can understand how their performance has been appraised. The employee Strongly Disagree Neutral Agree Strongly generally arrives disagree agree on time for work. This employee Never

Almost never Occasionally Almost Always arrives punctually always for meetings. The level of their Unsatisfactory Less than Average Satisfactory Exceptional punctuality can be average defined as: 319 BUILDING A TEAM The employee’s Very poor

Fair Good Very good Outstanding ability to arrive punctually for work is: They arrive at work Not at all true Not usually Somewhat Very true Completely on time every day. true true true This employee can Never on time Seldom on Occasionally Often on

Extremely on be described as: time on time time time I have seen the Not once Rarely Sometimes Frequently Constantly employee arriving late for work. (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 9.1: Examples of rating scales used in a performance appraisal form measuring punctuality • Management should clearly communicate performance standards with employees, in advance of their performance appraisal. This is only fair, since it ensures that employees are aware of their expected levels of performance. For example, employees should be provided with their job description upon joining the business, so that they are aware of what is expected of them at work. Specifi c targets or goals based around their general job-specifi c duties should be

predetermined ahead of a performance cycle and communicated to employees. • Performance appraisal forms can be completed by managers as well as customers, suppliers, colleagues, team members and subordinates, to form an overall view of the employee’s performance in all spheres. This is known as a 360° performance appraisal. • It is crucial that managers are trained in conducting performance appraisals. They must be able to appropriately measure performance using rating scales; limit their own personal feelings and subjectivity; and provide performance feedback to their staff in a positive, uplifting manner that will stimulate higher performance, rather than break down the morale of their employees. • Performance appraisals should be conducted individually and in private. Once a manager has conducted a performance appraisal for each employee, they will meet with each employee to have a personalised discussion regarding their behaviours at work during the period of performance evaluation. Since the onus is on managers to complete objective performance appraisals, in performance appraisal meetings attention should turn to giving employees a chance to refl ect on their own performance. At this stage, they should be given the opportunity to explain their performance, and/or share ideas on how to overcome issues aff ecting their performance. • When identifying areas where performance has been poor or below standard, it is useful for managers to fi nd out from employees why such poor performance occurred. For example, perhaps an employee had suff ered a death in the family or a personal crisis, which negatively aff ected their performance at a particular stage. Employees should be made to feel at ease during a performance discussion so that they feel comfortable to share such insights, bearing in mind that most employees approach performance appraisals with trepidation, fear and anxiety. Performance discussions should be encouraging and focus on developing solutions to problem areas, as opposed to managers perceiving this to be a time to punish employees for mediocre performance.

320 CHAPTER 9 • Performance appraisal meetings should include a personalised development plan (PDP) for every employee, to detail the course of action they should take to improve or maintain their performance in relation to their set performance standards. Specific solutions should be listed in the PDP, and new performance goals and objectives should be set that are mutually beneficial to both the employee and the organisation. All actions written in the PDP should be accompanied by timelines, to ensure that employees and their managers are aware of the deadlines to which they are being held accountable. • The outcomes of every performance appraisal should be recorded in writing so that follow-up evaluations of performance can be conducted in relation to PDP’s drawn up during such appraisals. Performance appraisals should be signed both by the evaluator and the employee. • The results of performance appraisals are confidential, and should only be shared with management and relevant human resource practitioners. Performance appraisals generally culminate in salary increases when it is determined that employee performance has been satisfactory. As previously discussed, salary decisions need to be made fairly and with no bias. Thus, linking an employee’s salary increase with their excellent performance review will provide a legally defensible basis for one employee to earn more than another. This limits employees being able to take their employers to court, claiming unfair discrimination on the basis of favouritism relating to gender, race, age and so forth. Performance appraisals also lead to the identification of short- and long-term problem areas of employees, such as performance areas needing improvement or developmental areas in which the employee

personally wants to grow in order to achieve their career goals. It would be difficult to know in what areas employees want or need to be trained, if their performance was, firstly, not formally evaluated, and if they were asked about their desired career paths. Performance appraisals may result in disciplinary action when it is uncovered that employees are falling behind required standards. The use of the performance appraisal form thus serves as a legally defensible document for disciplinary procedures, substantiating a verbal/written/final written warning, or a demotion or dismissal. 9.6.3 Training staff The following section discusses the human resource field of training and development, with a specific focus on distinguishing between these methods, as well as the methods for conducting these processes. In addition to assigning people their jobs and roles as well as managing their performance, entrepreneurs should facilitate training and development for their employees. Training is the process of employees being taught new skills, knowledge or capabilities, in order to improve their performance at work, and thus assist their organisation in realising its business strategy. Such training can cover the following skills (Grobler et al., 2011): • Technical skills – e.g. the knowledge required to operate equipment, work processes and/or new technologies needed to perform their jobs. • Conceptual skills – e.g. gaining an understanding of the company’s strategies and financial objectives. 321 BUILDING A TEAM • Human relations skills – e.g. interpersonal skills and the ability to motivate and communicate with staff .

Training is of particular importance within the South African context, given the shortage of skills in our country. Within the context of the Skills Development Act 97 of 1998, our government places an emphasis on improving the quality of the work lives of employees through increasing their prospects to better employment. This is primarily made possible through employees gaining the knowledge and understanding needed to operate within higher-paying positions. Training employees will result in improving productivity at work, which can cause an improved competitive advantage for businessess owing to: • staff learning how to operate more eff ectively and effi ciently; • implementing more cost-saving measures; • making more products in less time and at a higher quality; • decreasing the number of costly mistakes made at work; • developing better service to their customers; • improving employee decision-making, problem-solving and creativity; • enhancing team work; and • stimulating more lateral thinking. Within the South African context, an outcomes-based training model is applicable within companies, which entails the following: • Firstly, a training needs analysis must be conducted, which identifi es any issues or problems that training should address on an organisational level (e.g. strategic training), task level (e.g. specifi c skills needed for employees to perform their jobs) and personal level (e.g. rectifying performance issues when employees do not operate in line with what is required, according to their job description and person specifi cation) (Gomez-Mejia et al., 2010).

• Once companies know in what areas training must be conducted, they should begin to develop a training programme by determining learning outcomes based on unit standards. Truman and Coetzee (2009: 23) defi ne a unit standard as ‘a registered statement of education and training outcomes and their associated assessment criteria, together with administrative and other information as specifi ed by the South African Qualifi cations Authority (SAQA) regulations’. Such statements describe the scope and context within which a trainee’s competence must be assessed, by specifying the results of the learning that should take place during training (Truman and Coetzee, 2009). • Thereafter, assessments must be designed based on assessment criteria. Assessment is a strategy of gathering data that will measure a trainee’s ‘ability to demonstrate specifi ed applied competencies against agreed criteria’ (Truman, 2009: 213). For this reason, every SAQA-registered unit standard lists assessment criteria below each of its specifi c outcomes. This assessment criteria lists the evidence that is required for a Sector Education and Training Authority (SETA)-registered assessor to make an informed decision about whether a trainee can be deemed competent or not for each specifi c outcome (Truman and Coetzee, 2009). • The fourth step is for a trainer to develop lesson plans and training materials, in order to guide what will be taught during each training day, as well as plan the resources for the training. This 322 CHAPTER 9 is a practical step, focusing on administration as well as designing the content of a training course. • The training programme will then be developed through deciding on either a classroom-based approach (used in typical seminars or workshops), a workplace-based approach (i.e.

on-the-job training) and/or a technology-based approach (including online or e-learning). Specific training methods will be chosen based on the relevant approach, such as face-to-face facilitation. It is important that an acceptable instructional design method be chosen that is suitable for adults, who learn in a different manner to children in a classroom environment. More stimulation, engagement and active participation is needed for adult learners. • Subsequently, the training itself will be conducted by a facilitator who is a subject matter expert with experience in teaching technical, conceptual and/or human relations skills. • After the training, the trainees should submit their assessment material for evaluation according to the SAQA standards previously mentioned. The assessor’s judgements will be moderated by a SETAaccredited moderator, in order to determine whether assessment decisions should be upheld or not. This determines the trainee’s competence in the field being taught, and results in them becoming certified in the course if competent. • Finally, the training process itself must be evaluated to analyse the usefulness of the content, the quality of the facilitation and training venue, and how trainees reacted to the learning process itself. Moreover, it is important to determine whether any change of behaviour occurred at work after the training, such as improvements in customer service levels or reduced product defects in manufacturing. This will aid in assessing whether any business results were achieved, which is the overall purpose of training. In this way, return on investment can be calculated, which places focus on financial and productivity outcomes. All training programmes should be continuously improved based on this evaluative feedback. On the other hand, development can be understood as building up a broader range of skills, particularly those required for employees to

progress into, or operate within, managerial positions and/or improve their performance in their current positions. Usually, this aligns with the formulation of a PDP, which identifies the strengths and weaknesses of employees as well as any behavioural or performance issues that need to be rectified. Putting such a plan in writing serves as a form of action plan, to ensure that corrective action is taken by certain deadlines, such as attending training programmes or working with a mentor over a certain period of time. Various approaches can be taken to holistically develop employees. These approaches can be used in conjunction with the formal training programmes we have just discussed, or can be separate processes utilised for individual employees showing potential through their performance. • Job redesign: Employees can be challenged at work by providing them with increased responsibilities, opportunities for decisionmaking and problem-solving, and more detailed or complex tasks. This serves to empower them by passing on heightened accountability for their tasks. It also aids in improving their autonomy at work, making them feel more in control of their decisions. • Job rotation: Employees can be rotated across multiple positions, departments and/or geographic locations in order to widen their experience and aid them in gaining skills and 323 BUILDING A TEAM opportunities in diff erent working environments. This exposure to diff erent areas of a business could result in employees being considered for promotional opportunities in the future. • Mentoring: A mentor assists an employee in advancing their career and developing aspects of psychological wellbeing at work (Grobler et al., 2011). This is done through regular meetings in which the mentor passes on advice concerning career paths, progression through the company, opportunities for promotions, training opportunities, strengths and weaknesses of the mentee, networks to

use when information is needed and so forth. The mentor also advocates on behalf of the mentee in times of promotions or other opportunities at work. • Coaching: This process focuses on helping employees develop and reach specifi c goals and targets. It is therefore diff erent to mentoring, as it is less broad and long-term in nature, rather taking place for a certain period up until a point when an employee has improved their competence in a particular skills set, after which the coaching relationship comes to an end. It is important that the goals of coaching sessions are agreed upon in writing at the start of the process, and that neither party is forced to participate in the relationship, since this will hinder emotional bonds being formed between coach and coachee. • Leadership development: This serves to develop the potential of future leaders and/or managers of the business, and can encompass any of the techniques discussed above, together with assessment centre exercises. These can include working through case studies, performing in-basket exercises and conducting role plays. Leadership development can also include encouraging staff to join professional and trade associations, to continuously develop from a professional perspective and be given the opportunity to network with other professionals, in order to learn from their skills and expertise. 9.6.4 Motivating staff Lastly, entrepreneurs should also motivate their staff . Motivation is focused on what determines the actions of employees. It can be classifi ed as a force that energises behaviour, giving that behaviour direction and a tendency to persist even in the face of obstacles (Grobler et al., 2011). Motivation causes arousal, direction and persistence of voluntary eff ects that are directed towards goals (Perkins and White, 2009). These authors state that motivation concerns what causes individuals to make a choice to behave in a certain way, and to select between alternative actions, as well as what sustains the focus of such actions. Motivation infl uences the extent to which employees are committed to their work and

productive, with French (2010) highlighting that motivation is a dynamic concept that is associated with an individual’s drive to behave in a certain manner. In line with these explanations, Werner in Nel et al. (2004) mention that motivation entails two concepts. Firstly, being intentional, in terms of personal choice and persisting with one’s actions, and secondly, being directional, in terms of possessing a driving force that is aimed at achieving a specifi c goal or objective. Beck (2004) states that two primary classes of motivational variables exist, namely desire and aversion. Desire refers to ‘a preference for a behaviour whose outcome is preferred to a neutral outcome’, such as positive incentives, rewards and a need for achievement. Aversion is ‘a preference for a behaviour whose outcome is less preferred than a neutral outcome’, such as a fear of failure, negative incentives or stress (Beck, 2004: 31). 324 CHAPTER 9 Within the context of work, motivation can be defined as ‘a set of energetic forces that originate both within, as well as beyond, an individual’s being, to initiate work-related behaviour, and to determine its form, direction, intensity and duration’ (Pinder, 2008: 11). According to Meyer and Kirsten (2012), motivation is expressed as work effort, and as such, comprises both desire (to initiate tasks) and commitment (to perform to the best of one’s abilities). Work motivation is an internal, psychological process, which is a result of an individual interacting with the environment or context in which they exist (Pinder, 2008). This author specifies that his definition gives leeway for a variety of drivers, instincts, needs and external factors to propel human behaviour forward. In order to be motivated at work, employees therefore need to have a drive to perform their tasks.

Examples of positive drivers (i.e. motivators) might be a desire to impress their work colleagues, a desire to achieve the short-term incentive being offered if they reach their sales target or the desire to become a partner at the business by the age of 40. Negative drivers could include a fear of being shamed by their boss if they fail at their task, a fear of missing out on a promotion or a fear of not making enough money if they do not perform adequately, which could cause their family to suffer financially. Here is a brief guideline that entrepreneurs can utilise when trying to motivate their staff (Agrawal, 2016; Mukherjee, 2018; and Pozin, 2015): • Implement reward programmes that will motivate employees to work hard and ‘go the extra mile’ – provide positive reinforcement when employees perform well in their work. • Create a safe, welcoming workspace for employees. • Build trusting relationships with employees. • Lead by example. • Regularly talk to staff, listen to them and let them participate in decision-making. • Invest in the staff – provide them with training and development opportunities. • Provide each individual employee with SMART goals and objectives. 9.7 BUILDING TEAMS It takes commitment to build high-performance work teams, since this requires a manager building on the skills and strengths of every team member and ensuring that the team works together effectively on a continual basis. All teams go through stages of development when they begin working together for the first time. It is crucial to

understand each stage, so that a team can pass through each stage quickly, until they arrive at the stage where they perform effectively. These phases will now be described. 9.7.1 Forming, storming, norming and performing Tuckman (1965) was the original author to explain these stages of team/group development. Firstly, teams go through the process of forming, where they are introduced for the first time and begin getting to know one another. It is normal human behaviour to feel nervous, uncomfortable 325 BUILDING A TEAM or even anxious when meeting a group of people for the fi rst time, particularly when meeting colleagues with whom you are going to be working together as a team. This could be heightened if you do not fully understand your own work tasks yet, if you are a newly hired employee. Thus, team members may feel unsure of their roles in the team, and the policies and procedures for the organisation and/or the team need to be clarifi ed. The focus in this stage should be for team members to become acquainted, and for the level of comfort among them to grow. Secondly, teams go through a storming process, in which confl icts begin occurring. This is because initial politeness may give way to arguments when team members realise that they disagree with one another’s opinions or statements. This might be due to a misunderstanding, or to situational factors such as unclear procedures, unwanted meetings, frustrating technology and so forth. Such confl ict causes tension, stress, fatigue and possibly even burnout. If the confl ict is constructive, then it will serve to better bond the team once it is worked through and resolved. However, if the confl ict is destructive, then it will escalate and not easily be resolved without long-term off ence being taken. This is the case when fundamental diff erences of opinion exist, and neither party/

group displays a willingness to compromise. Hostility might occur, and emotions are usually high at this stage. Since confl ict is a natural part of a team’s growth, accepting this might be the best way to strengthen the team, by proactively working through the confl ict as soon as it begins to arise. Thirdly, the norming stage occurs when team members overcome their confl ict, and begin to experience a sense of cohesion and unity. At this stage, team members begin to develop their own identity, and the team reaches a stable point in its existence. Commitment and satisfaction is generally higher from this point onwards, and team members feel more accepted by their peers. Turnover and anxiety is less likely to occur. Fourthly, the team reaches a stage of performing, during which their productivity is at its peak. Members of the team understand one another’s opinions, strengths, personalities and skill sets. In order to maintain this stage of productivity, it is important for team members to emphasise not only their tasks, but also focus on developing the collegial relationships between themselves. The team will likely remain in this stage while all team members remain constant. Should a team member leave and be replaced, then this will infl uence productivity because new confl icts might arise, leading to new norms being formed. These four stages culminate when the team adjourns at the end of its existence, either because the project comes to an end (i.e. the purpose of the team is achieved when the task is completed), or when resources are depleted and the team is forced to adjourn. Alternatively, repeated failure could cause the team to break up, perhaps due to confl ict that could not be resolved. This could cause further anxiety and stress for team members. 9.7.2 Team dynamics

Team dynamics can be understood as invisible forces arising between diff erent people or groups within a team ( SQA, 2007). These forces infl uence how a team behaves or performs, because personal feelings and emotions can seldom be separated from one’s performance. Examples 326 CHAPTER 9 of team dynamics ( SQA, 2007) include friendships or romantic relationships between team members, which might cause favouritism towards one another, or could cause team members to feel excluded. This might result in a divide between team members. If the friends/romantic partners experience conflict, this could cause tension within the team and make the environment uncomfortable to work in. Alternatively, having a team where friendships exist might lead to higher levels of productivity and enhanced communication. Physical factors might also result in team dynamics, such as openplan offices that promote communication. This could lead to a funfilled, dynamic office environment, in which laughter and jokes are paramount. Alternatively, it could cause frustration for employees who prefer to concentrate in silence, or who find the jokes offensive or derogatory. Other team dynamics that influence team behaviour include the following ( SQA, 2007): • Personality styles – e.g. a tendency to include everyone in a conversation or discussion. • Team roles – e.g. stern or autocratic leaders. • Office layout – e.g. cupboards dividing teams. • Tools and technology – e.g. the use of emails rather than face-toface meetings. • Organisational culture – e.g. company cars being perceived as status symbols.

• Processes/procedures – e.g. ways of problem-solving or decisionmaking that exclude some members of the team. Team dynamics can best be handled when these forces are regularly assessed, and when interventions are used constructively. This requires making a conscious effort to deal with conflicts in a constructive and positive manner. 9.8 EMPLOYMENT AND THE LAW Employment cannot be separated from the legislative framework within South Africa. The most important pieces of legislation that govern the employment relationship in our country are the Basic Conditions of Employment Act and the Labour Relations Act. 9.8.1 The Basic Conditions of Employment Act 75 of 1997 (BCEA) The government of South Africa has been developing and implementing multiple new laws to transform our country since the introduction of a democracy into our nation, which has resulted in a comprehensive legislative framework within which organisations must operate. These authors note the importance of not only complying and conforming with such legislation, but also embracing it in such a way that it engages all South African employees and improves their working lives, while simultaneously creating a fair and just workplace in which employees can meaningfully participate. The purpose of the Basic Conditions of Employment Act is to advance economic development and social justice by fulfilling the primary objectives of the Act, namely to give effect to and regulate the right to fair labour practices conferred by section 23(1) of the Constitution, by establishing 327 BUILDING A TEAM and enforcing basic conditions of employment and regulating the variation of basic conditions of employment. It also gives eff ect to obligations incurred by the Republic as a member state of the International Labour Organisation. In so doing, it covers basic

working conditions, including the regulation of working times, leave, remuneration, termination, and prohibition of children and forced labour. Specifi c examples are as follows. Please refer to the entire Act for a full understanding of the terms relating to each of these sections: • Ordinary hours of work: A maximum of 45 hours per week can be worked, equivalent to working nine hours per day (if working fi ve days a week or fewer), or eight hours per day (if working more than fi ve days per week). • Overtime: A maximum of ten hours extra can be worked per week, at a remuneration rate of one-and-a-half times the employee’s hourly rate during the week (or half their time off ). The employee must agree to such overtime and reasonable notice for overtime must be given. • Rest periods: Employees are entitled to daily rest periods of 12 hours between ending and recommencing work, and a weekly rest period of at least 36 consecutive hours, generally including Sundays. • Meal intervals: After fi ve hours of continuous work, at least a onehour meal interval must be given, unless reduced to 30 minutes by agreement, in particular if the employee works less than six hours per day. • Sunday and public holiday work: Employees must be paid double their normal rate of pay if they work on a Sunday and on public holidays. An exemption is if employees normally work on a Sunday, in which case one-and-a-half times remuneration must be provided. • Night work: Employees must be given an allowance, or reduction in work hours, and be provided with transport if expected to work night shifts (i.e. work after 18h00 and before 06h00 the following day). • Annual leave: At least 21 consecutive calendar days of paid holiday leave must be given per annum, amounting to 15 working days. This can also be given as a minimum of one day’s leave for every 17 days

worked, or one hour for every 17 hours worked. If a leave day falls on a public holiday, then leave must be extended by one day. • Sick leave: This is leave with full pay, calculated as six weeks on a three-year cycle, based on the number of days ordinarily worked in a week. During an employee’s fi rst six months of employment, sick leave is calculated as one day for every 26 days worked. A medical certifi cate is required after two days of being absent, and/or after being absent two or more times in an eight-week period. Sick leave cannot be sold or carried over to the following three-year cycle. • Maternity leave: Four consecutive, unpaid months of maternity leave must be granted, beginning any time from four weeks prior to the expected birth date. • Family responsibility leave: For every 12 months worked, an employee is entitled to three days of family responsibility leave. This leave only covers an employee’s child being born or being sick, and death of a spouse, life partner, parent, adoptive parent, grandparent, child, adopted child, grandchild or sibling. • Payments upon termination of employment: Upon termination of employment, an employer is required to pay employees for any paid time off or annual leave that they did not take. • Severance pay: If dismissed due to a company’s operational requirements (e.g. due to economic, technological or structural reasons), then an employee is entitled to severance pay equal to a minimum of one week’s remuneration for every completed year of continuous service with that employer. 328 CHAPTER 9 • Prohibition of children and forced labour: No child under the age of 15 years may be employed, and no forced labour is prohibited. ACTIVITY 9 C

Refer back to the first Example section at the beginning of this unit. Has Candice complied with the Basic Conditions of Employment Act? Why or why not? Provide examples in your answer. 9.8.2 Commission for Conciliation, Mediation and Arbitration (CCMA) The Labour Relations Act makes provision for the Commission for Conciliation, Mediation and Arbitration (CCMA), an independent yet state-funded body, which is governed by a tripartite board appointed by the National Economic Development and Labour Council (NEDLAC). It is not affiliated to any political party, trade union, employer, employers’ organisation or trade union federation. The CCMA handles all disputes other than those dealt with by private procedures, or a bargaining or statutory council. Conciliation occurs prior to cases being referred to arbitration or adjudication. The CCMA is mandated to attempt to resolve disputes in terms of the Labour Relations Act, through conciliation. If the dispute remains unresolved after conciliation, then it should be arbitrated. The CCMA also serves to assist in the establishment of workplace forums, and needs to compile and publish information and statistics about its activities. For additional readings on labour relations within the South African context, it is recommended that you read Venter et. al (2014) and Bendix (2017) for a thorough overview. Moreover, Kantor (2015) provides detail specifically on the CCMA and how to handle situations of unfair dismissals. 9.9 HOW IS YOUR TEAM DOING? After reviewing this unit, you should have a solid understanding of basic elements related to building teams and managing the HRM function within an organisation. Consider the following questions in relation to how your own team is performing in your workplace: 1. Do you have a positive company culture at work? 2.

Have you written job descriptions and job specifications for every position in your company? 3. Are you focusing on both external and internal recruitment when hiring staff? Do your recruitment methods attract high-quality staff? 4. Are you using structured questions within your employment interviews? 329 BUILDING A TEAM 5. Do your selection tools help you to choose the most suitable candidates for your positions? 6. Are your staff motivated to perform? Do you have high turnover rates among your staff ? 7. Are you formally appraising all your staff at least twice a year? 8. Are you placing focus on actively training your staff ? Have you incorporated any developmental activities into your teams? 9. Are you utilising both fi nancial and non-fi nancial rewards/remuneration at work?

10. Are your employment contracts and employment conditions in line with the Basic Conditions of Employment Act? ACTIVITY 9 D (i) Summarise the core areas to be considered when conducting a performance appraisal. (ii) Name each stage of team development. (iii) Briefl y explain the physical factors that infl uence team dynamics. (iv) List four areas covered by the Basic Conditions of Employment Act, specifi cally in terms of leave. (v) Defi ne the CCMA and its role within the workplace. 9.10 SUMMARY This unit explained that entrepreneurs have a unique role to play as employers, as they need to operate eff ectively and in line with legislation within the realm of human resource management. The role that entrepreneurs play in developing a thriving company culture was also explained. The entire recruitment process was then discussed, from developing a job description and specifi cation, to selecting the best job

candidates, off ering them competitive pay packages and ensuring legal employment contracts are signed. The unit then explored the management of the workforce, in terms of ensuring that the correct work is assigned to employees, their performance is managed and correctly appraised, and that they are appropriately trained, developed and motivated. Team development was then clarifi ed through an explanation of the stages of group development, followed by understanding what team dynamics infl uence a workforce. Finally, the Basic Conditions of Employment Act was highlighted in reference to working hours, leave and remuneration, followed by an overview of the CCMA. It is hoped that current and future entrepreneurs will benefi t from this solid understanding of people management, by implementing the correct processes at work to ensure an engaged, committed workforce, who remain loyal to the business as it grows from strength to strength. 330 CHAPTER 10 MAKING IT RUN SMOOTHLY 10 10.1 Introduction 332 10.2 Life Lesson 333 10.3 Operations management 333 10.4 Physical premises 339

10.4.1 | Basics of an office 339 10.4.2 | Basics of a factory 340 10.4.3 | Health and safety 343 10.5 Information technology 346 10.5.1 | Digitisation of a business 347 10.5.2 | Equipment 347 10.5.3 | Security 348 10.5.4 | Backups 348 10.5.5 | Systems and software 348 10.5.6 | Cloud computing 350

10.6 Managing suppliers 352 10.6.1 | Selecting suppliers 353 10.6.2 | Building relationships 354 10.6.3 | Negotiating terms 355 10.7 Stock control 357 10.8 Quality control 358 10.9 Planning and forecasting 363 10.10 Reporting 364 10.10.1 | Internal reporting 365 10.10.2 | External reporting 365

10.11 Your operations dashboard 366 10.12 Summary 367 331 MAKING IT RUN SMOOTHLY Making it run Case studies – smoothly myths, leaders and Online inspiration start-ups Boring but Growing the important business stuff Building It is in the a team

numbers Cash is king Developing Selling products Spreading and the word Getting out of Forming a services What is the starting business entrepreblocks neurship? 10.1 INTRODUCTION All businesses have goals they wish to achieve. In order to achieve these goals, businesses must take resources and convert them into the products or services that constitute their goal. The process of doing this is called ‘operations’, and running a company’s operations optimally requires management. Since all companies have operations, being familiar with the basics of how to run these operations is essential, particularly ‘as mastering these basics can directly support your business goals’ ( Cleverism, 2016). Businesses rely on operations managers to ensure the highest level of effi ciency, in which organisational resources are used in a way that maximises profi t.

In this chapter, you will be introduced to operations within a business. We will consider the management of the business’s physical premises (i.e. offi ces or factories), its information technology (IT) and its suppliers. We will then consider the control of a business’s stock, how to create useful plans for the business, and the importance of reporting. After studying this chapter, you should be able to: • defi ne operations management; • list considerations pertaining to running an offi ce or factory; • demonstrate an understanding of health and safety measures on a business’s premises; • assess hypothetical scenarios based on this knowledge; • comment on the role of IT in entrepreneurial businesses; • outline the basic considerations regarding IT equipment, systems, security and backups; • discuss the importance of supplier management; • list some tactics for negotiating supplier terms; • defi ne stock control and describe the stock control process; • outline the various techniques for stock management; 332 CHAPTER 10 • describe the processes involved in business planning and forecasting; and • differentiate between internal and external reporting. 10.2 LIFE LESSON

A company – which we will call ‘Azuri Systems’ to maintain its confidentiality – has been in business for more than 20 years. The directors of the company could not understand why it was losing market share and why its profit-to-cost ratios were worse than those of its closest competitor. The loss of market share was particularly mysterious, since Azuri Systems was acknowledged in the market and by its competitors as having the best product. In desperation, the directors called in a consultant to help them understand the situation. This is what they discovered: • Although Azuri Systems had good products, many of them remained in the warehouse and did not sell. In other words, the company’s inventory management was inefficient. • Some products had excellent features, but the quality of the products varied substantially. • The company took too long to get its products to customers. • Its business processes changed often. Without proper management, confusion about the nature and role of the processes arose. A business depends on its operations. The way Azuri Systems managed its operations influenced customers’ responses to its products and services, and this realisation was important to its directors. 10.3 OPERATIONS MANAGEMENT What is operations management? In the broadest terms, it can be defined as a set of disciplines and procedures administered to ensure that an organisation achieves the highest level of efficiency possible ( Investopedia, n.d.). Operations management involves efficiently converting organisational resources (i.e. raw materials, money, people, products, services, equipment and technology) into products that bring high profitability. Operations management activities

Key operations management activities include the following: • Product and service management: Oversight aimed at ensuring that services and products always remain attractive, useful, affordable and effective • Quality control: Checking that products and services meet specific customer expectations • Inventory control: The management of the items (products and services) that a company sells to its customers • Storage: The physical place where items, such as finished goods and products, are kept until they are sold to customers • Logistics: The processes and procedures to procure and deliver products, or finished goods, to a customer 333 MAKING IT RUN SMOOTHLY • Evaluations: The review of procedures such as those involving the steps in creating products, so that the most effi cient work activity can always be ensured Manufacturing companies also rely on the following principles: • Processes and procedures: The main aim of operations management is to focus on the processes and procedures that organisations use to deliver products or services. • Planning: Since operations management must fi nd ways to ensure that processes and procedures create profi table products and services, there is a great deal of planning and forecasting involved in it. • Organisation: Operations management must ensure that the right resources are used by the right processes/people at the right time. In

addition, managers must ensure that all raw materials and resources are available for use at the right time • Coordination: Managers should ensure that all teams (internal and external) work together in the most effi cient way possible. • Control: Managers must ensure that resources are not misused or wasted. Such waste could cause a business signifi cant fi nancial loss. However, how a business carries out its operations management ultimately depends on the nature of the product or service provided by it. Iansiti (2015) makes it clear that operations management is also about giving entrepreneurs the power to act. Operations management gives organisations three important powers: 1. The power to create value for customers 2. The power to capture value for shareholders 3. The power to share value with stakeholders A brief history of operations management Even though the production and selling of products is as old as civilisation itself, operations management is a new concept. It dates from the 20th century, but has rich and interesting roots that can be traced back to the 18th century (Clark, 2017). The fi eld of operations management has been enriched and infl uenced by the innovations of several individuals. A few of these people are introduced in the following discussion. The contributions of Eli Whitney and Adam Smith

Agricultural mechanisation In the 1700s, Eli Whitney ( Biography.com, 2014) invented a machine (the cotton gin) that was able to clean cotton buds faster and more effi ciently than could be done manually. He proved that the use of machines to replace manual labour could create sustainable, large profi ts for farmers. By 334 CHAPTER 10 doing this, he was converting organisational resource inputs into products more efficiently and, therefore, increasing profitability. Interchangeable parts Around 1798, Eli Whitney accepted a contract from the government to improve the manufacturing of rifles. Whitney came up with the idea of interchangeable parts. This meant that different artisans would specialise in manufacturing different rifle parts, while others would assemble the parts into a working rifle. This led to a large increase in the number of rifles that could be produced over the years. Before the innovation of interchangeable parts, it took ten years to make 10 000 rifles, while afterward, it took only two years to manufacture 15 000. This innovation introduced processes that ensured a profitable inventory turnover ratio in a market with a high demand for rifles ( Biography.com, 2014). Specialisation The idea of interchangeable parts made it possible to create teams of experts that could specialise in making a single component. Adam Smith (Ravet, 2012) illustrated, in his famous pin factory example, that a worker who focuses on only one task would be more productive than a worker who focused on many. According to Smith, the worker who only cuts the pin wires produces more than the worker who must cut the pin wire, shape the pin head and sharpen the pin’s point. That worker not only produces more output, but also gets the opportunity to perfect their produce.

The contribution of Henry Ford Henry Ford was able to devise a way in which cars could be made at a faster pace. He proposed developing highly specialised assembly lines for mass car production. His innovation drastically increased the production of cars. The assembly line reduced car production time from over 12 hours to only two and a half hours ( History, 2009). In his experiment with the assembly line, Ford also suggested using black paint on the cars, since black paint had a quicker drying property than all other available paints, allowing for full-speed assembly (Kurylko, 2003). The work of Hammer and Champy In 1990, Michael Hammer wrote an article in which he argued that efficient companies do not have to automate. Instead, they need to re-engineer the organisation and obliterate wasteful processes (Hammer, 1990). This work was followed by a book published by Hammer and Champy (1993) in which they argued strongly that business processes must be reviewed and revised from time to time to ensure that procedures remain up to date and efficient. The contribution of Kelley Johnson In 1943, an engineer from Lockheed Aircraft Corporation, Kelly Johnson, assembled a team made up of pilots, engineers and designers to build a sophisticated aircraft prototype. The team had only 180 days to achieve their goal (Norris, 2014). Their project soon became known as the ‘skunk works’ and was completed within 143 days – 37 days ahead of schedule. 335 MAKING IT RUN SMOOTHLY Johnson assembled the team in an old aircraft store, creating an opportunity for designers, engineers and pilots to jointly review and eliminate errors in designs before moving on to building the aircraft.

The skunk works concept saved time and money, because it made it diffi cult to hide errors or design issues from team members. Over time, Johnson created his famous ‘14 rules’ to emphasis the elimination of waste and error in design in the delivery of any skunk works project. These rules are still incorporated as operations management principles today: 1. The person in charge of operations should be at a very senior level, and should be able to make quick and well-informed decisions. 2. Teams should be as small as possible, representing all stakeholders that have an interest in the product or service. 3. Small, focused teams are more eff ective than bigger teams, because in smaller, more focused teams, no one can hide their noncontribution to the product or service. 4. Simple, fl exible designs are more eff ective than complicated, elaborate designs. 5. Reports should be kept short, focused and clear, reporting only on important matters. 6. There must be a monthly cost review that covers not only what has been spent and committed, but that also covers projected costs of the entire programme.

7. All team members should have an equal responsibility in ensuring the success of the product or service. 8. Work should be inspected regularly and thoroughly, but not overinspected. 9. All products or services should be tested thoroughly before moving them into the market. 10. Customer needs and preferences should be specifi ed clearly before a product or service is developed. 11. Important funding for the development of a product or service should not be delayed. 12. A clearly defi ned trust between all stakeholders should exist. 13. Outsiders should not interfere with the development of the product or service. 14. The compensation of team members should be based only on performance. The work of Shigeo Shingo

The Japanese scientist, Shigeo Shingo, introduced the idea of muda, or waste that impacts the productivity of an organisation. He proposed seven forms of muda (Simboli et al., 2014): 1. Waste of transportation: Every time something is moved during production, there is a chance to waste time or cause delays. In an offi ce, this waste can be illustrated by an offi cial who sends a customer from place to place before fi nally helping the customer to resolve a query. 2. Waste of inventory: High levels of raw materials or unfi nished goods use high levels of wasted capital, because raw materials cannot translate into profi ts until the product is made and sold. In a service environment, a waste of inventory can refer to services on off er that no one wants to purchase. 3. Waste of motion: Products or unfi nished goods can be damaged when moved around. In an offi ce environment, this waste can be illustrated by the common misuse of the in tray, where a document is continually placed at the bottom of the in tray without fi nishing the work associated with that document. 336 CHAPTER 10 4. Waiting: When nothing is done to process goods, or to make goods, waiting occurs. A product must be manufactured, transported and sold as quickly as possible. In an office environment, this waste is evident in long queues and long periods of time taken to answer simple customer queries. 5.

Overprocessing: Waste occurs when more time than necessary is spent on manufacturing something. For example, an entrepreneur insists that a product receive six coats of varnish, when two coats would make the product look just as good. In a non-manufacturing environment, this waste occurs when offering solutions (so-called ‘value-added offerings’) that no one wants. 6. Overproduction: Waste occurs by making more widgets than what is needed by the market. In a non-manufacturing environment, an example of this waste would be writing a 70-page report, where a three-page report would suffice. 7. Defects: This refers to the continual delivery of faulty goods (and is also known as the ‘waste of rework’). In an office environment, it might be evident in someone writing a report repeatedly because it is full of mistakes. Lean thinking In 1996, Womack and Jones came up with the idea of ‘lean thinking’ (Lean Enterprise Institute 1, n.d.). This concept was built on the ideas of Kiichiro Toyoda (the founder of the Toyota Motor Corporation). Lean thinking teaches that organisations must be on a constant lookout to improve processes and procedures, so that customers can get the best possible value for money. It proposes a five-step process that repeats itself throughout the life cycle of a product, service or organisation ( Lean Enterprise Institute 2, n.d.): 1. Specify value: Identify the customer’s value in terms of products and services. In terms of lean thinking, defining or specifying value refers to an exercise in which the primary characteristic of a product or service is identified. Primary characteristics are defined as those elements in a product or service for which customers are willing to pay a premium.

From a lean perspective, value must: • make sense to the customer; • convince the customer that they have received the best possible product or service at the best price; and • convince the customer that the functions or features of the product or service will meet all the expectations that the customer has of that product or service. 2. Identify the value stream: It is important to understand all the steps, processes or procedures used to create a product or service. Lean thinking proposes that steps or processes that do not directly create value for customers should be eliminated. In lean thinking, ‘value streams’ refer to those activities and processes that create exactly the product or service that a customer needs, and when they need it. The basic principle of a value stream in lean thinking is to remove ‘bells and whistles’ that do not interest a customer. 3. Create value steps: This means creating procedures and processes that ensure the smooth delivery of products or services to customers. Anything that creates processes that waste 337 MAKING IT RUN SMOOTHLY time or money should be avoided. The fundamental idea in creating value steps is that the creation of products or services should be a smooth fl ow of actions. 4. Establish pull: Customers should be able to derive value out of any step in the creation of a product or service. In lean thinking, ‘pull’ refers to the use of materials and resources as and when they are

needed. The author of this section was involved in completing a project where all the ingredients for a specifi c recipe would be delivered to the factory a day before that recipe was used in it. Establishing pull in this way ensured that the factory always used fresh ingredients in whatever food product they made. 5. Pursue perfection: Lean thinking suggests that there are always opportunities to improve processes, or to remove processes that do not add value to the company or its customers. On this (sometimes contentious) view, companies should go back to the fi rst step and question whether they still provide value to shareholders or to customers. Agile development is about an organisation’s ability to rapidly develop a product or service. Under an agile development process, a series of short steps (rather than elaborate processes) must be used to ensure that the product or service reaches customers quickly and effi ciently. Agile was originally a software-development and project-management concept, but it soon started to be used in operations management. It assumes that a cross-functional team will develop a product and service in the quickest and most effi cient way. In addition, agile development looks at product or service development from a customer perspective. It asks the following questions: • How soon can a product or service be developed? • How soon will customers see the value of the product or service? • How soon will customers be familiar with the product or service? The philosophy of Kelly Johnson, discussed in this section, exemplifi es agile principles. It emphasises the rapid and thoughtful production of goods and services in the shortest possible time. There is a subtle link between agile and lean thinking (Ravet, 2012; Tolf, 2017; and Tripp et al., 2018). Lean thinking has its origin in the

work of Shigeo Shingo, and is aimed at reducing waste when creating goods or services. Agile, on the other hand, has to do with the most effi cient way to produce goods and services over a short period of time. In addition, agile makes sure that there is continual feedback from the customer or end user about the functions of a product or service while that product or service is being created. For example, in many space programmes, astronauts are part of the team that designs and builds the spacecraft. Since the astronauts are going to use the spacecraft, their views are important – especially when it comes to making the spacecraft safer (Stengel, 2018). 338 CHAPTER 10 ACTIVITY 10A (i) Define operations management. (ii) Discuss the key activities in operations management. (iii) List the three important powers that operations management gives to organisations. (iv) Explain the concept of lean thinking. (v)

Identify the five-step process of lean thinking. 10.4 PHYSICAL PREMISES It is a basic SARS (South African Revenue Service) requirement that all business enterprises in South Africa register as operating from a physical location. In addition, South Africa’s Finance Intelligence Centre Act 38 of 2001 (FICA) requires anyone opening a business account at a bank to show proof of the physical address from which the business operates. This section will briefly discuss what should be considered when planning to use an office or a factory as operating business premises. Keep in mind that service-based businesses have different needs for physical premises than manufacturing or product-based businesses. 10.4.1 Basics of an office Not all businesses require the traditionally imagined, fully stocked office located in a commercial area. Workspace requirements largely depend on the type and size of a business. SARS even allows entrepreneurs to utilise a portion of their home as an office from which to conduct their business ( SARS, n.d.). To facilitate this, it issues regular ‘interpretation notes’ that clarify the types of tax deductions that entrepreneurs can claim when they use part of their home as an office ( SARS, 2011). All businesses operating from home will, however, require some allocated workspace. A home office does not need to be elaborate or expensive. The type of workspace environment needed at home will vary depending on the type of business one operates. However, there are some basic requirements for any office – traditional or domestic. An office requires: • an affordable telephone and email service to stay in touch with customers;

• a basic filing system for business records (i.e. sales, taxes and customer details); • a basic desk and chair where you can work; and • a basic reception area, in case a customer wants to visit your home office. 339 MAKING IT RUN SMOOTHLY Utilising a portion of your home as an offi ce workspace can have some disadvantages. One of the key disadvantages is a lack of privacy. Some entrepreneurs feel that it is an intrusion of privacy to receive customers at their homes. For this reason, there are several offi ce solutions available that provide entrepreneurs with aff ordable options to meet customers in a professional environment. Examples of offi ce solutions that are available to entrepreneurs include the following: • Virtual office services: There are several virtual offi ce services that enable entrepreneurs to share services, spaces and technology for a monthly fee. This saves them the substantial cost of occupying a traditional offi ce. Part of the service often includes a business phone number that customers can call. The service can also include a receptionist who will answer your number at the virtual offi ce, and who will handle messages on your behalf. Virtual offi ce services allow for a more effi cient use of offi ce resources, and provide entrepreneurs with the fl exibility to rent only those services, spaces and technologies that they need. • Office pods: These are temporary spaces that an entrepreneur can use at an offi ce service provider. These offi ce pods are meant for entrepreneurs who do not need offi ce space all the time. They are often available on a fi rst come, fi rst served basis, allowing the entrepreneur to work away from their home offi ce in a more isolated space.

Customised offi ces Offi ce service providers usually design offi ce spaces around: • the number of offi ce locations required by the entrepreneur; • the number of people employed by an entrepreneur; • the number of telephone lines needed by the entrepreneur; and • the Internet and IT requirements of the entrepreneur. With the advent of customisable, serviced offi ce spaces, it is possible for any entrepreneur to start with a small offi ce solution, and to gradually move into larger premises. 10.4.2 Basics of a factory Depending on the type of products that an entrepreneur wishes to make, factories can range from a single room to a large fl oor space on which many sophisticated machines operate. There are a few factors that should be considered when building a factory. Nature of the manufacturing process The design of a factory should accommodate the type of manufacturing process that will be taking place. Factories that diff er in manufacturing processes almost always diff er in their design. Sindhuja, (n.d.) adds that it is seldom the case that the same building is suitable for two diff erent types of production. The nature of the manufacturing process therefore determines the design of the factory building. 340 CHAPTER 10 Proximity and transportation

Since South Africa has one of the highest fuel prices in the world, the entrepreneur must consider how far away the factory is from the raw materials that it needs. The shorter the distance between the raw materials needed and the factory, the better for the entrepreneur. However, raw materials are often far away from the entrepreneur’s target market. This means that the entrepreneur is faced with a transportation trade-off. The following are questions that can guide entrepreneurs when making decisions regarding transportation: • What is the impact of being close to raw materials and far from the target market? • What is the impact of being far from raw materials and close to the target market? • Is there a transportation provider that would be willing to deliver raw materials at a reasonable price? • How will I get the finished goods to the market? • What risks (such as strikes, road accidents, robberies etc.) must be considered to make transportation as affordable and as accessible as possible? Machinery and equipment Depending on the type of manufacturing, different tools and machines are required in the production process. The more complex the goods are to make, the more difficult and expensive it can be to find the right tools and machinery needed. The following tooling considerations are important to the entrepreneur: • How easy is it to get the required tools or machines? • If a tool or machine is not locally available, is it affordable to import it? • Is it more cost-effective to build the tool or machine?

• Is it more cost-effective to rent the required tools or machines? • Is it more cost-effective for me to pay someone else to make the needed goods? Lighting, ventilation and air-conditioning During the Industrial Revolution and well into the 1980s, factories were notoriously dark, dirty and dangerous. However, modern health and safety regulations make it very difficult for factories to be hazardous. These attributes impact productivity in the workplace, reduce accidents and contribute to the overall satisfaction of employees (Sindhuja, n.d.). Employee facilities According to Sindhuja (n.d.) ‘[good] employee facilities are incentives to the employees of an organisation, and they build up the morale of the employees’. These include restroom facilities, dispensaries, kitchens or cafeterias, and parking areas etc. 341 MAKING IT RUN SMOOTHLY Factory layout In modern factories, great emphasis is placed on waste reduction. Industrial engineers spend a lot of time designing the layout of factories in such a way that production can take place as effi ciently as possible. Lean theory ( TXM Lean Solutions, n.d.) suggests that entrepreneurs need to consider the following ‘productivity fl ows’ when laying out a factory design. ‘Raw material fl ow’ helps to decide the following: • Where to store raw materials so that they are easily accessible

• How close to a workstation materials should be, so that long waiting times for materials to fl ow from storage to the workstation are eliminated • What types of systems should be used to signal possible quality issues or quantity issues with raw materials • Methods to move raw materials into storage (forklifts, trolleys, cranes etc.) • Methods to move raw materials from storage to the work area (forklifts, trolleys, cranes etc.) ‘Work in process (WiP) fl ow’ helps to decide the following: • How raw materials and workers move inside a workspace • How to ensure that movement within the space does not create waste or muda • How to ensure that the right work is done at the right time, using the right tools and raw materials ‘Finished product fl ow’ helps to decide where a product goes after it has been manufactured. It asks questions such as the following: • Does it go directly to the customer? • Does it go to a storage area? • Does it go to another workstation where more work must be done on it? • Does the product need a quality check before it moves on? ‘Flow of consumables’ helps to decide the following: • What is needed to make a product

• When raw materials are needed • Where to source the raw materials from ‘Flow of people movement’ helps to decide the following: • How people move around safely in the factory • What hazards could be in the path of people’s movement, and how these hazards should be marked and avoided • To what extent the movement of people hinders or helps the manufacturing process 342 CHAPTER 10 ‘Flow of information’ helps to decide the following: • How and where safety instructions are displayed • How and where work instructions are displayed • How and where work sequence charts are displayed, so that people can know what must be done and when ‘Flow of waste’ helps to decide the following: • What type of waste is created in the manufacturing process • How the waste is removed without harming people, equipment or the environment • How the waste will be moved from one place to another (e.g. via forklifts, trucks, cranes etc.) • Whether the waste can be reused in the manufacturing process or used for the making of other by-products Future expansion

Possible future expansions should be considered during the planning of the factory building. The possibility of the business growing and requiring a future, multistorey building should be considered in the initial design, so that the building is able to support additional floors (Sindhuja, n.d.). 10.4.3 Health and safety The Department of Labour implemented the Occupational Health and Safety Act 85 of 1993 in order to ensure the safety of employees in their work environments. Entrepreneurs should be aware of the following minimum requirements, as stipulated by the Occupational Health and Safety Act: • The Department of Labour gives inspectors the power to inspect any factory or office to determine health and safety compliance. Inspectors have the power to shut down a non-compliant site and to insist on corrective actions by the business owner. • There is a duty on all employers to: §§ ensure that the workplace is safe; §§ ensure that there are sufficient precautions in place to prevent injury or accidents; §§ ensure regular training regarding health and safety measures; §§ ensure that all workers and visitors are following health and safety measures; §§ ensure that all equipment is used in a safe manner; and §§ ensure that safety precautions are implemented and reviewed from time to time. • Workers have the right to: §§ be informed of health and safety policies and procedures;

§§ appoint health and safety representatives to report on issues that could affect the health and safety of the workplace; and §§ make suggestions on improving health and safety standards in the workplace. 343 MAKING IT RUN SMOOTHLY • Workers have a duty to: § take care of their own health; § ensure that their actions do not cause health and safety issues that could cause monetary loss to themselves or the workplace; § not be negligent or complacent regarding health and safety issues; § comply with all health and safety procedures, measures and policies that are issued in the workplace; § wear the prescribed safety clothing when required to do so; and § use equipment as specifi ed by the manufacturer and the employers. • Suppliers have a duty to:

§ safeguard their clients against harmful products; § ensure that clients know how to correctly use equipment, chemicals etc.; and § ensure that products are packaged in such a way that they cannot cause health and safety issues when in transit to, or stored by, a customer. (Health and safety at Food Processors Inc.) EXAMPLE 10 A Food Processors Inc. is a former corporation that operated a factory in 2014, specialising in mixing soy with diff erent kinds of fl avourings. Their aim was to produce a product fi t for human consumption. Workers mixed up to ten metric tons of soy with diff erent kinds of fl avourings daily. Part of the mixing process required workers to lift bags, weighing up to 50 kilograms and two metres high, to empty the contents into a mixer. The company had no lifting gear or ladders to assist workers. Instead, workers had to climb on an offi ce chair with castor wheels in order to empty the contents of the bags into the mixer. On closer inspection by the author of this section, it was found that the electric mixer’s cables were frayed. The cables were loosely draped over the factory fl oor. The mixer’s cables did not have a proper plug fi tting a wall socket. Instead, bare wires were forced into the wall socket and held in place with a few wooden tooth picks. A big water tank that leaked on the fl oor (which workers walked over while carrying the heavy bags to and from the mixer) was positioned a few metres away from the electric mixer. These working conditions encouraged injuries. One day, a worker predictably tripped over the loose electrical wires and hurt his back as he fell on the cement. This

cost the factory a great deal of money in the form of workman’s compensation and well-deserved fi nes from the Department of Labour. Health and safety considerations do not only apply to the entrepreneur’s workforce; they also apply to safeguarding visitors to the entrepreneur’s premises against loss or injury. Whether an entrepreneur’s business makes use of an offi ce or a factory, there are signifi cant health and safety responsibilities that the entrepreneur bears toward anyone who is on their premises. 344 CHAPTER 10 Let’s now discuss the issue of public liability in view of what happened in this factory. The concept of public liability Any visitor who is injured on the entrepreneur’s premises can sue the entrepreneur and the entrepreneur’s landlord in case of injury. It is the duty of the entrepreneur and the entrepreneur’s landlord to safeguard visitors from injuries. For this reason, entrepreneurs must ensure that: • stairs have at least one safety railing; • steps on the stairs are rendered slip-free; • floor surfaces are always slip-free; • fire hydrants or extinguishers are always accessible; and • certain areas (such as factory floors) are clearly marked as out of bounds for all unauthorised people. A golden rule in terms of public liability is that if a person has no business in a specific area, they should not be in that area.

Office safety considerations Health and safety considerations do not only apply to factories. Many office safety considerations are deemed to be ‘obvious’, but are often overlooked. The following are important office safety considerations for entrepreneurs: • Stay clutter-free: Loose carpets, cables over the floor and objects that are stacked too high are all accidents waiting to happen. • Stepping on things: Standing on office chairs is not considered safe – especially when these chairs are equipped with castor rollers. Moving chairs can cause people to lose balance and fall. • Clear lines of vision: Blind corners and cubicle walls could cause collisions between people as they walk along corridors. Cubicles should not be so high that people cannot see who is coming around a corner. • Slip-free: Loose carpets are tripping hazards, and elegant tiles can be slipping hazards. • Protruding objects: An open desk drawer or a filing cabinet could cause injuries if someone walks into it. Similarly, objects that protrude from a shelf could cause eye or head injuries. • Stacking: Objects that are piled too high could tumble down and injure someone. Any stacks higher than 1.5 metres should be secured in such a way that they cannot fall over. • Ergonomic issues: Office environments do not always consider how incorrect equipment, or the incorrect use of equipment, affects the health and safety of office workers. The following are examples of ergonomic issues: § §

Inappropriate equipment: Modern offices make extensive use of computers. In that context, computer screens that are too bright or too dim could affect a person’s eyesight. Computer keyboards often put strain on a worker’s wrists, causing carpal tunnel syndrome. Chairs that are set too low or too high could cause neck, shoulder and back strains. 345 MAKING IT RUN SMOOTHLY § Lack of equipment usage training: Workers can experience ergonomic issues if not properly instructed how to use equipment. Let’s consider two examples. First, consider a paper guillotine, which is very sharp and, if not set up correctly, could cause a worker to lose a fi nger. Second, consider that not all workers know how to set up a workstation for optimal productivity. For a right-handed person, a telephone, for example, should be on the left of the desk to avoid the possibility of ‘phone pinch’. Phone pinch happens when someone tries to balance a phone handset on their shoulder and tilts their neck to hold the phone in place. § Posture issues: Many offi ce workers sit so high on a chair that their feet do not touch the ground. This could cause back strain and put strain on thigh muscles, leading to cramping or other forms of muscle strain. ACTIVITY 10B (i) List the basic requirements for any offi ce.

(ii) Name three basic factors that should be considered while planning a factory building. (iii) Discuss the offi ce safety considerations entrepreneurs should keep in mind. 10.5 INFORMATION TECHNOLOGY Information technology is the science of acquiring, processing, storing, retrieving, presenting and transmitting all forms of electronic data by means of computers, or other forms of telecommunications, from one user to another ( Shodhganga, n.d.). In broad terms, IT involves offi ce automation and telecommunication. However, the following are also examples of IT in the workplace: • Photocopy machines • Printers • Document scanners • Barcode readers • Cell phones • Telephones • Wi-Fi routers • Fibre-optic routers • Biometric sensors 346 CHAPTER 10

10.5.1 Digitisation of a business Digitisation refers to ‘the process of converting information, generally from the natural environment into a digital (computerised) format’ ( Talk Business, 2017). Digitisation is the move from the standard analogue processes to digital ones. Modern businesses are all working toward the use of digital developments, to create greater efficiency. Companies have discovered numerous benefits to digitisation. They have found that digitisation (Abi-Saab, 2015): • enhances the efficiency of business processes; • reduces operating costs; • enhances accessibility and information exchanges; • provides the option of making use of the advantages of analytics and user data; and • improves customer service and response time. While digitisation has many benefits, entrepreneurs need to be aware of several challenges associated with IT, such as the following: • Protection against malware and ransomware • Overall reliability and quality of IT equipment • Cost of IT equipment – especially telecommunications • Centralisation or decentralisation of IT solutions • Scalability of IT solutions • Ubiquity of IT solutions 10.5.2 Equipment

A critical decision for the entrepreneur is whether to rent, build or buy the IT equipment needed in the enterprise. Start-up enterprises may not have sufficient funds to invest in all the latest and greatest IT solutions on the market. The best possible approach to deciding what equipment to invest in is to use a basic triage method, asking the following three questions: 1. What type of equipment must the enterprise have to ensure uninterrupted operations? 2. What should the enterprise invest in at some point in the future? 3. What long-term goals for investment in equipment should the enterprise have? Depending on the type of enterprise (i.e. services- or manufacturingbased), different types of IT equipment may be required by the entrepreneur. In a following section, we will briefly discuss the different types of IT equipment that may be needed. 347 MAKING IT RUN SMOOTHLY 10.5.3 Security Making use of IT solutions creates the risk of hackers gaining unauthorised access to organisational assets. Security strategies are needed to prevent such unauthorised access, and to maintain the integrity and privacy of company-sensitive information ( CISCO, n.d.). It can become expensive to provide IT security; however, an information breach would cost the company far more.

Examples of IT security threats that are most commonly experienced include: • computer viruses; • trojan viruses; • ransomware; • spyware and adware; and • computer worms. 10.5.4 Backups It is best practice to store additional copies of important data in a physical place separate from the virtual location of the original data fi les. This is important in the event of data being lost or damaged. In the case of lost or damaged data, recovery can be costly, slow or even sometimes impossible. Organisations are usually the ones that suff er the most when it comes to data being lost or damaged, since company data is a valuable asset used to run smooth operations. Securing, storing and backing up company data regularly is therefore an important part of data management ( Trend Micro Incorporated, 2017). 10.5.5 Systems and software Information systems are defi ned as interrelated components that are used by people to collect, process, analyse, create, store and distribute data, typically within an organisation. There are four main types of information systems (Cress, 2009): 1. Transaction processing systems: These systems are designed to handle the exchange of information between departments and between diff erent companies. Besides the exchange of information,

transaction processing systems enable the entrepreneur to send and receive money. These systems collect, process, store, display, modify or delete information or transactions based on a set of business rules defi ned by the system’s users. 2. Management information systems (MIS): These systems commonly use the data created by transaction systems to help in the decisionmaking process. They are designed to extract or query diff erent sets of data, and to transform that data into meaningful and reportable information. The main aim of MIS is to help monitor the effi ciency of operations. 3. Decision support systems: These systems are often complex collections of algorithms and heuristic models that analyse big data sets to make forecasts and predictions, and to create 348 CHAPTER 10 models against which entrepreneurs can test their decisions. Decision support systems do not replace the action of decisionmaking in a business, but aim to improve the quality of management decisions. They are only as good as the data and the business rules that they use to come up with models and predictions. Decision support systems can range from spreadsheets with many formulas, to big computers that process billions of bytes of data per second. 4. Expert systems and neural networks: These complex systems are also referred to as ‘artificial intelligence’ (AI), because they have the capacity to learn how to interpret data, and how to apply it to come up with a range of actions or decisions. Robots often make use of expert systems and neural networks.

‘Software’ refers to computer programs. In essence, software is a set of rules telling a computer what to do. In the modern (2019) business environment, there are many software solutions available. Unless there is a special case for it, not many entrepreneurs have to write software from scratch. However, it does benefit entrepreneurs to know some principles of software quality management (SQM), so that they can ensure that they get the right product from vendors. A knowledge of SQM is especially handy because many small businesses nowadays develop and sell software products at cheaper rates than what could be bought from larger brands. Pricing, however, is no indicator of quality. Principles of software quality Alan M. Davis (1995) suggests several principles that entrepreneurs could find useful: • No customer will tolerate poor quality software: There is no reason why entrepreneurs should compromise and accept inferior software products from anyone. • Quality is in the eye of the customer: No matter what elaborate terms and words software developers use to convince you that they have a superior product, insist to ask for references and listen to what other users say about the product. Poor-quality software cannot be tinkered into acceptable levels of performance – no matter what the software vendor tells you. • Poor reliability is worse than poor efficiency: Products that crash often, or that take a long time to respond, do not help the entrepreneur to be efficient. • State your needs clearly: It helps to spend time writing out what you expect from a product. Start your sentences with phrases such as, ‘The software must be able to do […]’ Specify what functions you expect and why you need those functions. Once you have committed your expectations to

paper, it is easy to check later whether you bought what you said you needed. • Resist the ‘and there is more!’ argument: Specify only what you need, and avoid the temptation to buy any additional functions that you do not need in the next three to five years. However, ensure that additional functions are available at an attractive price for when you need those. • Beware the thick manual: Software should be intuitive and almost self-explanatory. Big, complicated manuals are a sign of big, clumsy software systems that may take so much time to understand, that you cannot do much real business. • Beware the shortcuts: More often than not, complex problems cannot be solved with a few simple steps or shortcuts. Shortcuts are not consistent and do not cover unexpected eventualities. On the other hand, a thick troubleshooting guide is not necessarily indicative of 349 MAKING IT RUN SMOOTHLY a bad system. Well-organised and well-written troubleshooting guides could be very valuable timesavers to solve issues. • Align reputation with organisation: Anybody can make a mistake or produce inferior work from time to time. However, a vendor that hides bad quality or hides serious software performance issues cannot be trusted, no matter how big or well known that vendor is. • Determine the problem before committing to any software solution: Clearly state (in writing) the business problems you want to be solved by software. State the reasons why solutions to those problems are needed. • Use natural language: Do not fall into the ‘technobabble trap’. Use ordinary business language to state your needs and why you want a specifi c solution.

• Management above technology: Davis (1995: 146) says that ‘[g]ood management is more important than good technology’. Often, entrepreneurs think that they can hide bad management habits by using technology. Good management of meagre resources is far better than the attempt to manage vast resources with meagre technology. Buying or building software costs time and money. Entrepreneurs must decide whether the software they think they need is necessary. Buy software or build it? Van Nieuwenhuizen et al. (2014: 101) suggest that the following questions should guide whether to buy or, instead, build software: • Consider buying software, unless there is absolute certainty that the IT department can build better functions than those off ered in the market. • Unless a company has more experience regarding the specifi c software that is required, buying is better than building. • Unless there are existing systems that could be upgraded quickly, easily and at low cost, consider buying. • If high levels of complicated integration between systems must be done, and the only option is to buy that expertise, do not waste time building a system. • The greater the need to conform to international benchmarks or to global best practices, the greater the argument for buying instead of building. • The wider the implementation will be, the greater the need to buy a solution. For example, it is better to buy a solution that must work across one hundred offi ces, than to build such a system. • High levels of legal and audit compliance could force a company to buy software instead of build software.

• Urgent implementation within a short time frame favours the buying of software. 10.5.6 Cloud computing For many years, the cloud symbol was used in IT diagrams to show some unknown process. The idea was normally associated with connecting to another computer system, and since the inner workings (processes and business rules) for that remote computer were not known, a cloud was used to show the connection with the remote computer (Gupta et al., 2010). Today, cloud computing is a common 350 CHAPTER 10 term, referring to the practice whereby users store, manage, and process data using a network of remote servers hosted on the Internet, rather than using a local server or a personal computer. Data storage in the cloud Building on the idea of software as a service, there are cloud service providers (such as Podio, Dropbox, OneNote etc.) that allow users to store all their data records off-site, on a remote computer. Some of the data storage solutions are free, but come with data limits. Other uses of cloud computing Cloud computing can also be used to provide solutions such as the following: • Affordable antivirus software and data encryption • Desktop publishing • Human resources management • Accounting and bookkeeping

• Payroll services • Online and classroom-free teaching solutions Advantages and disadvantages of cloud computing Advantages Disadvantages Accessible from anywhere via the Internet Does not work without access to the Internet Relatively easy to use System response times could be slow – especially if the remote server is in another country Mostly free of charge, but pricing could be Credentials of the system owner are not always based on the number of users on the system known No need to have expert programmers create Could be vulnerable to attacks from software solutions cybercriminals No need to buy large computers to store Requires specific login details that users could

different databases and applications needed to forget, causing delays while resetting passwords run a business (Source: EDGE Learning Media (Pty) Ltd, 2019) Table 10.1: Advantages and disadvantages of cloud computing 351 MAKING IT RUN SMOOTHLY (The case of Podio) EXAMPLE 10 B Citrix is a large enterprise resource planning (ERP) system provider. It saw a need to launch a smaller product for the benefi t of small and medium-sized enterprises that could not aff ord large ERP systems. Podio was created as an open-source, freeware platform that could act as an operational database, and on which anyone could build applications that could solve specifi c needs. Users can also create their own applications on Podio and make them available to anyone else in the Podio community. Users can choose to use pre-created applications, such as the following: • Customer relationship management solutions • Project management solutions • Sales management solutions • Basic invoicing and bookkeeping solutions • Event management solutions

Podio allows companies to use the system for free, on condition that the company does not have more than fi ve users set up on it. It acts as a database that stores customer information, project information etc. It also allows users to attach documents to customer records for storage and future reference. (Source: EDGE Learning Media (Pty) Ltd, 2019; adapted from Citrix, n.d.; and Citrix Podio, n.d.) ACTIVITY 10C (i) Defi ne information technology (IT). (ii) Identify fi ve of the challenges associated with IT. (iii) List fi ve examples of IT security threats. (iv) Explain why it is important that organisations have steps in place to back up important company data regularly. (v) Discuss fi ve software quality principles that are useful to entrepreneurs. (vi) Defi ne cloud computing. (vii) Compare the advantages and disadvantages of cloud computing. 10.6 MANAGING SUPPLIERS

Suppliers can be defi ned as the individuals or organisations that provide products or services to other businesses. Acquiring the right supplier is essential to the success of any enterprise (big or small) – it drives a company’s competitive advantage. 352 CHAPTER 10 10.6.1 Selecting suppliers Selecting a reliable supplier is vital, since unreliable suppliers could ruin the reputation of any business. Supplier selection does not need to be extremely complicated. The following basic principles could be useful when deciding which supplier to use. Quality and cost Entrepreneurs should strive to find a supplier that provides the best quality at the best possible price. A common mistake made by entrepreneurs is to think that high-quality suppliers are expensive. Conversely, they conceive cheap suppliers as inferior. When seeking the best quality at the best price, entrepreneurs must have a clear idea of the following: • What exactly is needed from the supplier in terms of function, reliability, warranties, guarantees etc. • How much the entrepreneur is willing to pay for the supplier’s product or service • Whether there are other suppliers that could provide the same product or service • What the supplier’s reputation in the market is Contract terms and duration

An entrepreneur needs to know that an agreement entered into with a supplier is reasonable, and that the supplier can deliver what is agreed upon. At the early stages of a new business, long-term contracts may not necessarily be the best option. Often, contracts are difficult to terminate before the contract terms have matured. Buying from a supplier on an ad hoc basis (i.e. buying only when supplies are needed) allows the entrepreneur to quickly switch from one supplier to another in order to obtain the best possible service. However, ad hoc agreements seldom ensure that entrepreneurs can get the best possible terms from suppliers. Sustainability Best practice suggests that suppliers with a proven track record are a better option than suppliers who are in the start-up phase of their own business. Suppliers who have a proven track record could be more expensive to use than others, however. But such suppliers have years of experience, and have built up network of contacts and subsuppliers, so that it could be easier for the entrepreneur to source from them than would be the case with suppliers who are new. Entrepreneurs must ensure that suppliers can provide what they need without causing interruptions to the entrepreneurs’ operations. Consistency, repeatability and reliability No business can afford suppliers that do not deliver the same quality product or service all the time. Suppliers who suddenly make excuses, or who demand more money so that they can keep on delivering the same quality of product or service than before, should be treated with scepticism and caution. 353 MAKING IT RUN SMOOTHLY 10.6.2 Building relationships Taking the time to build good relationships with your key suppliers is important. A productive relationship ensures quality service from your

suppliers that meets your specifi c needs. Besides customers, suppliers are the lifeline of any business enterprise. It can take years to build relationships with suppliers, and it could take minutes to break down those relationships. Trust is the essence of any relationship between an entrepreneur and a supplier. The TRUST acronym The word ‘trust’ makes a useful acronym, which stands for the following: • True • Reliable • Uniform • Safe • Trained True Companies demand that suppliers be honest. Consider the following two examples and decide for yourself whether a good relationship exists between the customer and the supplier. Often, companies discuss sensitive terms, such as preferential pricing, with a supplier. It would be highly inappropriate of that supplier to talk to third parties about such sensitive issues. There are also cases where suppliers deliberately try to deceive customers into buying inferior goods or services at a very high premium. In a recent example at the author’s own company, a supplier repackaged a cheap electronic component into the packaging of a famous brand. The deception was discovered when the package was opened. There is now a case of fraud being litigated against the supplier. Reliable

Suppliers have a duty to be consistent in their dealings with a company. In another recent example, the author of this chapter dealt with a supplier that was erratic in delivering products. The wrong products were sometimes delivered. At other times, items were missing from the delivery. This unreliable attitude from the supplier caused delays in products or services that had to be delivered to the author’s clients. Furthermore, queries about deliveries were dealt with by so many diff erent employees of the supplier, that it was very diffi cult to know the real reasons for this unreliable behaviour. Uniform It is very diffi cult to work with a supplier that changes procedures or operations constantly. One never knows what to expect from that supplier. For example, why does a supplier have a new policy each week for handling incorrect deliveries? 354 CHAPTER 10 Safe Consider working with suppliers that keep your business affairs confidential and do not share your issues or secrets with others. Beware of suppliers that attempt to try to influence your customers. Trained Suppliers that do not know their products and services could do entrepreneurs more harm than good. Relationships between suppliers are built on the idea of trust. In today’s world, it is very difficult to do business just based on a handshake. That is why the TRUST acronym is a nice guideline to know how to deal with suppliers.

In today’s business environment, more and more service level agreements (SLAs) are built with the elements of the TRUST acronym in mind. In contract law, there is a concept called ‘specific performance’. This means that the SLA spells out specifically how suppliers must act. In fact, SLAs between this author’s companies and suppliers specifically list the TRUST acronym, and list specific examples of what is expected from that supplier. Trust is non-negotiable, and strong relationships with suppliers are essentially built through collaboration, management, performance review skills and good negotiation. 10.6.3 Negotiating terms Negotiation is a discussion, or discourse, between two or more parties, with the aim of achieving something. In negotiations, one party wants something from the other, and may be willing to give something in exchange. This means that negotiations start with dividing differences between parties. Through a series of discussions, parties want to find common ground (reasons to agree) or alternatives that will be acceptable to all parties in the negotiation. Negotiation is a special form of communication that parties use to reach an agreement. Entrepreneurs are expected to negotiate many different terms, such as the following: • Salaries • Labour relations • Pricing • Goals and performance This section focuses on what entrepreneurs need to know when negotiating the best prices with suppliers. In the business world, a great amount of power is in the hands of the suppliers.

Their rates largely impact the profit companies can make. When the rates of suppliers are low, companies that they distribute products or services to are given the opportunity to make a great profit. When these rates are high, companies tend to lose out. The rates given by suppliers are also 355 MAKING IT RUN SMOOTHLY negotiable. For entrepreneurs to best position themselves in times of negotiation, it is important that they have strong negotiation skills. The following fi ve tactics are of great value when negotiating the best prices with suppliers ( Lucrum Consulting Inc., 2017): 1. Talk the talk: Understanding the unique industry jargon will earn you respect and make the negotiating process easier, as all parties involved are talking the same language. 2. The first offer is not the best offer: Never settle for the fi rst off er set on the table. Instead, prepare yourself to negotiate back and forth until you have reached a good deal. 3. Gather quotes from various suppliers: Before negotiating with a supplier, gather some quotes from their competitors. Be upfront with the suppliers about the quotes you have obtained, and let them know that the supplier that off ers the best deal will secure the contract. 4. Have a deposit available: Having a large amount of money available to make a deposit is benefi cial during negotiation. This shows the supplier how serious you are about making the purchase. It also shows the supplier that you are easy to work with.

5. Identify areas of mutual benefit: In cases where suppliers are unwilling to lower their price, closely inspect the contract, and try to fi nd areas in which both parties can benefi t from renegotiated terms. Negotiation styles Entrepreneurs should be aware of at least two negotiation styles: 1. Confrontational: Negotiation styles where one party is aggressive toward the other are not necessarily productive. Consider for a moment the damage done to property during strikes, and the eff orts of negotiators to reach an agreement while their mandate-givers smash windows, turn trash cans over and damage motor vehicles. Consider, further, a case where the negotiation team is openly aggressive to the other side. How could the aggressor’s opponent stay objective and consider any of the aggressor’s demands? 2. Facilitative: These negotiation styles allow parties to negotiate in a calm and collected manner. It is easier to consider the other side’s points when they conduct themselves professionally and can make their points without being threatened or threatening you. 356 CHAPTER 10 ACTIVITY 10D (i) Discuss why consistency is an important factor when it comes to selecting a supplier. (ii)

Explain the elements that entrepreneurs should have a clear idea of when seeking the best quality product at the best price. (iii) State why it is important that entrepreneurs take time to build good relationships with their key suppliers. (iv) List the factors essential to building strong relationships with suppliers. (v) Name four of the terms that entrepreneurs are expected to negotiate. (vi) Discuss five tactics entrepreneurs can use when negotiating the best prices with suppliers. 10.7 STOCK CONTROL ‘Stock control’ refers to the way that managers handle raw materials and finished goods cost-effectively, while ensuring that stock and finished goods are not wasted. Balancing these interests can be tricky. For example, buying too many raw materials could cause spoilage (metal can rust, wood can warp or be infested with damp mould, food can go off etc.). On the other hand, finished goods can spend a long time on shelves, thereby taking up space that could be used for other things. Obviously, finished goods are also susceptible to spoilage if not sold within a specific period. Three of the many possible techniques to control stock include the following: 1. Economic ordering quantity (EQQ) 2.

Materials requirement planning (MRP 3. Just-in-time (JIT) Economic ordering quantity (EOQ) ECQ is about ordering the most economic quantity of raw materials at a time. In other words, one orders just enough to use for a given period. The problem with this approach is that a sudden spike in orders may not be fulfilled, because there is not sufficient raw material available to make more goods. In addition, ordering more material at short notice may not guarantee quick delivery. Materials requirements planning (MRP) MRP involves estimating how much material will be used in a specific production cycle. A production cycle is the amount of time that it takes to manufacture products from start to finish. Typical production cycles involve the manufacturing of the same objects for a specified period. For example, in a production cycle, 1 000 000 A-widgets are manufactured over eight hours. Thereafter, the machines are retooled so that 1 000 000 B-widgets can be manufactured over the next eight hours. Because the A- and B-widgets have different sizes, they require different quantities of material. MRP systems are therefore designed to take into consideration the number 357 MAKING IT RUN SMOOTHLY of each widget to be manufactured and the quantity of material to be used in the manufacturing process. Besides being used to order the right quantity of materials, MRP systems are used to calculate the best way to cut materials so that waste is eliminated.

Just-in-time (JIT) This is a waste reduction philosophy that states that material should only be delivered as and when needed in a manufacturing process. The main assumption of JIT is that businesses do not hold big inventories of raw materials. For example, if a business is going to make A-widgets for a whole month, there is no sense to keep the raw material for B-widgets on hand. In addition, if a certain clamp is part of the A-widget’s manufacturing and is installed in step 25 of the manufacturing process, there is no need to order that clamp until one is ready to start step 25. Theoretically, JIT seems to make sense because it reduces the risk of buying too much raw material at any given time. From a practical perspective, however, managers must be aware of several constraints and conditions associated with JIT: • There must be a strong relationship with service providers to ensure that materials are delivered on time, and that their delivery does not delay the manufacturing process. • High traffi c volumes and high incidents of road accidents and hijackings in South Africa could mean that on-time delivery of raw materials cannot always be guaranteed. • Labour strikes could infl uence the delivery of raw materials. • Keeping a small quantity of stock on hand should be considered, to ensure that late deliveries or non-deliveries have less of a negative impact on production processes. 10.8 QUALITY CONTROL James R. Evans (2015: 6) states that there is no universal defi nition of the term ‘quality’, and he quotes a defi nition from the American National Standards Institute (ANSI) and the American Society for Quality (ASQ): ‘[T]he totality of features and characteristics of a product or service that bears on its ability to satisfy given needs’. According to ISO 9000:2015 (and the older ISO

9000:2000), ‘[q]uality is the degree to which a set of inherent (existing) characteristics fulfi ls requirements’ (in Bobade, 2014). There are many other opinions about what quality is. For the purpose of this section, however, the defi nitions that have been quoted are suffi cient. Quality is about meeting specifi c needs or expectations. These expectations diff er signifi cantly between a manufacturing environment and service environment. The quality dimensions of manufactured products include the following (Evans, 2015: 16): • Performance: Whether the product does what it is supposed to do • Features: Whether all the functions expected from the product are present • Reliability: The ability of a product to survive over a specifi ed time and under specifi c usage conditions 358 CHAPTER 10 • Conformance: The degree to which a product meets specific standards or specifications • Durability: The level of use expected from a product over a specified time before the product breaks or deteriorates • Serviceability: Whether the product can easily be repaired or serviced • Aesthetics: Whether the product has look and feel acceptable to the user • Perceived quality: The level of quality a user believes a product possesses

‘Service quality dimensions’, on the other hand, include the following (Evans, 2015: 19): • Time: How long someone must wait before they get attention from a service provider • Timeliness: Whether someone will do what they promised on time • Completeness: Whether the service provider can deliver all that was promised to the customer • Courtesy: Whether employees greet customers and are friendly to them • Consistency: Whether service providers deliver on promises to all customers in the same way • Accessibility and convenience: The ease of getting access to a service provider and their management team • Accuracy: Whether the service is performed right the first time • Responsiveness: The extent to which service providers act quickly and resolve unexpected problems as they occur What is quality control and what quality control techniques should entrepreneurs know about? The common definition of quality control is ‘a system of maintaining standards in manufacturing products by testing a sample of the output against the specification’ (Gasparelo, 2015). Clearly, this definition is not valid for a non-manufacturing (service) business. Most literature focuses on quality control in a manufacturing context. Recently (in the last ten years), more has been written about quality control in a non-manufacturing context. What follows here is a general discussion regarding quality control in any business environment.

William Edwards Deming, Joseph M. Juran and Philip B. Crosby are widely regarded as the fathers of quality control theory. In later years, Deming’s ideas found great traction in Japan. Deming’s chain reaction and 14-point philosophy Deming’s chain reaction theory states that businesses should have an inherent desire to improve quality of products or services at all times. The desire to improve quality causes a business to become more conscious of: • ways to decrease costs; • ways to reduce the ‘waste of rework’; • ways to make fewer mistakes; • ways to cause fewer delays; and • ways to make better use of time and materials. 359 MAKING IT RUN SMOOTHLY As soon as these fi ve actions start to happen, productivity increases, and the market can be captured with high-quality products at lower costs. Costs are lower because the removal of mistakes, rework and delays means that less time is spent to produce a product or service. As soon as customers realise that high-quality products or services are available at lower costs, more customers are attracted by word of mouth, which means the organisation can sustain itself over a long time. Long-term sustainability creates more jobs and greater prosperity for all in the business. Deming’s 14-point philosophy illustrates a systematic approach to achieving better quality in manufacturing and non-manufacturing contexts. The philosophy is as follows: 1.

Management personnel must demonstrate their commitment to quality control, and the improvement thereof, by publishing improvement standards. 2. Top management must adopt a philosophy of improvement and ensure that everyone in the business does the same. 3. Quality inspections must exist and take place on a regular basis. The focus of inspections must be cost reduction and improvement of all processes. 4. Entrepreneurs must end the practice of awarding business contracts based solely on price. If a service provider does not demonstrate that it is serious about quality, another provider should be found. 5. Systems of production and service must improve continually. 6. Training is an important component of quality. 7. The purpose of management and supervision is to create effi ciency in terms of human and non-human resources. 8.

Fear of making mistakes must be abolished. Mistakes should be used as opportunities to create trust and a climate for innovation. Ways should be found to innovatively ensure that mistakes are not repeated. 9. All teams should work toward the same quality goal, and should all fi nd ways to continuously improve quality. 10. Exhortations to the workforce should be eliminated. In other words, nagging people to adopt an attitude conducive to quality should be eliminated. Slogans and ‘cheerleading’ do not contribute to quality eff orts. People with inherent biases toward quality should be employed instead. 11. Production quotas and management by objectives should be eliminated. These methods are all about chasing numbers and not about achieving quality. 12. Barriers that rob people of the pride of workmanship should be removed. People should be encouraged to do their best and show their best – always. 13. Education and self-improvement for everyone should be encouraged. 14. Action aimed at producing quality should be taken.

The Crosby philosophy Philip B. Crosby stated that management’s attitude needs to be refl ected in a set of ‘absolutes of quality management’. Here, he makes the following points: 360 CHAPTER 10 • Quality means that one adheres to standards. Elegant touches such as ‘bells and whistles’ do no translate into quality. • There is no such thing as a quality problem. The real problem is people’s attitude toward quality. • There is no such thing as ‘economics of quality’. In other words, higher quality is not more expensive than mediocre quality. It is always cheaper to do the right things correctly the first time. • The only performance measurement is the cost of quality. The more one must rework something, the more expensive quality becomes. • The only performance standard is ‘zero defects’. Every defect that one is aware of must be removed immediately. Juran’s quality views Joseph M. Juran stated that quality is a way of life, and that all aspects of business (production, service, operations) should focus on quality improvement. Quality must be pursued on two levels and it must focus on three aspects. Juran calls these three aspects the ‘quality trilogy’: 1. Quality planning: This refers to the process of preparing to meet goals. Standards are specified and linked to specific actions and time lines. 2.

Quality control: This refers to all the processes associated with meeting quality goals during operations. 3. Quality improvement: This refers to breaking through and achieving new quality levels. Total quality management (TQM) The idea of Total Quality Management (TQM) emerged from the ideas of Deming, Crosby and Juran. TQM is a people-oriented quality control system. The basic idea of TQM can be summarised as follows: • Quality efforts should focus on customers and stakeholders to the business. If customers and stakeholders are not convinced about quality, significant market share losses may be the outcome. • Quality is also found in the processes that a business uses to produce goods or services. Error-prone processes and processes that contain unnecessary steps have a negative influence of quality. • Continuous improvement and learning are needed to ensure quality. People learn from mistakes. Therefore, processes should focus on the elimination of mistakes. In addition, negative feedback on products or services highlight mistakes made when those products and services were planned. Improving products and services therefore eliminates previous mistakes. Furthermore, businesses have to be flexible enough to make changes at short notice. The quicker they respond to feedback and the quicker they are to implement changes, the more in control of quality improvement initiatives they will be. • Employee engagement and teamwork to eliminate waste or mistakes is critical to any TQM programme.

361 MAKING IT RUN SMOOTHLY • ‘Management by fact’ is a hallmark of TQM. In other words, improvements or changes are not made on gut feel, but by examining the facts and learning from what the facts uncover. • Strong leadership is required, because TQM is a long-term, strategic action. TQM cannot be accomplished in a ‘quick and dirty’ way. ISO 9000:2015 ‘ISO’ is the acronym of the International Organization for Standardization. This organisation was founded in 1947 and is based in Geneva. The ISO provides internationally accepted standards on many disciplines. ISO 9000:2015 is the standard for a quality improvement programmes. The standard is based on eight principles: 1. There must be a defi nitive customer focus. 2. There must be clear leadership to drive the quality improvement programme. 3. People at all levels of the organisation must be involved in the quality improvement programme. 4. Quality improvement has a ‘process’ approach. 5.

Management should look at quality improvement as a systemsthinking component. 6. Improvements must be continual and ongoing over a long period. 7. Decisions should be based on fact. 8. Quality improvement eff orts should create mutual benefi ts to customers and to suppliers. Six Sigma Six Sigma is a structured quality improvement process that makes use of a concept named DMAIC. This abbreviation stands for the following: • Define: First, a set of quality criteria must be defi ned. Think, for example, of the world’s most perfect cookie. How would you write a standard to defi ne the perfect cookie? • Measure: After the quality criteria have been defi ned, an inspection follows to see how many things (products or services) meet the standard that was originally defi ned. Those cookies that meet the standard are put aside, and those that do not meet the standard are analysed in the next step. • Analyse: In the analysis step, one attempts to fi nd reasons why things (processes, products, services etc.) did not meet the quality standard. Maybe, the cookies that failed were not baked long enough, or maybe an ingredient was missing.

• Improve: In this step, actions and procedures are developed to ensure that the mistakes that were observed will not happen again. The improvements are implemented. • Control: Finally, the improvements that were made by comparing the improvements against the revised criteria are observed. Once observed, new criteria for quality can be defi ned, repeating the DMAIC process many times over. There are many other quality control systems, but we have focused on the most popular for entrepreneurs. You are encouraged to research the following quality control systems in your own time: 362 CHAPTER 10 • Lean • Baldrige • TRIZ ACTIVITY 10E (i) Define stock control. (ii) Identify and explain three possible stock control techniques. (iii) Explain five of the constraints and conditions associated with JIT. (iv) Discuss the various quality dimensions of manufactured products.

(v) Identify and explain five service quality dimensions. 10.9 PLANNING AND FORECASTING Planning is a basic management function. It is about the drafting of detailed proposals on how things need to be done. It involves the formulation of detailed plans aimed at achieving the best possible balance of needs or demands, given the available resources. Planning process The main steps that are involved in the planning process of an organisation are as follows ( Business Management Ideas, n.d.): 1. Perception of opportunities: The starting point of planning is perceiving the opportunities available within the organisation or external environment. 2. Establishing objectives: Major and minor objectives are set up for long- and short-term goals. These objectives are important, as they emphasise what must be accomplished. 3. Determining planning premises: Planning premises are the conditions under which the activities will be accomplished. These can be either internal or external. The former includes political, technological, social etc. factors, and the latter includes the policies of the organisations itself, resources available in the organisation, the organisation’s ability etc. 4.

Identifying alternative courses: Look at the various alternative ways in which objectives can be achieved. 5. Evaluating alternative courses: The available alternatives should be analysed in search of the one that will generate the most profit at the lowest cost. 6. Selecting the best course. Here, the plan that fits the organisation best is selected. 7. Formulating supporting plans: After selecting and formulating the main plan, supporting plans are developed to assist in its realisation. 8. Establishing the sequence of plans: The sequence of activities is established, and the plans are put into action. 363 MAKING IT RUN SMOOTHLY Forecasting Forecasting is about the prediction of a future event, and the estimation of that future event’s eff ects on a business. Forecasts look at historical data, attempt to detect a trend in the data, and then use that trend to predict what could happen in the future. Forecasts are typically used in situations where businesses want to: • increase market share, and want to understand the eff ect of such an increase on their income;

• understand the eff ect of new products’ sales on their income; • understand the eff ect of ongoing declines in sales on their income; or • understand how continual absenteeism infl uences productivity. Forecasts make use of many sources to make predictions. Sources include, but are not limited to: • economic indicators, such as changes in manufacturing output, changes in retail sales, numbers of vehicle sales etc.; • data of past performance; • data of past trends; and • input from experts. As a rule, forecasts attempt to be unbiased, but they could be: • neutral, affi rming the most likely outcome; • optimistic, expecting results that are more positive than the neutral forecast; or • pessimistic, expecting results that are less positive than the neutral forecast. 10.10 REPORTING Entrepreneurs should pay attention to ‘Whitman’s Rule’, which states that, ‘if you cannot measure something, you cannot control it’ . Reporting is an important measurement tool, and is at the heart of sustainable and efficient businesses. It allows for a professional and cohesive explanation of a business’s conduct, and helps businesses engage with their various stakeholders, both internal and external, while promoting better business decision-making ( International

Federation of Accountants, 2018). There are two classes of reports, namely internal reports and external reports. When deciding on what to measure in a business, entrepreneurs should consider various measurement principles, such as the following (Daft and Marcic, 2011): • Does the measurement help to understand what is going on in the business? • Does the measurement help to understand which products or services perform well, and which do not? • How easy is it to fi nd data from which the measurement can be created? • To what extent will the measurements produce the same type of information sets under all circumstances? 364 CHAPTER 10 • To what extent must the measurement be manipulated to produce a result? The more manipulation, the greater the chance that data could be misused and misinterpreted. • Is the measurement necessary? • Does the measurement reveal the truth about the business, or does it hide important facts? • How recent is the data on which the measurement is based? The older the data, the less relevant it could be to the decisions that entrepreneurs must make. • Does the measurement allow entrepreneurs to detect trends (upward, downward or level)?

• Does the measurement allow entrepreneurs to detect what actions are required to steer the business in the right direction? 10.10.1 Internal reporting ‘Internal reporting’ refers to the type of reports that are circulated inside the company. Most internal reports act to inform the business owners, managers and workers about the detailed state of the business. Internal reporting could be considered ‘live reporting’, because the information in the report changes in step with activities and actions in the business. Internal reports can show entrepreneurs what happens in the business on an hourly, daily, weekly or monthly basis. The following are examples of internal reports: • Income statements • Balance sheets • Cash flow reports • Debtors reports • Creditors reports • Budgets • Sales forecasts, arranged by person, product, service, region etc. • Production reports, arranged by product, region etc. • Staff leave reports (sick leave, vacation, absences etc.) • Staff performance reports • Sales figures, arranged by customer • Tax issues such as VAT, company tax, PAYE etc.

10.10.2 External reporting External reports are prepared and submitted to shareholders, investors, government and credit institutions. Generally, external reports do not contain as much detail as internal reports. External reports provide a snapshot of the business at a given time in the past. External reports typically group information into monthly, quarterly, half-yearly and yearly arrangements. The most common external reports include the following: • Sales forecasts • Budgets • Cash flow reports 365 MAKING IT RUN SMOOTHLY • Business plans • Overall strategic direction • Annual fi nancial statements • Quarterly fi nancial statements 10.11 YOUR OPERATIONS DASHBOARD With operational management being all about business effi ciency, operations dashboards are becoming increasingly popular among businesses today. These data reporting tools comprise a set of indicators that examine changing business processes to track, in real time, how well a business is doing from an operations effi ciency perspective. There could be diff erent types of dashboards in use at any given time.

The following are the most common dashboards: • Production dashboards: These dashboards indicate the level of production and sales in a business. • Control dashboards: These dashboards indicate who owes money to the business and to whom the business owes money. In addition, control dashboards show how actual sales compare to forecasts, and how actual costs in the business compare to the budgeted cost forecasts. They deal with debtors, creditors, open invoices, action items, and follow-up items. • Performance dashboards: These dashboards often indicate the overall health of the business in terms of income, expenditure, profi t and loss, and cash fl ow. These types of dashboards could also indicate performance levels of staff in the business at any given time. Operations dashboards are considered early warning systems. They give entrepreneurs important performance clues that should not be ignored. Dashboards allow entrepreneurs to fi nd answers to the following questions. Question Indicator How is the business Making a high profi t Making moderate Making a loss performing in terms of profi t profi t and loss?

What trends can I Things are improving Things are the same Things are worse observe? What fi nancial gains or High losses or gains Moderate losses or Insignifi cant losses or losses can I observe? gains gains Besides fi nancial gains or losses, what other things can I observe from the dashboard? How does this information compare to previous periods (months, quarters or years)? All things considered, what does the dashboard tell me to do? (Source: EDGE Learning Media (Pty) Ltd, 2019) Table 10.2: The use of operational dashboards 366 CHAPTER 10 ACTIVITY 10F

(i) Discuss the steps involved in the planning process of an organisation. (ii) Explain what is meant by the term ‘forecasting’. (iii) Explain the importance of reporting within a business. (iv) Differentiate between internal and external reporting. (v) Identify the most common operations dashboards and what they are used for. 10.12 SUMMARY There are many dimensions to operations management. In this chapter, we covered several themes that we can summarise as follows. Operations management is the nerve centre of a business. There are many disciplines or activities that need to work together so that the best product or service can be delivered to customers. The focus of operations management is broad and variable, but includes the following: • Selecting the right location of a factory or business • Ensuring that the work environment is safe • Ensuring the best use of information technology • Managing suppliers

• Managing levels and quality of stock • Reporting on the state of the business Operations management could, in other words, be seen as a great architectural drawing that shows how each of the pieces of a business fit together. 367 BORING BUT IMPORTANT STUFF BORING BUT IMPORTANT STUFF 11 11.1 Introduction 369 11.2 Life lesson 370 11.3 Why administration and details count 370 11.4 Tax 371 11.4.1 | The basics of tax and SARS 371 11.4.2 | Value added tax (VAT) 372

11.4.3 | Tax relating to employees 377 11.4.4 | Provisional tax 378 11.4.5 | Year-end returns 379 11.4.6 | Good-to-knows 380 11.5 Insurance 382 11.6 Black Economic Empowerment (BEE) 384 11.7 Contracts 393 11.8 Trademarks, copyright and intellectual property 401 11.9 Administrative policies and procedures 405 11.10 Are you secure? 409 11.11 Summary

411 368 CHAPTER 11 Boring but important stuff Case studies – myths, leaders and Online inspiration Growing the start-ups Making business it run smoothly Building a It is in the team numbers Cash is king

Developing Selling products Spreading and the word Getting out of Forming a services What is the starting business entrepreblocks neurship? 11.1 INTRODUCTION Effective and proper business administration is central to any business. Proper business administration entails the management of a business and the monitoring of its operations. It ensures that a business is run favourably, and that the business’s interests are promoted. In order to achieve this, various controls must be put in place. These controls promote the business, but they also protect it by ensuring that: • the business is tax compliant; • the business complies with the objectives regarding Broad-Based Black Economic Empowerment (B-BBEE, also referred to as BEE); • insurance cover is in place;

• valid and binding contracts are entered into; • the intellectual property rights of the business are considered; and • generally, that the internal operations of the business are protected through sound and value-adding policies and procedures that benefit both the employer and employee. This ‘boring but important stuff’ will contribute to the ongoing success and smooth functioning of a business. After studying this chapter, you should be able to: • explain the importance of proper business administration; • discuss the role of the South African Revenue Service (SARS) in the context of taxation; • explain tax and the various aspects thereof; 369 BORING BUT IMPORTANT STUFF • identify the items in a business that need to be insured and describe the reasons for insuring them; • explain the purpose and objectives of BEE and outline the benefi ts of being BEE compliant; • demonstrate an understanding of contracts and their implications; • discuss trademarks, copyright and intellectual property within a business context, and apply knowledge of these topics to a hypothetical scenario; and • outline key company administrative policies and procedures. 11.2 LIFE LESSON

Opening a new business is an exciting venture. However, it is important to note that when running a business, there are going to be many challenges. There will be good days, and there will be bad days. Most importantly, as a business owner, you must be committed to what you want to achieve. Running your business will teach you who you are, how you react to situations and challenges, and will help you grow as your business does. As a business owner, you must be able to: • listen; • communicate eff ectively; • establish and maintain relationships; • respond to your circumstances; • ‘think outside of the box’; • adapt to change; • survive the tough times; • be willing to learn; and • always ensure that customers are respected and valued. These life lessons will contribute to the success of any business venture you might embark on. 11.3 WHY ADMINISTRATION AND DETAILS COUNT To fully understand the importance of proper business administration, one must fi rst look at what business administration means. A business sells goods or services for payment. Administration is the process – undertaken by an individual or a group – of organising

resources in a manner that results in the accomplishment of the end goal ( Biz Brain, n.d.). Business administration is therefore the use of administration processes to help facilitate the selling of the business’s goods or services. The process of business administration involves the overseeing and controlling of the business. Ultimately, its purpose is to ensure the optimal running of the business. In this way, it aims to ensure that the business succeeds ( Biz Brain, n.d.). 370 CHAPTER 11 In any type of business, everyday administrative activities are important for its long-term success. Business administration involves a multitude of financial and commercial activities. It entails the following key functions ( Biz Brain, n.d.): • Management of overall activities of the business • Monitoring of overall activities of the business 11.4 TAX In the words of Benjamin Franklin (n.d.), ‘In this world, nothing can be said to be certain, except death and taxes’. Tax can be defined as compulsory payments imposed on citizens to raise revenue. The revenue is raised in order to fund general expenditure, such as education, health and housing, for the benefit of the taxed society. There are different pieces of tax legislation and types of taxes levied in South Africa. Tax legislation tells us what type of tax to pay and when to pay it. Examples of some of the tax legislation in South Africa are outlined in the following table.

Tax legislation Type of tax Income Tax Act 58 of 1962 Income tax Withholding tax Turnover tax Dividends tax Donations tax Value Added Tax Act 89 of 1991 Value added tax (VAT) Transfer Duty Act 40 of 1949 Transfer duty Estate Duty Act 45 of 1955 Estate duty Unemployment Insurance Contributions Act 4 of 2002 Unemployment insurance contributions Skills Development Levies Act 9 of 1999 Skills development levy (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 11.1: Tax legislation and the type of tax paid in terms of each act 11.4.1 The basics of tax and SARS The tax regime is determined by the National Treasury. The Minister of Finance delivers an annual budget speech, which contains the

rates of normal tax. This regime is managed by the South African Revenue Service (SARS), which is headed by the SARS commissioner. SARS is a government body tasked with the collection of taxes ( SARS 1 , n.d.). It was established in terms of the South African Revenue Service Act 34 of 1997 as an autonomous agency. The head office of SARS is in Pretoria, with various offices throughout the country. 371 BORING BUT IMPORTANT STUFF South Africa has a progressive income taxation system. This means that the more one earns, the more tax one pays. South Africa has a well-developed and regulated taxation regime, with laws that are constantly being revised and amended. 11.4.2 Value added tax (VAT) Taxation is a complex fi eld. In order to understand the terms used in this section, we will need to understand certain basic terminology. • Enterprise: The entity carrying on the business activities of the VAT vendor. • Input tax: A tax that is levied on personal income directly. Any VAT that the VAT vendor incurs may be claimed back from SARS. • Output tax: The VAT that the VAT vendor (supplier) levies on the selling price and, therefore, collects. • Recipient: The customer who purchases a vendor’s goods. • Supplier: The VAT vendor selling their goods. • Value added tax (VAT): An indirect tax on the consumption of goods and services.

• VAT vendor: A business that is registered for VAT and that levies VAT on the selling price of their goods or services. What is VAT? When consumers purchase goods or services from a business in South Africa, they must pay VAT (which is included in the purchase price of these goods or services). VAT is an indirect tax on the consumption of goods and services in South Africa, and is levied in terms of the Value Added Tax Act. It is indirect, as it is assessed directly by SARS, but indirectly through the taxation of goods and services. It is also an inclusive tax, as the price for the goods or services charged includes VAT. A VAT vendor carrying on an enterprise supplies goods or services to the recipient, and levies VAT on the selling price of these goods or services. VAT is charged at each stage of the production and distribution phase of the product. The amount of VAT payable is determined by the price of the goods or services being sold. The rate charged for VAT increased from 14 per cent to 15 per cent on 1 April 2018 ( SARS 3, n.d.). VAT is levied in any of three situations: 1. Supply of goods or services 2. Importation of goods into South Africa 3. Supply of imported services Who should register for VAT?

Any person who carries on a business should register for VAT. It is mandatory for a person to register for VAT if their taxable supplies made amount to R 1 million or more in any consecutive 12-month period. A person may also choose to register for VAT if their taxable supplies made exceed R 50 000 ( SARS 3, n.d.). 372 CHAPTER 11 Taxation of supplies Supplies are normally taxable at 15 per cent, but this is not always the case. The Value Added Tax Act provides for two types of supplies, and determines the taxation rate accordingly. 1. Taxable supply: These items can be taxed at 15 per cent or zero per cent. Items taxed at zero per cent are called ‘zero-rated’ goods or services. 2. Non-taxable supply: Goods and services exempted from taxation. We can see this represented graphically in the following flow chart. Taxable supply Non-taxable supply Standard rate Zero rated No VAT Exempted goods

@15 per cent @zero per cent and services (Source: EDGE Learning Media (Pty) Ltd, 2018) Figure 11.1: Types of supplies and their respective VAT rates Zerorated supplies Zero-rated supplies are taxable, but at a rate of zero per cent. These items are zero-rated, as they allow VAT vendors to claim back any input tax they have incurred. Examples of zero-rated supplies include petrol and diesel, brown bread, maize meal, rice, pilchards, milk, eggs, vegetable oil, samp, and fresh fruits and vegetables. For example, Zeanette is a registered VAT vendor; as is Caleb. Zeanette sells 20 loaves of brown bead to Caleb for R 200. Caleb sells the brown bread to his customers. Brown bread is zero-rated, so: 0 • Zeanette’s output tax = R 200 × =R0 100 0 • Caleb’s input tax = R 200 × =R0 100 Exempt supplies

Exempt supplies are those on which no VAT is charged. The VAT vendor is not permitted to claim any input tax from SARS. Examples of exempt supplies include public road and rail transport, and 373 BORING BUT IMPORTANT STUFF educational fees from approved institutions. For example, Mandla and Shannon are registered VAT vendors. The goods sold by Mandla are regarded as an exempt supply. Mandla sells goods to Shannon, which Shannon then retails to the public. • Mandla’s output tax = No claim, as this is an exempt supply • Shannon‘s input tax = No claim, as there is no VAT charged Calculation of VAT If a VAT vendor (supplier) collects VAT on behalf of SARS (output tax), this amount must be paid over to SARS. If a VAT vendor (supplier) incurs VAT on expenses (input tax), this amount can be claimed back from SARS. The steps are as follows: 1. Calculate output tax 2. Calculate input tax 3. VAT adjustments 4. Tax payable/refundable add/

Output VAT less Input VAT Adjustments = VAT payable/refundable less (Source: EDGE Learning Media (Pty) Ltd, 2018) Figure 11.2: The steps to calculate VAT A fi nal consumer cannot claim VAT back from SARS. Let’s have a look at a few examples: • James, who is not a VAT vendor, sells energy drinks to Kimbo for R 2 500. Kimbo is also not a VAT vendor, and he sells the energy drinks to his clients. Since James and Kimbo are not VAT vendors, they are not liable for VAT. • Lihle is a VAT vendor, and she sells energy drinks to Amy for R 2 530, inclusive of VAT. Amy is also a VAT vendor, and she sells the energy drinks to her clients. The calculation is as follows: 15 Lihle’s output tax = 2 530 × = R 330 115 15

Amy’s input tax= 2 530 × = R 330 115 • Henr y is not a VAT vendor. He sells energy drinks to Caylene for R 2 500. Caylene, however, is a registered VAT vendor and sells the red bulls to her clients. For Henry’s output tax, he does not claim, as he is not a VAT vendor. For Caylene’s input tax, she does not claim either, as Henry did not charge VAT and is not a VAT vendor. • Ronald is a VAT vendor. He sells energy drinks to Ina for R 2 530 inclusive of VAT. Ina is not a registered VAT vendor and she sells the energy drinks to her clients. The calculation is as follows: 374 CHAPTER 11 15 Ronald’s output tax = 2 530 × = R 330 115 Ina’s input tax = No claim as she is not a VAT vendor VAT periods VAT must be paid over to SARS. Every vendor is registered for a specific VAT assessment period. The SARS commissioner has the discretion to allow a VAT vendor ten days grace either before or after the day the period was originally supposed to end. The different VAT periods are discussed in the following table. Category

Applicable to VAT period Category A Vendors whose taxable supplies do not Two months ending on the last day of exceed R 30 million over 12 months January, March, May etc. or Farmers whose taxable supplies exceed R 1.5 million over 12 months Category B Vendors whose taxable supplies do not Two months ending on the last day of exceed R 30 million over 12 months February, April, June etc. or Farmers whose taxable supplies exceed R 1.5 million over 12 months Category C VAT vendors whose taxable supplies

One month ending on the last day of exceed R 30 million over 12 months each month Category D VAT vendors that only conduct farming Six months ending on the last day of activities with taxable supplies of less February and of August than 1.5 million over 12 months Vendors (classified as ‘micro businesses’) that are registered in terms of the sixth schedule to the Income Tax Act. Category E A vendor that is a company or a trust 12 months ending on the last day of the fund vendor’s year of assessment for normal tax purposes (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Tax Guide, 2017) Table 11.2: Categories of VAT and their respective tax periods 375

BORING BUT IMPORTANT STUFF Tax invoices When issuing tax invoices, strict requirements must be adhered to. If these requirements are not adhered to, input tax could be denied. The requirements can be found in section 20(4) of the Value Added Tax Act: • Invoices are only required if the supply by vendor is greater than R 50. • The vendor must supply a tax invoice within 21 days after request. • Copies should be marked as ‘copy tax invoice’. • The vendor is obliged to issue a tax invoice for amounts greater than or equal to R 5 000. • If the amount is below R 5 000, an abridged tax invoice is allowed. ACTIVITY 11A (i) Briefl y explain the following: a. How the South African taxation system works, with reference to the important role players involved. b. The nature of the South African taxation system. Select the correct answer from the options provided. (ii)

At what percentage is VAT currently levied in South Africa? a. 14 per cent b. 13 per cent c. 15 per cent d. Zero per cent (iii) VAT is charged on: a. local transport b. the supply of goods and services c. entertainment d. brown bread (iv) Identify whether the following statement is true or false. (If false, substantiate your answer.)

Milk, brown bread and petrol are zero-rated supplies. (v) Discuss the two types of taxable supplies in South Africa. Illustrate your answer in the form of a fl ow chart. (vi) Consider the following scenario. Benny is not a VAT vendor. He sells R 1 500 worth of goods to Thembi, who is not a VAT vendor. 376 CHAPTER 11 Required: Calculate the total output tax and input tax for both Benny and Thembi. (vii) Consider the following scenario. Moses is appointed to a new position as the CEO of a big company. He was previously earning a salary of R 1 million per annum. He will earn a salary of R 2 million per annum in his new position. He is worried that, because of the increase in his salary, he will be required to register as a VAT vendor. Required: Should Moses register as a VAT vendor? Answer ‘yes’ or ‘no’ and substantiate your answer. 11.4.3 Tax relating to employees

Important terminology • Employee: Any one of the following can qualify as an employee: a person (other than a company) who receives any remuneration; a person who receives remuneration by reason of services rendered by that person; a labour broker; a personal service provider; a director of a private company; or a person, class or category of persons whom the Minister of Finance declares to be an employee. An independent contractor is not considered to be an employee (according to the Labour Relations Act 66 of 1995 and the Employee Equity Act 55 of 1998). • Employer: A person (acting as a principal) who pays, or is liable to pay, any person an amount by way of remuneration. • Remuneration: An amount of income that is paid, or is payable, to a person in the form of a salary. SARS identifies a list of aspects that makes up the remuneration of an individual. These aspects include: ‘leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend; whether in cash or otherwise and whether or not for services rendered’ ( SARS, 2016). Employees’ tax Employees’ tax is the tax that must be deducted by an employer from the employee’s salary. It is withheld monthly from the employee’s salary by the employer. This deduction is known as payas-you-earn (PAYE). In addition, the employer needs to deduct the employee’s contribution to the unemployment insurance fund (UIF) before paying over the salary to the employee. The employer contributes toward a compulsory skills development levy (SDL) and the UIF. The employer is the sole contributor to the SDL (unlike the UIF, which is contributed to by both parties). The employer is legally obliged to pay these deductions and contributions to SARS ( SARS 4, n.d.). 377

BORING BUT IMPORTANT STUFF An employer who is registered with SARS for PAYE and/or the SDL is also required to register with SARS for the payments of UIF contributions ( SARS 4, n.d.). The amount deducted for PAYE must be paid by the employer to SARS on a monthly basis. This amount must be paid within seven days after the end of the month during which the amount was deducted. The employees’ tax to be paid is determined by the amount of the employee’s remuneration. 11.4.4 Provisional tax The following is some important terminology to note: • Income tax: Tax payable on the taxpayer’s taxable income for a particular year of assessment (i.e. the tax that you pay on your salary or wages). • Provisional tax: Provisional tax is a way in which one can pay income tax in advance for a particular year ( Revenue and Customs Authority, n.d.). • Year of assessment: The year in which income tax is calculated and charged ( Inland Revenue Authority of Singapore, n.d.). It is commonly referred to as a ‘tax year’, and usually runs from March to February. The tax year for natural persons diff ers from that of judicial persons (like companies). The year of assessment for a natural person runs from 1 March to 28 February every year; whereas, for a company, it is that company’s fi nancial year (which can end on the last day of any of the 12 months in a calendar year) ( 3E Accounting, n.d.). The diff erence between employees’ tax and provisional tax is that provisional tax is paid two or three times a year, whereas employees’ tax is paid monthly. A taxpayer submits an income tax return, assessed for income tax for a particular year. A provisional taxpayer, on the other hand, must estimate their taxable income for the year of

assessment. Both provisional tax and employees’ tax payments made during a year of assessment are deducted from a taxpayer’s income tax amount to determine the amount refundable to the taxpayer. Provisional taxpayers The following persons are considered provisional taxpayers: • Any company • Persons other than companies who receive income • Any person who has been notifi ed by SARS the they are a provisional taxpayer The following persons are excluded from being a provisional taxpayer: • Public benefi t organisations • Recreational clubs • Body corporates, share block companies and income tax-exempted associations • Non-resident owners/charterers of ships or aircrafts • Natural persons who do not receive income from carrying on a business • Small business funding entities • Deceased estates 378 CHAPTER 11 Registering for provisional tax

Registration must be applied for within 21 business days of becoming liable for provisional tax. SARS may approve an extension of this period. Provisional tax periods Provisional taxpayers make at least two provisional tax payments during a year of assessment. Provisional tax period Payment period First payment Within six months of the commencement of the taxpayer’s year of assessment Second payment On, or before, the last day of the taxpayer’s year of assessment (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 11.3: Provisional tax periods A third, voluntary provisional tax may be made to reduce paying any interest on tax liability. ACTIVITY 11B Create a table and use it to identify the differences between employees’ tax and provisional tax. 11.4.5 Year-end returns Tax returns should be filed annually, irrespective of what business entity you are trading through. The tax return for individuals runs over a 12-month period. It commences on the 1st of March and ends on the last day of February

of the following year. The year of assessment is the year in which the period ends. Corporate income tax (CIT) is a tax imposed on companies in South Africa. CIT is applicable to the following types of companies ( SARS 2, n.d.): • Listed public companies • Unlisted public companies • Private companies • Close corporations • Cooperatives • Collective investment schemes • Small business corporations • Body corporates 379 BORING BUT IMPORTANT STUFF • Share block companies • Dormant companies • Public benefi t organisations Companies must fi le annual returns at their fi nancial year end. In addition, every company is required to submit provisional tax returns. The provisional tax returns are submitted in two instalments that are six months apart. The fi rst instalment must be submitted within the fi rst six months of the commencement of the new year. The second instalment must consist of the approximate total taxable income that

was earned or will be earned. This is due at the end of that same year ( SARS, n.d.). SARS e-fi ling E-fi ling is the electronic submission of tax returns and payments. Taxpayers that are registered for e-fi ling can pay the following taxes online ( Entrepreneur Magazine, 2012): • VAT • PAYE • Income tax • Provisional tax • SDL • Dividends tax • Transfer duty • UIF contributions 11.4.6 Good-to-knows South Africa has various categories of tax rates, apart from the ones that have been previously discussed. These tax rates are regulated by South African statute, which requires all residents and nonresidents of South Africa to pay the applicable rates without fail. The categories of tax and their respective rates due are as follows ( Expatica, 2019). Category Tax rate Explanation

This is a form of inheritance tax that is taxed on all estates that are worth Estates duty more than R 3.5 million. This is tax charged on any property that is disposed of as a donation. If the yearly value of the donation is less that R 100 000, then the Tax Donations tax donation is exempt from this tax rate. rates for Donations tax is currently set at 20 per cent of the value of the donated property property. and wealth This is tax charged on any property that has been acquired through a sales transaction. Transfer duty Properties valued at less than R 900 000 are exempt from this tax rate. Transfer duty is calculated on the value of the estate. Percentages therefore vary. 380 CHAPTER 11 This is tax payable by all businesses and companies that are registered Business tax in South Africa.

This is an alternative taxation method that is charged on all small Turnover tax businesses that have an annual turnover of R 1 million or less. This form of tax replaces income tax, capital gains tax and VAT. Company taxes This is payable by an employer to SARS, to encourage and promote SDL skills development and learning by employees. This is a benefit that can be claimed by any employee who works more than 24 hours a week, or who becomes unemployed, sick or is on UIF maternity leave. UIF comprises two per cent of an employee’s salary. These are amounts imposed on high-volume, daily consumable items. Excise duties These include fuel, tobacco and alcohol, electronics, and cosmetics. Indirect and levies The purpose of such levies is to discourage the consumption of certain taxes products. Customs duty This is a tax charged on imported goods.

(Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Expatica, 2019) Table 11.4: The categories of tax and their respective rates due The following links to websites provide additional information on the taxes discussed: • Employees’ tax: http://www.sars.gov.za/TaxTypes/PAYE/Pages/default.aspx • Income tax rates: http://www.sars.gov.za/Tax-Rates/IncomeTax/Pages/Rates%20of%20 Tax%20for%20Individuals.aspx • Personal income tax: http://www.sars.gov.za/TaxTypes/PIT/Pages/default.aspx • Provisional tax: http://www.sars.gov.za/TaxTypes/PT/Pages/default.aspx • SARS e-filing: http://www.sarsefiling.co.za/ • VAT: http://www.sars.gov.za/TaxTypes/VAT/Pages/default.aspx It is always advisable to seek the advice of a tax professional, as tax is a complex field. Doing so will help avoid incurring penalties from SARS for non-compliance with a tax Act. ACTIVITY 11C Perform an online search using the previously provided links and answer the following questions. (i) List the three types of documents that one would need to register for SARS e-filing. (ii)

Explain which website you would use in order to calculate the personal income tax (if any) that a person would pay if their remuneration was between R 423 301 and R 555 600, for the 2019 tax year. Provide the formula you find there. (iii) Identify two methods of payment that can be used to pay VAT. 381 BORING BUT IMPORTANT STUFF 11.5 INSURANCE Insurance is payment made to someone to have them share the risk of loss or damage to property. When you take out insurance, you are entering into a contract with another party. The contract is an agreement whereby the insured party pays an agreed payment (called a ‘premium’) to the insurer, and the insurer agrees to pay the insured party an amount of money if a specifi c event that results in a loss occurs. The diff erence between indemnity and non-indemnity insurance Insurance can be divided into indemnity and non-indemnity insurance. The main diff erence between these is that indemnity insurance deals with patrimonial loss, whereas non-indemnity insurance deals with non-patrimonial loss ( Rhodes University, 2011). Patrimonial loss is concerned with the reduction in an individual’s fi nancial position. An example of this would be medical expenses incurred as a result of an incident. Non-patrimonial loss is concerned with loss that does not have an easily determinable monetary value. An example of this would be compensation for pain and suff ering as a result of an incident. Indemnity insurance

This covers the amount of direct, monetary loss that has been suff ered (i.e. patrimonial loss). Cover is against an uncertain event. The aim of the cover is to place the insured party in the same position that they were in before the loss took place ( Rhodes University, 2011). An example of this is motor vehicle insurance. The amount the insurer will pay in this case is the amount of the cost of repairing the damage to the vehicle. Non-indemnity insurance (capital insurance) Under this type of cover, the insurer undertakes to pay the insured party a specifi ed amount if some uncertain event occurs. The sum insured is not related to the loss suff ered, though ( Rhodes University, 2011). An example of this is a person insured for their health. They are insured for the fi xed amount of R 100 000 and become ill. They are then paid R 100 000, not because their deterioration in health has cost them that amount, but because of the fi xed sum agreed with the insurer. Short- and long-term insurance These types of insurance diff er mainly in the duration of the contract, and are appropriate to diff erent types of risk. Long-term insurance is regulated by the Long-Term Insurance Act 52 of 1998, while shortterm insurance is regulated by the Short-Term Insurance Act 53 of 1998. 382 CHAPTER 11 Long-term insurance An example of long-term insurance is a life insurance policy. This is cover for a certain event that will occur at an uncertain time.

Short-term insurance An example of short-term insurance is motor vehicle insurance. This type of cover is for an uncertain event that may or may not occur. What do we need to insure in business? Insurance might seem like an unnecessary, additional cost for your business. However, with the right type of insurance and the correct advice, it can actually be an investment that provides security. There are many types of insurance available. It is therefore important to ensure that you and your business are covered adequately. Be sure to consult a broker who has adequate knowledge and experience in the business insurance field. With the correct advice, you can have affordable insurance cover. When deciding on the most appropriate insurance, certain factors should be considered, including what your business does; where it is situated; whether you own or lease your business premises; what potential risks your business might face; and what staff you have employed. Types of Insurance to consider ( Show Me, n.d.): • Fire, flood and storm cover: This type of insurance will protect you from loss to stock or machinery as a result of damage caused by natural disasters. • Theft cover: This cover will protect your stock and equipment in the event of theft. • Motor cover: This is important to have if your business is using a vehicle for deliveries, or if salesmen are using company vehicles. • Business interruption cover: This type of insurance ensures that your loss due to business interruption is covered. An example of such a loss would be loss suffered from employees striking.

• Public liability cover: This loss covers you against claims from third parties if they are injured on your premises. It also covers product liability, loss and defective workmanship. • Key person insurance policy: Your company could suffer huge setbacks should you lose a key employee. This form of insurance protects the business in the event of such a loss. • Employees insurance: This type of insurance ensures that both the company and employee are covered in the case of an employee’s injury or death. 383 BORING BUT IMPORTANT STUFF ACTIVITY 11D (i) In no more than 50 words, explain the diff erence between indemnity and non-indemnity insurance, and give an example of each. (ii) Consider the following scenario. You open a manufacturing business in an area that is notorious for its high level of crime. Required: Identify at least two types of insurance policies you should consider taking out in this instance. (iii) Consider the following scenario.

You open a jewellery store business. You are an excellent salesman, but you do not know how to make or repair jewellery. You hire a wellknown jeweller who specialises in jewellery repair. Required: Explain which insurance policy you should take out in this instance. Justify your answer in one sentence. 11.6 BLACK ECONOMIC EMPOWERMENT (BEE) BEE is an important tool aimed at addressing the economic injustices and inequalities perpetuated by the apartheid government. This is done through legislation and government policies. BEE finds application in affirmative action, employment equity, and the regulation of the way that the public and private sectors procure goods and services. BEE seeks to promote increased ownership of, and control over, the economy by black persons. The overriding purpose of BEE is to ensure that South Africa moves toward an inclusive economy, so that meaningful economic transformation can be realised. To align themselves with this purpose, it is important that enterprises ensure that they achieve BEE compliance. This is especially important for enterprises that intend to do business with the state. Background to BEE In South Africa, the system of ‘apartheid’ created social, economic and political inequalities based on racial classifi cation. African, Indian and Coloured persons were excluded from actively participating in the South African economy. In 1994, the African National Congress (ANC) took power as the fi rst democratically elected government in South Africa. 384 CHAPTER 11

Most of the population had previously been largely excluded from economic opportunities in the country. The new government identified economic freedom and participation for all as important goals, alongside political freedom and participation. In order to achieve this, it decided that a broad-based economic intervention (known as BEE) was required. BEE was therefore an attempt to overcome the economic suppression caused by apartheid by attempting to empower a broad section of the previously marginalised population. BEE is founded upon the principles enshrined in the Constitution of the Republic of South Africa, 1996. The Constitution emphasises the right to be treated equally, and mandates government to take steps to address the historic imbalances created by the past. The Constitution, for example, provides in section 217 that when an organ of state in the national, provincial or local sphere of government (or any other institution identified in national legislation) contracts for goods or services, it must do so in accordance with a system that is fair, equitable, transparent, competitive and cost-effective ( KZN Health, n.d.). In addition, it states that a procurement policy must be implemented that will provide for categories of preference in the allocation of contracts, and that will protect or advance persons (categories of persons) disadvantaged by unfair discrimination ( Department of Trade and Industry, n.d.). A commission dealing with BEE was established. It released a report in 2001, in which it defined BEE as follows (Black Economic Empowerment Commission, 2001): It is an integrated and coherent socio-economic process. It is located within the context of the country’s national transformation programme, namely the RDP. It is aimed at redressing the imbalances of the past by seeking to substantially and equitably transfer and confer the ownership, management and control of South Africa’s financial and economic resources to the majority of its citizens. It seeks to ensure broader and meaningful participation in the economy by black people to achieve sustainable development and prosperity The current legislative framework regulating BEE

In order to deracialise the economy of South Africa, the government sought to establish a legislative framework to support economic transformation. Legislation such as the Employment Equity Act 55 of 1998 is important in promoting BEE in South Africa. The Employment Equity Act provides that any company that employs more than 50 people, should implement affirmative action measures to ensure equitable representation of black people, women and people with disabilities within it. The Preferential Procurement Policy Framework Act 5 of 2000 (PPPFA) addresses past economic inequality by making organs of state give preference to black people when awarding contracts of employment. In 2002, the Broad-Based Black Economic Empowerment Act 53 of 2003 (B-BBEE Act) was enacted to codify the aims of government in implementing and achieving black economic empowerment. The B-BBEE Act cites one of its objectives as the establishment of a legislative framework for the promotion of BEE. The rationale for passing the B-BBEE Act into law was to (Broad-Based Black Economic Empowerment Act, 2003): 385 BORING BUT IMPORTANT STUFF • address the issues created by apartheid that restricted access to resources and skills based on race; • address the issue that the South African economy excluded the majority of its people from ownership of assets and possession of advanced skills; • address the issue that the South African economy performs below its potential due to the majority of people earning low levels of income; and • ensure that steps be taken to eff ectively include all persons in South Africa as participants in the economy.

While the BEE strategy document issued in 2001 provided a defi nition of BEE, the B-BBEE Act went a step further by codifying defi nitions that related to BEE. The following are important defi nitions to be considered in the application of BEE, as they inform the public of what is meant by BEE, and to whom it applies. Section 1 of the BBBEE Act defi nes ‘black people’ and ‘broad-based black economic empowerment’ as follows (Broad-Based Black Economic Empowerment Act, 2003): ‘Black people’ means Africans, Coloureds and Indians. […] Broad-based black economic empowerment’ means the economic empowerment of all black people including women, workers, youth, people with disabilities, people living in rural areas, and military veterans through diverse but integrated socio-economic strategies that include, but are not limited to – a. increasing the number of black people that manage, own and control enterprises and productive assets; b. facilitating ownership and management of enterprises and productive assets by communities, workers, cooperatives and other collective enterprises; c. human resource and skills development; d. achieving equitable representation in all occupational categories and levels in the workforce; e. preferential procurement; and f. investment in enterprises that are owned or managed by black people. The Act also provided for the establishment of a Black Economic Empowerment Council, which enables the Minister to issue strategic policy statements and codes of good practice regarding BEE. In 2013, there was an amendment to the Act, which included the following important amendments for your reference. The amendment to defi nitions and inclusion of new provisions in the B-BBEE Act are

important in how the B-BBEE Act is to be applied (Consolidated Broad-Based Economic Empowerment Act 46 of 2013 ): ‘Black people’ is a generic term which means Africans, Coloureds and Indians— a. who are citizens of the Republic of South Africa by birth or descent; or b. who became citizens of the Republic of South Africa by naturalisation— 386 CHAPTER 11 (i) before 27 April 1994; or (ii) on or after 27 April 1994 and who would have been entitled to acquire citizenship by naturalisation prior to that date. In terms of the first definition provided for in the Act, the definition of black people was broad. As can be seen from the amended definition, black people now only included Blacks, Indians and Coloureds who hold South African citizenship or are naturalised South African citizens (Consolidated Broad-Based Economic Empowerment Act, 2013): ‘Broad-based black economic empowerment’ means the viable economic empowerment of all black people, in particular women, workers, youth, people with disabilities and people living in rural areas, through diverse but integrated socio-economic strategies that include, but are not limited to: a. increasing the number of black people that manage, own and control enterprises and productive assets; b. facilitating ownership and management of enterprises and productive assets by communities, workers, co-operatives and other collective enterprises; c. human resource and skills development;

d. achieving equitable representation in all occupational categories and levels in the workforce; e. preferential procurement from enterprises that are owned or managed by black people; and f. investment in enterprises that are owned or managed by black people. It is important to note the shift in the amended definition of broadbased black economic empowerment, which placed emphasis now on primarily promoting women, and not just merely including these groups in the process. The PPPFA was also expanded to clearly state that it referred to those enterprises owned or managed by black people. The amended B-BBEE Act also identified the need to address those situations where an enterprise was conducting business with an organ of state or public entity, and had secured such business by misrepresenting its empowerment status. These types of actions contradict the spirit and objectives of empowerment, and the Act now permits organs of state to cancel these contracts. The amended Act includes the following provision (Consolidated Broad-Based Economic Empowerment Act, 2013): 13A. Any contract or authorisation awarded on account of false information knowingly furnished by or on behalf of an enterprise in respect of its broad-based black economic empowerment status, may be cancelled by the organ of state or public entity without prejudice to any other remedies that the organ of state or public entity may have The falsification of empowerment status was also addressed in the amended B-BBEEE Act, by making such an action a punishable offence. A new provision was included, which states the following (Consolidated Broad-Based Economic Empowerment Act, 2013): 13O. (1) A person commits an offence if that person knowingly— 387 BORING BUT IMPORTANT STUFF

a. misrepresents or attempts to misrepresent the broad-based black economic empowerment status of an enterprise; b. provides false information or misrepresents information to a BBBEE verifi cation professional in order to secure a particular broadbased black economic empowerment status or any benefi t associated with the compliance with this Act; c. provides false information or misrepresents information relevant to assessing the broad-based black economic empowerment status of an enterprise to any organ of state or public entity; or d. engages in a fronting practice. (2) A B-BBEE verifi cation professional or any procurement offi cer or other offi cial of an organ of state or public entity who becomes aware of the commission of, or any attempt to commit, any off ence referred to in subsection (1) and fails to report it to an appropriate law enforcement agency, is guilty of an off ence. The PPPFA was enacted as a response to section 217 of the Constitution. It seeks to regulate the procurement policies and processes of the government. The PPPFA seeks, in particular, to advance the interests of historically disadvantaged individuals (HDIs) and small, medium and micro enterprises (SMMEs) in conducting business with organs of state. Every organ of state and public entity or enterprise must adhere to the provisions of the PPPFA and its regulations whenever undertaking procurement processes. In 2011, the Preferential Procurement Regulations were implemented. The purpose of these regulations is to guide the state in applying and awarding tenders. Tenders are awarded based on the points allocated to the parties bidding for the contract. These points are determined by the tender specifi cations and the parties’ responses to them. Points are allocated based on various factors, including the tenderer’s B-BBEE empowerment status. These points are then added together to give the tenderer a score out of 100. The tenderer with the highest score will then be awarded the tender ( National Treasury, 2011).

These regulations introduced the preference point system for the securing of goods and services. Depending on the value of the bid, diff erent ratios of points allocation were used at the time as follows ( National Treasury, 2011): • The 80/20 preference point system (100 points in total). This system was applicable to bids ranging from R 30 000 to R 1 million. • The 90/10 preference point system (100 points in total). This system was applicable to bids above R 1 million. The numerator (i.e. the ‘80’ or ‘90’) indicates the number of points awarded to a bidder in accordance with the tender price presented. The denominator (i.e. the ‘20’ or ‘10’) indicates the number of points awarded to a bidder based on their B-BBEE contribution status (i.e. their empowerment status). An enterprise’s empowerment status had to be (and still must be) supported by applicable proof. 388 CHAPTER 11 On 1 April 2017, the amended Preferential Procurement Regulations came into effect. Tenders are therefore still awarded on the preference point systems just discussed, but the determination of which system a bid falls under has changed ( National Treasury, 2011): • The 80/20 preference point system now applies to bids between R 30 000 and R 50 million. • The 90/10 preference point system now applies to bids above R 50 million. One of the key amendments that the 2017 regulations introduced is a concept known as ‘pre-qualifying criteria’. This change means that an organ of state now has the discretion to determine whether it would like to impose a pre-qualifying criteria on the tender. If it does, the

criteria must be specified as a tendering condition. Therefore, an organ of state is now empowered to limit who will be eligible to respond to a tender. It may limit responses to tenderers that, for example (Crampton, 2018): • must have some minimum B-BBEE rating or contribution status; or • must be an exempted micro enterprise (EME) or qualifying small enterprise (QSE). An example of the application of the pre-qualification criteria can be seen in the system implemented by Eskom, in terms of their ESCO Model funding. In order to bid, the tenderer must subcontract at least 30 per cent of the tender to a cooperative that is at least 51 per cent owned by black people, or to an EME or QSE that is at least 51 per cent owned by ( Eskom, 2017): • black people; • black people who are youths; • black people who are women; • black people with disabilities; • black people living in rural or underdeveloped areas or townships; or • black people who are military veterans. It is therefore important to have knowledge of how organs of state and public entities award tenders. Public entities are awarded the discretion to implement their own derivatives of this system (as seen by the example of Eskom). The pre-qualifying criteria is merely an example of an instrument used to correct the racial imbalances caused by the apartheid regime, and an attempt to award black people (as defined by the B-BBEE Act) an equal opportunity to partake in economic activities that they were previously excluded from.

It is important to understand that an enterprise’s B-BBEE rating is also influenced by its size. Enterprises are currently divided into three categories: EMEs, QSEs and medium to large enterprises (M&Ls) (Crampton, 2018). The type of enterprise is determined by its annual turnover, which in turn determines which B-BBEE compliance level the enterprise must attain. 389 BORING BUT IMPORTANT STUFF Exempted micro enterprise (EME) annual turnover: R 10 million or less Types of enterprises for B-BBEE Qualifying small Medium to large enterprises (QSE) enterprise (M&L) annual turnover: annual turnover: R 10 million to R 50 million

R 50 million or more (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Crampton, 2018) Figure 11.3: Classification of enterprises for BBBEE compliance There are fi ve elements that comprise the BBBEE scorecard. These fi ve elements are as follows: 1. Ownership 2. Management control 3. Skills development 4. Enterprise development 5. Socio-economic development (Source: EDGE Learning Media (Pty) Ltd, 2018) Figure 11.4: The five pillars of the B-BBEE scorecard 390 CHAPTER 11 These five pillars will be unpacked further in the following table. Item Explanation Ownership This focuses on the level of black ownership in the enterprise by looking at areas such as the number and influence of black shareholders, and the value of the share they hold in the enterprise. Management control This measures the proportion of black people who have control over the business and can direct it. Skills development

This measures how the business invests in the development and training of black employees. Enterprise development This measures whether the business offers support programmes to black employees. Socio-economic This measures whether the business contributes to socio-economic development development and whether it creates long-term access to the economy. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Crampton, 2018) Table 11.5: Explanation of the five pillars of the BBBEE scorecard For an enterprise to determine its B-BBEE status, it must indicate how it is adhering to the five pillars of the B-BBEE scorecard previously discussed. This is especially true for those enterprises that fall under the QSE and M&L categories. Each criterion is given a different weighting, and points are provided accordingly. EMEs are not required to be assessed on all these criteria – they are scored on the percentage of black ownership of their enterprise (i.e. on the first pillar). B-BBEE compliance levels range from ‘1’ (being the highest level of compliance), to a level known as ‘non-compliant’. The level is determined by the points scored in terms of the B-BBEE scorecard. This also gives the enterprise a ‘B-BBEE Procurement Recognition Level’. For example, a level-1 compliance enterprise would have scored more than 100 points on the scorecard, and could have been awarded a B-BBEE Procurement Recognition Level of 135 per cent. An enterprise that achieves a non-compliance level would have

scored less than 40 points in terms of the scorecard, and would be awarded a B-BBEE Procurement Recognition Level of zero per cent. It is important to take note, however, that these scores can only be verified as correct by the South African National Accreditation System (SANAS). SANAS is the only accreditation body in South Africa that can confirm an enterprise’s B-BBEE status, and any certificate confirming an enterprise’s B-BBEE status must be validated by a SANAS accreditation rating agency. This prevents enterprises from validating their own BEE status, or colluding with others to do so. 391 BORING BUT IMPORTANT STUFF What are the benefi ts of being B-BBEE compliant? There is no legal requirement for an enterprise to obtain a B-BBEE certifi cate, or to demonstrate its B-BBEE empowerment status. However, it would be benefi cial for any enterprise to be B-BBEE compliant, or to aim toward achieving compliance. Being compliant is of benefi t to such an enterprise when bidding for a tender in the public and private spheres. It allows for active participation in the South African economy ( Cenfed, 2016). If an enterprise wants to contract with an organ of state or public entity (as we have discussed), points will be awarded (through either the 80/20 or 90/10 system) based on the enterprise’s empowerment status. Therefore, the demonstration of B-BBEE compliance will give an enterprise a greater chance of success in securing tenders. Given the possibility of an organ of state imposing pre-qualifying criteria (such as a minimum B-BBEE rating) on a tender (under the 2017 PPPFA regulations), compliance would be benefi cial to an enterprise by expanding the number of tenders it could bid for. B-BBEE compliant enterprises have a better chance of securing contracts with the private and public sectors, because both the private and public sectors are encouraged to do business with compliant enterprises.

The benefi ts of being B-BBEE compliant include the following (Crampton, 2018): • Being B-BBEE compliant means that your enterprise is committed to transformation, and to ensuring that the participation of black people in the economy is promoted. • Companies will generally prefer to do business with enterprises that have a higher B-BBEE status. • By annually reviewing your B-BBEE status and obtaining a B-BBEE certifi cate, your enterprise can track how it is progressing toward achieving level 1 B-BBEE compliance ( Cenfed, 2016). • A B-BBEE status means that an enterprise is serious about promoting development initiatives and aligning itself with the government’s vision for economic empowerment for all. • B-BBEE compliance assists the enterprise in developing its employees, which helps it to obtain further points. • An enterprise that knows and understands its B-BBEE compliance rating, is better able to maintain or improve it. This awareness has the added impact of encouraging an enterprise to include B-BBEE initiatives in its organisational culture. • Demonstrating a favourable B-BBEE rating makes your enterprise more marketable. 392 CHAPTER 11 ACTIVITY 11E (i)

An organ of state is a national, provincial or local government entity, or a state-owned enterprise. In one paragraph, discuss which two pieces of legislation an organ of state must adhere to when procuring goods and services. Substantiate your answer. (ii) Consider the following scenario. Ubuntu Municipality has undertaken a project involving the upgrading and construction of new roads. The project will cost in the region of R 100 million. It is decided that this project should be put out to tender in order to appoint a contractor. Required: When deciding who to appoint to this project, which point system should the municipality use? Substantiate your answer. (iii) Consider the following scenario. Gloria is a black woman who owns a small dress-making business. She employs two other people from her community to assist her with her business. She currently turns over about R 250 000 per year. Required: a. Identify what type of enterprise Gloria’s business would qualify as for the purposes of B-BBEE. b. How would the enterprise be assessed in terms of the B-BBEE scorecard?

11.7 CONTRACTS A basic understanding of contract law is vital for running a business. At some point, a business will be required to enter into contracts between the owners (e.g. between directors), with employees or with external stakeholders (such as customers or suppliers). It is essential that valid and well-drafted agreements are in place, not only to protect the interests of the business, but to also ensure that disputes are minimised. What is a contract? A contract is an agreement entered into by two or more persons with the intention of creating an obligation that the law recognises as binding on the parties. Contracts are reciprocal in nature. This generally means that contracts require one of the parties to do something for, or refrain from doing something to, the other. In most contracts, the parties to the contract are either described as creditors or debtors. In order for a contract to be binding on the parties, all the requirements for a valid contract must be present. 393

BORING BUT IMPORTANT STUFF What are the requirements for a valid contract? A contract is valid if it is lawful and can be enforced. It is not necessary to reduce contracts to writing for them to be valid. Contracts can be of three types: they can be express, tacit or implied. A contract that has been reduced to writing is an example of a contract that has been expressly entered into. Sometimes, the law will require that certain agreements be reduced to writing for the agreement to be valid. For example, if you want to purchase business premises (immovable property), the law requires that you have a written agreement in place. A tacit contract is a contract that has been entered into through nonverbal communication. Here, the actions of an individual has led the parties to believe that an agreement has been entered into ( Boston Media House, 2014). This is still a valid contract; however, such a contract can be problematic when disputes arise. An example of a tacit contract would be where a woman brings her cat into the veterinarian’s offi ce for a vaccination. The cat begins to choke on an unidentifi ed object. The veterinarian performs a procedure to stop the cat from choking and, in return, saves the cats life. The veterinarian has every right to send the woman a bill for her services. The woman is obliged to pay the required fee. The contract was entered into by the two individuals based on their actions (the woman

bringing the cat to the veterinarian for care, and the veterinarian performing a procedure to save the cat’s life), even though that was not the woman’s intention when she entered the veterinarian’s offi ce. An implied contract usually comes into eff ect through the law. These contracts come into eff ect based on what is contained in legislation, regulation and statutes ( De Jure, 2013). It is essential to understand the basic requirements for a valid contract. Contract law can be incredibly complex, and contracts are often the subject of disputes between parties. The following fi gure shows the requirements that must be present in a contract for it to be valid. Consensus Possibility Capacity Legality Certainty Formalities (Source: EDGE Learning Media (Pty) Ltd, 2018) Figure 11.5: Requirements for a valid contract 394 CHAPTER 11 In this section, we will explore each requirement for a valid contract in more detail: • Consensus: Consensus can be referred to as a ‘meeting of the minds’. This means that the parties to the contract have the intention

of concluding the agreement. • Capacity: Capacity refers to the competence of a natural or juristic person (such as a company), to enter into an agreement. A person must have the capacity to enter into an agreement for a contract to be valid. Certain classes of people are excluded from entering into a valid contract due to their lack of contractual capacity. These classes include minors, persons who have been declared insane, and persons who are under the influence of drugs or alcohol ( US Legal, n.d.). For example, a child under seven years of age can never enter into a valid contract. Juristic persons (e.g. companies) do not have the capacity to act alone; a natural person therefore has to act on behalf of a company in order for a valid contract to arise. • Formalities: Some contracts require that certain formalities be complied with for the contract to be valid. An example of a typical formality is that the contract be reduced to writing and signed by witnesses. It is also possible for parties to a contract to make it a condition of the agreement that the contract be reduced to writing for it to be valid. • Legality: A contract must not be prohibited by the law. For example, a contract will be unlawful if you agree to sell a banned substance, such as cocaine. This contract will be void; in other words, it will be considered illegal and cannot be enforced. • Possibility of performance: It must be possible for the parties to do what they agree to do when they create the contract. In other words, the performance must be ascertainable and enforceable by the court. For example, two individuals enter into a contract in which one sells their neighbour’s house to the other. Since this is not something that the seller can possibly deliver on (because they do not own the house they have agreed to sell), the contract is invalid. • Certainty: A contract cannot be vague; it must be certain and determinable. An agreement must bring about certainty regarding its

terms and legal consequences. There must also be certainty about whether a party’s lack of performance would prevent the creation of obligations. Obligations are created by the parties themselves and, in return, create rights and duties that are conferred upon each party to the agreement. For a contract to be certain, the parties must be aware of these obligations, and the court must be able to enforce all rights and duties that have been formed by such obligations. This is required because the parties to the agreement might at a later date be absent (because they have moved abroad, for example) and unable to explain the content of the contract. In such an instance, certainty is important, so that both parties are aware of their contractual obligations. It must be remembered that all of these requirements must be met in order for the contract to be valid. Types of contracts During the course of your business operations, you will encounter a number of different types of contracts that you might need to enter into. A discussion of some of these follows. 395 BORING BUT IMPORTANT STUFF Contract of sale A contract of sale exists when there is an agreement between a buyer and seller for the exchange of goods or services for the payment of a sum of money. A contract of sale is valid if the following (additional) essential elements are complied with: • There must be an intention to buy and sell. • There must be agreement as to the identity of the thing. • There must be agreement on the price to be paid for the thing.

There are many examples of a contract of sale, including the sale of immovable property, the sale of movable property (e.g. motor vehicles or offi ce equipment), credit agreements and agreements to sell a business. Credit agreements While running your business, you may need to purchase equipment for your offi ce (e.g. computers, photocopiers or furniture). In order to purchase these goods, you may be required to enter into a credit agreement, in terms of which you agree to repay amounts in instalments. Lease agreements In order to conduct your business or trade, you made need to enter into a lease agreement for the hiring of premises (or other essentials). A lease agreement does not have to be in writing, but it is advisable that any agreement is reduced to writing. This ensures that the parties are certain about the terms that they agree to. A written agreement will assist in avoiding or resolving any disputes that may arise from the agreement. A lease agreement is an agreement between two parties known as the lessor and the lessee. The lessor, or landlord (in our example), is usually the owner, or responsible person from whom the lessee (the tenant in our example) will lease the premises. The lessor, for purposes of a lease agreement over premises, will agree to grant temporary use and occupation of the premises to a lessee for a temporary period, in return for the payment of an amount of money. This amount is usually referred to as the ‘rent’. It is important to note that, in a lease agreement, the lessee is only allowed to use the property, and is not allowed to sell it (as they would be able to do in the case in a contract of sale of land).

There are three (additional) essential elements for a lease agreement to be valid: 1. The parties must agree on the specifi c immovable property to be leased. The description of the property must be clear; a clause refl ecting this might read: ‘The lessee hereby leases from the lessor the premises known as 123 Main Street, Johannesburg, 2001’. 2. The parties must agree on the duration of the lease. Remember, a lease agreement is only for a set period. For example: ‘The lessee agrees to rent from the lessor the premises known as 123 Main Street, Johannesburg, 2001, for a period of 6 (six) months’. 396 CHAPTER 11 3. The parties must agree on the amount of money to be paid. In other words, the amount paid to the lessor must be certain. For example: ‘The lessee agrees to pay the lessor an amount of R 10 000 (ten thousand rand) on, or before, the first day of each month’. What are the duties of the lessor? Both the lessor and the lessee have duties in respect of the lease agreement. The duties of the lessor can be briefly described as follows: • The lessor must ensure that the lessee has free and undisturbed use of the property. • The lessor must maintain the property and ensure that when the lessee takes occupation of the property, it is in a proper state of repair.

• The lessor must ensure that they do not disturb the lessee when they are in occupation of the property. What are the duties of the lessee? The duties of the lessee can be briefly described as follows: • The lessee must ensure that they pay the rent as and when agreed upon. • The lessee must ensure that they only use the property for the purposes for which it was let. For example, if the lessor and lessee agree that the premises will only be used for office accommodation, the lessee cannot proceed to use the premises for manufacturing goods for the business. • The lessee must return the property in the same condition as it was in at the time they took occupation of it. The duties we have discussed are those that typically arise from lease agreements, but contracts are flexible, and the parties can vary the extent and nature of their duties by agreement. A breach of contract happens where one of the parties has not complied with one of the conditions of the lease agreement. That party is said to be ‘in breach’ of the contract. There are various remedies available to both the lessor and the lessee, depending on the type of breach that has taken place. They might seek to cancel the lease agreement, claim damages or get the defaulting party to perform their contractual duties (e.g. to pay the rent). Of course, the types of remedies available will often be determined by what was agreed upon initially. When do lease agreements come to an end? Lease agreements may come to an end for a variety of reasons. If you are conducting a business from leased premises, it will be important to note when a lease is coming to an end in order for you to source new premises timeously, or to renegotiate a new lease with

the lessor. This is especially important to avoid any disruption to your business activities. A lease could be terminated when, for example, the lease period expires, or when one of the parties gives notice to the other of their intention to cancel the lease. 397 BORING BUT IMPORTANT STUFF Insurance contracts Every business operation faces the risk of the possible loss of, or damage to, property (particularly to its movable property). The loss or destruction of these assets could have a detrimental impact on business operations. In order to mitigate this risk and protect the business from fi nancial loss, these assets are often protected by insurance contracts. An insurance contract is an agreement between an insurer and an insured party, in terms of which the insured party will pay a premium to the insurer. On the (possible, yet uncertain) occurrence of a specifi ed event in which the insurer has some interest, the insurer will pay over to the insured an amount of money. There are four essential elements of a contract of insurance: 1. The subject of the insurance must be identifi ed. 2. The risks that are being insured against must be identifi ed. 3. The amount of the premium payable by the insured to the insurer party must be identifi ed. 4.

The time period for which the insurance is applicable must be identifi ed. Depending on the nature of your business operations, the following types of insurance could be applicable: • Workers’ compensation insurance: You may be required by law to obtain this type of insurance to cover your employees against injury during the course of their work. For example, an employer who runs a construction company may have to take out insurance, in case an employee is injured on duty while operating heavy machinery. • Insuring leased premises: In the event that the premises from which you operate your business are damaged by a fi re or fl ood, for example, this type of insurance may assist you. It will help you to avoid fi nancial disaster in the event that you cannot operate your business, have lost stock that you cannot replace etc. • Motor vehicle insurance for company vehicles: If you intend to operate company vehicles, it is recommended that you obtain vehicle insurance, and advise the insurer that the vehicles will be used for business purposes. • Public liability insurance: Should your business operations entail members of the public coming to your premises, it is prudent to insure against their possible injury while there. • Product liability insurance: If your business operations involve the manufacturing, selling or repairing of goods, then it is essential that you obtain this type of insurance to cover any defects that may result in any harm or damage to customers. This is not an exhaustive list of insurance types. It is merely intended to alert you to the diff erent options available. The type of business operations you conduct will infl uence the type and extent of insurance cover you require. For example, a business selling baked goods will not need to obtain professional indemnity insurance, which is required if you are a doctor running a medical practice.

398 CHAPTER 11 Credit security agreements A company may, at some point, need to obtain credit to fund its business operations. The financing institution (or financier) may only want to grant credit to the company if one of the directors signs a suretyship agreement. It is not uncommon for financial institutions to require this type of agreement where juristic persons are involved. A suretyship agreement is a form of security provided by a debtor to a creditor. In terms of the agreement, a third party agrees to fulfil the obligations of the debtor if the debtor fails to do so. A suretyship agreement must, by law, be reduced to writing for it to be valid. For example, ABC Bank agrees to lend TMI Company R 100 000, provided that the director of the company, Mr X, signs a suretyship agreement. TMI Company then fails to make payment of one of its instalments, and is thus in arrears. ABC Bank decides to recover the arrears directly from Mr X, and is entitled to do so, because he signed on as surety for the loan to TMI Company. It is important to remember the serious consequences that can flow from signing a suretyship agreement. The failure by the company to pay its debt could render the surety personally liable for the debts of the company (as we saw in the previous example). Furthermore, the financing institution might, for example, not have to first (or even at all) try and recover the money from the company before trying to recover it from the surety. Contracts of employment It is important when engaging new employees for written contracts of employment to be entered into. Contracts of employment may be entered into verbally or reduced to writing. It is recommended that written contracts are concluded, and that they have due regard for,

and comply with, the Constitution, the Basic Conditions of Employment Act 75 of 1997, and the Labour Relations Act. An employment relationship comes into existence when one person – the employer – agrees to compensate another person – the employee – for the services rendered by the employee to the employer. Employees could be permanent or fixed-term employees. A permanent employee is employed for an indefinite time period, while a fixed-term employee is appointed for a specified period of time ( LegalWise, 2017). Section 29 of the Basic Conditions of Employment Act, ‘Written particulars of employment’, reads as follows: 29.(1) An employer must supply an employee, when the employee commences employment, with the following particulars in writing a. the full name and address of the employer; b. the name and occupation of the employee, or a brief description of the work for which the employee is employed; c. the place of work, and, where the employee is required or permitted to work at various places, an indication of this; 399 BORING BUT IMPORTANT STUFF d. the date on which the employment began; e. the employee’s ordinary hours of work and days of work; f. the employee’s wage or the rate and method of calculating wages; g. the rate of pay for overtime work; h. any other cash payments that the employee is entitled to; i. any payment in kind that the employee is entitled to and the value of the payment in kind; j. how frequently remuneration will be paid;

k. any deductions to be made from the employee’s remuneration; l. the leave to which the employee is entitled; m. the period of notice required to terminate employment, or if employment is for a specifi ed period, the date when employment is to terminate; n. a description of any council or sectoral determination which covers the employer’s business; o. any period of employment with a previous employer that counts toward the employee’s period of employment; p. a list of any other documents that form part of the contract of employment, indicating a place that is reasonably accessible to the employee where a copy of each may be obtained. Related business implications It is important that every business enterprise ensures that it has valid and written contracts in place, which regulate its relationships with its internal (e.g. employees) and external stakeholders (e.g. suppliers). Any person who signs on behalf of a business must also have the necessary capacity to do so. For example, a director of a company must have the necessary resolution from the board of directors to conclude and sign a specifi c agreement on behalf of that company. However, poorly drafted or unenforceable written contracts will not assist a business enterprise in minimising liability, and may create just as much uncertainty as if there were no written contract in place. Properly drafted written contracts will assist the business when disputes arise between parties, however. They will help reduce unplanned or unnecessary legal costs arising from disputes. It is also important that where a business concludes contracts, a system of contract management is put in place, which ensures that the contracts are monitored and complied with. Failure to monitor contracts could result in unintended liability for a business. There should be record management policies in place that safeguard the enterprise’s contracts. Therefore, the conclusion and management of

contracts should be part of the risk management plan of any business. ACTIVITY 11F (i) Match the following activities in Column A with their correct agreements in Column B. Column A Column B a. A is selling offi ce furniture to B. 1. Lease agreement 400 CHAPTER 11 b. C is borrowing money from D to buy business 2. Suretyship equipment, but D needs E to sign an agreement before agreement lending the money to C. c. X wants to rent factory premises from Y to run his steel 3. Insurance manufacturing business. agreement

d. E enters in to an agreement with F that if any of the 4. Sale motor vehicles used by the business are involved in an agreement accident, F will cover the cost of repairing the vehicle. (ii) Consider the following scenario. Sean runs a successful furniture-making business. He is expanding his business and needs to purchase more tools. Thami and Sean enter into an agreement in terms of which Thami agrees to sell Sean one lathe machine and one angle grinder. They agree that Sean can collect the items from Thami’s business premises. Required: Identify the type of contract that has been concluded by Sean and Thami, and whether the contract is valid. Substantiate your answer. (iii) Consider the following scenario. Vaughn and Ryan enter into a contract in which Ryan agrees to sell Vaughn 1 kg of cocaine for R 5 000. Vaughn draws up a written agreement stating who the parties are, what the agreed sale consists of and the price that Vaughn is required to pay. Both Ryan and Vaughn agree to the terms of the agreement and sign the contract. Vaughn pays the R 5 000 and Ryan hands over the 1 kg of cocaine. Required: Examine the six requirements for a valid contract, and indicate whether a valid contract has been entered into by Vaughn and Ryan.

11.8 TRADEMARKS, COPYRIGHT AND INTELLECTUAL PROPERTY The World Intellectual Property Organisation (WIPO) defines intellectual property as ‘creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce’ ( World Intellectual Property Organisation, n.d.). According to the Companies and Intellectual Property Commission (CIPC), the recognition of intellectual property rights aims to ( Companies and Intellectual Property Commission, n.d.): • encourage owners of intellectual property rights to engage in innovative activities that benefit society; 401 BORING BUT IMPORTANT STUFF • reward the innovators’ eff ort and skills; • promote wider access to innovations, and advance further research and development by others; • provide a set period of protection; • provide several competitive advantages for owners (e.g. give owners the right to determine who can use the intellectual property and how it can be used); • provide a valuable bargaining tool that can be sold for fi nancial gain; • help the owners to compete on the basis of the reputation associated with their product, rather than on price alone; and • provide the owners with several options (such as licencing) that can be exercised if the owners cannot aff ord to manufacture the subject

of the intellectual property or position themselves competitively in all potential markets. By recognising the existence of intellectual property rights, our legal system seeks to off er intangible property a level of protection similar to that associated with immoveable and moveable property. Considering WIPO’s earlier defi nition, the protection sought is over the products of a person’s mind. The recognition of these rights also intends to provide an incentive to individuals for developing innovative creations. It is through the protection of these innovative creations and through incentivising these creations that WIPO intends to encourage and stimulate more innovative activity among the public. The diff erent types of intellectual property rights are illustrated in the following fi gure. Trademarks Intellectual Designs property Copyrights rights Patents (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Companies and Intellectual Property Commission, n. d.) Figure 11.6: Intellectual property rights 402 CHAPTER 11

Trademarks Trademarks are regulated by the Trademarks Act 194 of 1993 and have to be registered with the CIPC. A trademark is a sign that distinguishes the goods and services of one enterprise from the goods and services of another. A trademark has to be distinctive and used in commerce in relation to goods or services. In its simplest form, a trademark may be described as a brand name, slogan or logo. Section 1 of the Trademarks Act defines a trademark as follows: [A] mark used or proposed to be used by a person in relation to goods or services for the purpose of distinguishing the goods or services in relation to which the mark is used or proposed to be used from the same kind of goods connected in the course of trade with any other person. Should you open your own business it is important that you register your trademarks to prevent anyone else from using your ideas without your permission. Copyrights Copyrights are regulated by the Copyright Act 98 of 1978. Copyright refers to ‘that exclusive intellectual property right awarded to the copyright holder to exercise the entitlements defined in the Act in respect of his or her work (reduced to material form) or to authorise the exercise of such entitlements’ (World Intellectual Property Organisation n.d.). A copyright is a legal term used to describe the rights that creators have to their literary or artistic works ( World Intellectual Property Organisation, n.d.). The word ‘works’ refers to a range of categories, such as books, music, paintings, computer programs or databases. There are no registration requirements for copyright, as the law automatically protects them, unlike trademarks. It is not required for a work to be registered for it to obtain copyright protection. Section 2 of the

Copyright Act identifies nine categories of work that automatically qualify for copyright protection. These categories are: • Literary, artistic and musical works (e.g. books, novels, paintings or musical compositions) • Sound recordings (e.g. a song or record) • Cinematograph film (e.g. movies) • Broadcasts (e.g. radio broadcasts) • Programme-carrying signal (e.g. any information, image or data transmitted by a satellite) • Published editions (e.g. magazines or newspapers) • Computer programs (e.g. computer games) Any work that falls within one of these categories automatically receives copyright protection. Patents Patents are regulated by the Patents Act 57 of 1978, and must be registered with the CIPC. A patent gives inventors the right to use their product in the marketplace, or to profit by transferring that right to someone else. 403 BORING BUT IMPORTANT STUFF According to section 25(1) of the Patents Act: ‘A patent may, subject to the provisions of this section, be granted for any new invention which involves an inventive step and which is capable of being used or applied in trade or industry or agriculture’.

Section 25(2) of the Patents Act specifi es the types of things that cannot be patented: 25.(2) Anything which consists of— (i) a discovery; (ii) a scientifi c theory; (iii) a mathematical method; (iv) a literary, dramatic, musical or artistic work or any other aesthetic creation; (v) a scheme, rule or method for performing a mental act, playing a game or doing business; (vi) a program for a computer; or (vii) the presentation of information… Designs Designs are regulated by the Designs Act 195 of 1993, and must be registered with the CIPC. A design could be an aesthetic design or a functional design. According to the Act: an aesthetic design means any design applied to any article, whether for the pattern or the shape or the confi guration or the ornamentation thereof, or for any two or more of those purposes, and by whatever means it is applied, having features which appeal to and are judged solely by the eye, irrespective of the aesthetic quality thereof; and a functional design means any design applied to any article, whether for the pattern or the shape or the confi guration thereof, or for any two or more of those purposes, and by whatever means it is applied, having features which are necessitated by the function which the article to which the design is applied, is to perform, and includes an integrated circuit topography, a mask work and a series of mask works. ACTIVITY 11G (i)

Identify whether the following are subject to trademark or copyright protection, and substantiate each answer: a. Julie writes a novel that she wants to publish. b. James records a song that he wrote and wants to cut a record deal with EMI. c. Kim creates a sign for her business. d. Larry designs a catchy slogan for his fi sh and chips restaurant. e. Sizwe paints a beautiful picture of the stadium in Durban. 404 CHAPTER 11 (ii) List the procedure for applying for a trademark by doing desktop research through the following link: http://www.cipc.co.za/index.php/trade-marks-patents-designscopyright/trade-marks/ (iii) In a sentence or two, discuss whether copyrights need to be registered or not.

11.9 ADMINISTRATIVE POLICIES AND PROCEDURES When conducting a business (and especially as a business grows and the number of employees increases), it is essential to have clear rules and guidelines (i.e. policies and procedures) in place. These help to avoid disputes and to support a positive working environment. What are policies and procedures? A policy is a written statement in which rules and guidelines are provided for a given topic. Policies seek to inform employees of the rules that they are required to abide by in the workplace. They also ensure that the business is conducted in an effective, organised manner. Policies, though directed and influenced by legislation, can be adapted and formulated to meet the needs of the company in question (Employers Organisation, 2015). A procedure is an official way of handling certain situations ( Employers Organisation, 2015). Procedures deal with the way in which situations should be handled by detailing steps to be taken. A simple example of a procedure is the series of steps an employee must take when applying for sick leave. These procedures inform the employees of what steps must be followed when applying for leave, while simultaneously informing the employer what steps to take when granting or opposing leave. Policies and procedures must comply with applicable legislation, and must be reasonable. For example, if the labour laws provide that a pregnant employee is entitled to maternity leave, a business would be acting illegally if it included a provision in a policy that provided that pregnant employees were not entitled to any leave. Depending on the business environment, the law might even require you to ensure that you have a certain type of policy in place. This will usually be the case in matters of occupational health and safety in a workplace, for example.

What is the purpose of policies and procedures in the workplace? It is important to note that all company policies must comply with South African labour laws and any other applicable legislation. The purpose of policies and procedures is to ensure that employees are aware of their rights, obligations and steps to be taken in any employment or workplace-related situation. Policies and procedures are important in that they seek to protect the rights of employees, but also seek to protect the interests of the company. The size of the business will usually determine the type of policies that should be put in place. 405 BORING BUT IMPORTANT STUFF It is recommended that when new employees are appointed, the policies and procedures that the company abides by form part of their employment contract. Employers should always take steps to ensure that employees know about existing policies and procedures, and any amendments to them. They should also have access to details of the policies and procedures. To facilitate this, employers should display policies and procedures in the workplace, where possible. It is important that employees be aware of these policies and procedures, and that they are trained on the content of these tools. Why is it important to communicate and inform employees of policies and procedures? Doing so: • advises the employees of their legal obligations; • promotes transparency and accountability in the workplace; • creates certainty; • advises employees of their rights; • can be used to open communication with employees; and

• guides employees in terms of what is expected of them. Policies and procedures can be devised in response to specifi c issues arising in the workplace. For example, if a large number of employees are taking smoke breaks during work hours, a smoking policy can be devised. This policy would regulate and control how often employees take smoke breaks during working hours. Companies must be vigilant when it comes to changes in legislation. Policies and procedures that are put in place should constantly be reviewed and updated as the law is amended. An example of how an amendment in law could impact a company policy can be seen in the paternity regulations that were implemented in 2018 through the Labour Relations Amendment Act 6 of 2014. Fathers are now entitled to ten days paid paternity leave. It is important that companies work such amendments into their existing policies. Denying fathers the right to paid paternity leave would be a contravention of the law, which the company may commit unwittingly if it is not vigilant. What types of policies and procedures should a business have in place? It is important to commence the process of having certain policies in place, and to revise and add policies and procedures when necessary. Here are some of the policies and procedures that could initially be put in place. Code of conduct A code of conduct advises an employee of the rules and standards of the company to be adhered to. These standards and rules usually regulate the ethical conduct of employees, acceptable standards of behaviour, desired business conduct and general professional behaviour. An example of a rule of conduct may be to always act in the best interests of the business, respect other employees, and conduct oneself in a professional and courteous manner.

A breach of the code of conduct by an employee could be viewed by an employer as amounting to misconduct. 406 CHAPTER 11 Leave policy A leave policy will usually deal with the different types of leave available to employees, and the number of days per year that are allocated to each type. What follows is an example of how such a policy could look: • Annual leave – 21 days per year • Sick leave – 30 days per two-year cycle • Study leave – five days per year • Family responsibility leave – five days per year • Maternity leave – three to four months per year • Paternity leave – ten days per year A leave policy will outline the procedures to be followed when an employee wants to take leave. This will usually involve directing the employee how to make the application; to whom it should be made; when it should be submitted by; any forms to be completed; and supporting documents required (which may differ with different types of leave). For example, family responsibility leave applications may need to be supported by a death certificate. Further examples of procedures to be followed when dealing with leave include how to report an unplanned absence from work and the policy to be followed if an employee is off sick. The company’s

procedure might require an employee to report their absence to their supervisor before 08h00 on the day of absence. Such a policy may also deal with other leave considerations such as whether or not the organisation permits an employee to exchange their annual leave days for cash. Disciplinary procedure Occasionally, an employee’s conduct may need to be addressed by management. For example, the employee is alleged to have breached the company’s code of conduct by accepting a lavish gift from a client and not declaring it to the company’s management. The purpose of having a disciplinary procedure is to ensure that all employees are treated fairly, and that their conduct within the workplace is consistent. It can also serve as a tool to promote employment relations. This type of policy will usually indicate the following: • The grounds on which a disciplinary proceeding may be instituted against an employee • The procedure to be followed in initiating a disciplinary procedure – i.e. the information to be included in a notification to an employee and a description of the alleged offence • Time frames for the commencement and conclusion of disciplinary procedures • How a proceeding must be conducted • How a decision is made and communicated • Determining the types of sanctions that may be imposed on an employee (e.g. a written warning, a dismissal) 407 BORING BUT IMPORTANT STUFF

• Appeal procedures available to an employee who is unhappy about an outcome of a disciplinary hearing Sexual harassment policy A sexual harassment policy demonstrates a company’s commitment to providing a workplace that is free from harassment and unfair discrimination. It shows that the company aims to ensure that the dignity of its employees is respected and protected at all times. Sexual harassment is unacceptable behaviour, as it has an impact on the morale of staff . A sexual harassment policy will generally seek to: • provide a defi nition for what constitutes sexual harassment; • provide for diff erent forms of sexual harassment (e.g. physical, verbal and non-verbal); • provide procedures for dealing with sexual harassment complaints (how an employee is to lodge a sexual harassment claim and with whom such a complaint is to be lodged); and • preserve the parties’ confi dentiality in sexual harassment cases. Information technology policy As modern business relies on computers and electronic communication, an information technology (IT) policy seeks to inform employees of their roles and responsibilities when using electronic equipment for work purposes. Electronic equipment can include computers, telephones, email and the internet. An IT policy seeks to regulate and inform employees of the following ( Corporate Computer Services, n.d.): • How equipment may be used, and what would be considered acceptable and unacceptable use. (For example, an employee uses their work email address to conduct private business, or an employee uses the Internet at work to view pornography – these types of usages may be considered unacceptable by an employer.)

• How information about the business should be treated, particularly in respect of security and data protection. (For example, the policy may stipulate that an employee should not share internal, confi dential business information with third parties.) • General information on how IT problems must be addressed. (For example, who is responsible for dealing with IT problems, and what the procedure for reporting a problem is.) There are a multitude of internal policies and procedures that a business could adopt. Here are some other examples of possibilities, but this is not an exhaustive list: • Performance management policy: This policy provides for the way in which the performance of an employee is assessed by an employer. • Probation policy: This policy provides for the procedures to be followed by an employer and employee during an employee’s probation period. 408 CHAPTER 11 • Whistle-blowing policy: This policy provides for the procedure available to an employee to report illegal acts or misconduct within a company. This type of policy will encourage employees to report issues by ensuring that procedures are in place, which will protect them from possible harassment or victimisation. • Procurement / supply chain policy: This policy provides for the procedures that a business must follow in order to procure goods or services for the business. • Declaration of interests policy: This policy provides for what interests employees are expected to declare, and when they are expected to declare them. (For example, this usually requires an employee to declare any business interest they may have.) ACTIVITY 11H

(i) What do you understand by policies and procedures? Provide a short sentence, in your own words, explaining what each of term means. (ii) Name two advantages of having policies and procedures in place in the work environment. (iii) Consider the following scenario. Tina suspects that her colleague, Tim, is receiving money from a client ‘under the table’ in exchange for preferential treatment. Tim is quite an aggressive man, and has been known to intimidate other work colleagues. The client that she thinks is paying Tim money is performing substandard work and indirectly causing her company to suffer substantial losses. Tina wants to report her suspicion to management, but is afraid of Tim’s reaction, should he find out. Required: Identify the policy that you think Tina could use to assist her in this circumstance. Substantiate your answer. (iv) Consider the following scenario. John uses the work email to send offensive and derogatory cartoons about woman to all staff members. John thinks this is hilarious. Required: Provide at least two policies that would apply in this circumstance.

11.10 ARE YOU SECURE? When operating a business, it is important to ask yourself the question, ‘Is my business secure?’ It is imperative that your business takes cognisance of important measures to keep it secure. A few of these will be outlined in this section. 409 BORING BUT IMPORTANT STUFF Insurance As previously mentioned, insurance is an important means of securing your business and its assets. Items that you may need to insure in your business could include offi ce equipment (e.g. computers), vehicles, stock and the business’s premises. Should these items not be insured, you might not be able to replace damaged or stolen goods except by paying for them personally. For a monthly premium, your insurers would take on the risk associated with damage or theft of your business assets. Important legislation Depending on the type of business operation conducted, the business may need to comply with the provisions of the Promotion of Access to Information Act 2 of 2002 and the Protection of Personal Information Act 4 of 2013. These two pieces of legislation regulate how information is provided and kept by a business. The Promotion of Access to Information Act was enacted to comply with, and give eff ect to, section 32 of the Constitution, which deals with the right to information (section 9[a] of the Act explains this). In order to access information, though, the requester must comply with the procedural requirements of the Act (section 11[1][a]) and access must not be refused in terms of the listed grounds for refusal (section 11[1][b] read with sections 33–46).

The Protection of Personal Information Act was enacted as a means of protecting how a person’s personal information is used and distributed (Real Motor Industry Organisation, 2018). Only some sections of the Act have currently commenced. Computers and IT-related matters The Internet is at the heart of a growing information society and knowledge economy. E-commerce is the new way of doing business. Almost everything that can be done today has some relation to the creation, retrieval, processing or management of data on a computer. In your business, important and private information (or ‘data’) will be stored on your computer. It is imperative that this private information be kept secure. An example of private data on your computer could be a list of client information, your products’ prices or a list of supplies. You would not want your competitors to have this information. The Electronic Communications and Transactions Act 25 of 2002 formed the cornerstone of cyberlaw, and has provided much needed protection for IT crimes. However, with the continued development of cybercrimes such as hacking, online fraud, cracking, malware distribution and spamming, the Cybercrimes and Cybersecurity Bill is now in the process of being enacted. It is imperative to ensure that your online information is safe. 410 CHAPTER 11 The following safety measures should be noted to ensure that your computer data is safe: • Install and constantly update antivirus and anti-malware software. • Choose passwords cautiously and update your passwords regularly. • Make backup copies of your online files regularly, and keep them in a safe place.

• Adopt a cautious approach when opening email attachments. Another important measure to safeguard your company is to monitor employees’ online activity. The following risks should be noted and addressed: your employees will have access to all of your important company information online that you do not want disclosed; the concept of vicarious liability applies (you are responsible and equally liable for your employees’ actions whilst they are on duty); and you do not want your employees surfing the Web and downloading from sites that contain viruses. An employee communication policy (ECP) is an effective way to monitor employees’ online communication. An ECP should comply with schedule 8 of the Labour Relations Act, and should inform the procedure undertaken in relation to a dismissal of an employee for misuse of electronic media. By signing an ECP, the employee consents to the interception and monitoring of data at the workplace (Regulation of Interception of Communications and Provision of Communication Related Information Act 70 of 2002, and Information and Communications Technology Law). The ECP would therefore contribute to proving that an employee was aware of the rules relating to the monitoring of their online communication. These rules would have to be reasonable and applied consistently, however. This concludes the chapter on ‘boring but important stuff’. It is important to ensure that you are secure in your business. In order to conduct a successful business, the business owner must ensure that all facets of their operations are protected, that they are compliant with prevailing legislation and policies, and that internal operations are regulated accordingly. 11.11 SUMMARY

Successful business enterprises must be cognisant of the risks and challenges they face. To do so, they must be aware of the importance of compliance with the South African legislative framework that governs taxation, insurance, employee relations, intellectual property rights, the promotion of BEE and contracts. The day-to-day operations of the business are supported by the existence of policies and procedures. These provide a structure through which activities are carried out, provide certainty and clarity, and give expression to the national legislative framework. 411 GROWING THE BUSINESS GROWING THE BUSINESS 12 12.1 Introduction 413 12.2 Life lesson 414 12.3 Growing a business 414 12.3.1 | Changing nature of the business 418 12.3.2 | Types of growth 419 12.3.3 | The risks of rapid growth

422 12.4 Financing growth 425 12.4.1 | Organic growth 425 12.4.2 | Debt 426 12.4.3 | Investors 426 12.5 Managing growth 427 12.5.1 | Formalising business processes 428 12.5.2 | Sharing authority, autonomy and responsibility 431 12.5.3 | Watching costs 437 12.5.4 | Selecting opportunities 438 12.6 Maintaining company culture 440

12.7 From entrepreneur to Chief Executive Offi cer (CEO) 444 12.7.1 | Entrepreneur vs. CEO 444 12.7.2 | Identifying the required skills 445 12.7.3 | Working on the business 445 12.7.4 | Working with a management team 446 12.7.5 | Taking a step back 447 12.8 Summary 448 412 CHAPTER 12 Growing the business Case studies – myths, leaders and

Online inspiration Boring start-ups but Making important it run stuff smoothly Building a It is in the team numbers Cash is king Developing Selling products Spreading and the word Getting out of Forming a services

What is the starting business entrepreblocks neurship? 12.1 INTRODUCTION Naturally, the main aim of any business venture is to grow it to a point where it is truly successful. It is up to the entrepreneur what the goal will be. Some may aim for the business to stay small with a few employees, all the while remaining financially lucrative. Others may have a much more ambitious goal of expanding a business to open a number of branches, or even to possibly become a nationally or internationally recognised brand. This chapter focuses on the ways in which entrepreneurs can grow their business, as well as all the most important considerations that will affect how the business is grown. It is also important to understand that the role of an entrepreneur and the role of a chief executive officer (CEO) differ vastly. This will be discussed in detail. After studying this chapter, you should be able to: • compare and contrast start-ups with growing businesses; • describe the risks of rapid growth for a business; • compare and contrast different sources of financing growth, with reference to the advantages and disadvantages of each source; • discuss the importance of formalising business processes;

• explain the importance of sharing authority, autonomy and responsibility; • discuss the impact of change on company culture; • assess the importance of company culture on a growing business with reference to a hypothetical scenario; 413 GROWING THE BUSINESS • compare and contrast the role of an entrepreneur with the role of a chief executive offi cer (CEO); and • discuss ways of working with the management team. 12.2 LIFE LESSON In everyday life, we are surrounded by brilliant people with brilliant ideas. People who are willing to take on the risk of turning these ideas into reality are called entrepreneurs. However, there is far more to being an entrepreneur than merely having a brilliant idea. One of the most successful and well-known entrepreneurs in the world is Sir Richard Branson. Branson is best known for his Virgin brand, which includes Virgin Atlantic Airlines, Virgin Mobile, and the record label Virgin Records. According to Forbes (2018), Richard Branson got his start with a small mail-order record business almost 50 years ago. Now, his current real time net worth is US $ 4.9 billion. Branson owes his success to a few lucky breaks, strategic decisions, risk taking and creativity. While it is diffi cult to dissect what makes one entrepreneur successful and another not, this chapter will provide examples of successful enterprises and mistakes businesses have made, and provide a theoretical foundation for business growth.

12.3 GROWING A BUSINESS When an entrepreneur makes the decision to grow a business, there are a number of factors that need to be considered. Logically, managing a start-up company is vastly diff erent to managing a large enterprise, which has a sizable staff complement. Businesses typically go through four phases: 1. The introduction stage 2. The growth stage 3. The maturity stage 4. The decline stage Depending on the current phase of the business, the entrepreneur may adopt a diff erent approach to business (Phillips and Gully, 2015: 49). The following fi gure shows these business cycles as represented on a graph. 414

CHAPTER 12 (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Phillips and Gully, 2015: 49) Figure 12.1: Business cycle phases The point at which the business starts up is the introduction phase. It is at this point that an entrepreneur first puts their plan for a business into action. This may be done on a very small scale, with the entrepreneur completing all the work alone, or with just a handful of employees. Often, at this point, the entrepreneur may seek a small amount of capital from investors or the bank, or use some of their own personal savings to get the business up and running. During this stage, the entrepreneur may only make products to order, and may not have a vast amount of inventory. The business could be based on a small premises, from home or even online. The aim, at this stage, would be to build a solid customer base, and to try and carve out a niche of customers within the market.

The business strategy pursued during this cycle would likely be a differentiation strategy, which entails trying to sell the product being offered as unique or special, or even as something that nobody else is currently offering. This is done as an attempt to gain a share of the market (Phillips and Gully, 2015: 49). The next phase in the business cycle is the growth phase. It is at this point that a business has already gained some market share, and has an existing customer base – even if this is a small customer base. The entrepreneur may start to hire more employees, move to bigger premises or begin advertising on a larger scale. At this point, the entrepreneur may also start looking for more skilled employees to hire. The business strategy pursued during this cycle is, similar to the introduction phase, aimed at selling items in an innovative way, and on setting themselves apart from competitors. This is referred to as the differentiation strategy (Phillips and Gully, 2015: 49). 415 GROWING THE BUSINESS (Silvery South Africa) EXAMPLE 12 A Silvery is an online, custom, handmade jewellery business based in Durban, South Africa. When it was started, the business was run as more of a hobby for the owner than a formal business. All the jewellery originally was imported. In 2016, the business was bought over by the current managing director, Justin Blake, an enthusiastic and innovative entrepreneur who identifi ed Silvery as an outstanding business opportunity – one that could easily be expanded to cater to global markets, as all off ered products are small and easily shipped worldwide.

After purchasing Silvery, Blake’s fi rst change was redesigning the entire website to be more user friendly, and provide a great online experience for the user. A variety of stunning products were added to the site, and the stock was made available 24/7 for customer convenience. Silvery also began manufacturing all the jewellery, rather than importing stock. Back in 2016, the manufacturing machinery owned by Silvery was valued at R 800. In 2018, the equipment range had expanded to the value of a whopping R 1.8 million, a clear indicator of the company’s remarkable growth. Silvery prides itself on providing unique, high-quality jewellery, which can be customised to the clients’ unique requirements. This, coupled with its strong social media presence on both Facebook and Instagram, has contributed to this South African business’s success. Initially, Silvery only employed one qualifi ed jeweller. The staff has since expanded to include three qualifi ed jewellers, who also hire and train additional unqualifi ed staff . This shows the business’s commitment to social upliftment, as it aims to hire untrained staff who would otherwise struggle to fi nd employment. Presently, Silvery owns a registered website in Germany, an international website where people as far as South Korea have placed orders for their customised jewellery. This company is a shining example of a proudly South African business, and also a fi ne example of how a business can start off small and expand to reach international success. To see more of what Silvery does, view its work process using the following link: https://www.youtube.com/watch?v=r6WSMpBdvy4 Its website can also be accessed via the following link: https://www.silvery.co.za/ (Source: Adapted from Silvery, n.d.) 416 CHAPTER 12

Once the business is a well-established brand and has managed to secure a segment of the market, it will enter into the maturity phase. This is the point at which the business may add branches in more than one location, and will likely have a larger staff complement than both of the previous business cycles. This is also the point at which the organisation is at its maximum potential. The owner of the business, at this point, may begin to focus on reducing the price of their product selection, so as to better be able to compete with their competition. Unfortunately, sometimes businesses reach a point where they enter into the decline phase. During this phase, a business will experience weaker business performance, a decrease in sales and may be forced to retrench their employees (Phillips and Gully, 2015: 49). This can happen when a product becomes redundant, where there has been an updated version of the product or if the product was a fad. Not all businesses enter into the decline phase. When a business enters into the decline phase, they have the option of updating their products. In so doing, the business cycle starts again from the introduction phase. (A throwback to the 90s and the 00s – VCR machines) EXAMPLE 12 B Back in 1990s, one of the greatest products in technology at the time had just been invented: The video machine or the VCR. Up until that point, households were only able watch movies when they were scheduled on television or at movie houses. Video machines fast gained popularity, becoming a standard feature in most households, before being replaced by the more modern DVD player. DVDs eliminated the need for rewinding, which was necessary for video tapes, and were also much less easily damaged.

They also had the improved features of better sound, higher-defi nition pictures and added bonus features on the DVD. Because VCR machines were being so quickly replaced by DVD players, major VCR manufacturers were faced with a choice. They could either become obsolete, or change their product mix and start manufacturing DVD players. Most electronics manufacturers, such as Panasonic, Sony and Samsung, kept up with advancing technology, and began manufacturing DVD players, and eventually Blu-ray machines, too. This was necessary because, as VCR sales began to decline, VCR manufacturers moved into the decline phase of business. As result, many businesses redesigned their products and entered into the introduction phase again with a new range of products. 417 GROWING THE BUSINESS 12.3.1 Changing nature of the business Naturally, as a business grows, change is inevitable. The types of changes that a business may face include the following: • Change in leadership • Introduction of new products or services • Introduction of new technology • A new business marketing strategy • Restructuring of the business • Mergers/acquisitions • Changing demographics of the workforce

• Economic changes impacting the business As a whole, change is considered to be one of the only constants within the business world. The current business environment in South Africa is incredibly fast-paced. Consequently, businesses are under constant pressure to remain current and relevant, or face becoming unsuccessful and losing customers to competitors. However, the responsibility falls on the entrepreneur to be adaptive, fl exible and in touch with what change is needed, as well as manage the rolling out of change within the workplace. It is likely that one of the greatest challenges in managing change is managing the resistance that comes with change. Robbins and Judge (2014: 291) identify two main categories of change resistance: 1. Individual resistance to change 2. Structural resistance to change The following table off ers an explanation and the various sources of resistance of each. Type of change resistance Source of resistance Explanation Individual Habit People generally develop set patterns of behaviour, and are reluctant to change this.

Security Individuals may feel threatened by change. Economic factors Often, people may view change as something that may overload them or threaten their job. Fear of the unknown It is natural that individuals are resistant to change, as it leads to great uncertainty. Selective information Often, employees may only hear what processing they want to hear and ignore other information. 418 CHAPTER 12 Organisational Structural inertia An organisation may be structured in such a way that its very nature is resistant to

change. It may have a vast amount of red tape and rigid procedures. Limited focus of change Change has to be focused on the organisation as a whole, and not only on select sections. Group inertia Groups develop set dynamics and patterns of behaviour, and it is difficult to deviate from these. Threat to expertise Those with specialised skills may feel threatened by new expertise coming into the business. Threat to established power Certain groups who are responsible for relationships decision-making may feel threatened by change. Threat to established When more groups come into the resource allocations

business, resources have to be split more than before, and groups may feel threated by this. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Robbins and Judge, 2014: 291) Table 12.1: Sources of resistance to change If the entrepreneur can effectively navigate the business through change, and manage the employees through change, the chances of organisational growth and increased profitability are increased dramatically. Thus, this highlights why managing change is essential as an entrepreneur. 12.3.2 Types of growth Synerion (2015) identifies four main types of business growth: 1. Organic business growth 2. Strategic business growth 3. Mergers and acquisitions 4. Internal business growth Organic business growth is the straightforward growth of a business, whereby more premises may be purchased, more products or services may be produced and more employees may be hired. This is usually in line with an increasing demand for a product from

customers. Obviously, businesses will not put such mechanisms in place unless they are aligned with their customer demand. 419 GROWING THE BUSINESS Synerion (2015) states that this is the most basic form of growth. However, it can also be the least sustainable, as it is not highly strategic in nature. It merely aims to add employees, produce more items or open new branches. This has a relatively short-term focus. Strategic business growth has a longer-term focus. An entrepreneur focused on strategic business growth may engage in a process called forecasting. Forecasting is the process of attempting to predict the future demand for a product or service, and ensuring that the business is well prepared for this, in terms of staff complement, raw materials and space. Synerion (2015) highlights that this form of growth generally focuses on expanding into new markets by attempting to anticipate what the needs of customers will be. This type of growth may be more time-consuming than organic growth, but often can yield better results in the long term. Some entrepreneurs do not have the resources to grow on their own, and therefore, may opt for a merger or acquisition. This is a quick way to enter into new markets, and simultaneously decrease competition by joining forces with another company. However, it is also the riskiest approach to growth ( Synerion, 2015). The diff erence between a merger and acquisition is that a merger occurs when two companies combine to form an entirely new organisation. An acquisition takes place when one company completely takes over another. Mergers and acquisitions allow for quick and easy access to good resources, and may come with an existing following from customers. It also allows the business to tap into another range of business skills that the business otherwise would not have had.

(Superbalist and Spree merger) EXAMPLE 12 C Superbalist and Spree are well-known South African e-commerce fashion sites, and a good example of a merger. Both respected fashion retailers in their own right, they provided a wide range of quality items for men, women, children and for the home. In late 2018, the sites merged to form one company. Spree was bought over by Superbalist and all Spree stock was shifted across – both online and to the Superbalist warehouse. The Spree app and website no longer exist. All Spree consumers had their online profi les migrated across to Superbalist, but are still able to access their order history on Superbalist. This move was a strategic one, as it has removed one more ecommerce competitor from the market by combining two of them, and allows for Superbalist to now off er an even wider range of fashion options. The website now impressively off ers over 400 brands. 420 CHAPTER 12 Finally, internal business growth is both the easiest and most difficult way for a business to expand ( Synerion, 2015). It focuses specifically on using internal resources to grow, rather than on external resources such as merging or adding new branches to a business. Internal business growth may consider factors such as how the skills of existing employees can be capitalised on, how waste can be minimised and how production can be increased. Examples of internal business growth strategies may include the introduction of automated workforce management systems, and lean manufacturing, which is dedicated to maximum efficiency.

Synerion (2015) mentions that this is often the most challenging form of growth as, instead of simply adding a new product range, it makes internal changes, which can often be daunting for employees and management to handle. The following table summarises the ways in which a business can grow, and highlights the advantages and disadvantages of each. Approach to growth Advantages Disadvantages Organic growth • Simple to execute • Often is not sustainable • It can be successful, but there is • Lacks a long-term focus no guarantee Strategic growth • Involves risks that are more • Can be very time-consuming calculated • Forecasting can be inaccurate • Often has greater success in the long term Mergers and • Quick and easy way to expand • There can be cultural clashes

acquisitions • Can eliminate some competition between two companies from the market by joining forces • The identity of the entrepreneur’s • Allows access to strong brands original business can get lost and other resources • Can be very costly Internal growth • Simple to implement • Difficult to identify problem • Minimal costs involved areas • Low risk • Difficult to get employees’ buyin for change (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Synerion, 2015) Table 12.2: Advantages and disadvantages of growth sources 421 GROWING THE BUSINESS 12.3.3 The risks of rapid growth

While growth is the primary goal for any entrepreneur’s business venture, growth that is too rapid can actually be detrimental. Growth is a tricky process of deciding on the right time to expand. Expansion often involves an initial cash outlay, and if this is not recovered, it can go on to negatively impact the business. Inc. (2017) identifi es eight issues that can arise as a result of this rapid business growth: 1. Losing track of fi nances 2. Cash fl ow mistakes 3. Overvaluing sales 4. Ineff ective business operations 5. Hiring the wrong people 6. Not scaling customer service 7. Management mistakes 8. Incorrectly scaling technology for business needs

Generally, as a business starts, its operations may be run on a relatively small scale, including the fi nancial side of the business. As the business grows, and particularly if it grows too quickly, the business may lose track of its fi nances. For example, it is easy to be deceived into thinking that the business is very successful at one point, before additional salaries for new staff and additional material costs have been factored in. Often, when dealing with a vast increase in sales, it is challenging to track one’s success. The amount refl ected in the business’s bank account is not all profi t – the expenses also need to be factored in. In a similar vein, it becomes easier to make cash fl ow mistakes. Cash fl ow refers to the rate at which cash is coming into the business, and the rate at which it is going out to pay expenses. For example, a business might take in R 500 000 on the 20th of the month, but if all staff salaries are due on the 25th and this amount is R 400 000, the owner of the business will need to ensure that R 400 000 is available, and that no more than R 100 000 is spent on other expenses. When a business is especially large and has seen very quick growth, managing this cash fl ow can be diffi cult due to the rapid rate of money fl owing in and fl owing out of the business. This can result in the business not being able to meet its fi nancial obligations on time. Inc. (2017) emphasises the fact that, often, entrepreneurs assume that if sales grow, other areas within a business will follow. Often, businesses may make the decision to expand, based only on an increase in sales, and discard the amount of debt that currently exists, or the amount of additional growth costs. It is important that businesses take into account a variety of information when deciding whether to grow or not. This may include market studies and economic analyses ( Inc. , 2017). 422 CHAPTER 12

As previously highlighted, when a business is smaller, it is often easier to manage. This refers also to the management of employees. It will always be easier to manage a smaller, more intimate team, rather than a larger one. With business growth, the entrepreneur needs to be more organised than ever before, and business operations need to be managed effectively. The inventory, budget, sales estimates, cash flow and staff will all need to be closely monitored as the business grows. Inc. (2017) notes that when a business starts up, it is easy to find a team of people who tick every box. A business usually starts up with a small and close-knit group of people. As the business grows and more staff are required, the hiring process can become more hurried, as there is an urgency to fill new positions quickly. This can result in poor hiring decisions and the wrong people coming into the business. It is important to remember that, no matter how urgent the need to fill positions, the hiring process should always be done thoroughly – even if it is not as meticulous as when the business first started up. One of the greatest challenges that a rapidly growing business can face is not maintaining a good level of customer service as they grow. For example, a very small business, with a small number of employees and a small number of sales, is able to provide individual, personalised customer service to customers. However, when the business begins to grow, this specially individualised level of customer service may begin to decline, owing to the rapidly increasing sales volumes. It is therefore important that the business attempts to maintain the same level of customer service by increasing the number of customer service consultants accordingly. Inc. (2017) states that, often, management cannot cope with growth, and tend to fixate too much on the small details, rather than on the bigger picture. This is actually a common mistake, as most businesses start out small, where managers are able to focus on the finer details. As the business grows, the manager must avoid micromanaging, and rather delegate tasks to the staff, and focus on the overall functioning of the business.

Finally, it is vital that businesses update their technology in accordance with how the business is growing. If unnecessary technology is introduced, it can be an unnecessary cost that the business incurs. If newer technology is not introduced fast enough, the business can fall behind the competition, and lose customers as a result. Additionally, when implemented correctly, technological changes can assist with smoother organisational operations. It is important that the business implements new technology when and if it is needed. 423 GROWING THE BUSINESS (Sports Sense) EXAMPLE 12 D Sports Sense is a small sporting equipment business based in Port Elizabeth, South Africa. Originally, when the business fi rst started out, it was based in a popular shopping centre. It experienced great success here, and gradually increased staff numbers and expanded its range of goods. After roughly fi ve years of steady business, Sports Sense was faced with the decision of whether to expand or not expand. The owner made the decision to expand, and opened up two additional branches, one in Port Elizabeth and one in Jeff rey’s Bay, about an hour away. Initially, all three shops were somewhat successful. The original store in the shopping centre did experience an initial decrease in sales, as some customers began shopping from the second Port Elizabeth branch.

However, roughly a year after the additional branches opened, the entire shopping centre that Sports Sense was originally based in closed down. This meant that Sports Sense lost its very appealing location, and was hard tasked to quickly fi nd premises elsewhere. The new premises were not based in a prime location, and so the business began to lose sales and could not maintain the rent and additional expense of the other two branches. The owner had been faced with the diffi cult reality of running a business that is profi table, but essentially not at a point where he could aff ord the additional expenses of running the additional two branches – especially once the fi rst store had been forced to relocate. As a result, the owner had to close the additional branches, and once more focus all their attention on the original store. This, in the long run, turned out to be more fi nancially lucrative than running the three stores. ACTIVITY 12A Yuppiechef The well-known e-commerce site, Yuppiechef, was founded in 2006 by two friends, Andrew Smith and Shane Dryden, who shared a passion for kitchen tools and equipment. The business started out very small, in the living room of Andrew’s home, off ering 32 products. All orders were shipped from Smith’s lounge. 424 CHAPTER 12 The founders of Yuppiechef feel that this strong South African brand emerged at the perfect time, when people were truly becoming a generation of ‘foodies’ who were intrigued by the likes of Jamie Oliver and popular television series, Masterchef. The founders began

sourcing and supplying the unique and high-end cooking equipment seen on these shows, which were not readily available in South Africa. Smith and Dryden had stated that ‘Yuppiechef was born from a love of kitchen tools and a passion for cooking’ (Yuppiechef, n.d.). In the last 12 years, Yuppiechef has grown significantly to become a pioneer in e-commerce in South Africa. It currently offers over 300 brands online, and employs over 100 staff members. The first Yuppichef store was opened in Westlake, Cape Town, in 2015, and since then, more have opened in Willowbridge, Gardens Shopping Centre and, more recently, the V & A Waterfront. (Source: Adapted from Yuppiechef, n.d.) Required: (i) Identify which factors you think have contributed the most to Yuppiechef’s success. (ii) Would you describe the growth of Yuppiechef as rapid? Substantiate your answer. (iii) Describe the type of business growth that Yuppiechef has adopted. 12.4 FINANCING GROWTH A growing business is inevitably associated with high expenses. Hiring of more employees, leasing a bigger shop space, introducing new technological systems, higher material costs, higher storage costs and purchasing of new equipment are just some expenses which can be associated with the growth of a business. Credibly (n.d.) states that costs associated with business growth may also

include increased advertising and marketing expenses, buying inventory and covering seasonal lows. For an entrepreneur facing business growth, they must determine exactly how business growth will take place. The three main ways this occurs is through organic growth, debt or investors, each of which will be discussed in detail. 12.4.1 Organic growth This form of financing growth occurs when the entrepreneur finances the growth of the business themselves. This may be as a result of a gradual increase in sales, or making use of the entrepreneur’s own personal savings to cover the costs of the growth. This approach to growth can be useful, as it is often slow and steady, and the growth will not be as rapid. This allows the entrepreneur to slowly become accustomed to the increasing customer demand for products, the business’s increasing cash flow and the expansion of overall business 425 GROWING THE BUSINESS operations. This may be more manageable for the entrepreneur, as the growth and the change are more gradual. Slow and steady growth also means that the business will not incur any debt, and that there will be no signifi cant increase in the expenses of the business as a result of debt. It is also lower risk, as often the entrepreneur stands to lose little other than their own investment. However, this approach to fi nancing requires much patience. Occasionally, entrepreneurs can miss out on opportunities to break into a new market if the decision to do so is not done quickly. You may have heard the phrase, ‘Strike while the iron is hot’. Organic growth and funding may often mean that this is not possible, limiting the businesses opportunities.

12.4.2 Debt As previously mentioned, business growth can be very costly. Another fi nancing option for a business is to grow via business loans obtained from the bank. Naturally, the business incurs debt this way, an expense that has to be factored in when assessing the business’s overall fi nancial success. In obtaining fi nancing, the business is able to take on any new opportunities quickly and, thus, expand more rapidly. Often, when the entrepreneur has done proper economic forecasting and studies on customer demand for their products and services, obtaining fi nancing is the best solution for rapid growth. However, this can be problematic when an entrepreneur becomes impatient, and seeks out fi nancing from banks when the business has not yet shown promise to be fi nancially viable. In this situation, the business may fi nd itself in debt that it is not able to repay. Ultimately, this can result in bankruptcy if fi nancial obligations are not met. This can further result in the business being shut down, employees losing their jobs and the entrepreneur’s personal credit record being damaged. Thus, obtaining fi nancing or incurring debt has to be done in a responsible manner, in order to ensure that the growth is successful and results in the desired outcome. 12.4.3 Investors Occasionally, entrepreneurs are granted the opportunity of receiving funding form investors. This allows for rapid growth and expansion, and sometimes, a lower level of personal risk for the entrepreneur. However, it can also place a higher level of pressure on the entrepreneur to perform. Often, investors may attach certain conditions to their investment, such as that the business is tied into a contract of a particular length, that the business has to earn a certain amount annually, or that the

investor can withdraw. Naturally, investors choose to invest in a business, as they expect to receive a certain level of returns. Thus, the entrepreneur should strive to maximise the returns on the part of investors. 426 CHAPTER 12 Obtaining investment for a business can prove to be tricky, as the entrepreneur will need to present the opportunity to investors in such a way that they are able to see the financial potential of the business. It is entirely up to the entrepreneur to capture investors’ interests and convince them to invest. There is also extensive information required, such as the business’s financials, a business proposal, a business forecast, information about the business’s founders, and extensive paperwork to be completed. However, if the entrepreneur is successful, this is a fantastic way for a business to grow quickly. Within South Africa, there is a range of government institutions that provide funding to small businesses. Some of the institutions include the Department of Trade and Industry, the National Empowerment Fund, the National Youth Development Agency, the Isivande Women’s Fund, the Small Enterprise Financing Agency, and the Technology Innovation Agency. For each of these institutions, there is set criteria that must be met in order for applicants to qualify for funding. The application process may be a timeous one, involving a vast amount of paperwork. Nonetheless, it is a quick and easy way for a business to grow. The following table summarises the advantages and disadvantages of the three financing options for business growth. Source of funding Advantages

Disadvantages Organic • Minimal risk • Opportunities can be missed • No debt incurred • Requires great patience • Gradual increase in demand Debt • Quick way to expand • Has to be done in a responsible way • Can have a negative outcome if done too hastily Investors • Quick way to expand • Clauses and obligations attached • No expense from the owner’s to the investment pocket • Difficult to secure

• Much paperwork required (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 12.3: Advantages and disadvantages of business financing options 12.5 MANAGING GROWTH In an earlier section, we highlighted the risks of growth as being very rapid. We also raised the point of how challenging it can be to manage a business that has grown virtually overnight. Overall, there are many more employees, advancements in technology, and business processes for the entrepreneur to manage, and this can easily become overwhelming. 427 GROWING THE BUSINESS This section will discuss how growth can be eff ectively managed through formalising business processes, sharing authority, autonomy and responsibility, watching costs and selecting opportunities. 12.5.1 Formalising business processes Often, with smaller businesses or start-ups, business starts out very informally; usually with just a handful of employees who work very closely together. It can often be the case that employees do not even have offi cial job descriptions. They all would likely work as a team, helping one another to complete various tasks. The work that is completed can be fairly simple, as most business’s will start out with a small off ering of goods and services, making it fairly easy to keep tabs on the business – both in terms of fi nances and employees. Swanepoel (2017) identifi es three key areas that are indicative that business processes need to become formalised: 1.

A growing number of employees 2. The business is becoming multifaceted 3. Business growth is accelerating rapidly A growing number of employees and its eff ects As previously discussed, businesses will often start out with a small number of employees. As the business grows and the number of employees increases, so does the responsibility for the entrepreneur. There will be more employees whose salaries now need to be paid, meaning that the entrepreneur is legally bound to be able to cover employees’ salaries and benefi ts, as stipulated within their contracts. The business’s staffi ng function will also become more complex. The hiring of staff may be done in a more standardised and structured way than before. Staffi ng may need to be done according to set staffi ng requirements, and in compliance with certain company policies and procedures. As the number of staff members increases, various human resources (HR) functions will also need to be implemented. Processes such as performance appraisals and succession planning may need to come into eff ect. Performance appraisals entail the measurement of employee performance, in order to gauge whether they are meeting their set performance targets for their job, and where there is room for improvement. Succession planning is used in HR to engage in strategic planning for the staffi ng of the organisation. It is used, in particular, with reference to key positions within the organisation, where employees occupy positions that are vital for organisational success, or require a level of high or 428

CHAPTER 12 scarce skills. For example, if a company knows that the head of their sales division will be retiring soon, succession planning should be implemented, in order to determine who could potentially replace this key employee. If the managing Director of an organisation is due to go on maternity leave, a plan should be set in place for somebody to stand in for her during this time, so that the running of the organisation is not affected negatively. Moreover, Swanepoel (2017) highlights that, as a business gains more employees, it is necessary to comply with certain labour law restrictions within South Africa. Any employer with a staff of more than 50 employees is required to be compliant with both Broad-Based Black Economic Empowerment (B-BBEE), as well as employment equity (EE). South African legislation also states that any employer whose total annual salary bill is above the threshold of R 500 000, is liable to pay a skills development levy each month over to the South African Revenue Service (SARS). Employers are required to pay one per cent of their annual payroll toward skills development. Naturally, legislation such as B-BBEE and EE will influence the workplace hiring process, in that individuals from previously disadvantaged backgrounds should be given preference, and be treated equally and fairly within the workplace. Once a business has more than 50 employees and an annual turnover of above R 5 million, it is a legal requirement to have external auditors audit the books of the business. This measure is in place to prevent fraud and corruption, and ensure that the business operated in compliance with tax regulations. A multifaceted business and its effects Swanepoel (2017) notes that, when different product ranges are added to a product line, or when a business begins to open multiple

branches that are geographically dispersed, the result is that the business becomes more multifaceted and, thus, the running of the business is more complex. Moreover, in instances where a business is dealing with information that is highly confidential or intricate, and clients require feedback, formal business processes are absolutely essential. For example, a financial services company is required to provide evidence of how they are managing their clients’ money and the returns that they have got them. The process of developing these reports will need to be done in a professional, formal and standardised manner for all clients, hence why, in this instance, formalisation of business processes is crucial. This will ensure a set standard of customer service, in order to meet the demands of clients accordingly. If the business fails to deliver on time, does not meet customer needs or makes errors, it is likely that they could rapidly start losing clients. 429 GROWING THE BUSINESS (Roman’s Pizza – a nationwide chain) EXAMPLE 12 E Roman’s Pizza is a popular pizza chain in South Africa. They are well-known for their great pizza and for their ongoing promotion of buy one, get one free. The brand is a franchise, meaning that anybody wishing to open up a Roman’s Pizza branch would need to purchase the rights to do so from the franchise. This also means that there is a standardised set of operating policies, including requirements for staff uniforms, packaging, recipes, ingredients, staff policies and the overall layout of the store.

Each branch is provided with a manual that contains standardised policies and procedures for a range of topics, including the management of personnel. This ensures that a certain standard is maintained across all branches of the chain, and guarantees a high standard of products for customers. (Source: Adapted from Roman’s Pizza, n.d.) Rapid business growth and its eff ects Swanepoel (2017) highlights that, when a company experiences rapid growth, business processes, employees and management should keep pace with this level of growth. If they do not, the growth will not take off in the way that it should. As the business grows, the company will need to ensure that it has the correct resources in place to manage this growth, including the right staff numbers, standardised business processes, eff ective automated systems to manage a range of functions, the correct demand for the product, the right amount of production and ample space for the manufactured goods to be housed. Some tools that may be utilised to assist in the managing of business growth include: • a fi nancial services company to track the business’s fi nancials; • HR software to assist with managing employee information and payroll; and • employees who are well-trained within their respective jobs to ensure maximum productivity and employee performance. 430 CHAPTER 12 The following flow diagram summarises all the factors that influence the formalisation of business processes.

Multifaceted business - numerous branches of a business - new product ranges added - required level of customer Number of employees service - impact on employee Accelerating growth management - correct resources in place - impact on HR function for growth - legal impact Factors influencing the need for formal business processes

(Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Swanepoel, 2017) Figure 12.2: Factors influencing formalisation of business processes 12.5.2 Sharing authority, autonomy and responsibility As we have already mentioned, most businesses start out on a very small scale, with a small number of employees. Generally, the entrepreneur takes responsibility for everything, and manages everything that happens in the business. After all, it is their ‘baby’ so to speak. Thus, in the early stages of a business, it is natural that an entrepreneur would keep close tabs on all areas of the business. However, once the business reaches a certain point of growth, it becomes impractical for the owner to manage each and every aspect of the business so closely. It is simply too much for one person to be responsible for, and there is a high potential for mistakes. It is at this very point that the entrepreneur will need to start looking to delegate some of their responsibilities to capable subordinates. Should an entrepreneur fail to do so, this could result in burnout for them personally, and the business’s growth may actually be stunted. It also disempowers employees and does not develop 431 GROWING THE BUSINESS further skills in employees. All businesses should aim to have employees that are multiskilled. By not giving them responsibility in certain areas or delegating tasks to them, their skill sets may remain very limited. By delegating to employees, sharing responsibility and ultimately empowering them, employee skills are further developed. Moreover, delegation can develop a sense of intrinsic reward within employees. These are internal and intangible rewards experienced by each individual employee. In turn, the employee then uses these rewards as motivation toward succeeding and achieving greater goals as an employee. Empowering employees can prove to be very intrinsically rewarding.

Moreover, among the current, younger generation of employees, autonomy in work is increasingly valued. Cheverie (2015) defi nes autonomy as people’s need to perceive that they have choices and are in charge of their own actions. In the work setting, it is giving employees the freedom to work in the way that they choose to work, with whom they choose to work, and giving them the opportunity to get creative and make improvements within the workplace. This, too, is a form of intrinsically rewarding and empowering employees. Cheverie (2015) highlights that, generally, people view work as a place that is an intricately linked social system, meaning that people can experience strong emotions at work, just as they would in their normal everyday lives. As a result, employees may begin to feel frustrated or ignored at work, leading to dissatisfaction at work and poor performance or leaving the organisation. In giving employees autonomy and greater responsibility at work, micromanaging can be prevented. Micromanaging can frustrate employees; instead, autonomy shows them that they are trusted, and viewed as competent enough to work independently. A sense of increased autonomy may also allow employees to be be more creative, more invested in their work and more satisfi ed at work (Cheverie, 2015). Work can be made more intrinsically rewarding in the following ways: • Engaging in job enrichment • Implementing job enlargement • Having a job rotation system • Allowing autonomy in work Job enrichment is defi ned as a motivational approach to the design of work, and focuses on increasing the responsibility and interest levels of the employee currently occupying the job (Landy and Conte, 2010: 399). The job characteristics model (JCM), developed by Hackman and Oldham (1976: 276), eff ectively includes fi ve key

elements necessary for an employee to view their job as being ‘enriched’. This model is shown in the following fi gure. 432 CHAPTER 12 Critical Core job psychological Outcomes characteristics state Skill variety Task identify Meaningfulness Task significance Work motivation Greater work satisfaction Autonomy Responsibility Growth satisfaction

Work effectiveness Knowledge of Feedback results (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Hackman and Oldham, 1976: 256) Figure 12.3: Job characteristics model According to this model, the five critical areas for job enrichment include skill variety, task identity, task significance, autonomy and feedback. Each of these is further discussed in the following table. Job dimension Explanation Skill variety Exposing employees to a variety of different tasks, and multiskilling them in a range of different areas, rather than relying on monotonous work. Task identity The extent to which an employee identifies with the work they have produced, in the sense that they take pride in the work they are doing, and are able to complete one whole component/task and feel accomplished in doing so. Task The degree to which an employee performs the work they are doing is contributing significance

to the organisation’s overall performance. Autonomy Allowing employees freedom to be creative and manage their own work schedules and ways of completing tasks without micromanaging them. Feedback Giving employees constructive feedback on performance, and recognising what is being done well, and where there is room for growth and improvement (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Hackman and Oldham, 1976: 256) Table 12.4: Job dimensions explained The premise of the model is that, together, these dimensions allow employees to feel that their work is more meaningful, and serves more of a purpose within the broader organisation. Employees can quickly become discouraged and lose interest completely if they feel that their job makes no real impact in the organisation. 433 GROWING THE BUSINESS Moreover, the presence of these dimensions is also said to encourage employees to take more responsibility for the outcomes of work, as they may feel that they have to be directly involved in the process of reaching this outcome. As a result, employees want to take on more in the business, and show interest in the work that they are doing. Providing employees with feedback also allows them to have knowledge of the actual results of their work activities. They may come to view the organisation’s success as their own, and also come to feel personally invested in the success of the business.

In turn, these factors are believed to increase employees’ intrinsic motivation, their work performance and level of satisfaction at work. Intrinsic motivation, which is related to intrinsic rewards, refers to motivation that stems from within the employees themselves, and doing something well, purely for the purpose of enjoyment and the satisfaction that they derive from that task. There are no other external factors (such as pay or incentives, which are considered to be extrinsic sources of motivation) infl uencing the employees. Finally, Hackman and Oldham (1976: 256) state that, when employees experience higher levels of intrinsic motivation and satisfaction, not only is their work performance better, but they are also less likely to leave the organisation and less likely to be absent from work. Thus, this model summarises job enrichment well by detailing the key elements that should be in place in order to motivate and empower employees. The following provides a practical example of job enrichment and how it may be implemented in the workplace. (Job enrichment) EXAMPLE 12 F Consider the following hypothetical scenario. Rachel works for an online shopping store named Vanilla Cream. The store is still in the growing phase, and cannot yet compete with major online retailers. At this company, Rachel is a buyer; she is responsible for choosing the clothing that will be sold via the store. She specialises in women’s clothing and accessories. Recently, Rachel has been feeling like she might want to take on more responsibility, and potentially move to a bigger company that may consider sending her overseas to meet with buyers. She also has the desire to train up other young buyers. Presently, Vanilla Cream, being a relatively small company, has not off ered Rachel this

opportunity. Her boss soon fi nds out that Rachel is unhappy. Because she has been such a valuable asset, he decides that they will look at allowing Rachel to travel overseas to meet with buyers twice a year. He also decides that on intern programme will be initiated, where Rachel will mentor the intern. Rachel is delighted at the news, and feels like she has fi nally been given the challenge, the variety and the opportunity to be creative, which she has been so desperately craving. 434 CHAPTER 12 In contrast to job enrichment, job enlargement is when the employee’s functions and job descriptions expand, as a result of extra tasks and responsibilities. More simply, the employee is trusted with a greater workload within their existing line of work, due to increased productivity and competence. Job enlargement is often used to introduce more variety into the employee’s everyday work, to utilise their skills to their full potential, and to eliminate boredom at work. In using the employee to their full potential and giving them more responsibility, they may feel more like they have accomplished something, which in itself is rewarding. The following example illustrates a practical application of job enlargement within the workplace. (Job enlargement) EXAMPLE 12 G Consider the following hypothetical scenario. Aaron is currently employed at Mango Dream Designs, a growing graphic design agency based in Cape Town. He is in charge of the interns who come into the company. However, recently, Aaron has been feeling that he is not getting to use his full range of skills, and this is causing him to feel bored and frustrated.

His boss picks up on this, and decides that he will expand Aaron’s job to include employee development and training. He will also be aff orded the chance to be in charge of a special project, which the interns could work on with Aaron. Aaron is ecstatic to receive this news, and is delighted that he is being given the chance to shine and utilise his skills more within the workplace. Finally, when employees are moved from one area to another, within the same working environment, there is a shuffl ing of their functions. This is often referred to as job rotation. The purpose of job rotation is to expose employees to all the various areas of business. This, in turn, helps them to develop and improve upon their existing skill sets, and enables them to multitask effi ciently. As a result, employees are able to perform and function in various roles within the business. Job rotation can motivate employees, as their work will feel less monotonous. Furthermore, they may feel that the organisation has a vested interest in them, and that they have better opportunities for growth and improvement within the company. In ensuring that employees are rotated, there will be greater fl exibility within the workforce, as diff erent employees can fulfi l a number of diff erent roles. Job rotation is explained more clearly in the following example. 435 GROWING THE BUSINESS (Job rotation) EXAMPLE 12 H Consider the following hypothetical scenario. Lindiwe has just completed her studies in HR management, and has managed to secure a one-year internship with a well-known multinational company. She is truly excited to begin!

On her fi rst day, Lindiwe is allocated to the training division within HR. Initially, she assists the head of the department with the setting up of training venues, capturing of employee surveys after training has occurred, and the binding of training manuals. The head of training teaches Lindiwe how training programmes are developed, and the best training techniques for teaching adult learners. After being in the training department for three months, Lindiwe moves into recruitment. Here, she is taught how to manage an employee database, interviewing techniques, how to conduct phone interviews and how to screen applicant CVs. Once Lindiwe has completed her three months in recruitment, she is transferred to the payroll/compensation division. In this division, she is shown how personnel fi les are managed, how tax deductions are made, how salaries are benchmarked and the diff erent pay grades in the company. Finally, Lindiwe is transferred to the confl ict resolution / labour law division, where she learns more about the management of employee confl ict, labour law, how to manage strikes, and the dismissal process. By the end of Lindiwe’s internship, she has been exposed to a wide range of disciplines within HR, and is multiskilled across a number of areas. Having excelled at each of them, the organisation off ers her a position as an HR generalist, owing to the fact that she is capable and competent across all facets of HR. To recap and make this all clearer, the following table highlights the key diff erences between job rotation, job enlargement and job enrichment. Element Main objective Desired outcome Job rotation

To move an employee across a variety of Reduce boredom, reduce monotony functions and key roles. of work, multiskill employees and build a more skilled workforce overall. Job To give an employee additional tasks or roles Reduce employee boredom, motivate enlargement within a similar line of work to what they are employees and increase the workload in presently. completed by employees. Job To increase the level of enjoyment and Increase employee job satisfaction, enrichment motivation an employee feels within their job. and stimulate the employee more. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from UK Essays, 2018) Table 12.5: Differences between job rotation, job enlargement and job enrichment 436 CHAPTER 12 12.5.3 Watching costs As we have reiterated throughout the chapter, with business growth, costs will need to be closely monitored. As the business grows, it becomes more complicated to keep track of expenses. To illustrate this concept in a very simple and relatable way, consider the following simple scenario.

You start out in an internship position, where you are earning a small salary of R 5 000. With this money, you can only cover three main expenses: Your portion of rent, transport costs and food for yourself. It would be fairly easy to manage a small amount of money when you have a small number of expenses. As time goes by and you gain experience, you are promoted to a higher position, and therefore earn significantly more. Imagine that you are now earning R 60 000. With this large increase in salary, you will likely see a huge increase in expenses. You will likely need to pay a bond on a house, for a car and fuel, food, water and electricity, medical expenses, costs of insurance, school fees for children (if you had them), and you would likely be paying into a pension fund. You would also need to cover food and entertainment expenses. Managing your cash flow from the 25th of one month to the 25th of the next month can be challenging – even though the income you are receiving has increased. You have a lot more expenses to manage than when you earned R 5 000 as an intern. This principle is exactly the same within businesses. The larger the business, the more difficult it becomes to track the expenses of the business and manage the cash flow effectively. Managing large sums of money is time-consuming, and requires great deal of planning and attention to detail. Finder.com (2018) provides a number of practical suggestions of how to closely monitor the costs within a business. These include hiring an accountant to manage the books of the business, as they are an expert in this field and can manage the books well for the entrepreneur. The business owner should also closely track spending by keeping receipts and monitoring bank statements, so that they can monitor how much money is coming in and going out. It is also recommended that the entrepreneur draws up financial projections, so that there is a clearer idea of how the business is performing and what the future performance is likely to be.

Furthermore, Finder.com (2018) highlights how important it is to remain on top of invoicing. As soon as work is completed, the client should be invoiced. This avoids any oversights due to human error by either party. Entrepreneurs are also encouraged to keep separate business and private accounts, so that the finances are kept entirely separate, and that any business loans can be tracked. Multiple loans should not be taken without assessing whether the business is in a stable financial position and can afford to pay this back. Entrepreneurs are also encouraged to remain very frugal and not pay themselves exorbitant salaries, especially when the business is just starting out. Finder.com (2018) also advises that travelling costs should always be kept to a minimum, if travel is necessary. The grandest hotels and most expensive flights are not always necessary. 437

GROWING THE BUSINESS Entrepreneurs are also advised to rent rather than buy initially, as this ties them down less (fi nancially). They are also advised to avoid premature spending on things like state-of-theart equipment and

printing business cards or marketing materials. Finally, it is advisable that entrepreneurs think very carefully before opening a business. They must always consider whether they have enough capital to cover the start-up costs comfortably. 12.5.4 Selecting opportunities Operating in the current working environment, which is fast paced and ever changing, it is likely that in the time a business is open, there will be many fads and crazes. With businesses facing more competition than ever before, globalisation aff ecting the way businesses operate, and customers changing their minds faster now than ever before, choosing the right opportunity at the right time can be the diff erence between a business’s success or its failure. As an entrepreneur, it is important to put signifi cant thought into which opportunities will be pursued, and which will be dismissed. Medal (2019) identifi es fi ve steps in selecting the right business opportunities. These are illustrated in the following fi gure. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Medal, 2019) Figure 12.4: Selecting opportunities steps As illustrated in the fi gure, the fi rst step entails the identifi cation of a problem or market need. Most business opportunities surface as a result of some consumer need that is currently going unfi lled. It is usually the gap in the market where opportunity lies. This ‘gap’ refers to what is currently available on the market, and what consumers need. To identify what consumers need, it is important to constantly communicate with consumers, analyse the market and consistently engage in market research. 438 CHAPTER 12

A business opportunity is really only actually an opportunity when it brings something new to the market, or it does something in a way that is either cheaper or better than what competitors can do. When labelling something as an opportunity, the following three questions should be asked: 1. Does this opportunity bring something new to the market? 2. If it is not new, can we do it cheaper than competitors? 3. If it is not new, can we do it better than competitors? If the answer to all of these questions is no, chances are it is not a real opportunity, and may not be worth investing time, effort and money into. If something is considered to be a real opportunity, the next step is to position the business to be ready to roll out this opportunity. This may entail doing calculations such as the costs associated with it, whether the business can afford the opportunity and what the potential return on the investment could be. The business must be organised and have a solid plan in place before actually taking advantage of a new opportunity. This is followed by being quick – but still not cutting corners. We have already mentioned how competitive and fast paced the market is. However, it is also important to not rush a business to roll out a new product or service before everything has been properly prepared and planned for. Rushing to make something happen could result in wrong decisions or a poor-quality service or product. There are even some instances where cutting corners can result in legal issues if the due diligence is not followed, and rules or regulations are broken in the company’s haste (Medal, 2019).

Once the business has established that it is the right timing, and that all necessary quality checks have been done, it is time to round up a team. As an entrepreneur, the execution of a new project can seldom be done alone. There are restraints placed on an individual, both in terms of how much responsibility one person can take and how much time one person has, but also the skills an individual has. For example, an entrepreneur might have an idea for something like the manufacturing of custom-made furniture, but may not personally have the skills to produce the goods. In such a case, a skilled employee will be hired to fulfil this role. With this, it is important to have a team who has the same vision and the same goals as the entrepreneur. They need to be committed, focused and just as passionate about the project as the entrepreneur is. The final step in this process is the actual execution of the identified opportunity. Medal (2019) states that not all businesses will execute something in the same way; some may do it slower than others, and each business may have a different approach to execution. It is at the discretion of the entrepreneur to decide what the best way to execute is. Which tasks will be completed first, and what the main priorities of the project to begin with, will need to be decided upon beforehand. 439 GROWING THE BUSINESS (Million Pound Menu – selecting opportunities and investors) EXAMPLE 12 I A great example of how to select opportunities, and how to decide whether to invest in a project, can be seen on the popular Netfl ix show, Million Pound Menu. The premise of this show is that small business owners or entrepreneurs with nothing more than an idea for a business can submit a business plan, along with their fi nancial situation, to a board

of investors. The investors will then analyse all the submitted business proposals, and decide on which opportunities are most appealing. The selected entrepreneurs will be given a small pop-up restaurant space for three days to trial their idea. They will be given the opportunity to serve the public, and the investors will come to the pop-up, sample the food, and assess whether the concept can be implemented on a larger scale. The investors assess the fi nancial feasibility of the concept, the expected returns, whether they feel the brand is appealing, whether it off ers something special and unique, and whether they feel it has a place in the market. Once the investors have seen the pop-up, sampled the food and met with the entrepreneurs, they are able to establish whether they feel the brand is worth investing in or not. It is fascinating to see how seriously they think about investing their money. This provides insight into the level of thought that should be done before an opportunity can be selected. This show also highlights that not all opportunities that present themselves are worth investing in. There is a great deal of research that needs to go into assessing whether an opportunity is worth investing in or not. 12.6 MAINTAINING COMPANY CULTURE Company culture refers to the way in which employees perceive the organisation, and generally accepted behaviours within the organisation (Robbins and Judge, 2014: 275). It is also defi ned as the system of shared meanings held by members in an organisation, which diff erentiates it from another organisation. Robbins and Judge (2014: 275) identify seven characteristics that will shape the type of company culture an organisation has. These will all

exist to some extent within an organisation. These characteristics are as follows: 1. Innovation and risk taking: The extent to which employees are encouraged to be creative and take risks. 440

CHAPTER 12 2. Attention to detail: The level to which employees are expected to be precise and show great attention to detail. 3.

Outcome orientation: The degree to which management focuses on results and outcomes, rather than on the processes to arrive at the outcome. 4. People orientation: The extent to which management consider employees when making decisions. 5. Team orientation: The level to which work is organised to be completed in teams, rather than by individuals. 6. Aggressiveness: Whether a company’s employees are highly aggressive and competitive, or are more easy going. 7. Stability: Whether the focus of management is to maintain a set standard, or whether growth and change is encouraged. Van Nieuwenhuizen and Duke (2017: 133) define company culture as the ideas, customs, behaviours and beliefs of people within a business. Together, the beliefs, values and behaviours of employees, philosophies, values and actions of management, and roles, structures and technology in the organisation make up the organisation. By combining these three elements, it makes up the organisation’s culture, which includes shared experiences, sayings, feelings and language (Van Nieuwenhuizen and Duke, 2017: 133). This is illustrated in the following figure. This clearly demonstrates that the individual employee’s style of management and organisational factors ultimately dictate what an organisation’s company culture will be.

(Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Van Nieuwenhuizen and Duke, 2017: 133) Figure 12.5: Influences on company culture 441 GROWING THE BUSINESS Within the organisation, culture occupies a variety of diff erent functions. Robbins and Judge (2014: 277) state that it gives the members of the organisation an identity, and clarifi es what is expected from them at work. It enhances the stability of the organisation, as all employees eff ectively know they are working toward a common goal. These authors also mention that it drives commitment within employees. They feel as if they are part of something bigger than themselves. Overall, company culture is primarily responsible for establishing a particular working climate that may be fun, lighthearted, more serious, competitive, supportive and highly creative – whatever best suits the company. Now, having highlighted the crucial role of company culture, it is important for entrepreneurs to ensure that, as a company grows, any shift in the company culture is not too drastic – particularly if the company culture the business started out with was particularly successful and resulted in close-knit employees. Occasionally, when businesses start out small, they may be very fl exible and laid-back in nature and, as they grow, become more formal and rigid. This shift in culture may prove to be particularly challenging for the employees who started out with the company at its inception. While it is necessary for a company to grow, develop and change, it is important that company culture (especially when it started out very good and very strong) is maintained. The failure to do so may result in the loss of great employees who helped the business to achieve success. Maintaining company culture may prove to be especially challenging when a business chooses to grow via the option of going through a

merger/acquisition. In this instance, two or more completely diff erent companies may come together, each with their own separate set of experiences, meanings and ideas. These two company cultures – instead of being complementary – may actually be polar opposites! This can be frustrating and disheartening for employees who have been with the original company for a long time. Let’s discuss an example of a merger where corporate culture was not considered, and resulted in signifi cant resistance to the change among employees. Often, change is both unavoidable and essential for organisations. Van Nieuwenhuizen and Duke (2017: 128) state that change may be the only option available in the following scenarios: • There is a decline in organisational profi tability. • There is a desire to grow and set the correct structures in place for the growth. • Competition forces the business to change, so as to remain relevant. • Technological, legal or social environment changes and advancement force the business change accordingly. These reasons for change are all valid; however, the entrepreneur should keep their employees in mind, and do everything possible to ensure that change does not result in signifi cant disruptions to company culture. 442 CHAPTER 12 ACTIVITY 12B

Read the following case study and answer the questions that follow. A few years ago, a group of well-known academic institutions made the decision to merge into one comprehensive university. This was done because there were four separate institutions all competing for the same groups of students in the same geographical area, which seemed to make no sense. Based on this, the institutions agreed to meet, in order to discuss the possibility of a merger moving forward. This was challenging, however, as they were four separate institutions that all had entirely different approaches to teaching, learning and research. The salary structures across the organisation, as well as how pay increases and performance were measured, were also completely different. Additionally, the workplace cultures of the different institutions clashed in a number of ways. When the employees across the institutions heard about the looming change, this was met by both panic and resistance. Part of the problem was that employees felt helpless to stop the change from happening. Employees were worried about how this would affect them, because, naturally, a large number of retrenchments would occur as a result of overlaps between positions across the separate institutions. Faithful employees were faced with the reality of potentially being retrenched, which resulted in them feeling bitter and adopting the mentality that they were no longer going to keep giving of their best, if they were likely going to lose their job in any case. A task team was formed to attempt to handle the difficulties that were likely to surface; however, the employees still felt that their interests were not being fully represented. Once the change was implemented, the task team continually measured how successful the change had been, and monitored the operation of new systems and policies, as well as the satisfaction of staff. In spite of this, a number of employees still felt that the cultures of each institution were too vastly different, and that they could not be seamlessly amalgamated into one comprehensive university. This

resulted in high levels of office politics and employee turnover. Employees did not enjoy that the institution took bits and pieces from the company culture of each institution, rather than attempting to develop a new company culture with new policies and procedures that could potentially benefit all employees. Required: (i) Provide suggestions for how the institutions could have better handled the change. (ii) Briefly explain the reasoning behind the change. (iii) Discuss how a clash between different organisational cultures be addressed. 443 GROWING THE BUSINESS 12.7 FROM ENTREPRENEUR TO CHIEF EXECUTIVE OFFICER (CEO) Generally, most businesses start with an entrepreneur – the person with the idea behind the business. They are the passion and the creativity behind the plan, and the one who brings something that is just an idea to life. Should the business gain momentum and grow increasingly successful, this individual may fi nd that their role within the business drastically changes over time. They are no longer merely the passion and the brains behind the operation. They are now in charge of making strategic decisions and being the boss of all the employees in the company. With these changes comes an immense load of

responsibility. This may come as quite a surprise to the creative soul who was once labelled ‘entrepreneur’, and is now the CEO. 12.7.1 Entrepreneur vs. CEO Tribby (2014) describes an entrepreneur as the person who sees the opportunity in the market place, and then makes a plan to start a business undertaking. In the beginning, the entrepreneur is the person who is managing the business and receiving all the profi ts. Green (2017) elaborates further, and says that entrepreneurs are individuals who wake up every day, ready to take new risks. On the other hand, the CEO is the person who sets up all fi nancial statements, implements the business’s vision and mission statement, provides guidance and advice, evaluates organisational success, and maintains awareness of both the internal and external environments (Tribby, 2014). From these two defi nitions, the key diff erence between an entrepreneur and CEO is clear: Entrepreneurs are the passion, the brains, the risk takers and the creativity behind a concept. A CEO, on the other hand, is less focused on taking risks and more focused on managing risks. Green (2017) highlights that the key diff erence boils down to a fundamentally diff erent approach to the running of the business. The CEO relies on reasoning, logic and a set of strong business and managerial skills, while the entrepreneur relies on their passion and vision. Moreover, Green (2017) states that entrepreneurs think about how to shake up their industry and come up with new and fresh ideas, while CEOs think more along the lines of how to meet targets, stick within the budget, and generally will be answerable to investors and a managing board.

Tribby (2014) notes that, unfortunately, it is quite common that an entrepreneur cannot also eventually go on to being a CEO. As these are both two completely diff erent mindsets, it is rather rare for the entrepreneur of a company to be able to step up into the role of CEO later on. It is not impossible for this to be the case, but is relatively rare. It is for this reason that, occasionally, as the business grows, the entrepreneur may eventually need to hire a CEO. 444 CHAPTER 12 12.7.2 Identifying the required skills It has previously been highlighted that, as a business grows, the business processes will need to become more formalised. This extends to the hiring process as well. In order for the business to be successful, the right talent needs to be brought into the organisation. By having the right employees at the right time, who are committed and giving of their absolute best, this could become an integral part of the organisation’s competitive advantage. A competitive advantage relates to something that the business does better than their competitors, and something that gives them a competitive edge. It is something that cannot be copied easily by competitors. Having incredible employees who are skilled and knowledgeable is the ultimate competitive advantage, as this is one of the things that competitors cannot copy, as each organisation will have a unique mix of talent. To best identify the required skills within a business, the business owner should make use of a formal job analysis process. Phillips and Gully (2015: 106) define job analysis as the systematic process of identifying and describing important aspects of a job, and the traits that an individual will need to perform the job well. Phillips and Gully (2015: 106) state that carrying out this process assists the business owner in:

• determining job entry requirements; • developing a strategic recruiting plan; • selecting the best individuals for employment; • developing employee training plans; • designing accurate employee compensation systems; and • developing systems for measuring employee performance. The process of job analysis leads to the development of a job description and a person specification. A job description focuses only on the aspects of the job (in particular, the tasks, duties and responsibilities that a job entails), while the person specification focuses on the person who will occupy the job, and the necessary skills, experience, qualifications and knowledge that are required for the job. Overall, this makes the talent requirements for various jobs in the company clearer, and it makes the recruitment process more structured with a clearer goal in mind. The bottom line is that, by introducing this formalised process, the best talent can be brought into the business. 12.7.3 Working on the business As the business grows, there is a greater need to consistently keep in touch with the clients’ needs, keep up to date with the market, turn clients into loyal customers and remain technologically relevant. It is frequently said that the only constant is change. It is up to the business owner to keep this in mind, and consistently strive for improvement. The business should also constantly focus on the way in which it is marketing and advertising to existing clients, and how it is bringing in new ones. 445

GROWING THE BUSINESS Finally, the business owner should also give due attention to managing the fi nances and the budget of a business. The expenses, cash fl ow and profi ts within the business should be monitored closely. 12.7.4 Working with a management team It has previously been highlighted that a business owner cannot operate alone and fulfi l every single role within the company. It is essential that they have a team that they share the responsibility with. Robbins and Judge (2014: 175) defi ne work teams as groups of employees who generate a positive synergy through a coordinated eff ort. This results in a level of performance that is higher than what could be achieved alone. The work team comes together to pool ideas and resources, make decisions, share responsibilities and get

creative. This provides a layer of support that an entrepreneur otherwise would not have had. In order for teams to be most successful, certain factors should be considered, according to Robbins and Judge (2014: 178). These factors include: • the team context; • composition; and • team processes. These factors, along with their subcomponents, are shown in the following fi gure. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Robbins and Judge, 2014: 178) Figure 12.6: Factors influencing team effectiveness 446 CHAPTER 12 Team context refers to the factors needed to support the optimal functioning of the team. These include adequate resources, great leadership, and trust between team members and leaders. The composition of the team refers to the characteristics of team members. These include the abilities of the team members, their personalities, their flexibility, and the size of the team. The abilities of team members should complement one another, and the personalities of the members should mix well together. The management team should also not be too large. This is because the bigger the team, the more difficult it becomes to make decisions together, as there are more opinions to consider. Finally, the role of each member within the management team should be clearly defined, so as to ensure that there is clarity surrounding who is responsible for what.

In order to maximise team effectiveness, team processes should also be clearly structured. The team should have a common purpose they are working toward, specific goals they are all aiming for, and conflicts should be kept to a minimum. In managing all of these factors, the management team can produce outstanding results for the business. 12.7.5 Taking a step back Taking a step back can be done in two ways: 1. Stepping back and allowing employees to take over the reins. 2. Stepping back and taking a more holistic view of the business. We have already discussed the former in terms of not micromanaging staff and delegating to employees. Let’s move on to the next option of having a more holistic view of the business. Adam (2017) states that, all too often, businesses are focused on just one issue within a business, and tend to look for a quick fix for that problem. However, this is not a sustainable approach to business in the long term. Instead, the business should be viewed as a complete and holistic entity, rather than separate parts. The business and its success should be analysed as a whole, rather than by focusing on small sections in the business. After all, a business is only as successful as the sum total of its parts. Once the business has reached a particular stage, the entrepreneur should no longer be focusing on individual elements of the business, but instead, be focusing on the business as a whole, and thinking more strategically about the decisions that will better the business as a whole.

The entrepreneur, in time, should reach a point where the daily operations are managed by various other team members. Instead, they are often more focused on strategic decisions that impact the overall function of the business. The bigger picture should be their focus, rather than fixating on the smaller details that can easily be delegated. 447 GROWING THE BUSINESS ACTIVITY 12C (i) Explain the diff erence between an entrepreneur and a CEO. (ii) Discuss whether all entrepreneurs can be called CEOs. (iii) Name and discuss any two factors that infl uence team eff ectiveness. 12.8 SUMMARY This chapter has elaborated on the diff erence between start-ups and growing businesses, as well as described the risks of rapid growth for a business. It has compared and contrasted organic business growth, growth via debt and growth via investors, and relative advantages and disadvantages of each. The value of formalising business processes, the importance and value of autonomy, and sharing responsibility has also been expanded on. The impact of change on company culture, the contrasting roles of an entrepreneur and a CEO, and the importance of a management team have all been discussed.

448 CHAPTER 13 ONLINE START-UPS 13 13.1 Introduction 450 13.2 Life lessons 451 13.3 The emergence of technopreneurs 452 13.4 What is a tech start-up? 454 13.4.1 | Characteristics 455 13.5 Online vs. traditional businesses 456 13.5.1 | Advantages and disadvantages 459 13.6 Business models, methods and concepts 460

13.6.1 | Free, paid and freemium e-commerce approaches 460 13.6.2 | Crowdsourcing and crowdfunding 461 13.6.3 | Apps, services and software 463 13.6.4 | Incubators 467 13.6.5 | Angel investors 468 13.6.6 | Pivoting 469 13.6.7 | Exit strategies 471 13.7 High risk, high return of online start-ups 473 13.8 Summary 477 449 ONLINE START-UPS Online start-ups

Case studies – myths, leaders and inspiration Boring Growing but the business Making important it run stuff smoothly Building a It is in the team numbers Cash is king Developing

Selling products Spreading and the word Getting out of Forming a services What is the starting business entrepreblocks neurship? 13.1 INTRODUCTION The 21st century is marked by increasing reliance on new and cutting-edge technologies in both business and daily life. Entrepreneurs continue to fi nd ways to deploy research and technology, and create businesses that revolutionise the way we do things, seemingly overnight. Some companies that began as small technology (tech) start-ups, like Facebook, Google and Amazon, have become some of the most powerful companies in the world. In terms of online businesses, lower operating costs have allowed for rapid innovation and growth for new start-ups (Murray, 2011). This chapter will focus on the concept of technopreneurship, named after a combination of its two core aspects: technology and entrepreneurship. Simply, a technopreneur is someone who starts a business with a focus on new and advanced technology, usually computers. In the strictest sense of the word, a technopreneur is an entrepreneur involved with high technology ( Merriam-Webster, n.d.). ‘High technology’ is a broad term used to refer to cutting-edge and complex uses of technology, from online-only businesses to even more technical areas, such as solar energy, robotics, drones, facial

recognition, 3D-printing, supercomputers, powerful and compact satellites, advanced health sensors and more (Magee, 2019; and Newman, 2018). Clearly, a technopreneur is more than simply an entrepreneur, but rather, someone whose business is focused on innovative developments, particularly within the technological and electronic sphere. Another characteristic of a technopreneur is the ability to develop innovative technology that will improve the lives of people, simplify everyday activities or solve complex problems. In the context of this textbook, technopreneurship has a wide variety of meanings, ranging from low technology to high technology. Since this chapter will discuss a wide range of concepts, we need to fi nd a generic defi nition for the word ‘technopreneurship’. Therefore, we will consider 450 CHAPTER 13 technopreneurship to be the use of knowledge and application of different types of technology, in order to create a range of computerbased or technology-based products and services. After studying this chapter, you should be able to: • discuss the emergence of technopreneurs and provide relevant examples; • describe the characteristics of a tech start-up; • compare and contrast traditional businesses and online businesses, with reference to the advantages and disadvantages of both types of business; • discuss current trends in online business in terms of business models, methods and concepts; and • assess a hypothetical online business in terms of risk and return. 13.2 LIFE LESSONS

Today, it feels like technology is everywhere. The rapid changes we have seen in computers, smartphones and the Internet seem set to continue into the foreseeable future. When you think of a technopreneur, pioneers like Steve Jobs, Bill Gates and Mark Zuckerberg may spring to mind. This may make it seem like technopreneurship is a new development that took off in the late 20th century and early 21st century. However, as long as people have been gathering knowledge about the world, entrepreneurs have sought to use technology to solve needs, improve daily lives, and start successful organisations. Let’s look at a few examples throughout history, where technology was applied to solve real-life needs. It would be impossible to list every major inventor and invention. Therefore, the following list has focused on a handful of inventions that have met key needs and display elements of technopreneurship, regardless of when they were invented and when they operated: • Heron (or Hero) of Alexandria, who lived from 10 to 85 CE, applied his knowledge of business, hydraulics and pneumatics to create numerous inventions, such as the first coin-operated ‘vending machine’ (which supplied water), and machines for lifting and moving heavy objects, such as statues for ancient Greek temples (Papadopoulos, 2007). • Cai Lun, a court official in China from around 62 to 121 CE, is credited with inventing paper from bark, kelp, rags and fishnets, a design that earned him honour, and a title from the emperor ( Encyclopedia Britannica, n.d.). His cheap, reliable invention spread quickly across China, and eventually the world. • In 1886, Josephine Cochrane patented her design for a mechanical dishwasher, which went on to become the first commercially successful one of its kind ( Lemelson-MIT, n.d.). In an attempt to escape debt left by her late husband, Cochrane set about creating a

machine to wash dishes effectively and without damaging them, meeting a need for herself and many other people. • In the early 2000s, a team of developers in Kenya, working for Vodacom’s partner Safaricom, created the mobile banking and mobile-financing platform, M-Pesa. The platform was created as a way to meet the crucial needs of people who worked far from home, and needed a way 451 ONLINE START-UPS to easily and cheaply transfer money to their families (Joseph, 2017). M-Pesa, launched in 2007, allows users to transfer money from one cell phone to another via SMS, at very low transaction costs. The platform made a dramatic impact on the Kenyan economy, helping to alleviate poverty in many cases (Joseph, 2017). • In order to allow modern South Africans to transact without carrying cash or bank cards, Cape Town entrepreneurs formed FlickPay in 2015, aimed at urban youth who wanted an effi cient and fast way to make purchases, with the assurance of security (Van der Berg, 2014). What we can take from these few examples is the importance of understanding technology, and applying it in a way that improves the lives of or meets the needs of people, and is also accessible and profi table. As we move further into the Digital Age, it is as important as ever to look for new ways to use technology for the benefi t of both people and the environment. Digitalisation increases opportunities to connect with one another, and to deploy new technologies and knowledge to solve more problems. Furthermore, as technologies become more complex and sophisticated, they allow us to tackle more complicated issues and to collaborate across national borders. One disadvantage is the impact that digital transformation will have on employment rates. As machines become both more complex and more aff ordable, it is likely that unemployment in many sectors may increase in the face of a looming machine era.

Let’s consider the following guidelines for how you can be innovative in a profi table manner (Jamaledine, 2018): • Identify and understand the problem that you are trying to solve. The best way to understand the problem or address the need of society is to put yourself in the shoes of the customer or the user of your invention. This way, you are able to understand the situation and compile necessary solutions to the problem or need. • Come up with as many ideas as possible that could potentially address the identifi ed problem or need. It is important to know that there is no right or wrong answer. • Take the best idea and transform it into a functional sample or prototype. You will need this prototype in order to approach investors and buyers. In addition to this, establishing good connections with buyers and investors is important. Give them something to test and play with. This will create a desire and make the audience inquisitive. • Evaluate and refi ne your creation. Take the feedback that you have received from engaging with the public and use it to make your product better. This stage should provide a functional solution to the problem or need identifi ed in the beginning. 13.3 THE EMERGENCE OF TECHNOPRENEURS Defi ning technology As discussed, while it may seem that technopreneurship is a relatively recent trend, in reality, there have been entrepreneurs throughout history who used the latest technologies of their time. The very defi nition of the word ‘technology’ suggests that technopreneurship has been ongoing for centuries. 452 CHAPTER 13

Oxford Dictionaries 1 (n.d.) offers three related meanings for the word ‘technology’: 1. ‘The application of scientific knowledge for practical purposes, especially in industry’. 2. ‘Machinery and equipment developed from the application of scientific knowledge’. 3. ‘The branch of knowledge dealing with engineering or applied sciences’. From these definitions, it becomes clear that technology refers to the application of knowledge and to the devices that result from this application of knowledge. Specifically, technology refers to using knowledge, scientific study, engineering and design principles to solve specific practical problems. Technology solutions are intended to improve lives, create more efficient work (such as automation) and, in today’s context, provide solutions that do not harm the environment. Since technology is about the practical application of knowledge, technopreneurship is about the ability to transform any technology into a viable business opportunity. There are many types of technopreneurship, some of which are discussed in the following table. Resultant Technology Questions that led to a form of technopreneurship technopreneurship

Online banking and • Do people really need banks? • PayPal payments • What happens if a person does not have access • M-Pesa to a bank? • FlickPay • How can the bank come to the people? • TransferWise • How can people do banking transactions anywhere, without having to go to a bank? Space travel • Why is it so expensive to send cargo to the • SpaceX International Space Station? • Why can rockets be used only once? • How could we reduce the cost of space transport, to allow smaller countries or private companies to launch satellites? Fossil fuel transport • Why do we keep using fossil fuels (petrol, diesel • Tesla, Inc. systems etc.) that cause pollution and global warming?

• Magnetic levitation • What if there is a system that does not use fossil trains fuels at all? • Electric busses • What other advantages could come from • Solar-powered alternative fuels in cars? vehicles • Vehicles that use hydrogen as fuel (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 13.1: Examples of business opportunities in technology Why do we use a specific term for this technological entrepreneurship? The following section will briefly discuss both the similarities and the differences between entrepreneurship and technopreneurship. 453 ONLINE START-UPS The similarities and diff erences between entrepreneurship and technopreneurship Let’s begin by outlining the general features of entrepreneurship. Entrepreneurs focus on identifying a need that presents an opportunity, then build or develop a product to meet this need, navigate the associated risks, and deliver the fi nal product to the right market ( Arkansas Money & Politics, n.d.). What sets a technopreneur apart, therefore, is their fundamental approach, which focuses on using their specifi c technological tools and skills to solve problems and meet needs. In many cases, technopreneurship can be

described as developing ‘solutions in search of problems’ (Venkataraman and Sarasvathy, 2001: 9). In other words, many technopreneurs look for problems or gaps in the market that their already-developed technology, or partially-developed technology, could be applied to. In these cases, technopreneurs pivot (change direction) toward solving problems when they are identifi ed. While entrepreneurs can come from many diff erent backgrounds, technopreneurs tend to be designers, scientists or engineers who wish to use their technological know-how to meet demands, and thereby launch a new business (Bailetti, 2012: 9). Another key feature is that technopreneurial activities focus more on a shared view of likely technological developments, rather than generally looking for any opening in the marketplace (Bailetti, 2012: 10). In other words, there can be diff erent drivers for a technopreneur and an entrepreneur. ACTIVITY 13A Indicate whether the following statements are true or false. (If false, substantiate your answer.) (i) The word ‘technopreneur’ comes from the words ‘technology’ and ‘entrepreneur’. (ii) Technological entrepreneurs are unique to the 20th and 21st centuries. (iii) Technopreneurs diff er from entrepreneurs in that they fundamentally focus on using technology to solve problems. (iv) Technopreneurs and entrepreneurs both identify problems fi rst, and then build solutions.

(v) Technopreneurs do not require their technology to be profi table. 13.4 WHAT IS A TECH START-UP? A tech start-up can be defi ned as any enterprise that uses technology as the main enabler to create products and services. Tech start-ups do not only focus on what could be done with computers, but also focus on new approaches to engineering, industrial design, architecture, medical sciences, business support systems, and many other business ideas or business solutions in which technology plays a major role. In other words, a tech start-up is the kind of business started by a technopreneur. 454 CHAPTER 13 13.4.1 Characteristics The characteristics of a tech start-up are listed in the following figure. There must be a market need for a technology • The technology must fit the market’s needs when it is created. • The technology must be innovative and different from any competitors. There must be entrepreneurial passion • The entrepreneur must believe in the usefulness of their technology. • Passion attracts investors and fosters dynamic workplace environments. There must be necessary experience

• The entrepreneur must understand and have experience with technology. • The entrepreneur should understand the industry and how to start a business. The business must aim for rapid growth • In tech, rapid growth shows investors that a product is successful and dynamic. • Continuous growth should be built upon initial rapid growth for future success. Intellectual property (IP) must be protected • Technology is driven by innovative ideas, which must be protected. IP includes the design, product, features, service and prototype, after an idea is made tangible. (Source: EDGE Learning Media (Pty) Ltd, 2019; adapted from World Intellectual Property Organization, n.d.) Figure 13.1: Core characteristics of a successful tech start-up Kalinkin (2015) provides the following advice regarding tech start-ups: • Timing is essential: If a technology cannot be launched rapidly, opportunities can be lost. This means that the technopreneur has to work long hours, often sacrificing time for family and friends to make a technology idea work. • Money: Tech start-ups are not cheap. Unless the technopreneur has both the technical and business expertise required to design, create and launch a product or service, other experts will have to join the team, in order to ensure that a high-quality product/service can be produced. • Market needs: It is important to be familiar with industry and customer needs, to prevent wasting vast amounts of money on

developing a product or service that nobody will want. The following characteristics are also associated with entrepreneurship: • Hi-tech enterprises require sophisticated tools and equipment. Luckily, there are a number of innovation and technology transfer hubs that can help to move an idea on to design, prototype and early production versions. 455 ONLINE START-UPS • Time is essential. Avoid spending too much time on making meaningless and cosmetic changes to an idea. Innovation hubs and techno parks have experts on hand who can provide valuable design insights at reasonable costs. • Obey the three-year rule. In other words, if a product could not move from idea to production in three years or less, fi nd ways to improve on the idea, so that you can move into a commercialisation phase within three years. The tech industry requires start-ups to be able to move quickly, and this is why many follow a lean model, as a way to get their product out into the market as quickly as possible. • Avoid trying to pursue impossible ideas, like miracle drugs, and focus on tangible projects that can meet specifi c and stringent regulatory standards. • Be ready to produce a basic prototype that could be demonstrated to potential investors. ACTIVITY 13B (i) List fi ve requirements of a tech start-up.

(ii) Briefl y explain the importance of the ‘three-year rule’. (iii) Briefl y explain why a tech start-up often requires a team of experts. (iv) Explain the importance of protecting IP for a tech start-up. 13.5 ONLINE VS. TRADITIONAL BUSINESSES We have seen that there is more to a tech start-up than running a small e-commerce enterprise. For this reason, this section will focus not only on e-commerce, but also on classifying enterprises based on their use of technology to create goods or services, and operate their businesses. Quick business classifi cation For the purposes of this section, we will diff erentiate between at least three types of businesses, namely: non-technology businesses, lowtechnology businesses and high-technology businesses. The following table describes the characteristics of the three types of businesses. Remember that this classifi cation is only based on the level of technology used in a business. Type of business (based on Main characteristic (with examples) technology usage) Non-technology businesses • No use of technology at all

• All processes are done manually • All goods that are manufactured are made by hand • Direct sales channel – buyer and seller meet face-to-face • Communication between buyer and seller is verbal or paper-based (mailed or hand-delivered letters) Examples: Informal traders, very small businesses and rural businesses that have no access to any technology 456 CHAPTER 13 Low-technology businesses • Basic forms of technology are used • Some processes make use of technology • Some goods are made with machines • Some technology-based sales channels (such as an e-commerce website) exist alongside direct sales channels • Some communication makes use of basic technology, such as email, fax, SMS and phones Example: The majority of businesses in South Africa that have access to basic phone services, electricity and Internet High-technology businesses • Use advanced forms of technology • All processes are automated and driven by technology

• All goods are manufactured using technology (robots, complex machines etc.) • Majority of sales channels are driven by technology • Majority of communication is driven by technology • Advanced knowledge of engineering and other sciences is required to create products or services Examples: KLAZ Robotics, FANUC, Denel Dynamics, Axxess, redPanda Software and Afrihost. (Source: EDGE Learning Media (Pty) Ltd, 2018) Table 13.2: Categories of technology businesses There is a heated debate regarding whether traditional ‘brick-andmortar’ businesses are outdated, and whether e-commerce will eventually be the only way that business is done. In the following section, we will briefly discuss the concepts of e-commerce and ‘brick-and-mortar’ businesses. Understanding e-commerce E-commerce refers to the use of the Internet to conduct business. In the narrowest sense, e-commerce refers to a business that creates a website through which customers can order goods or services. An ecommerce website works like an electronic or online catalogue; it lists all the products on offer, along with their prices, and the company’s terms and conditions. The website will usually also provide an option to pay online or to contact the company itself. While e-commerce businesses may have physical buildings, like offices or warehouses, customers almost never visit those areas. In today’s world, we can buy almost everything through an ecommerce business. Such a business need not even be in your own town or in your own country. Many South Africans buy goods from,

and use services of, e-commerce sites such as Amazon.com, Shopify, Takealot.com and Airbnb. Buying from an e-commerce store obviously requires that the buyer: • have some form of Internet connection; 457 ONLINE START-UPS • is able to see images of the products on off er, or read descriptions of the services off ered by the seller; and • has the means to pay for the goods and services, via credit card or debit card enabled for e-commerce, or electronic funds transfer (EFT). After the buyer has paid in full for the goods or services on off er, the seller will start a process of preparing the goods, and shipping them to the buyer (usually using a courier service). Comparing e-commerce to brick-and-mortar businesses Unlike ecommerce, where most business is done via the Internet, brick-andmortar businesses operate from a physical address that customers can visit if they so wish. The following table lists the six key diff erences between e-commerce and brick-and-mortar businesses (Johansson, n.d.). Characteristic E-commerce Brick-and-mortar 1. Location A business does not need a physical The business has a physical address that place to sell goods or services. The customers must visit

to view, order and goods can be viewed, ordered and buy goods. paid for remotely. 2. Sales Makes use of card payments or EFT Customers can pay with cash, cheques, transactions payments. cards or EFT while in the store. 3. Channel There is more than one channel There are limited channels available, fl exibility through which customers can buy as customers have to visit the store to goods or services (omnichannel). transact. 4. Marketing The business has the option of These businesses make use of mainly using a combination of advertising traditional advertising. If digital advertising methods, but focuses mainly on is used, customers cannot ‘click through’ to digital media, social media and other transact. ‘non-traditional’ forms of advertising. 5. Customer Customers do not care about personal Customers need personal interaction and attention

attention. They want to be able to get guidance, in order to make a decision. their goods or services immediately. 6. Operating There is no need to maintain large These businesses bear the cost of paying expenses infrastructure, which allows these for immoveable property (buildings). businesses to provide best-cost This expense increases if more than one advantages to customers. On the store is opened. Infrastructure could other hand, there could be additional be expensive, but there is cost-saving costs, such as shipping, hosting in that customers often do not need fees and high costs associated with their purchases delivered. Even when customer recovery. purchases must be delivered, goods may not have to travel long distances to reach the customer. (Source: EDGE Learning Media (Pty) Ltd, 2019; adapted from Johansson, n.d.) Table 13.3: Differences between e-commerce and brick-and-mortar businesses 458 CHAPTER 13 13.5.1 Advantages and disadvantages E-commerce and brick-and-mortar enterprises all have specific advantages and disadvantages to consider. However, this does not mean that one enterprise type is better than the other. The decision of which type to choose is dictated by the specific strategic goals of the business owner.

The following table lists some common advantages and disadvantages of the two types. E-commerce enterprises Brick-and-mortar enterprises Advantages • Able to reach customers over a wide • Some customers prefer faceto-face area contact when doing business • No need for the overheads of office • The business has a physical address rent and presence so that customers • Customers can do business from know where to go when they have anywhere, at any time queries. • Many customers could buy items at • A physical address and presence the same time, without the hassle of adds credibility to the business queues • A physical presence, especially your • All marketing campaigns can be own building, assures customers

concentrated on the e-commerce that you have sufficient cash levels site, potentially saving on high to sustain your business marketing costs • Certain products, such as perishable • Potential customers can read the goods, fit better in a brick-andtestimonials of other customers and mortar model than other products develop confidence in what the (such as non-perishable goods) e-commerce site offers • Brick-and-mortar businesses signal that you intend to do business for a long time Disadvantages • Some customers do not trust • Renting brick-andmortar space e-commerce sites; they still want to could be expensive do business on a face-to-face basis • Some locations of brick-and-mortar

• There is always a risk of somebody businesses could be in areas that hacking your e-commerce website customers view as unattractive, • Unless tested properly, e-commerce unsafe or inconvenient websites can crash when least • There could be high employee expected costs – especially when the business • Maintaining a backup site (to redirect has to maintain stock inventory in traffic when the main e-commerce warehouses or storerooms site crashes) could be costly • There are overhead costs to keep the • There is always a risk that products premises neat and tidy ordered might not be delivered to • Customers are limited by geography customers on time or at all, might – only those who are able to reach be incorrectly delivered, or might be

the store can buy from it damaged when delivered (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from GROW, 2017) Table 13.4: Advantages and disadvantages of ecommerce and brick-and-mortar businesses 459 ONLINE START-UPS ACTIVITY 13C (i) List the three categories of businesses, based on their level of technology use. (i ) In your own words, diff erentiate between e-commerce and brick-andmortar businesses. (iii) Consider the following scenario: Lindiwe runs a blog about running. This led her to come up with a business idea, selling a range of custom-designed running shoes and other fi tness equipment. She then starts selling her products from her home, to clients recommended by friends and family. The majority of her sales have been to older people. However, she wants sell on a larger scale, to people all over South Africa. Required: In a paragraph, make a recommendation about whether Lindiwe should start an e-commerce business or a brick-and-mortar business. (iv)

Some business models consist of a combination of an e-commerce store and a brick-and-mortar store. Provide one advantage and one disadvantage of a combination of the two models. 13.6 BUSINESS MODELS, METHODS AND CONCEPTS For technopreneurs, there are many diff erent business models and methods to consider. Some technopreneurs may use one specifi c model, while others may use a combination of models to achieve their goals. You will learn more about business models, methods and other concepts in this section. 13.6.1 Free, paid and freemium e-commerce approaches Techno enterprises could be built on one of three main approaches, as follows: 1. Free techno enterprises: These off er products for free, and derive income from two main sources, namely donations from users, and selling advertising space on their website or other platforms. Facebook and YouTube are two clear examples of free techno enterprises. There are no sign-up fees or subscriptions that limit use of these platforms. Instead, adverts are placed in a number of areas on the web page or app. Both of these companies make their money through this advertising. 2. Paid techno enterprises: These off er products and services to anyone; however, customers must pay a basic fee to use the service. E-commerce sites, like Takealot.com or Amazon. com, host products that users pay for, and also charge a fee to vendors who sell on the website. Microsoft requires that users pay a monthly or yearly subscription fee for their Offi ce Suite. One of the key characteristics of many paid techno enterprises is that you can

view their off erings, but that you have to register as a user and submit payments to 460 CHAPTER 13 them before you can make use of their services. For example, Computicket allows you to view details of concerts, shows and other events on their website; however, to buy a ticket to those events, you need to register and submit your bank card details to them. Some academic websites, such as Elsevier, will show you a summary of an article; but, if you want to read the article, you need to buy the article from them. 3. Freemium techno enterprises: This is a hybrid of the first two approaches. In other words, some functions or features on an ecommerce site are available for use, but other functions must be paid for. An e-commerce site such as Podio offers additional functions to users, on condition that users pay a monthly or annual subscription fee. Most freemium techno enterprises provide what could be called ‘just-enough’ functionality. In other words, they provide basic functionality that a customer would use anyway, but specialist functions (such as the workflow component in Podio) are part of the premium service that users must pay for. 13.6.2 Crowdsourcing and crowdfunding Crowdsourcing and crowdfunding are two distinct concepts. The distinction between them can be better understood through the use of two ideas: micro-tasking (distributing small tasks among many people) and micro-funding (acquiring small amounts of funding from many people). Crowdsourcing is the tool that you would utilise if you were looking to ‘divide and conquer’ (Schweissguth, 2015). This entails engaging with a large group of individuals, in order to achieve a common goal. This is where the idea of ‘micro-tasking’ comes into the equation. One common task, or common objective, is

achieved through the combined efforts of a large group of individuals, who are able to contribute varying levels of knowledge and expertise. Crowdfunding is, essentially, a type of crowdsourcing, in that it entails approaching a large group of people in the attempt to raise funds for a particular cause. That is where the idea of ‘micro-funding’ comes into play, as each individual contributes a small amount of money that, in total, allows the business to achieve its objectives. Definition of crowdfunding While there are a number of ways to define crowdfunding, let’s discuss it as a broad concept. Crowdfunding is a method of gathering financing for a project or startup, by borrowing funding from a crowd of people, usually using the Internet or another platform where users can make small contributions that collectively enable unusual or innovative ideas to be funded ( Oxford Dictionaries 2 , n.d.; and USLegal, n.d.). Social media plays a key role in crowdfunding approaches, as communication and a community are vital in maintaining trust between the vast crowd of donors and the start-up that is expected to deliver on its promises and on the crowd’s investment. Considering this definition, the following characteristics are essential to crowdfunding (Van Nieuwenhuizen, 2012; and USLegal, n.d.): • There must be some form of trust between the entrepreneur and the investor. • Funding is obtained mainly in the form of pledges. • There can be different forms of counter-performance from the entrepreneur, in exchange for funding. • Investors can demand equity, interest or some form of dividend, in exchange for funding. 461

ONLINE START-UPS There are four categories of crowdfunding (Zeoli, 2014): 1. Donation-based crowdfunding: The public makes donations for a cause they support, without necessarily expecting anything directly in return. This makes it a good form of fundraising for non-profi t and charity work. 2. Rewards-based crowdfunding: People make contributions with an expectation of a reward for their support. These rewards are often tied to the amount of money given as a contribution – e.g. for a small donation, a coupon or discount may be off ered on the fi nal product, while a larger contribution may secure a limited or special edition version, or act as a signifi cantly cheaper pre-purchase. 3. Debt-based crowdfunding: The company looks to borrow money from the crowd, and the various people who contribute expect to be repaid, with interest, in a specifi c time frame. 4. Equity-based crowdfunding: The contributors receive some ownership in the company in exchange for their support, which means that the company or person running such a campaign is usually selling off shares in their company. Technopreneurs may elect to use one form of funding or a combination of all four, in order to acquire funds for their business. Crowdfunding Donation-based Rewards-based

Debt-based Equity-based crowdfunding crowdfunding crowdfunding crowdfunding Community crowdfunding Financial return crowdfunding (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Kirby and Worner, 2014) Figure 13.2: Forms of crowdfunding Benefi ts and risks of crowdfunding Crowdfunding as a method of acquiring resources and funding has a number of benefi ts and risks. Being aware of these benefi ts and risks is important when considering raising funding for any business venture. The following section will discuss these benefi ts and risks in more detail. The benefi ts of crowdfunding include the following (Johansson, 2018): • It is a fast and accessible way to raise money. • It allows you to reach a larger number of people; for example, via online searches. 462 CHAPTER 13

• It fosters a community and is therefore a source of feedback from your target market. • These investors do not take any control of the business from you. • It acts as an early form of promotion. The risks of crowdfunding include the following (Tysiac, 2014; and Johannson, 2018): • Not all projects or business ventures are accepted by crowdfunding platforms. • You need to meet the minimum ‘threshold’, in order to receive any funding at all. • Many platforms charge a fee on contributions raised. • There can be a lot of competition on these platforms, between countless start-ups looking for money. • If copyright or patent protection has not been secured, there is a high risk that your business concept could be copied, due to the public nature of crowdfunding. • As an investor, there is a high risk of fraud, meaning that there is always a concern surrounding the validity of a crowdfunding campaign. • There is a lack of transparency in terms of possible risks which, in many instances, are only disclosed to investors once they have already invested in the project. 13.6.3 Apps, services and software Smart devices, such as cell phones and tablets, have extensively revolutionised the e-commerce industry. Online shopping has become one of the main focuses of many e-commerce businesses, after statistics revealed that at least 70 per cent of consumers use

their smart devices to shop online (Zorzini, 2018). E-commerce businesses rely on digital technology and new technological advancements in order to help develop, differentiate and improve their businesses, and capitalise on the growth in online shopping. Three of these technological advancements are apps, services and software. Apps Developing apps to accommodate online shopping is now more of a necessity for all e-commerce businesses. Many apps can be used to improve efficiency, by targeting specific business tasks. Some examples of areas that new apps can augment include the following ( BlueSwitch, 2017): • Customer support / help desk: Customer support is an important part of both traditional and e-commerce businesses. Apps can streamline the process of online support; for example, by collecting support and inquiry tickets from customers, facilitating live chats with customers, or using a chatbot (an automated response system) to assist. This makes it easier for customers to contact the business, and can improve corporate image and reputation, thereby further developing customer loyalty. • Outsourcing: Many small businesses do not have the resources, or the skill set, to perform certain tasks. They solve this problem by outsourcing to independent contractors and freelancers. Apps and websites can streamline the process, provide accountability, and connect a business with freelancers from a wider pool of talent. • Finances and invoices: As we have seen in previous chapters, startups need to be keenly aware of their finances. Apps can make tracking and managing finances, receipts and expenses more 463 ONLINE START-UPS

eff ortless. These apps place all fi nancial information in one place, where it can be monitored and accessed from anywhere, in order to prevent fraud and facilitate easy transactions. • Building contact lists: Email and social media apps, as well as other aggregators, can help to send automated messages to customers and clients consistently. • Team collaboration: Many technology start-ups require coordinated teamwork. There are several apps that can help teams to work remotely, store documents and drafts in the cloud, communicate eff ectively and facilitate project management. • Organisation: As with collaboration, many project management apps help employees and entrepreneurs to track deadlines and project progress, often remotely or on their smartphones. Other areas in which apps can be valuable are sourcing funding from the public, performing analytics on websites and e-commerce sales, and social networking in order to build a brand and connect with consumers. These valuable apps can include social networking platforms like Facebook and Twitter, and analytics suites like Hootsuite and Google Analytics. Services As we have seen with apps, technopreneurs both use and off er online products and services. In other words, technological services can be considered in two ways: 1. Service utilisation: This category consists of all the services that are used by an e-commerce business, such as website hosting for an online shopping platform. 2. Service offerings: This category consists of all the services that are off ered by an e-commerce business, such as multiple payment options or automated suggestions.

Service utilisation One of the core services required by technology start-ups is website design. Not every team has an in-house designer who can create a professional and attractive website. In these cases, the start-up will require the services of website designers, to ensure that: • the website is easy to use, so that customers can fi nd whatever items or features they are looking for; • colour combinations, typography and other design elements are clear and easy to read, without clashing (i.e. all font is readable and there is harmony among colours); • the databases and information about each item or service are up to date; • the website is responsive (i.e. it is compatible or usable on desktops, laptops, tablets and mobile phones); • the website is virus free and all customer details are secure; • the branding (logos, menus, look and feel etc.) is consistent and communicates the brand identity; and • any e-commerce features comply with specifi c security requirements, as specifi ed by banks and aggregators. 464 CHAPTER 13 A well-designed website must also have the core functionality and programming required to provide the service. This is often done through purchasing plug-ins (pieces of computer code that can simply be ‘plugged in’ or made to work with any site) or additional functions. These can allow a business to link the website with their order entry system and a basic invoicing system.

This integration allows customers to order goods and receive an invoice immediately. Another integration to consider is linking the product catalogue to a price comparison plug-in, so that customers can compare your prices to other e-commerce sites. Hosting refers to the type of server or computer that will be used to run your e-commerce website. E-commerce websites are data-intensive, and a website that is slow or that crashes at high-traffic times could be disastrous. There are two main options to consider when hosting an e-commerce website: 1. Use your own computer as a host server: Setting up a computer as a host server could be complicated and expensive. Not only must your e-commerce website be protected against hackers, but all your databases need protection, too. 2. Use cloud computing and hosting services: There are some powerful e-commerce packages and services available that will host and protect your website and databases against hackers. This will avoid the initial cost of setting up your own host server, but will cost a monthly fee. Another key area of service utilisation is payment gateways, which are the systems that enable customers to make payments on a website. There are three main types of service providers: 1. Banks: Some banks offer card acquirer services (also known as merchant services). Signing up at a bank as an acquirer (someone who accepts debit cards or credit cards) can be costly, as banks work on a sliding-fee scale. For example, they could charge R 5.00 per transaction, if your monthly card payment volumes are less than 10 000. The more card payments you process per month, the lower your monthly fees. In addition, banks charge a monthly rental fee for their card machines. Businesses with low transaction volumes may find

that it is expensive to make use of the card payment systems offered by banks. 2. Aggregators: These are private companies that specialise in processing low-volume transactions for small to medium business enterprises. Aggregators sign up many small businesses with low transaction volumes. Because aggregators make money out of many batches of small transaction volumes, they generally offer lower rates than banks. However, businesses will still have to rent the card machines from the aggregators. 3. E-payment platforms: There are many companies (such as PayPal) that offer Internet-based payment systems on which customers can pay by card or via EFT from a cheque account or a savings account. Although e-payment platforms are freely available, each one has different rules on when and how money is paid over to the business owner. Some e-payment platforms are based offshore, and may only release funds to the business owner on a quarterly basis. Others may be based locally and release funds to the business owner on a more regular basis. Many e-payment platforms operate on the principle of net settlement. In other words, they deduct their fees before money is transferred to business owners. 465 ONLINE START-UPS When choosing a payment gateway and having a website designed and hosted, it is important to remember that e-commerce sites must comply with the specifi c requirements set by banks and e-payment platforms. Some of the requirements include, but are not limited to, the following: • All payment transactions must be encrypted and protected against hacking.

• Businesses must keep customer bank details private, and cannot display any customer account numbers in any way that could lead to fraud. • Acquirers and aggregators reserve the right to send transactions back if customers complain that they have not received goods or services. • The business must have a valid bank account against which payments and payment returns can be processed. • Acquirers and aggregators reserve the right to close payment facilities if they suspect that the business owner is defrauding customers. Service off erings Service off erings are what attract a customer to any business. Generating revenue should not be a business’s only objective. A business must determine what it is that a customer wants, and try and implement those services, in order to ensure longevity. These additional services are what set a business apart from its competition. An e-commerce business can off er its customers the following services (Ekstrom, 2016): • A platform to post reviews: Allowing customers to post reviews gives them a chance to make their voice heard, while potentially allowing the business to establish the good quality of their off erings through positive reviews and good interactions. Reviews can also guide future business decisions, as they provide a snapshot of what customers want. • Brand ambassadors: Loyal customers, especially those with a social media infl uence, can be given rewards in exchange for undertaking activities that promote the business. • Live chat: A system where customers can be put in touch with support, which can be either an automated artifi cial intelligence (AI),

called a chatbot, or a person from customer service, to provide support and reassurance. • Cart recovery: This service allows customers to recover their cart in the event that their checkout was unsuccessful, or where technical errors occurred. • Product suggestions: Online shoppers like options. Therefore, businesses can use programs to provide product suggestions to customers, based on their previous searches. • Payment options: Off ering a number of diff erent ways to pay, such as cash on delivery, enables customers without credit or cheque cards to make online purchases. This benefi ts both the customers and the business. • Delivery options: Providing customers with delivery and collection options for purchases and returns will entice them to shop more, as they will not have to leave their homes. 466 CHAPTER 13 Software There are three main classes of software with which e-commerce sites can be built: 1. Proprietary software: This is software that you or your team have built for exclusive use by your business. This type of software is owned by the people who built it, and cannot be used by anyone else. The advantage of proprietary software is that it provides a unique advantage over competitors. However, this type of software can be expensive to build – especially when quality software is essential to ensure that your ecommerce site will run smoothly.

2. Commercial software: This is software that can be bought from a software company, and can be used to build an e-commerce website. This type of software is high quality and allows you to set up an ecommerce website quickly. However, it may be expensive (though not as expensive as building your own), and may need some customisation to suit the specific needs of your business. 3. Open-source software: This is software that was built by groups of people, and is freely available for anyone to use. Most open-source software can be obtained free of charge, and can allow you to build your e-commerce site quickly. The main drawback of open-source software is that it may not be as user-friendly or rigorously designed. You may need to know a specific programming language or hire a programmer if you want to customise anything. 13.6.4 Incubators Defining the term ‘incubator’ An incubator is an enterprise or innovation support system, often funded by universities or private investors. An incubator gives young entrepreneurs access to expertise that can help to evaluate, design, build and commercialise ideas, as well as support for managing the fledgling business. For young entrepreneurs, there are two types of incubators to consider: 1. Business incubators: These aim to help young entrepreneurs to start and grow their business. 2. Innovation incubators: These aim to help innovators to move an idea through the design, prototyping, building and commercialisation

phases. Both types of incubators share the following common characteristics: • Incubators offer access to office space or manufacturing space. Initially, there is little to no cost of renting space at an incubator; however, as the business grows, rentals increase based on the entrepreneur’s turnover and affordability. 467 ONLINE START-UPS • Incubators provide advice and support to the entrepreneur, through which they are encouraged to continue growing the business. • Incubators provide networking opportunities, where entrepreneurs can connect with potential customers and suppliers. • Many incubators have expertise to help young entrepreneurs in securing fi nance for the business. • Incubators provide infrastructure such as reception services, basic bookkeeping services and basic business consulting services. • Technology incubators are often associated with universities, and can help entrepreneurs with innovation research, and the development of useful products that could make a diff erence in the economy. • Entrepreneurs could have access to marketing services through incubators. It is important to remember that incubators have specifi c criteria that entrepreneurs must meet before they can become part of the incubator. These can include limitations on the kinds of products being developed, set time frames for moving to commercialisation, and focus on specifi c sectors and areas.

13.6.5 Angel investors Incubators and crowdfunding are two of the ways in which a tech start-up can obtain fi nancial support, alongside the traditional way of appealing to specifi c investors for funds. In this case, we often think about venture capitalists, who traditionally take an interest in companies, and provide them with funding, usually in exchange for some control of or equity in the business. However, these investors do not usually act as individuals, but rather, as groups, and are stringent about which companies they will support. Angel investors, on the other hand, are typically individuals who are willing to invest (in exchange for equity) in fl edgling companies or in companies that cannot raise fi nances in any other way (Forrest, 2014). These wealthy individuals put their own fi nances into the growth of a small business, and will often invest very early in a company’s development. In some instances, advice, mentorship and business experience are also off ered to the entrepreneurs by angel investors. Angel investors are not the same as venture capitalists. It is therefore important to understand the diff erence between angel investors and venture capitalists. Angel investors Venture capitalists • Individuals who use their own money to • Generally fi rms of investors whose pooled invest in a small business. resources are invested in promising businesses. • Willing to invest in start-ups if they are • Not willing to invest in startups unless they confi dent that the business venture shows meet specifi c criteria, so that they are more potential.

certain of their investment’s future. • They are willing to take a risk on new brands • They prefer to invest in businesses and brands and businesses with unproven business that are proven to some degree. models or even undeveloped products. 468 CHAPTER 13 • Gives start-ups access to capital quickly • May invest later in the development process, and early in development. They may have but bring with them significant experience, connections from previous experience, but connections and resources, as well as an are also often younger founders of other interest in supporting a business in the long start-ups. term. • Willing to be a ‘hands-off’ investor. In other • Prefer to be involved in the daily management words, they do not get involved in the day-to-of the company, and set specific time frames day management of the company. for returns on investment. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Forrest, 2014) Table 13.5: The differences between angel investors

and venture capitalists There are many websites in South Africa, and in the world, that offer access to angel investors. Each website and each angel investor has unique requirements that entrepreneurs must know about. At the very least, entrepreneurs must be aware that: • some angel investors specialise in specific projects; • there are limits to the level of finance that they will consider; • entrepreneurs must provide detailed reasons for the investment request; • they must submit documentation to justify why they need the investment; and • they must accept the terms and conditions imposed by the angel investor. 13.6.6 Pivoting Pivoting refers to radical changes in a business. The pivot can occur either along a change in strategy or along a change in product or service offerings (De Wet, 2013: 24). Often, the change is fundamental, and is aimed at weeding out practices, products, services or strategies that do not add value to the business. Pivoting is, in other words, a complete relook at how things can be done, and what the new focus or strategy should be. Often, entrepreneurs do not position a product or service correctly. They may try to sell the right product to the wrong customer, thus failing to generate revenue. Of course, there could also be cases where the wrong product is sold to the right customer, and this too can have disastrous effects on a company’s revenue line. The general rationales about pivoting are as follows:

• ‘We launched product X in market Y. It did not work, so we pulled the product and launched it in market Z.’ • ‘The market thinks that our low-cost strategy tries to push inferior products and services. We changed our communication to emphasise that quality can exist at lower prices.’ Pivoting must not be confused with second-guessing. In other words, pivoting is not about disorganised trial and error. Before any pivoting decisions can be made, trends must show that 469 ONLINE START-UPS the pivot is justifi ed. A mere dip in revenue for one or two months may not be suffi cient to justify a pivoting exercise, due to the following reasons: • Some industries have a longer sales pipeline than others. For example, a cell phone company could sell a product to a customer in minutes, but a college may need months to make a sale to a single student. • An enterprise’s value added tax (VAT) basis determines how quickly an invoice is recognised as revenue: § A cash-based VAT setup recognises the revenue only when payments are refl ected in the business account, and not from the time the invoice was raised. § An invoice-based VAT setup recognises income from the moment that the invoice has been raised, whether the customer has paid yet or not. • The time spent in the market by products or services could infl uence whether a pivot is required or not. It can take as long as 18

months or more before the market is familiar with a product or service, and before sustainable revenue can be sourced from a product or service. • The time in the market for a strategy is important. Many companies make the mistake of declaring a strategy unsuccessful after it has been implemented for only a short while. It may not be reasonable to assume that a strategy will produce results only a month or two after implementation. De Wet (2013: 25) suggests ten things to be considered when deciding on pivoting actions: 1. A zoom-in pivot is designed to develop a single feature of a product, into a larger product. 2. A zoom-out pivot is designed to integrate a whole product as a feature, into a larger product. 3. Customer-segment pivots are designed to launch an existing product into a new market segment. 4. Customer-need pivots are designed to better understand what customers want, and to modify a product to meet specifi c customer needs. 5. Platform pivots are aimed at changing how products are delivered to customers. 6.

Business-architecture pivots are meant to redesign processes and procedures, in order to reduce administration costs. 7. Channel pivots change how products are distributed to customers. 8. Value-capture pivots change a company’s revenue model. 9. Engine-of-growth pivots focus on what actions best ensure company growth. There are three main engine-of-growth pivots to consider: 1. Sticky growth engines are designed to retain customers for as long as possible. 2. Viral growth engines are designed to make as many customers as possible excited about your products. 3. Paid growth engines are designed to gain customers through leads acquired from somewhere else. 10. Technology pivots aim to change the type of technology being used. 470 CHAPTER 13 13.6.7 Exit strategies

An exit strategy can be defined as a plan to discontinue a business, product or service, over a specific period of time. In the context of this textbook, an ‘exit strategy’ refers to the discontinuation of a business venture. Zwilling (2011) states that there are two reasons why entrepreneurs would want to exit a small business: 1. Outside investors want to get their investments back. 2. Entrepreneurs want to start a company, build it, sell it and start a new company. In the context of this section, exit strategies are synonymous with change of ownership, or with an expansion of shareholders. The following exit strategies are some of the most common (Zwilling, 2011): • Mergers and acquisitions, in which a company is bought by another (usually larger) company • Initial public offerings, whereby a private company transforms into a public company, in order to trade on the stock exchange • Selling to a friendly individual at an agreed price (also known as ‘cash out’) • Turning the company into a cash cow by finding someone else to manage the company, so that you can collect the profit • Liquidation and closure, or shutdown for a variety of reasons Implementing an exit strategy is not always to the detriment of the entrepreneur. In many instances, implementing an exit strategy can ensure greater chances of success for an entrepreneur ( AsheEdmunds, n.d.).

Why every company should have an exit strategy It is often the case that the entrepreneur does not think that an exit strategy is necessary. However, an organisation is a juristic entity, and can occasionally be forced to consider exit strategies. Aspects that could lead a company to consider an exit strategy include that: • a specific product offering has not generated the revenue expected from it; • a specific customer segment is no longer attractive; • the company can no longer sustain profitability, and must be closed; and • the owners have decided to close the company because they are retiring. Middleton and Sawyers (2016) provide the following valuable insights into the crafting and execution of an exit strategy: • There is always a possibility that a product, service or even company could fail. • An exit strategy allows managers to plan for the worst, and offers a course of action if failure becomes imminent. • Successful exit strategies consider one or more of these options: 471 ONLINE START-UPS § Selling to a business partner §

Selling to an investor § Selling to employees § Selling to family members • It is not uncommon to have options such as giving a business away for humanitarian reasons. • All exit strategies take time, and need to be carefully planned. • Signifi cant advice (legal and fi nancial) is necessary to ensure a painless exit strategy. • It is important to identify the right type of investors or partners long before the exit strategy becomes real. • Exit strategies can be complex. Do not attempt this on your own. In addition to these guidelines, the following insights can be drawn, based on practical experience: • Be very clear about what it is that must be exited. It is easier to get rid of a product or service than it is to close down a business, or to sell a business to someone else. • Gather evidence on why a product, service or business must be exited. Ensure that the evidence is based on fact, and not on a panicked reaction or subjective opinion. • Ask for advice on whether it is possible to rescue, transform or reposition the product, service or business, before contemplating an exit.

• Do not rely on advice from one source alone – especially if that source is a family member. You need at least fi ve solid, independent opinions before a decision is made. • Do market research to understand why the product, service or company has not been successful. Often, the non-performance that convinces someone to exit has more to do with the fact that the market has no need for a product or service, or that the business cannot produce what the market actually wants. • Compare the cost, in terms of money and time, of reinventing a product, service or company, with the cost of an exit strategy. Which will be the most expensive and time-consuming? That can be a good indicator of your course of action. ACTIVITY 13D (i) List and briefl y defi ne the three main approaches to selling techno enterprise services. (ii) Provide two advantages and two risks associated with crowdfunding a tech start-up. (iii) Explain the purpose of an incubator for a tech start-up. (iv) Consider the following scenario: Jehan and Andile have been developing an app that aims to help connect restaurant managers to musicians looking for gigs. Their initial focus was on allowing restaurants to leave ratings for the musicians they have booked, and to contact musicians registered

with the service. They have rolled out an early version of the app to get feedback from clients. When they check the reviews, they see that the app generally has favourable comments. However, many users said that they instead want to use the app to book musicians for private functions, large events, live shows and music festivals. 472 CHAPTER 13 Required: Explain what a pivot is, and suggest the kind of pivot that Jehan and Andile will need to make in this case. 13.7 HIGH RISK, HIGH RETURN OF ONLINE START-UPS We have now discussed the opportunities offered by online start-ups, from the likelihood of lower operating costs to the broad reach of ecommerce. However, it is important for all entrepreneurs to consider the risks involved in starting any enterprise. Generally, benefits have some level of risk attached; otherwise, the opportunity would likely have been seized by someone else (DeMarco and Lister, 2003: 9). To know that a project has no risks would also require perfect knowledge about every potential outcome of each business decision. Instead, entrepreneurs must act in a world of probabilities and uncertainty. This is especially true in the tech industry, where there are many costs involved in creating a start-up, and the company may only see returns after years of work (Ressel, 2016). South African tech start-up veteran, Sheraan Amod, emphasises that understanding and managing risk is vital for technopreneurs (in Ressel, 2016). Defining risk In its simplest form, a risk can be considered a possible future event with a negative result, and the result itself (DeMarco and Lister, 2003: 16). In other words, a risk is something that may occur, and a problem is a risk that has occurred (DeMarco, 2003: 17). Identifying a

risk involves determining the probability (or likelihood) and impact of the outcome (Kerzner, 2003: 653). An unlikely outcome with limited impact is a low risk. A moderate risk might arise from an unlikely outcome with a high impact or a likely loss with a moderate impact. A high risk would be both likely and wide-reaching in its impact. When evaluating a decision, it is important to understand these elements. However, it is not always possible to know with certainty what likelihood there is of a risk coming to pass. This means that decision-making happens in three different types of situations (Kerzner, 2003: 656 – 661): 1. Decisions under certainty: The business has exact knowledge about the outcomes and payoffs derived from any decision, which reduces or removes any elements of surprise. 2. Decisions under risk: Different decisions come with different levels of risk, often tied to higher potential returns. The probability of each outcome must be determined, and then decisions will be made based on how willing the decision-makers are to take different levels of risk for different potential returns. 3. Decisions under uncertainty: As with decisions under risk, there are levels of risk for different decisions, but it is difficult to assign probabilities to these, and to anticipate all outcomes. Because the risks and probabilities cannot be quantified with certainty, there is no one way to manage risk in making decisions. 473 ONLINE START-UPS

When we consider risk management, we do not need to worry about decisions made under certainty, as the outcomes of these are known. What we will be considering in this section are decisions made under risk and decisions made under uncertainty, which must be managed. Now that we understand the basic concept of risk, let’s examine the two core risk types for tech start-ups (Bhimani, 2017: 35): • Business risks: These are the risks related to the product and technology, as well as the marketplace. The attainability of the technology in the time frame required, the potential for the market to change its needs, and the question of whether there is demand for the product, are areas of business risk. • Financial risks: These are risks related to the funding and costs of the start-up, such as the expectations of investors, the likelihood of attracting the right investment, and the likelihood of incurring various costs during the early stages of the business. Start-ups in technological fi elds often have high initial costs, as new technologies or programs must be developed, often using expensive equipment and approaches. Even though many initial costs can be low, scaling an idea up to meet the demands of the marketplace requires signifi cant investment. This means that tech start-ups can have high initial costs, and there is a good chance that a start-up will not succeed. However, if a start-up does succeed, this can result in very high payoff s, making investment in these fi elds attractive to certain investors, if the entrepreneurs are able to manage or mitigate the risk (Bhimani, 2017: 37). Managing risk The fi rst step toward assessing and managing risk in a new business is to honestly acknowledge potential hazards and areas where the business may fail; this is an area that many online and tech start-ups avoid in favour of adopting an optimistic view of their chances (DeMarco and Lister, 2003: 31). By fi rst acknowledging where the areas of potential risk might be, a technopreneur can look for

moments of ‘risk transition’, where the potential risk scenario suddenly becomes likely and a problem might be imminent (DeMarco and Lister, 2003: 17). This allows entrepreneurs to take actions to mitigate that risk. However, it would be even better to manage risk in such a way as to avoid the worst risks from ever becoming real problems. One of the core aspects of managing risk (which can apply to both entrepreneurs planning to start a business, and investors looking to support a startup) is taking due diligence (Bhimani, 2017: 36). This involves careful analysis of the viability of the core concept, technology or product, as well as the expertise of the development team and whether there is a demonstrable market for this product or concept. It also involves looking at the marketplace for rival products or services, and then evaluating whether the start-up has suffi cient features to diff erentiate itself, or a way to ensure that potential customers are ‘locked in’ and will keep coming back in future (Bhimani, 2017: 36). As we have discussed previously, there will be situations where the business may not have perfect knowledge of risk areas, or the extent of these risks. In these moments, where decisions are made 474 CHAPTER 13 under uncertainty, the way in which an entrepreneur or investor views different levels of risk comes into play. Some entrepreneurs may see starting up a risky business as a way to chase lucrative rewards, if it succeeds. Others may wish to build on a more solid, but potentially less profitable, idea. This is called ‘risk appetite’, and it determines how comfortable a person or organisation is with taking or actively pursuing a greater risk for different levels of return (Risk and Insurance Management Society, 2012: 3). It is important to note that there is no one right approach to risk management. While technopreneurs are often thought of as having high appetites for risk, entrepreneurs can have very different approaches and risk appetites; even those who enjoy risk-taking do not simply gamble (Axelton, n.d.). Let’s look at the three risk profiles summarised in the following figure.

• Most willing to take on high-risk, high-reward projects, as Risk-the chance of bigger payoffs is the driving factor. taking • Focuses on the ultimate positives from a risk, rather than potential negative impacts. • Generally takes moderate risks, where payoffs and negative Riskimpacts are in balance. neutral • Attempts to quantify or understand risks, but accepts that not every outcome can be predicted. • Tries to avoid risks where possible, even if that means Risk-avoiding options with higher returns. averse • May try to mitigate the highest possible risk, or to only take risks where they are willing to afford the loss. (Source: EDGE Learning Media (Pty) Ltd, 2019; adapted from Kerzner, 2003: 656–661; and Taleb 2012) Figure 13.3: Three basic risk appetites of entrepreneurs and investors What is clear from each of these profiles is that risk appetite comes from striking a balance between the likelihood and magnitude of a risk, and the size of the return or payoff. In other words, risk assessment is essentially asking whether the likelihood of a negative outcome and the impact this might have, are in balance with the rewards that could come from making the risky decision (Kerzner, 2003: 663). As we have seen, it is vital for a technopreneur to carefully assess the various risks faced by a new start-up, and to work to position the business in such a way that investors will see potential risks in 475 ONLINE START-UPS

balance with the returns that can come from success. Furthermore, identifying risks can help the business to be aware of triggers or warning signs that indicate that a risk may become a problem. Finally, it also helps the business to mitigate negative impacts from anticipated risks. ACTIVITY 13E The Internet of Things is a growing area of technological innovation, where many diff erent devices and gadgets are connected to the Internet and smartphones, allowing apps and devices to communicate. From fridges that can help to order food deliveries when they are empty, to intelligent toys and washing machines, these new inventions use the Internet to make the lives of consumers easier. Musa is a programmer and Jaco is an engineer. Having just graduated from university, they want to bring their technological skills together to update a classic South African pastime: braaiing. They have decided to create an Internet-enabled smart braai called the Shisa-Smart, and develop a smartphone app to interact with it. The Shisa-Smart can notify the app when the temperature is just right for anything the user wants to cook, remind them to turn the meat, and even tell them when the food is likely to be done. With their fi rst ever start-up idea ready, they are looking for investors to help them cover the steep initial costs, so that they can develop the Shisa-Smart to release three weeks before Heritage Day 2024, to capitalise on Braai Day fever. The project will cost around R 1.5 billion to develop over fi ve years. In this time, they aim to run a crowdfunding campaign, to cover some of the costs. They expect to raise at least R 80 million from donations and preorders. After fi ve years, the project will show some real returns. The following table shows some forecasts of what Musa and Jaco expect from the project.

Year Description of project activities Projected costs Projected revenue 2020 Development begins. R 150 million Zero 2021 Finish basic design of app and product. R 280 million Zero Research heat-resistant circuitry for the Shisa-Smart. 2022 Complete the prototype and fi rst R 270 million R 80 million (donations version of app. Launch crowdfunding or pre-orders) campaign. 2023 Build and test functional version 1.0. R 500 million Zero

Test app. 2024 Launch product for Heritage Day. R 150 million R 90 million 476 CHAPTER 13 2025 Continue to roll out app updates. R 150 million R 160 million Develop product version 1.1. 2026 Launch version 1.1 and continue to R 60 million Revenue for version sell both versions. 1.0: R 560 million Revenue for version 1.1: R 780 million Required: (i)

Identify and describe the risk appetite that you believe you have. (ii) List three or more risks that the Shisa-Smart start-up faces. (iii) Would you invest in this start-up? Justify your answer with reference to the risks and rewards. 13.8 SUMMARY In this chapter, we looked at the nature of online or technological start-ups. Since the advent of the Internet, it is easier than ever to become a technopreneur – an entrepreneur who applies technology to meet consumer needs and market demands. We have looked at how, throughout history, entrepreneurs have applied the newest technologies of their time to improve lives, develop new businesses and machines, and make a profit. From there, we have seen how technological start-ups require a market, entrepreneurial passion, and experience with both business and technology. Rapid growth and protection of the idea (i.e. IP) are vital for turning a start-up into a success story. We have also seen that tech start-ups differ from traditional brick-andmortar businesses, by reaching a wide audience and reducing certain costs, such as the need to rent a premises, while also introducing other costs, like website design. Similarly, there are many different trends in the tech start-up ecosystem, like crowdfunding or looking for angel investors. Finally, it is vital to consider risk, as tech start-ups are often high-risk, high-reward businesses. It is also important to consider your appetite for risk, and to carefully evaluate the likelihood and extent of returns, when you start your own online business or invest in another. 477

CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS 14 14.1 Introduction 479 14.2 Life lesson 1 485 14.3 Life lesson 2 485 14.4 Life lesson 3 487 14.5 Life lesson 4 489 14.6 Life lesson 5 490 14.7 Life lesson 6 490 14.8 Summary 492

478 CHAPTER 14 Case studies – myths,leaders and inspiration Online Boring start-ups but Growing the business Making important it run stuff smoothly Building a It is in the team numbers Cash is king

Developing Selling products Spreading and the word Getting out of Forming a services What is the starting business entrepreblocks neurship? 14.1 INTRODUCTION In this chapter, we will explore some popular myths associated with entrepreneurship. We will also discuss the success stories of some of the world’s most celebrated entrepreneurs, to see whether these myths have any bearing on reality. Finally, we will investigate how these myths have created an unrealistic image of some of these entrepreneurs, and will dig deeper to uncover the true stories behind their success. Entrepreneurship myths What is a myth? Stevenson and Soanes (2003: 1164) provide the following two definitions of a myth. 1.

A traditional story about the history of someone or something, which usually involves some sort of supernatural being or event 2. A widely held but false belief or idea about someone or something Myths are also known as ‘urban legends’ or ‘urban myths’. These are stories that are presented and disseminated as truth (Stevenson and Soanes, 2003: 1941). Often, urban myths are told by people who claim to have heard the story from a friend or relative. 479 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS The following list outlines some of the defi ning features of a myth: • Fame: A myth often refers to a famous person or event, or something that is popular/common knowledge. • Second-hand sources: The main source of the myth is often a ‘friend of a friend’. • Limited facts: It is diffi cult to fi nd facts to back up the story. • Vagueness: The details of the story – e.g. the time and place of the event – are unclear or undefi ned. • Lack of witnesses: It is often diffi cult to fi nd a witness to corroborate the story. The standard response may be: ‘Ask so-and-so – they will tell you the same thing.’ • Tales of caution: Most myths contain elements of a cautionary tale – e.g. ‘My uncle’s friend started a business, but the Mafi a took it over.’ • Worsening effects: The story tends to become more severe and dramatic each time it is told.

• Spread in popular media: Most myths are spread via social media, the Internet, and ‘citizen reporters’ seeking to create sensationalism. The response to an urban myth may sound something like, ‘I saw it on television!’ or ‘I read it on the Internet!’ • Exaggerated effects of success: The results of a person’s actions are exaggerated in a myth – e.g. ‘My uncle’s friend started his business with R 20 in his pocket. After a year, he was a multimillionaire!’ • Perpetuation and growth: Myths tend to acquire more twists and turns as time goes on. Morris’s 13 entrepreneurship myths Commenting on myths surrounding entrepreneurship, Sightler (2000) states that these often arise due to a general misunderstanding of what entrepreneurship is, and what it involves. In his article, Sightler shows that there are also many diff erent types of myths about entrepreneurship. Additionally, he demonstrates that entrepreneurs tend to have diff erent opinions about these myths, compared to non-entrepreneurs. Quoting the work of Morris (1998), Sightler lists the following ‘myths of entrepreneurship’. Entrepreneurship myth Response to entrepreneurship myth 1. Entrepreneurship • The very essence of entrepreneurship is the setting up of a business in is about starting the hope of making a profi t. and running a small • Although many businesses start small, this does not mean that they business.

will remain small. • There is a profi t motive in any business – big or small. • The entrepreneur is challenged not only to start and run a business, but also to ensure that it acquires acceptable levels of profi t. • Businesses can only grow when profi ts are made, and when the business can sustain itself through increased sales and eff ective cost management. 480 CHAPTER 14 2. Entrepreneurship is • It is possible that some business ideas come ‘out of the blue’. However, something that ‘just the majority of new business ventures do not ‘just happen’ – they are happens’. carefully planned. • An entrepreneur can spend months – even years – conceptualising a new business venture before it is launched. • Many new businesses seem to ‘just happen’ because outsiders are not aware of all the planning, conceptualisation, trials and errors that take place before the business venture is actually launched. • Most new business ventures arise because someone has identified a need in the market, and has decided to meet that need by means of a specific business venture (i.e. selling goods or services to those who have a need for such goods or services). 3. Entrepreneurship is • While natural talent may play a role, entrepreneurship is not an innate an ‘either/or’ thing trait in someone’s make-up.

– someone is either • Entrepreneurship is the result of careful planning and development, to an entrepreneur, or ensure that a product or service meets a specific need. they are not. 4. Similarly: • Some people become entrepreneurs out of necessity. For example, Entrepreneurs are they cannot find a job, and decide to start their own business instead. born, not made. Others may lose their job, and decide to become an entrepreneur simply to pay the bills. 5. Entrepreneurship is • People misunderstand what is meant by ‘risk’. HM Treasury (2004) about taking wild defines the term ‘risk’ as an uncertainty of outcome. For example, it is risks. often difficult to predict which team is going to win a sports match. • Since risk is an uncertainty about a specific outcome, entrepreneurs can deal with it in (at least) one of three possible ways: 1. They work to actively prevent potential losses of money/ opportunities. 2. They decide to proceed with caution, knowing that they could lose money/opportunities. 3. They set a limit, beyond which they are not willing to lose money/ opportunities.

• The level of risk that entrepreneurs are willing to take depends on their risk aversion (unwillingness to accept a risk). High risk aversion means that someone is not willing to risk anything, while low risk aversion means that someone is willing to take a substantial risk. • If someone says that they are willing to take a risk, this means that they first need to understand the consequences of their actions. • All businesses – big or small, new or old – take risks, because they cannot predict with 100 per cent certainty how a product or service will perform in the market. 6. Entrepreneurship • The primary goal of entrepreneurship is to provide a product or service is about greed and at competitive rates, while making a sustainable profit. This profit may deceit. be large or small. • Some entrepreneurs may be driven by greed and deceit. However, the majority of sensible entrepreneurs understand that ethical and honest business practices are necessary to sustain the enterprise in the long run. 481 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS 7. There is only • Popular media portrays the entrepreneur as a sort of celebrity who one type of is a slick, charismatic smooth-talker and can persuade thousands of entrepreneur. consumers to buy into their enterprise.

• In the real world, ‘celebrity’ entrepreneurs represent only a very small minority of all entrepreneurs. • Not all entrepreneurs are glamourous, and it is certainly inaccurate to think that this is the hallmark of entrepreneurship. • In order to sustain an enterprise, the entrepreneur must also have signifi cant diplomacy skills, and the ability to show that they are trustworthy. 8. Entrepreneurship is • There are some rare examples of individuals who built a business empire about individuals. single-handedly. However, any successful and growing enterprise will reach a point in its life cycle where a single person cannot fulfi l all of the necessary functions on their own. • Many of the most successful enterprises in the world are the result of two or more entrepreneurs combining their skills and resources. 9. Entrepreneurship • The common myth states that ‘it takes a lot of money to make a lot requires a lot of of money’. The belief is that an entrepreneur can spend their way into money. success. • Many successful entrepreneurs have started with very little to their name. • The foundational principle is that there must be a healthy balance between income and expenses, so that an enterprise can become/ remain profi table. 10. Entrepreneurship is • Tjan (2017) insists that luck plays a role in entrepreneurial success. However, about luck.

luck is not limited to entrepreneurs. Many large corporations have testifi ed that they had a lucky break with a specifi c product or service. • Tjan also suggests that there is a link between luck, capability, behaviour and maturity. For example, an entrepreneur who does not gain the trust of a customer cannot expect to sell their product or service to that customer. However, the entrepreneur may be lucky if a customer decides to make a purchase prior to building trust. • The ability to deliver a product or service better than anyone else could be considered ‘luck’ by some. However, the entrepreneur must constantly strengthen this ability, to ensure that customers can continue to trust and rely on the brand. 11. Entrepreneurship • Being an entrepreneur does not mean that one has to launch a starts with a new completely new product or service. Some of the most successful product or service. products have simply taken well-established concepts and improved on them in some way (e.g. in terms of quality, price or even customer service). • As per the ‘Ansoff matrix’, entrepreneurs can fi nd opportunities in any of the following combinations: 1. New product/service in an old market 2. New product/service in a new market 3. Old product/service in an old market 4. Old product/service in a new market 482

CHAPTER 14 12. Entrepreneurship is • The success of any business enterprise depends on careful planning unstructured and and the frugal use of resources. chaotic. • There is a saying that ‘without a map, the road will take you anywhere’. • Entrepreneurs have to continually plan and measure their performance, and take the necessary corrective actions. • It is true that the start-up phase of a business may be somewhat chaotic and unstructured. However, it is the responsibility of the entrepreneur to bring order to this chaos as soon as possible, so that they can focus on building a sustainable enterprise. 13. Most • As per the famous maxim: ‘He who fails to plan, plans to fail’. entrepreneurial • Conversely, the entrepreneur who can manage their resources (especially ventures fail. finances) wisely and with foresight, stands a great chance to succeed. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Morris, 1998; and Sightler, 2000) Table 14.1: Morris’s 13 entrepreneurship myths Other entrepreneurship myths

Let’s briefly consider some entrepreneurship myths that were not mentioned by Morris. Pierce (2008) discusses the following six myths and responses to them: 1. Entrepreneurs make a lot of money: Although entrepreneurs generally have high-income potential, they have to work hard for every sale, and high income is never guaranteed. 2. You need a formal qualification to run a business: Although formal qualifications are valuable, they do not necessarily account for all aspects of running a business and the attendant practicalities. Additionally, they may not be suited to all types of businesses (e.g. small businesses). These days, there are many free resources and courses available, which can help guide the entrepreneur to success 3. Business ideas must be kept secret: Although it is wise to conceal these ideas from competitors, it is often helpful to consult other professionals and experts for guidance and advice. 4. Great inventions make entrepreneurs rich: These days, even the greatest invention is unlikely to result in success without the necessary product development, branding, marketing, advertising and customer relations. 5. Running a business is easy: Unfortunately, entrepreneurs typically work long hours and experience high levels of stress. 6.

Business people need to be aggressive and ruthless: While business people need to be resilient and assertive, customers and clients respond to honesty, integrity, trust and fairness, rather than aggression. As you can see, there are many stories and ideas surrounding entrepreneurship. One last source of entrepreneurship myths to consider here, is the entertainment industry. Let’s take a closer look. 483 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS Entertainment, soap operas and reality television Von Feilitzen (2004), Bjorvatn (2015) and Barsoum et al. (2016) have published extensive works discussing how the entertainment industry infl uences young people’s perceptions of reality. In particular, they consider how entrepreneurship is portrayed in entertainment, and how these portrayals infl uence people’s beliefs about entrepreneurs – regardless of how realistic or accurate these portrayals are. Some of the main beliefs held by young viewers are summarised as follows: • Entertainment shows provide an accurate portrayal of reality. • It is acceptable for entrepreneurs to have low ethical and moral standards, as this is a mark of success. • Industrial espionage and bribery are part of an entrepreneur’s secret to success. • Successful entrepreneurs do not have to work hard, and always live a glamorous lifestyle. • The glamour seen in entertainment shows is a representation of success. • Entrepreneurial success is guaranteed, and one should not be concerned about the consequences of unethical actions. If a soap

opera hero can get away with it, so can a young entrepreneur. Unfortunately, the perceptions created by these entertainment and reality shows are far removed from reality. This is because they aim to attract viewership, and not to portray the reality of life – which is often less entertaining, less glamorous and less appealing. Even ‘reality’ shows are carefully planned and scripted, in order to ensure high viewership. This means that anyone watching reality television will still be given a ‘skewed’ picture of entrepreneurship – sometimes romanticised, sometimes vilifi ed, but always a deviation from reality. The following sections will consider both lesser-known and wellknown entrepreneurs and their stories, in order to provide a more realistic picture of entrepreneurship. ACTIVITY 14A (i) a. List four myths associated with entrepreneurship. b. State whether these myths are true, and explain why or why not. (ii) Explain what is problematic about the entertainment industry’s portrayal of entrepreneurship. After studying this chapter, you should be able to: • apply knowledge and skills gained in this textbook to relevat case study material.

484 CHAPTER 14 14.2 LIFE LESSON 1 Herman Mashaba: Black Like Me Herman Mashaba is a South African entrepreneur and politician. He has also held the office of Major of Johannesburg since 2016. Mashaba was born in 1959, and was brought up by his sister in GaRamotse near Hammanskraal. It has been said that he was a ‘delinquent youth, selling drugs and engaging in unacceptable behaviour’ (Verhoef, 2015). Later in his life, he decided to study business administration at the University of the North (now University of Limpopo). However, due to political unrest in the early 1980s, Mashaba was forced to suspend his studies. When the university eventually reopened, he decided not to return. Instead, he found a job as a clerk at a Spar supermarket in Pretoria, where he worked for seven months. He then joined Motani Industries. During his employment here, he began to sell different products on a commission basis. In 1983, he sold a range of haircare products, which inspired him to start his own haircare brand. Just two years later, in February 1985, his first range of ‘Black Like Me’ products was launched. To finance his new business, Mashaba took out a loan of R 30 000. At this stage, the business included him, his wife and three other partners – one of whom developed the formula for the first range of Black Like Me products. In 1997, the brand was sold to ColgatePalmolive; but it was bought back in 1999, at which point it expanded into the international market of the United Kingdom (UK). (Source: Adapted from Verhoef, 2015; and LeadSA, 2014) Key lessons The following lessons can be learned from Herman Mashaba:

• Unfavourable conditions do not necessarily lead to despair. Determination can help young entrepreneurs to overcome challenges. • Never give up. A simple start in life can still lead to new and rewarding opportunities. • Incomplete or failed educational qualifications do not necessarily close the door to future success. • Working on a commission basis can serve as a motivation to succeed. Some people consider working on commission to be ‘too much work’ or ‘too risky’; however, entrepreneurs understand that if they cannot sell their goods or services, their businesses will not succeed. • If necessary, team up with other entrepreneurs to develop sustainable products/services. 14.3 LIFE LESSON 2 Dave Thomas: Wendy’s In 1969, the town of Columbus, Ohio, was introduced to the square hamburger patty. This was the invention of Dave Thomas, who founded the famous fast-food outlet called Wendy’s. Wendy’s quickly became the third-largest hamburger restaurant chain in the United States (US), after McDonald’s and Burger King. 485 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS Thomas started his career working for KFC, but always wanted to own and operate his own hamburger restaurant. He did not enjoy the burger restaurants in Columbus, so he decided to improve on their off erings. His restaurant was named after his daughter, Wendy.

Thomas has credited part of his success to ‘sticking to basic business management principles’ (Thomas, 1996). For him, the diff erence between success and failure comes down to attention to detail. The following list summarises some of the fundamental aspects that contributed toward the success of his business: • All food was made fresh. Nothing was allowed to be precooked or to stand under heat lamps. • Wendy’s used the highest-quality ingredients for all of its meals. The infamous ‘pink goo’ used as a meat substitute by other restaurants was not allowed at Wendy’s. • Despite using the best ingredients, Thomas kept profi t margins low. He believed that it was more important to provide good quality at aff ordable prices, than to gain high profi ts through substandard quality. • Thomas oversaw all advertising campaigns personally, and for a long time, he was ‘the face’ of Wendy’s. This allowed customers to create a strong, positive association between the brand and its owner. • Thomas never hesitated to do any job in his restaurant chain. He was often seen behind the service counter, attending to his customers in person. (Source: Thies, 2009) Key lessons In 1996, Thomas wrote an article entitled What Makes for Success? He argued that success has three important drivers, namely skills, attitude and values: 1. Skills: Entrepreneurs have to do the right things, at the right time, in the right way. These skills often take time to develop.

2. Attitude: Entrepreneurs need to remain positive, even in times of diffi culty. A negative mindset could lead to demotivation and failure to thrive. 3. Values: There are certain principles that are not negotiable for entrepreneurs (e.g. honesty, trustworthiness and reliability). Thomas further defi ned four categories of success, namely inward, upward, outward and onward success: 1. Inward success or ‘getting your act together’ refers to your attitude in terms of the following criteria: • Honesty: Whatever you do, do not cheat or deceive anyone. • Faith: Every person has a basic belief system, in which honesty and trust play a pivotal role. Do not do anything that goes against your belief system. People judge you by your actions. • Discipline: There are certain routine tasks that must be done. Do not avoid doing these tasks. Be clear about your plans, and stick to them to the best of your ability. 486 CHAPTER 14 2. Outward success considers how you treat people in terms of the following criteria:

• Care: Show others that their opinion counts, and treat all people as you wish to be treated. • Teamwork: You cannot do everything on your own. As a business grows, there is a greater need to depend on other people to get the work done. • Support: Help others to solve problems, and allow them to help you. • Motivation: Find a way to remain focused and positive – especially in times of difficulty. 3. Upward success refers to taking actions that allow you to do things well – and better than your competitors: • Be creative: Consider new ways of doing things. Understand which actions work, and which ones do not. Improve and strengthen the actions that lead to positive results. • Become a leader: Being a leader does not mean that you have to be a high-powered executive. It refers to whether others see you as being capable and trustworthy. Leaders do things that transform them from ‘wannapreneurs’ to entrepreneurs, who offer real and valuable products or service to customers. 4. Onward success means that you put others first, and yourself second. • Responsibility: You take ownership of your actions, and teach others to do the same. • Courage: It takes courage to stick to your principles, regardless of how difficult this may be. Courageous entrepreneurs do not get involved in bribery or corruption. They also believe in their product or

service, and they do everything in their power to convince others of its value. • Generosity: Strong entrepreneurs are generous, offering assistance and advice to others, so that they can become successful, too. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Thomas, 1996) 14.4 LIFE LESSON 3 Anita Roddick: The Body Shop Anita Roddick grew up in the UK, where her father owned an American-style restaurant called a ‘diner’. This diner became very successful, and Anita quickly realised that customers were attracted to venues with a pleasant atmosphere – including lighting, decor, cleanliness, friendly staff etc. When she travelled to Tahiti one year, she noticed that the locals used natural products to clean themselves and wash their hair. After trying these products herself, she decided to start a small shop that specialised in hygiene and beauty products made of natural ingredients. In 1976, Roddick hired a chemist to help develop these products. She took out a small loan, and rented a retail space in Brighton (England). She called her store ‘The Body Shop’. 487 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS Remembering that customers are attracted to a pleasant atmosphere, she sprayed a trail of perfume down the street that lead to her shop. Inside the shop, she arranged potpourri (dried perfumed fl owers) to create a pleasant scent. This sensory experience attracted customers to her store. Once she had successfully established her business, Roddick desired to expand it. However, the bank refused to give her another loan. Thankfully, she quickly found a business partner who was

willing to fund the expansion. Her business continued to excel, and soon, people began to enquire about owning their own branches of The Body Shop. As such, it soon became a franchise. Roddick set high standards for franchisees: they were all taught about haircare and skincare, and were expected to acquire high levels of knowledge and expertise in the fi eld. Part of The Body Shop’s success can also be attributed to Roddick’s use of free publicity. For instance, she encouraged word of mouth among the community, in order to spread awareness and positive feedback regarding her products and services. In her marketing drives, Roddick sought to learn as much as possible about the diff erent customer segments that were interested in her products. She then designed her marketing messages and campaigns around these segments. For example, for people who spent a lot of time on their feet, she marketed soothing peppermint foot lotions. The fact that her products were made of natural ingredients contributed to the prestige associated with The Body Shop brand. Key lessons The following lessons can be learned from Anita Roddick: • Be aware of your environment, and of what customers value. • Understand how products or services can be adapted and improved to meet customers’ needs in a unique way. • Do not be discouraged by obstacles. Bring partners on board if needed, and do not hesitate to make use of free publicity, if there is an opportunity to do so. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from McLuskey 2015; and Sharma, n.d.) ACTIVITY 14B

(i) Do you think that Herman Mashaba provides a good example to young South Africans? Substantiate your answer. (ii) List and briefl y defi ne the three drivers of successful entrepreneurship, as described by Dave Thomas. (iii) Explain Anita Roddick’s three main approaches to establishing a successful business. 488 CHAPTER 14 14.5 LIFE LESSON 4 Sam Walton: Walmart Sam Walton is the founder of Walmart, the largest supermarket in the world. Born in 1918, Walton grew up in the midst of the Great Depression, and quickly learned the skills of thrift and frugality (i.e. being careful with money). In his youth, Walton would milk the family’s cow, bottle some of the milk, and sell it to the neighbours. He also delivered newspapers and sold magazine subscriptions to members of the community. Eventually, Walton had saved enough money to go to university. In 1942, he joined the army to fight in World War II. At a later stage, in 1945, Walton used the money he had saved while in the army, and a loan from his father-in-law, to open his first small store. He quickly discovered that it was profitable to buy products in large volumes (‘buyer power’), and to sell them at lower prices compared to competitors (‘low cost provider’). By 1962, Walton had opened 15 small discount outlets. At this point, he decided to launch the first

large Walmart store. This remains one of the largest and most successful retail enterprises in America – and the world. Today, Walmart consists of over 11 500 retail outlets, as well as ecommerce platforms, and has expanded internationally. It reportedly grossed $ 485 billion in the 2017 fiscal year. Key lessons Walton applied many principles of entrepreneurship to his business venture. The following list contains just some of the lessons that can be learned from him: • He knew what he wanted to achieve, and pursued it wholeheartedly. • He did not follow mass opinion, but used common sense to understand situations. • He carefully selected a team of people who could help him accomplish his goals. • He always looked for the best strategy, and would quickly change it if needed, to maintain a competitive advantage. • He believed in the ‘basics’. In other words, he understood how to contain costs and how to maximise profit – without cheating his customers. • He set high standards of achievement, and expected everyone else to meet these standards. • He admitted that he did not have all the answers, and would seek advice when needed. • He was one of the first entrepreneurs who believed in profit-sharing (i.e. sharing his profits with those who worked just as hard as he did in the business).

• He believed in communicating with as many staff members as possible, to understand what really happens ‘on the ground’ of the business. • He did not hesitate to guarantee the quality of his products, and refunded dissatisfied customers without question. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Blenheim Partners, 2013; and Hyde, 2018) 489 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS 14.6 LIFE LESSON 5 Richard Branson: Virgin Group Ltd As the owner and founder of the Virgin brand, Richard Branson is often considered ‘the perfect example’ of an entrepreneur. Branson was only 15 years old when he decided to publish his own magazine. Although the magazine was originally motivated by his desire to be creative, it taught him to persist, and to shape his persuasive skills; for instance, by convincing executives to purchase advertising space in this new, unknown publication. In 1972, Branson identifi ed an opportunity to sell music at a discount, and subsequently launched a company called Virgin Records (later known as Virgin Megastores). Here, he took advantage of selling goods to customers at attractive prices. For many years, Virgin Megastores successfully launched the careers of new bands, using public relations (PR) as its supporting approach. Over the next few decades, the Virgin brand expanded dramatically, encompassing everything from telecommunications to commercial airline services – and even space tourism! In 2000, Branson was knighted at Buckingham Palace, in honour of his services to entrepreneurship. (Source: BBC News, 2000)

Key lessons There are valuable lessons to be learned when considering Branson’s humble beginnings: • Take risks, but be aware of the consequences. • Think carefully before entering a market. • Apply your creativity when designing new products or services. • Use persuasion to sell your goods. • Always focus on closing the deal. • Remain on the lookout for new opportunities. 14.7 LIFE LESSON 6 Steve Jobs: Apple Inc. A discussion on entrepreneurship would be incomplete without mentioning one of the world’s most celebrated entrepreneurs: Steve Jobs. Jobs was born in San Francisco, California, and was put up for adoption by his biological mother. As a young adult, he briefl y attended Reed College in 1972; however, he dropped out after just a few months, due to the fi nancial strain that it placed on his adoptive parents. He continued to audit classes despite no longer being a registered student, and lived off free meals provided by a Hare Krishna temple, as well as by getting refunds for empty Coco-Cola bottles. In 1974, he found himself travelling through India, in an attempt to study Zen Buddhism and ‘seek enlightenment’. 490 CHAPTER 14 Upon returning to the US, he co-founded Apple Inc. in 1976, along with his childhood friend and electronics expert, Steve Wozniak.

Together, they conceptualised and built the first Apple I computer – and later, the Apple II computer, which led to the company’s explosive commercial success. Today, Jobs is often referred to as the ‘Grandfather of the Digital Revolution’. In 2011 – the year of his death – his net worth exceeded $ 8.3 billion. To date, he remains one of the most influential and exemplary entrepreneurs in the world. (Source: Kim, n.d.; and Denning, 2011) Key lessons The following ten life lessons can be learned from Jobs: 1. Love what you do – your company, your co-workers, your products. 2. Do not tolerate co-workers/stakeholders who do not take the business seriously. Seek out the right people, who have the right mindset and work ethic to make the business a success. 3. You cannot do it alone. Bring partners and supporters on board, and delegate tasks according to everyone’s strengths. 4. Empathise with your target market. If you want to sell an idea, product or service, you need to put yourself in your consumers’ shoes. 5. Find a niche, and be the best at fulfilling those needs – but avoid being so exclusive that your product is unrelatable to the masses.

6. Do not try to beat the competition – redefine the game. 7. Do not risk your health for success. Without taking care of your physical, mental and emotional well-being, you will never achieve or sustain success. 8. Never ‘take your foot off the pedal’. Once a business venture has taken off, it is imperative to maintain momentum, and not to become too comfortable – otherwise, competitors will quickly overtake you. 9. Presentation is just as important as content. Even the best idea will fail if it is not presented in a way that is attractive and desirable to the target market. 10. Take pride in your work. Your work is a reflection of your character. If you are dissatisfied with your own product or service, it is not worth selling. (Source: EDGE Learning Media (Pty) Ltd, 2018; adapted from Jackson, 2013) 491 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS ACTIVITY 14C (i) Identify Walmart’s unique selling point (USP).

(ii) Defi ne Walton’s two main approaches to profi tability. (iii) Name two key approaches that Branson used to build his businesses. (iv) Consider the following key lesson from Steve Jobs. Do some research, and explain how this principle is embodied in the Apple brand and products. Presentation is just as important as content. Even the best idea will fail if it is not presented in a way that is attractive and desirable to the target market. 14.8 SUMMARY In this chapter, you were introduced to some common myths surrounding entrepreneurship. You learned about the common misconceptions that people have about this profession, and how some of these misconceptions have come about; for example, through the entertainment industry and its skewed portrayals. You then had the opportunity to explore some real-life stories of successful entrepreneurs, and the key lessons that can be learned from them. As this textbook d raws to a close, it is our hope that you can go into the future with a more comprehensive and objective view of entrepreneurship, and how successful business ventures come about. Ultimately, entrepreneurial success is not about glitz and glamour – it involves passion, creativity, motivation, and a lot of hard work. 492

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ACTIVITY SOLUTIONS UNIT 6 Activity solutions As you work through your textbook and arrive at an activity, attempt to answer it on your own. You can check your answer against the one provided in this section.

Chapter 1 What is entrepreneurship?

Chapter 2 Getting out of the starting blocks

Chapter 3 Forming a business

Chapter 4 Developing products and services

Chapter 5 Spreading the word

Chapter 6 Selling

Chapter 7 Cash is king

Chapter 8 It is in the numbers

Chapter 9 Building a team

Chapter 10 Making it run smoothly

Chapter 11 Boring but important stuff

Chapter 12 Growing the business

Chapter 13 Online start-ups

Chapter 14 Case studies – Myths, leaders and inspirations 539 ACTIVITY SOLUTIONS

CHAPTER 1 WHAT IS ENTREPRENEURSHIP? ACTIVITY 1A (i) Answers may vary. The following serves as a guide. Business-minded An entrepreneur should be business-minded, as this will allow them to ensure that the business remains up and running, and to make decisions that will benefit the business in the long term. Creative and innovative A successful entrepreneur should be innovative so that they can identify a gap in the market, and seize that opportunity. Often, innovation goes hand in hand with creativity, as entrepreneurs have to think ‘outside the box’ in order to seize great business opportunities, and develop successful solutions to their problems. Networking skills A successful entrepreneur should have good networking skills, as this will help them attain opportunities that will strengthen their business. Developing good relations with people in the industry will allow them to learn from them, and to work with them if the opportunity arises. For instance, an entrepreneur can network with people in their industry in order to find a good supplier for their business. Driven

A good entrepreneur should be driven so that they will put in all the hard work needed for their business to be successful. Moreover, an entrepreneur should not easily give up when they experience failure in their business. If an entrepreneur is driven, it will strengthen their competitive nature, which will help the business gain a competitive edge in the industry. 540 ACTIVITY SOLUTIONS Knowledgeable An entrepreneur should be knowledgeable about their industry so that they can identify gaps in the market, and have the necessary information to develop or update their product or service. Moreover, being knowledgeable will assist the entrepreneur in all aspects of their business. They will understand the product better, be able to effectively target the right market, know how to successfully market the product, and be able to run the business proficiently. (ii) The four life lessons that will help entrepreneurs with their success are as follows: • They should not give up in their entrepreneurship journey when they make mistakes and failures. • They should always try to learn from their mistakes (and never stop learning). It is even better if they can learn from the mistakes of other entrepreneurs. • They should create entrepreneurial opportunities that they will enjoy and be passionate about because it will increase their chances of success. • They should try to see past commonly accepted norms in society, because they will often need to be visionaries, and try to do the

‘impossible’ in order to break through the barriers of entrepreneurship and be successful. ACTIVITY 1B (i) Any of the following characteristics can be listed. • Leader • Resistant • Optimist • Realist • Self-employed • Persistent (ii) An entrepreneur is a person who has started the process of organising and developing a business venture. The business venture is used to take advantage of any need in the market. The reason why an entrepreneur created this venture is not always solely motivated by profit, but the effectiveness of the venture is measured through it. The entrepreneur manages the main decisions and activities of the venture. An entrepreneur will take full responsibility for any big failures of the venture, and will often provide the risk capital for the enterprise. Entrepreneurs are usually the sole self-employed owner of a venture, or a partner of a venture, or a person who owns the most amount of shares in the venture. Lastly, entrepreneurs are self-reliant, and often perform great efforts to attain excellence. An entrepreneur is optimistic, and seeks a moderate challenge. 541

ACTIVITY SOLUTIONS (iii) A novice entrepreneur refers to an individual who is new to entrepreneurship in the sense that they barely have any experience in starting a business venture. Moreover, they are a new business owner who has only had their venture up and running for less than three years. A habitual entrepreneur can be classified as an experienced entrepreneur, as they have had prior experience in starting a venture. Moreover, they have been in business for at least three years. Habitual entrepreneurs can also be further classified into serial entrepreneurs or portfolio entrepreneurs. (iv) Neo Lekgabo is essentially a habitual entrepreneur, owing to the fact that he has years of prior experience at MultiChoice (seven years), and the SABC (two years). Neo Lekgabo can also be categorised as an opportunity entrepreneur. Neo could be doing something else besides running Sendr. Thus, he is an opportunity entrepreneur because he has, or had, other options available to him. ACTIVITY 1C (i) • The move from a ‘mercantile’ system to a more capitalistic system that promotes self-interest • Increased competition and opportunity for innovation • Mass production • The innovation and technological cycle • Availability of cheap labour

(ii) Jean-Baptiste Say (iii) Entrepreneurial culture refers to the collective attitudes and behaviours of individuals who promote innovation, risks and the courage to develop new solutions to problems or challenges. (iv) The Internet is a space that provides many opportunities for entrepreneurs to start up their business ventures. The Internet empowers entrepreneurs because it allows immediate connections, safekeeping of information and virtual communication. In fact, the Internet encourages innovation and problem-solving. For instance, entrepreneurs can promote their businesses over the Internet, be inspired by new innovations on the Internet, or integrate their services with the Internet to establish a new creative venture. The rise of business ventures that revolve around cryptocurrencies and blockchain technology is an example of how the Internet promotes innovation and problem-solving. Lastly, the rise of the Internet has awakened a strong entrepreneurial culture among Generation Y and Generation Z, as it weakens many barriers to entrepreneurship. 542 ACTIVITY SOLUTIONS ACTIVITY 1D (i) Enthusiasm, daringness, effective worker, dynamicity, savviness, economical, strategic, personable, realistic and reflective.

(ii) Entrepreneurs, or rather successful entrepreneurs, are naturally hard working. They fully commit themselves to their business and put in the time and effort to produce successful results. A high risk for entrepreneurs is that they often overwork themselves, which can be debilitating, physically as well as mentally. In order to combat this, they need to properly manage their stress, and delegate work so that they are not overburdened. This will allow them to be able to successfully run their business with the necessary energy, clear mind, and passion. (iii) A skill must be acquired or honed through practice and training, while a trait is something one possesses as a result of heredity. Traits make a person more capable of acquiring certain types of skills. A trait can be enthusiasm, daring, savvy, realism etc. A skill can be communication, problem-solving, personal branding etc. Negative traits can also prevent people from acquiring skills. (iv) Entrepreneurs need good communication skills as it will help them develop meaningful business relationships that will benefit their entrepreneurial venture. It will also strengthen the specific message that they are trying to convey, and help with successful networking. In addition, communication skills help entrepreneurs to successfully sell their vision of their business. (v) Answers may vary. The following serves as a guide. Two opponents are debating whether entrepreneurs are born or made and, more specifically, whether there is an ‘entrepreneurial gene’ that will determine whether a person would be a successful entrepreneur.

For ‘entrepreneurial gene’ (FEG): Not all people are entrepreneurs and not all people have a natural tendency towards entrepreneurship. This is because entrepreneurs are born and not made; there are specific entrepreneurial characteristics that are hereditary. In fact, many world-renowned psychological theories support this belief – such as the biological approach, psychoanalysis approach and cognitive psychological approach. All these theories hold that nature does play a role in defining, to a certain extent, people’s cognitions and behaviour. Against ‘entrepreneurial gene’ (AEG): I disagree, a specific hereditary gene cannot determine whether a person would be an entrepreneur. You mentioned the biological approach, but one of the many critiques against this approach is that it is too limited in explaining human behaviour and cognition. The psychoanalysis approach does claim that nature plays a part in defining people’s characteristics and behaviour; 543 ACTIVITY SOLUTIONS however, it holds that it only does so to an extent. This also applies to the cognitive psychology approach – nature and nurture both play a key role in defining a person’s characteristics. Therefore, even if there is such a thing as an ‘entrepreneurial gene’, it will only be effective to an extent and will not necessarily determine whether an individual will be a successful entrepreneur because the environment also plays a key role in shaping characteristics and behaviour. In addition, you mention that there are world-renowned psychological theories that would hypothetically support the notion of a possible ‘entrepreneurial gene’. However, you are neglecting strong psychological theories that would hypothetically argue against this notion. Such theories are the humanism approach as well as the behaviourism approach. FEG: The psychological approaches that you used also have strong critiques against them, as they are also seen as limiting since they do not take inherent characteristics into consideration – especially the ‘behaviourism approach’. There is physical evidence that supports

the notion of an ‘entrepreneurial gene’. A study, conducted by Fisher and Koch (2008), on 234 entrepreneurial CEOs came to the conclusion that these individuals were simply more inclined towards entrepreneurship than others. This study indicates that individuals who are successful entrepreneurs have a natural disposition towards such an occupation. In fact, another scientific study on 1 335 people, conducted by Nicolaou et al. (2011) identified a specific ‘entrepreneurial gene’ in the dopamine receptor DRD3 gene. This gene is assumed to have a strong relationship to attention-deficit hyperactivity disorder (ADHD) and sensation seeking – which, according to them, are common traits for entrepreneurs. Lastly, Nicolaou et al.’s research on identical twins (with the exact same genes) and fraternal twins (with 50 per cent of the same genes) concluded that there is a strong genetic component to the tendency to be an entrepreneur. All these studies indicate that there is an entrepreneurial gene, and that entrepreneurs are born. AEG: There are critiques against the findings of Nicolaou et al. (2011), as it seems that they cannot be replicated by other researchers. Thus, the evidence that you are referring to appears to be flawed. Therefore, I would argue that there is not sufficient evidence to support the notion of an ‘entrepreneurial gene’. Moreover, the researchers that try to pinpoint a specific ‘entrepreneurial gene’ often focus on one or two specific personality traits found among entrepreneurs, and try to determine whether these traits are genetically inherent. However, it can be argued that there are numerous different kinds of entrepreneurs who are not just limited by one or two personality traits – which makes these studies inherently flawed as they cannot be generalised to the overall population of entrepreneurs. The notion of finding a specific ‘entrepreneurial gene’ will be very difficult. FEG: You cannot argue that ‘nature’ does not play a role in helping people engage in entrepreneurship. AEG: True, I do agree that nature, to a certain extent, plays a role in helping a person become an entrepreneur. Entrepreneurs are born, and also need to be made. However, I would 544

ACTIVITY SOLUTIONS argue that environmental factors would play an even bigger role in doing this. It is both the environment (family, upbringing, friends, work etc.) and one’s inherent cognitive system that work together to help form a tendency towards entrepreneurship. I believe that individuals can be taught skills. There are studies, such as one conducted by Lange et al. (2011), that indicate that education has a key role in influencing people to become entrepreneurs and developing their skills to become great entrepreneurs. FEG: Yes, but even one of the researchers in the Lange et al. (2011) study, Julian Lange, claims to a certain degree, that entrepreneurs are born (have genetic traits and inclination towards entrepreneurship), and that education builds on their natural abilities (Entrepreneur, 2013). You are not denying that there is an ‘entrepreneurial gene’, therefore I win this debate. AEG: No, I am not denying the possibility of an ‘entrepreneurial gene’ since there is no replicable evidence supporting this notion. But if there is an ‘entrepreneurial gene’, then I am denying the large extent of influence that such a possible gene would have. People may be born with natural inclinations to become entrepreneurs, but their environment (family, education etc.) plays a large role in helping them become ‘successful’ entrepreneurs. We are debating whether an ‘entrepreneurial gene’ will determine whether a person will become a successful entrepreneur. I am claiming that an ‘entrepreneurial gene’ may help, but there are many other environmental factors also help a person to become a successful entrepreneur. FEG: Precisely, we are not arguing the sole determiner of successful entrepreneurship – we are just focusing on one of the determinants. Therefore, there may be numerous factors that help a person to become a successful entrepreneur, and one of these factors is having an ‘entrepreneurial gene’.

AEG: As mentioned before, there are definitely natural traits that increases a person’s tendency towards entrepreneurship. However, no concrete evidence has been found for this ‘entrepreneurial gene’. I see that we disagree on the whether a specific ‘entrepreneurial gene’ exists; however, we both agree that both nature and nurture play key roles in making a successful entrepreneur. FEG: Yes, we do both agree on that point. We just seem to differ on the extent of influence that ‘nurture’ or ‘nature’ has in creating successful entrepreneurs. ACTIVITY 1E (i) • Reduce it • Accept it • Transfer it • Eliminate it 545 ACTIVITY SOLUTIONS (ii) • Ignorable Risks: Risks that have little to no negative impact on the business • Nuisance Risks: Risks that have high possibility of transpiring; however, their impact on the business is not too serious or damaging • Insurable Risks: Risks that have a low possibility of occurring; however, their impact on the business is very serious or damaging

• Company Killers: Risks that have a good chance of occurring and their impact on the business is devastating; there are four categories of company killers: strategic risks (risk that the company’s strategy is inadequate), compliance risks (failures or challenges in complying with rules, regulations and/or policies), operational risks (failures or challenges in operational processes), and financial risks (financial problems for the business). (iii) Answers may vary. The following serves as a guide. Risk: Load shedding is a risk where Eskom, the South African electricity public utility, may cut off an area’s supply of electricity for hours at a time. This will affect the coffee shop as they rely on electricity to run the coffee machines, for lights, and to charge the card machines. Solution: The coffee shop can buy generators and use them when load shedding occurs. Risk: Many areas in the Western Cape, such as Cape Town and Knysna, are often vulnerable wild fires in the summer months. The coffee shop is next to a forest in Knysna, and a risk is that it can either be damaged by fire, or be completely burned down. Solution: The coffee shop should have a good insurance contract that will insure them if they are susceptible to fires. (iv) Any of the following insurance companies can be listed: • Santam • Hollard • Mutual and Federal

• Guardrisk • Outsurance • Telesure • Absa • Zurich • AIG • Standard Insurance • Discovery • Momentum • Alexander Forbes 546 ACTIVITY SOLUTIONS ACTIVITY 1F (i) ‘Social entrepreneurship’ refers to when entrepreneurs create innovative and sustainable business ventures that address both social and environmental issues. (ii) This venture empowers and educates disadvantaged women in poor communities by teaching them to write code. This is innovative and sustainable, as it creates specialised, higher income job opportunities for these women. (iii)

1. Inhospitable business environment 2. Lack of funding and resources 3. Shortage of skills and employee-related issues 4. Challenging market entry regulations 5. Lack of entrepreneurial opportunities. 6. Social perceptions of failure 7. Inadequate education 8. Lack of sufficient entrepreneurial training 9. Lack of real-world and industry experience 10. Aversion to risk

(iv) Inhospitable business environment There are not many entrepreneurial regulations in place, and there is pervasive corruption that allows criminal activities, which further hinders entrepreneurship. Lack of funding and resources It is difficult for South African entrepreneurs to attain loans and investments into their business. Additionally, there are very few available government entrepreneurship programmes to help South African entrepreneurs. (v) The role of entrepreneurs within South Africa is currently limited. There are high rates of unemployment, so there is a large labour force. However, the conditions within South Africa are not completely conducive to the emergence of entrepreneurs. For example, South Africa has strong physical structures and internal market dynamics that support entrepreneurship. However, there is a lack of research and development and commercial and legal infrastructure to support new ventures. Entrepreneurship is also hindered by internal market burdens or entry regulations, and non-conducive cultural and social norms. Additionally, there is a lack of entrepreneurial finances, government policies that provide support and relevance for entrepreneurs, as well as taxes and bureaucracy that support entrepreneurship. There should also be an increase in governmental entrepreneurial programmes, entrepreneurial education at school and entrepreneurial education post-school. Overall, entrepreneurship is neglected, which is 547 ACTIVITY SOLUTIONS a shame because it can empower individuals, disrupt the cycle of poverty, develop the skills of young people and strengthen national economic growth.

(vi) Answers may vary. The following serves as a guide. Here, you must self-reflect, and decide whether you are ready to be an entrepreneur or not. Regardless of your answer, you must justify your arguments, and explain why you do, or do not, feel ready. The strength of the answer rests largely on your own narrative, and your ability to self-analyse and determine your own level of readiness. If you do not feel ready, it is to be expected. You may feel that you need to learn more, or earn your degree before you truly embark on the journey to becoming an entrepreneur. You may already have one or more ventures in place and are, thus, already an entrepreneur looking at expanding your horizons, and formalising your knowledge in the form of a degree. There is no right or wrong answer; it depends largely your level of self-reflection and honesty. 548 ACTIVITY SOLUTIONS

CHAPTER 2 GETTING OUT OF THE STARTING BLOCKS ACTIVITY 2A (i) Answers may vary. The following serves as a guide. The statement is not correct, as it misunderstands the way in which business ideas are created and refined. Ideas do not usually emerge out of nowhere. Instead, ideas often come from a number of sources, such as examining problems and sources of waste, brainstorming, or wearing De Bono’s six hats to examine an idea from a different perspective. The chapter’s example of the development of computers shows the long history of an idea that now drives so much of the world. Every stage in the invention of Microsoft’s MS-DOS or Apple’s Apple I relied on seeing opportunities to change and improve on previous ideas, going back to even before Alexander Babbage’s difference engines. Changes in technology and use drove this development as well, showing how new developments in other fields can be sources of ideas for an entrepreneur. Furthermore, the statement ignores the way in which an idea needs to be validated and refined into a viable business strategy. (ii) The types of muda include the following: • Waste of transportation • Waste of inventory

• Waste of motion • Waste of waiting • Waste of over-processing • Waste of over-production • Waste of defects (iii) Answers may vary. The following serves as a guide. Validating an idea is the process where the entrepreneurs consider whether or not an idea is viable and will work. In part, this involves examining the business plan, as well as looking for feedback, either from trusted friends and family, expert advisors, or an interest group of potential users; examining the marketplace for similar ideas and competitors; and determining what products or services your target market do not like in order to avoid or learn from their failings. It is important to validate an idea, because it is possible 549 ACTIVITY SOLUTIONS that there are problems you have not considered when drawing up the idea. Unseen flaws can ultimately lead to the ruin of a business, so including validations like a fatal flaw analysis and the business plan can ensure that the idea is viable, and any threats or weaknesses are accounted for. (iv) Answers may vary. The following serves as a guide. How many of your workers have to disappear, fighting traffic to the store over their lunch break to buy food, or order unhealthy fast food? Local Lunches allows users to order a home-cooked lunch delivered hot and fast to their office lobby. We offer healthy and fresh

ingredients in basic, banting, halaal, kosher and vegan meals. A healthy workplace is a productive workplace, so it benefits businesses as well. From the app, the user sends their office location, and they can see in real time when their meal will reach the office. Unlike competitors, these are all made at home by our range of user cooks, who take a percentage of the sale. Customer reviews ensure the cooks maintain quality. This is a win for people who can cook; for the customer, who can eat healthily with minimal effort; and for businesses with a productive and healthy workforce. It is like Airbnb or Uber, but for office lunches. Remember that an elevator pitch must be short and cover the following: what the business does, what the product or service’s key functions are, what differentiates it from competitors, and the benefits it offers to users. The length should be less than 160 words. ACTIVITY 2B (i) The five key parts of a business plan include: • the introduction and overview; • the assumptions and methods; • the business impacts; • the sensitivity and risk analysis; and • conclusions and recommendations. (ii) Answers may vary. The following serves as a guide.

The business plan is an important part of validating an idea as well as a key document to show to potential investors. The plan ensures the entrepreneur is clear both on the financial narrative (the plans of the business in terms of its finances) and the strategic narrative (how the business intends on attaining these financial goals and strategic objectives). This can help to grow support for the business, as well as ensure the entrepreneur has considered the situation of the business and the risks that they will take. As a result, it is an important planning tool that can be referred back to over time 550 ACTIVITY SOLUTIONS to ensure the business is on track. It acts as an early warning system, showing areas where problems may arise both as it is drawn up and in subsequent comparisons with actual business performance. Finally, the business plan orients the organisation from the beginning, helping it to focus on the best way to gain competitive advantages. (iii) Answers may vary. The following serves as a guide. There are a few drawbacks to the process of creating a business plan. It is possible for the entrepreneur to optimistically overstate income and profits, as these can only be estimates. Similarly, the business plan may underestimate costs, or fail to account for unforeseen expenses. The business plan can only be useful if it is referred to frequently to review how the business is performing relative to the plan, and it is also only useful if the plan is continually updated to reflect the actual performance of the business. (iv) c. (v) a. (vi) d. ACTIVITY 2C

(i) Answers may vary. The following serves as a guide. Hamerkop Software is creating waste in a number of ways. Firstly, there is a waste of waiting and over-processing. Thandazo and Mustafar are asking the artists to continually create and recreate work for ideas that have not been finalised. This work might not be used. They have also hired a musician, but she is waiting for the team to finish some sections before she creates any music. The team is also wasting time and money on working in an office that is too large, and requires the team to bring their equipment from home. They could consider downsizing, or even allowing some of the work to be done remotely. Finally, there is another kind of over-processing waste, as the two owners are working on two different products at the same time, rather than focusing only on what is essential. (ii) Answers may vary. The following serves as a guide. Hamerkop Software would benefit from using the lean start-up model, as they have a high level of waste in their business. They should start by eliminating aspects of the waste mentioned in the previous question. The studio should downsize its office space, allow employees to work remotely, and only hire employees once they have decided on specific aspects of their product, and those employees’ skills are required to progress. Most importantly, they should think about rapid prototyping and developing a 551 ACTIVITY SOLUTIONS minimum viable product. A significant part of the team’s waste comes from not having tested the owners’ hypotheses. They do not know whether there is a market for either of their two ideas, and so the many aspects they are developing may not be desired by their customers.

To eliminate the waste of developing two games at the same time, they should research their market and see whether there is a demand for their idea. Lean start-ups need to find a niche and focus on it. They could make rough prototypes to test, seeing whether their audience is interested in their ideas. They could then choose the one with the highest audience interest, and focus on fleshing it out over time. The feedback they receive on their rapid prototypes can then help to avoid rework at a later date, as they will be able to quickly see what elements are working and what they should change. This is in line with the lean principle of not moving forward to the next step until all rework areas have been identified and corrected. 552 ACTIVITY SOLUTIONS

CHAPTER 3 FORMING A BUSINESS ACTIVITY 3A (i) Answers may vary. The following serves as a guide. A business can be defined as an entity in which a person (or persons) invest their time, labour and attention in order to produce a profit, or to support their livelihood. (ii) a. False. Generally, all goods and services sold by a business (where annual income is more than R 1 million) bears a 15 per cent value added tax. b. True. (iii) 2011. (iv) A general/ordinary partnership, an anonymous/sleeping partnership and a commanditarian partnership. (v) The essential elements that should be included in a legal binding agreement include the following: • The name and purpose of the business, as well as the conduct of its partners – i.e.

the responsibilities and performance expected of each partner, together with their remuneration. • How profits or losses will be administered. • The division of earnings and procedures, should the partnership is dissolved. • Whether the partners are full-time, or whether other business activities are allowed. • Steps to be followed when a partner is disabled or dies. • A detailed description of each partner’s investment – cash, assets, loans, labour etc. • Guidelines for the withdrawal and admission of partners, as well as the grounds for expulsion. • Whether a partner can sell membership interests to an outsider. • Which partners will perform the financial role, handle payments and have signing powers. • Who may draw from the partnership’s bank account. • How and where the books will be kept. 553 ACTIVITY SOLUTIONS • The methods that will be used in order to determine the value of the business in the event of sale, dissolution, disability or withdrawal of a partner. • Decisions on whether a partner who leaves should be obliged to sign a non-compete agreement – this inhibits the potential for abuse

of private information, client lists, business practices and upcoming products, and prevents the copying of marketing plans. • A buyout clause covering details of partners who retire, die or leave. • How disputes must be settled – i.e. whether by negotiation, mediation or arbitration. (vi) The donor, trustee and beneficiary. (vii) Answers may vary. The following serves as a guide. • Plumber • Hairdresser • Motor mechanic • Builder (viii) State-owned companies, public companies and non-profit companies. (ix) Any three of the following functions of the CIPC can be listed: • Registration of companies • Disclosure of information on its business registers • Promoting education and awareness of company and intellectual property law • Promoting compliance with relevant legislation

• Efficient and effective enforcement of relevant legislation (x) A franchise’s functions are regulated, and its terms are stated within a franchising contract or agreement, whereas a business opportunity has neither of these characteristics. (xi) Answers may vary. The following serves as a guide. There is no specific process or set of steps that a sole trader needs to take in order to stop their business. However, if they are registered for VAT purposes, then they need to deregister their business with SARS. (xii) Answers may vary. The following serves as a guide. Sole traders do not have to register their name, nor do they need banking mandates and multiple signatories. Furthermore, the owner of a sole proprietorship can operate the business’s bank accounts themselves, as the business is not a separate legal entity. (xiii) A juristic person is not a real person (a human being), but an entity or organisation that has its own duties and responsibilities, and can be sued or held liable as a separate 554 ACTIVITY SOLUTIONS ‘person’. In this way, the owners and employees of the business are protected from being sued or held liable. For example, the director of a motor industry would not be held liable for the death of a driver if the brakes of a new car fail. Rather, the driver’s family would sue the firm, which has a juristic personality. (xiv) Answers may vary. The following serves as a guide.

In a personal liability company, the directors are legally responsible. Another example is in the case of a private or public company. Here, if gross negligence is a factor, the courts can override the protection that the directors enjoy. ACTIVITY 3B (i) Answers may vary. The following serves as a guide. Mr Okeke should invest in a franchise, as a franchise usually has a tried-and-tested business model, which is given to franchisees. (ii) Answers may vary. The following serves as a guide. Mrs Bankole should consider becoming a sole trader. This would be the most ideal entity to choose, as only one person will manage the business. In addition to this, starting a sole proprietorship is relatively easy, and there is no legal personality required for this type of business. (iii) Answers may vary. The following serves as a guide. Ms Smith should consider a B-BBEE partnership model. Having this model is ideal if she is to compete with other businesses for government tenders, as it will certify her business at a high level of BBBEE compliance, which will make her a more likely candidate for tenders. Furthermore, since Ms Smith does not have access to a substantial amount of capital, a B-BBEE partnership will benefit her, as it is relatively easy to establish, and there are no statutory requirements, such as paying auditors to prepare her business’s financial statements. (iv)

Answers may vary. The following serves as a guide. The ideal company for the students to establish would be a private company. This is because such a business entity requires a group of people to own and manage the business, and it will allow the students to remain in strategic roles. It seems that the group of students is also preparing for their business to expand even more, which is ideal for a company-type of business. 555 ACTIVITY SOLUTIONS (v) Answers may vary. The following serves as a guide. A public company has a complicated starting procedure, and the added complex requirements may be expensive and tedious for the group of students. Additionally, a public company may lead to a loss of direct control, as a percentage of the shares are issued and controlled by outsiders. This allows the possibility for the group of students to lose their strategic roles, and be removed through a hostile takeover. ACTIVITY 3C (i) Answers may vary. The following serves as a guide. First, Ms Ekwensi would need a municipal licence, which will allow her to trade. In order to get this licence, her premises will be inspected, and she will receive a certificate of acceptability. Additionally, Ms Ekwensi would need to follow the zoning regulations of the area – i.e. she needs to ensure that she can trade in her area of choice. Another factor that she needs to consider is tax. Once the tax threshold of the profit from her coffee shop has been reached,

and employees are hired, Ms Ekwensi needs to ensure that the VAT, PAYE, UIF and SDL are registered and paid over to SARS. (ii) Companies and Intellectual Property Commission (CIPC) (iii) They would need to approach the municipality for a licence to trade, and would need to adhere to the regulations that the licence imposes. (iv) Any two of the following advantages would be considered correct: • A partnership agreement states what each partner is responsible for. • A partnership agreement states what percentage of profits each partner is entitled to. • A partnership agreement includes the procedure for what should happen in the event of the death of one of the partners. • A partnership agreement includes the responsibilities and performance expected of each partner, together with their remuneration. 556 ACTIVITY SOLUTIONS ACTIVITY 3D (i) Answers may vary. The following serves as a guide. Question

Matters to consider What form of business I have decided on a sole proprietorship, as it is ideal for entrepreneurs entity should I choose? who have just started their first business venture. The starting procedure for this business entity is simple, as there is no legal personality, and all the distribution of profits go to myself. Since this is my first business, I have limited experience in owning and running a business, which, again, makes the sole trader venture ideal. The requirements for a sole proprietorship include the following: • A licence to trade in my selected area • Pay attendant fees • No need to register a name • No need for banking mandates and multiple signatories What registration and I am familiar with the municipal, provincial and national requirements. licences are applicable? Since I will not be selling any liquor, no liquor licence is needed. Who is a partner to my I am a sole trader. business? If there are multiple N/A partners, should we

consider forming a company? Do I have a suitable bank Yes, I am with First National Bank (FNB), and I have a Gold Business account? cheque card. Moreover, I am protected in terms of signatory limitations. If I have employees, do I have two employees, which means I would need to comply to the I comply to the legal Labour Relations Act, as well as the Basic Conditions of Employment framework? Act. I would also have to ensure that the coffee shop complies with the Occupational Health and Safety Act. Lastly, I should comply with B-BBEE, and ensure that I employ black employees. Furthermore, I can consider a B-BBEE partnership in the future, when my company grows. Am I familiar with the tax I am a new business, so I do not have to register with SARS as of yet. regulations that affect my However, as my business grows, I will register with SARS, and will ensure business? that I pay PAYE, VAT, SDL and UIF – all of which need to be paid to SARS, together with submissions after certain thresholds have been reached.

What is the best way I will research a good marketing campaign that will spread awareness in which to manage of my new coffee shop, as well as techniques that will ensure that I have marketing, sales, strong sales. In addition to this, I will ensure that I use the most effective production, logistics, production system, and practice how to successfully run it before I open administration? the coffee shop. I will also do research on all the logistics concerning my coffee shop, and find out about all the administration that is needed in order to run a coffee shop smoothly and legally. 557 ACTIVITY SOLUTIONS (ii) Answers may vary. The following serves as a guide. • How far is the bank’s branch and ATMs from my premises and/or home? • What are the bank charges? • How complicated are the forms? • Am I served in my language of choice? • Do I already have a good personal credit record at that bank, and would that assist me in gaining access to finances for the business? (iii)

Answers may vary. The following serves as a guide. • Do I have a municipal licence, if one is required in my line of business? • Is my product or service one that is not already offered by other parties? • If so, how is mine better/different – i.e. how does it enable me to be competitive? • Do I have a good and reliable supplier? • Do I have a safe place for storing my inventory and equipment? • Am I recording all of my expenses and income, so that I can determine whether the business is growing or not? • Are my takings secure, and would a separate bank account allow me to better determine the profitability of my enterprise? • Who stands in for me if I am sick? • How can I spread the word about my product or service? • Is there any organisation that offers training or support to enable me to grow and protect my business? • Would a partner be beneficial to my business? 558 ACTIVITY SOLUTIONS

CHAPTER 4 DEVELOPING PRODUCTS AND SERVICES ACTIVITY 4A (i) Answers may vary. The following serves as a guide. Businesses can be split up into product-orientated businesses, service-orientated businesses, or a combination of both. Productbased businesses work with tangible goods that are sold as inventory to consumers. They often use automated processes, and a location is necessary in order for the business to operate and hold inventory. Service-orientated businesses produce intangible services for a predetermined customer (they create specifically tailored services for customers), promote interpersonal skills among staff. They do not use automated processes as often as product-orientated businesses, and they do not have inventory; therefore, they do not require a set location to hold inventory. (ii) Answers may vary. The following serves as a guide. Identified productDistinctive feature for Identified serviceDistinctive feature for orientated business

success orientated business success Woolworths Provides readily weFix Fixes devices at a prepared meals lower cost than chain stores Checkers Affordable products Capitec Bank Lower costs and in accessible stores transaction fees nationwide Pick n Pay Brand-matched Spur

Quality service prices and catering to families Smartshopper points 559 ACTIVITY SOLUTIONS (ii) Answers may vary. The following serves as a guide. Type of business Advantages Disadvantages Product-orientated • Has inventory – it is easier to • Infl exible working hours business sell tangible goods • More job insecurity in • More automated processes comparison to service are incorporated as they are

businesses cheaper and faster • Requires signifi cant capital • Highly developed to start-up, as the business interpersonal skills are not needs to purchase inventory, required arrange a physical location • Easier to assign values to, to house inventory and as values are tangible and production processes have already been allocated • Processes are becoming more fi nancial value automated – fewer human • Has more security in times of resources are being used economic depression than

• Has inventory, so inventory service-orientated businesses control and management is necessary • Has an (often indirect) dependency on raw materials • Continuous product development is necessary, as market needs are always changing and developing, but is diffi cult to adapt products (process is slow) Service-orientated • Flexible hours • Start-ups usually build business • Job security momentum slower than • Focus on, and development product-orientated

of, interpersonal skills businesses • Less capital is required for • More diffi cult to sell service-orientated start-ups something that is intangible • No inventory, therefore there (a service) than something is no need for inventory that is tangible (product) control or a location to hold • Diffi cult to assign value to inventory services as they are intangible • Not necessarily dependent – often no clear allocated on raw materials fi nancial value for a service • Usually easier for service• Is threatened in economic

orientated businesses to depression or hard fi nancial adapt to market needs and times changes • Constant demand for new and improved services 560 ACTIVITY SOLUTIONS (iv) Answers may vary. The following serves as a guide. A service-orientated business often has customers who know exactly what they want from the business – i.e. they want to place a specific order, or receive a specific service. For example, a client who is a representative for his company would go to an advertising agency, such as the South African company, called ‘The Creative Counsel’, to pay for a specific custom-made advertisement. The client would often have specific instructions or directions for the advertisement – i.e. it should focus on the latest product launch, it needs to reach a specific target market and create brand awareness. This can even be said for customers who go to a hair salon – they often go with a specific idea in mind for what they want to do, and want a customised hair-cutting experience. For instance, a lady may go to a hair salon to dye her hair the same colour as a celebrity’s hair colour, as well as cut her hair 5 cm shorter.

On the other hand, products from a product-orientated business are often not customised for each and every customer that approaches the business. The products are made beforehand and the customer chooses from the business’s already-made selection of products. For instance, a boy goes to Mr Price Clothing store to select a pair of shoes – the shoes are not custom-made for the specific customer. ACTIVITY 4B (i) The following five features are what make a product sell. 1. Relevant 2. Functional and good-quality 3. Customers should be well-informed of the product (i.e. the advantages of the product) 4. A good name that stands out from other products 5. Adaptable and flexible in the ever-changing competitive market (i.e. stay trendy) (ii) • Step 1: Opportunity or problem recognition • Step 2: Immersion • Step 3: Incubation

• Step 4: Insight • Step 5: Verification and application (iii) Product development is when an individual or company creates a product that offers something new and interesting to the industry, or provides more benefits to an existing product. 561 ACTIVITY SOLUTIONS (iv) Answers may vary. The following serves as a guide. Creativity helps entrepreneurs look at things differently – it helps them identify problems or gaps in the market. Innovation and creativity play large roles in successful entrepreneurship, as they help them to create and develop effective solutions to identified problems and needs. An entrepreneur’s creativity kickstarts the innovation process needed to help them develop good solutions. (v) Answers may vary. The following serves as a guide. Thando’s creative mindset was a driving force that catapulted her innovative entrepreneurial venture. Thando’s creative idea was to provide a safe environment for children whose parents cannot afford to pick them up at the crèche at 17h00, from Monday to Friday. Thando’s innovation is evident through her implementing her creative idea and starting ‘Thando’s Care’. The five distinct steps in Thando’s process could have looked as follows:

• Step 1 (opportunity): Thando identifies the security risk of the children waiting alone for their parents to fetch them outside the crèche, and wants to fix this problem. • Step 2 (immersion): Thando is told by the crèche owner that it is not her responsibility as a crèche teacher to work overtime and look after the children, especially when the crèche’s operating hours are over. • Step 3 (incubation): Thando is still bothered by the security risk of the children who wait outside the crèche alone. She subconsciously starts thinking of possible solutions. • Step 4 (insight): Thando walks past an aftercare centre on her way to work and gets the bright idea of starting her own aftercare centre. • Step 5 (verification and application): Thando conducts her own research on how to run an aftercare centre. She talks to the children’s parents or legal guardians and determines if they would be willing to support this initiative. She talks to the crèche owner about possibly hiring the crèche facility for the aftercare programme. She implements her idea and starts her entrepreneurship. (vi) Answers may vary. The following serves as a guide. Firstly, Thando can encourage creativity among her assistants in the workplace by promoting effective collaboration between her assistants and herself. Thando should encourage her assistants to work cohesively together when facing any challenges or issues at their work; for example, when an assistant is struggling with a child who is suffering from severe attention-deficit hyperactivity disorder (ADHD). The child is disrupting the class and is struggling to sit still and focus after an extended period of time. Another assistant can offer to take the child outside every hour and let the child run around for five minutes so that he or she can release some pent-up energy to help focus. 562

ACTIVITY SOLUTIONS Secondly, Thando needs to create brainstorming sessions with her assistants. This will give the assistants opportunities to come up with new ideas and good solutions. For instance, every Wednesday afternoon, Thando can arrange for a meeting with all the assistants where they are given a space to freely discuss any challenges, issues and solutions at their workplace. Thirdly, Thando should help reduce the barriers between employees and herself. She can do this by encouraging the assistants to ask her any questions, or to freely talk to her about any challenges or issues that they encounter at work. For instance, Thando should allow the assistants to come and talk to her at any time of the day when they encounter serious issues. The weekly brainstorm sessions also help the assistants feel ‘heard’ and help them feel important, which will strengthen collaboration within the workplace. Fourthly, Thando should ensure that there are resources dedicated to experimenting with new ideas and solutions at work. For instance, the assistants realised that the children did not have enough things or activities to stimulate them during play time at the crèche. The assistants recommended that they build a little playground for the children. Thando approves of this solution and tries to get resources in order to get the materials for the playground. Fifthly, Thando should give her employees job assurance. For instance, during their brainstorming sessions, Thando should tell her assistants that they are encouraged to address any challenges or issues in their workplace, and that they will not lose their job when they execute approved innovative solutions. Lastly, Thando should give her employees incentivised rewards. For example, Thando could give an assistant a year-end financial bonus as she brought their attention to an issue (i.e. lack of physical activity in the after-care centre), and also supplied a good innovative solution

to resolve this issue (she offered to help build a playground for the children and conducted extensive research into how they can build a safe, child-friendly playground). ACTIVITY 4C (i) Answers may vary. The following serves as a guide. The key issues to take into consideration when you design a survey questionnaire, include the following: • Questions should be concise and no longer than two pages. • The questionnaire should cater to a specific target market. • A cover letter, or letter of consent, should be attached to the survey. 563 ACTIVITY SOLUTIONS • If the questionnaire needs to be returned via mail, it should include a return envelope with a prepaid postage. • Including incentives may increase the number of people who wish to participate. (ii) Answers may vary. The following serves as a guide. Ongoing research is essential in any business. Market research assists companies in obtaining data and analysing it in order to effectively manage their businesses. Such research could include financial data, customer feedback and the results obtained from a competitive analysis. Market research that is conducted accurately can help to form good foundations of successful businesses, such as

information about customers and the market. Research lets business owners determine the feasibility of a business, before spending capital on it. Research allows for managers to better understand their company, the position it holds in the market and how to improve that position. (iii) Answers may vary. The following serves as a guide. There are various methods that can be used to conduct market research. The first is surveys, which are done by providing questions about a product or service to individuals to fill out, in order to gain a better understanding of their experiences or opinions. The second is focus groups, which are small groups designed to elicit opinions and experiences about a certain product from individuals. The third is observation in which market researchers observe consumer behaviour and try to fill in the gaps. The fourth is in-depth interviews, which are usually done in person and on a one-on-one basis, in order to fully understand the experiences or demands of the consumer. (iv) Competitor analysis can be explained as the identification of businesses’ competitors, and the analysis of their strategies and shortcomings in order to determine their strengths and weaknesses, and to assess how much of a threat they are to the business. A competitive analysis is a critical part of any business’s marketing in order to make accurate comparisons. It helps to identify USPs of the product or service. (v) A key component of a competitor analysis includes the objectives of the competitor – i.e. what the competitor is doing and what its goals are. Another component of competitor analysis is looking at the strategy of the

competitor, such as analysing its behaviours and patterns. Competitor analysis also includes the analysis of competitors’ resources and capabilities – i.e. seeing what they have and what they can use in order to reach their objectives. Another component is considering the assumptions of the competitors, and assessing how they understand the market and the operations of their business. Lastly, competitor analysis requires the analysis of the response profile of the competitor – i.e. a culmination of all this information that can predict what actions a competitor is likely to take. 564 ACTIVITY SOLUTIONS ACTIVITY 4D (i) Any two of the following skills can be listed. • They should take risks • They should be passionate about their endeavour • They should have good communication skills, business skills or technical skills (ii) The pricing strategies that are specifically geared for serviceorientated businesses, consist of: • hourly wages; • project-based pricing; • retainer pricing; • the business’s previous record of accomplishment; and

• performance-based pricing. (iii) A USP is what sets a business apart from its competitors. It is important to have as this could sway consumers into buying from you rather than your competitor if you offer something that no one else is. (iv) It is of vital importance that you know the true cost of your product or service. This will set the foundation for accurately and successfully pricing your product or service. Accurately pricing a product or service can determine whether a business will fail or succeed. If you do not know the true cost, then you make your business vulnerable to either overpricing or underpricing a product or service. If an entrepreneur is aware of the true cost of his or her product or service, then they are able to make more profitable decisions for the business. (v) Pricing determines how much consumers will pay and how much profit the business will make. If this is set too low or too high, it could have drastic effects on the business. It is important to accurately research and calculate costs before pricing a product or service. (vi) It is important for an entrepreneur to validate a product or service early in the developmental stages, so that they can determine whether the product or service actually addresses a need in the market, whether the customers would actually enjoy such a product or service, and whether the product or service is realistic, sufficient and has the potential to be successful. Validation will help an

entrepreneur pick up on any errors or problems in the product or service in the early development stage. 565 ACTIVITY SOLUTIONS (vii) Premium pricing works when the brand already stands out from the rest; this enables businesses to charge more for the product. Penetration pricing refers to when a price is set artificially low when it is first released to increase its market share. Economy pricing refers to pricing techniques that target mass markets. Skimming price strategies include charging a higher price for a product until competitors start to produce the same product. (viii) Answers may vary. The following serves as a guide. A survey is a list of questions that aims to elicit the opinion or experience of the respondent. It should be concise and to the point, and the questions should stick to a particular topic. (ix) Answers may vary. The following serves as a guide. The USP for this business could be that you have a software program, which means that they can practise more often if they have access to a computer. (x) Answers may vary. The following serves as a guide. I would use penetration costing initially, because the computer program will be doing most of the work and there will likely be more word-of-mouth and more students using it if it is affordable.

(xi) Answers may vary. The following serves as a guide. The business would need to conduct an evaluation of its competitors in order to see how they compare to them. They should take particular note of what their marketing and advertising strategies are and how they attract their customers. They should look out for who their customers are and what their USPs are. 566 ACTIVITY SOLUTIONS

CHAPTER 5 SPREADING THE WORD ACTIVITY 5A (i) Microsoft tried to create something new to compete with existing offerings, but their new product was not at all competitive, because they assumed the market was going to react to this product in they same way that they had reacted to their other products, which did not have significant competition. Their new operating system was not able to provide or support the same level of functionality that iOS and Android were able to. Entering an existing market with strong and established brands, and trying to compete by putting out an inferior product will very rarely result in success, unless it competes on price in an extremely price-sensitive market. (ii) This statement is correct. The first entrants in a new market have the advantage of no competition, and by the time there is competition, customers are familiar with the original brand, and are often already loyal to it. However, there will always be a market for affordable products, and those looking for superior features, quality and service. If a product or brand is not able to compete on any of these levels, there is no reason for a customer to support it over its competitors ACTIVITY 5B Category Strategy My reason for existence:

Providing indoor and outdoor toys and educational games targeted at boys and girls, aged 0–13 years What sets my business apart from the rest? The range of toys and games on offer, and the superior service provided My target customers are: 1. Parents of babies and toddlers looking for educational and stimulating toys 2. Parents of babies and toddlers looking for toys 567 ACTIVITY SOLUTIONS 3. Parents of tweens looking for educational puzzles, books and games to complement classroom learning 4. Children wanting to spend pocket money, birthday money or savings on toys and games for themselves 5. People buying gifts for children for

birthdays or Christmas What is most important to my ideal customer 1. Quality when they are buying what I am selling? 2. Aff ordability What I want to accomplish this year: An increase of 20 per cent in sales The top three things that are going to get me 1. Introducing a loyalty programme there: 2. Off ering birthday discounts to children under 13 years 3. Having a stand at the Baby and Child Expo to raise awareness What will trigger my ideal customer to think Birthdays of me? Programmes I am running to reach my goal 1. Off ering a ten per cent birthday discount to anyone under the age of 13 (they need to bring their birth certifi cate to prove it has been their birthday) 2. Off ering a fi ve per cent discount to anyone who brings in a voucher from the Baby and Child Expo

3. Off ering a R 50 discount voucher for anyone who spends R 750 on their loyalty card. ACTIVITY 5C (i) Yes, having a national chain stock for Jayvid makes sense, as they already have a customer base that goes into their stores. While these customers are in the store, they will see the brand, and can get advice from the trained salespeople. Some customers are nervous to buy products online, especially shoes, when they are unfamiliar with the brand and sizing. (ii) Red would be a good choice, as it is known for increasing physical energy and stamina, and is associated with passion – an important characteristic in sportspeople, and a characteristic any sporting brand would want to be associated with. 568 ACTIVITY SOLUTIONS

CHAPTER 6 SELLING ACTIVITY 6A (i) Entrepreneurs need to have a good understanding of the challenges their sales teams may face. They should motivate and empower the team and lead by example: they should really listen and teach their staff to do the same. Entrepreneurs need to have in-depth knowledge of products and the market, and of how their offerings could satisfy market needs. They also need to network and build relationships with people who can help to grow the business. (ii) Answers may vary. The following serves as a guide. Note that the numbers and percentages are purely examples. Your answer may look different. Target market The target market for this vehicle is middle- to high-income individuals who want to save money in the long-term by cutting petrol costs, and/or who are environmentally conscious. Revenue targets The company aims to sell 100 hybrid vehicles in the first quarter and to gain five per cent market share within the first year of operation. Sales strategies and tactics • Objective: Sell 20 vehicles in the first month.

• Game plan: §§ Conduct training for all sales staff on the benefits of a hybrid vehicle. §§ Offer a higher percentage commission than on other vehicles for each hybrid vehicle sold. §§ Offer an incentive for the salesperson who sells the most hybrid vehicles in the first month. 569 ACTIVITY SOLUTIONS Pricing and promotions As this is a new product, the car will be offered at an introductory price, with the mid-range vehicle being offered at the entry-level price. Deadlines and directly responsible people Month one sales: • Jayson: Three vehicles • David: Four vehicles • Isabella: Six vehicles • Heather: Seven vehicles Team structure and resources Team structure: • Jayson: Junior salesman; new to the company. • David: Junior salesman; has been with the company for three months.

• Isabella: Senior saleswoman; has been with the company for two years. • Heather: Senior saleswoman; has been with the company for two and a half years. Resources: • R 100 000 available for a launch party and marketing • R 50 000 available for incentives • R 5 000 available for training Market conditions There is no direct competition in South Africa. This is the first hybrid vehicle on the market so there is no comparison that can be drawn. The company is hoping to benefit from the increase in environmental awareness and the public’s willingness to pay for environmental responsibility. They also hope to capitalise on the increasing petrol prices. ACTIVITY 6B (i) A lead is someone who has already shown interest in the business. It is important to find these people so that when the sales team approaches them, they have already established their interest. The salespeople will have information about the prospect that will help to tailor their pitch to suit the prospect’s needs and/or interests. 570 ACTIVITY SOLUTIONS (ii)

When dealing with a ‘tough customer’, the salespeople should not become flustered or try to prove their dominance. Rather, they should maintain control and try to understand what is causing the prospect’s unhappiness or what their challenges are. They should also avoid taking it personally. (iii) If the salesperson does not follow-up a pitch, it is likely that the prospect will forget the company or even move on to the company’s competition. The salesperson should use the opportunity to show prospects how important they are and how much they would like to build a relationship with them. If the prospect is not ready to make a purchase at the time, the follow-up will keep the salesperson, and the company, at the forefront of the prospect’s mind. ACTIVITY 6C (i) Salespeople should be managed in a transparent way that motivates and encourages them to reach the goals set by the entrepreneur. If staff feel supported and empowered, they will be motivated and committed. Salespeople should also be given achievable targets that stretch and challenge them. This will ensure that they do not end up feeling demotivated by trying to achieve unrealistic goals. They should also be offered ongoing product and sales training. (ii) Car manufacturers use the services of third parties as they have sales knowledge and skills, whereas the manufacturer’s skills and knowledge are more technical. The dealers have retail stores conveniently situated near their target markets and competitors, while the manufacturer has a single plant that is usually not in a location frequented by their customers. 571

ACTIVITY SOLUTIONS

CHAPTER 7 CASH IS KING ACTIVITY 7A (i) Cash is the money at hand or in the bank account of an organisation or individual. It could be in the form of coins or notes, and may be referred to as currency or legal tender used for exchange of goods and services. For businesses, cash may include marketable securities held such as treasury bills. Cash is regarded as the most reliable form of payment, unlike bank cheques and credit cards. This is precisely why some businesses prefer to be paid in cash. In some instances, we also count cash equivalents alongside coins, notes or money in the bank. The term revenue refers to income earned, whether or not cash is received. Revenue may also be defined as sales in units multiplied by the selling price per unit. The key difference between cash and revenue is that revenue is determined when earned, and it may be earned without the money itself being received; for instance, in the case of a credit sale. As a result, revenue may not always be the same as the cash situation of a business. (ii) Answers may vary. The following serves as a guide. It is clear that managing cash more effectively will have many benefits for Johanna and Rajesh’s business. While they are able to command a fee of R 100 000, they are still unable to pay their creditors. Although their revenue is high, their cash situation is not good. This

puts their business at significant risk. They are spending their business cash on personal expenses, without monitoring the impact this could have on their business cash flow. While doing this, they are struggling to pay their debts on time, and cannot raise the capital they need for day-to-day operating expenses. Finally, by not monitoring their cash situation, they have allowed debts to be written off as bad debts, further harming their inflow of cash. Managing their cash more effectively, the two will be able to ensure their business pays its debts timeously, without incurring expenses. It will also help them to understand their business’s cash situation by drawing up a cash budget and a cash flow statement. These steps could also allow their business to be more attractive to investors. Finally, it will also help them to separate their own expenses and purchases from the business. 572 ACTIVITY SOLUTIONS They also need to be able to distinguish between revenue and cash, and they must be aware that the business may have high revenue and profitability but still be bankrupt. They should therefore follow the advice of only accepting a booking if payment is made up front, cutting on their unnecessary expenses, leasing vehicles instead of buying them, and collecting from debtors before paying creditors. (iii) Answers may vary. The following serves as a guide. I agree with the advice given by the financial planner as it is in line with the principles of effective cash management covered in the chapter, which include cutting all the non-essential costs of your business, disposing of assets that are unwanted and costly to

maintain, leasing non-current assets instead of buying them outright, speeding up collections from debtors by offering discounts and other deals, and managing working capital effectively. ACTIVITY 7B (i) ‘Cash is king’ is a common phrase used in business to emphasise that cash is the most important form of business asset. While a business may appear profitable and have high revenues, bad cash flow can cause a business to become unable to pay short-term debts and expenses. This is one of the most common reasons for businesses failing. (ii) Mr Dube needs to control the expenses of his business, particularly those of the two new branches, using a cash budget. He needs to establish a credit policy and require upfront payment from uncreditworthy customers. In addition, Themba needs to ensure that the receivables are collected before creditors are paid and must put controls in place to deter employees from colluding with customers to defraud his business. He also needs to limit his flight costs by avoiding unnecessary flights and by booking flights personally to lower the exorbitant fees charged. He needs to monitor his cash flow regularly via the online platforms and cell phone banking facilities provided by most banks, and must adopt an accounting system or outsource accounting to a well-established firm. With proper records, he will be able to obtain a credit line like a bank overdraft, which so far has been declined. He further needs to negotiate with creditors not to repossess inventory, and he must pay his workers on time. (iii) Profit and cash are not the same thing. While profit is the difference between revenues and expenses as determined by accounting rules, cash is money on hand and in the bank account of a business.

Therefore, a business that solely or generally relies on credit sales but purchases on a cash basis may be profitable on paper, but can go bankrupt if it cannot collect payment from debtors, or if its own debts come due at the same time. In other words, in that situation it will not have cash to pay salaries and meet other obligations as they fall due. 573 ACTIVITY SOLUTIONS ACTIVITY 7C (i) a. Calculation of PK Ltd cash balance as at 28 February 20.7 Rands Balance at the beginning on 1 March 20.6 200 000 Add: Cash receipts 12 800 000 Issue of shares 1 200 000 Receipts from cash and credit customers 11 200 000 Disposal of property, plant and equipment

400 000 Total cash receipts 13 000 000 Less: Cash payments (12 000 000) Payment to suppliers 8 000 000 Acquisition of property, plant and equipment 800 000 Other operating expenses 800 000 Salaries 400 000 Tax paid 400 000 Dividends paid 400 000 Loan repayment 1 200 000 Closing cash balance as at 28 February 20.7

1 000 000 b. PK Ltd cash flow statement for the year ended 31 December 20.7 (using the direct approach) Cash fl ows from operating activities Rands Rands Receipts from cash and credit customers 11 200 000 Payment to suppliers (8 000 000) Salaries (400 000) Other operating expenses (800 000) Cash generated from operations 2 000 000 574 ACTIVITY SOLUTIONS Income taxes paid (400 000)

Net cash flows from operating activities 1 600 000 Cash flows from investing activities Disposal of property, plant and equipment 400 000 Acquisition of property, plant and equipment (800 000) Net cash flows from investing activities (400 000) Cash flows from financing activities Cash received from issue of shares 1200 000 Loan repayment (1 200 000) Dividends paid (400 000) Net cash flows used in financing activities (400 000) Net increase (decrease) in cash and cash equivalents 800 000

Cash and cash equivalents, beginning of year 200 000 Cash and cash equivalents, end of year 1 000 000 (ii) DD Ltd cash flow statement for the year ended 28 February 20.7 (using the indirect approach) Cash flows from operating activities Rands Rands Net income after tax 556 000 Adjustments to reconcile net income to net cash: Add depreciation 60 000 Add loss on disposal of equipment 12 000 Add decrease in accounts receivable 40 000 Add increase in accounts payable 400 000

Add increase in accrued expenses payable 20 000 Less increase in inventory (200 000) 332 000 Net cash flows from operating activities 888 000 Cash flows from investing activities Acquisition of a building (640 000) Acquisition of equipment (100 000) Disposal of equipment 16 000 Net cash flows from investing activities (724 000) Cash flows from (used in) financing activities 575 ACTIVITY SOLUTIONS Dividends paid

(60 000) Net cash fl ows used in fi nancing activities (60 000) Net increase (decrease) in cash and cash equivalents 104 000 Cash and cash equivalents, beginning of year 136 000 Cash and cash equivalents, end of year 240 000 (iii) Answers may vary. The following serves as a guide. Sibodo Limited can reduce its cash conversion cycle in the following ways: • Reduce the debtor collection period by offering discounts to debtors for prompt payment • Reduce the debtor collection period by developing a clear and stringent credit policy with shorter terms for your debtors than those offered by creditors • Reduce the debtor collection period by charging penalties for delayed payments • Use a just-in-time system for purchasing materials • Use a just-in-time system for sales and production

• Take full advantage of credit periods to increase the creditor payment period, unless there are discounts or incentives to pay earlier • Renegotiate terms with creditors to extend repayment periods (iv) ASR Limited cash flow statement for the year ended 31 December 20.2 (using the indirect approach) Cash fl ows from operating activities Rands Rands Net income 220 000 Adjustments to reconcile net income to net cash: Add depreciation 120 000 Add loss on disposal of equipment 6 000 Add decrease in accounts receivable 100 000 Add decrease in inventory 40 000 Add increase in accounts payable 360 000

Less increase in prepaid expenses (10 000) Less decrease in accrued expenses payable (20 000) 596 000 Net cash fl ows from operating activities 816 000 Cash fl ows from investing activities Disposal of equipment 34 000 576 ACTIVITY SOLUTIONS Acquisition of long-term investments (50 000) Acquisition of land (520 000) Net cash flows from investing activities (536 000) Cash flows from financing activities Dividends paid

(120 000) Bonds payable repayment (600 000) Ordinary shares issued 400 000 Net cash flows used in financing activities (320 000) Net increase (decrease) in cash and cash equivalents (40 000) Cash and cash equivalents, beginning of year 100 000 Cash and cash equivalents, end of year 60 000 577 ACTIVITY SOLUTIONS

CHAPTER 8 IT IS IN THE NUMBERS ACTIVITY 8A (i) The following are roles accounting plays in ensuring effective management of a business by an entrepreneur: • Accounting provides numbers that act as a summary of business performance. These numbers allow an entrepreneur to tell how the business is performing immediately and take necessary actions if it is underperforming. • Accounting provides budgets and financial information required for entrepreneurs to control expenditure. These budgets can be compared against actual performance, highlighting areas of deviation. This allows the entrepreneur to act to control spending and take corrective actions. In other words, accounting helps entrepreneurs to monitor performance, control expenditure and limit resource wastage. • Accounting quantifies the processes and transactions of a business, allowing entrepreneurs to set and monitor progress towards goals or targets. These goals give the business direction, and monitoring them allows the entrepreneur to correct for deviation. • Accounting provides standardised financial information, allowing for comparison of the business against its competitors. This helps the entrepreneur determine how well their business is doing relative to others, and therefore may help to determine what actions may improve performance. (ii)

Answers may vary. The following serves as a guide. An entrepreneur can use information gained from accounting to determine whether or not it is a good idea to buy a business. There are many pieces of accounting information that can provide insight into the performance and relative value of a business, including the following: • Revenues, expenses, and gross and net profit, which give a sense of the income, expenses and profitability of the business • Cash flows, as knowing the amount of cash in a business can show whether it can cover its debts • Liquidity and solvency, which show whether the business is sustainable 578 ACTIVITY SOLUTIONS • If shares are traded in the open market, the valuation of the shares is a performance indicator • Projected growth as per the business plan gives an indication of what to expect in the future for the business (iii) Entrepreneurs will generally be asked by investors and lenders to provide financial forecasts. These forecasts can help these groups to decide whether to invest in, or lend money to, the business. Therefore, having a business plan that contains a forecast of income and expenditure – in the form of pro-forma financial statements along with other information – is vital in securing finance. For this reason, it is important for an entrepreneur to be able to prepare this information, or secure the services of an accountant to do so. ACTIVITY 8B (i)

Answers may vary. The following serves as a guide. Financial accounting provides information and financial statements for use in decision-making by external stakeholders of the business. Management accounting provides information for use in decisionmaking within a business. The other differences between management accounts and financial accounts can be summarised as follows: • Companies are legally required to prepare financial accounts or statements, but not prepare management accounts. • Financial accounts and related financial statements of listed companies must be audited by an independent and registered auditor; this is not mandatory for management accounts of listed companies. • Financial accounts contain only historical information and are usually prepared annually, covering the preceding 12-month period. Management accounts, on the other hand, can contain both historical and future-oriented information, may be prepared as often as management requires, and can cover any time period. • Financial accounts are required to be prepared according to International Financial Reporting Standards (IFRS) as set by the International Accounting Standards Board (IASB) and are regulated by the IASB. Management accounts are not required to be prepared according to any standards and are not regulated by the professional accounting bodies. • Statements and reports produced through financial accounting cover all aspects of the business. By contrast, management accounting typically produces reports covering a specific aspect or part of the business, and can therefore focus on selected cost centres or products. 579

ACTIVITY SOLUTIONS (ii) It is important to have a strong financial accounting function to be able to prepare timely financial statements and reports for decisionmaking by external stakeholders. Having a weak financial accounting function could result in a negative (qualified) audit report, which can be detrimental to a business as it will be unable to attract investors, lenders and key employees. On the other hand, having a strong management accounting function will ensure effective decisionmaking, which will help the business to achieve its objectives. A weak management accounting function can lead to incorrect and sometimes irreversible decisions being made, which can ultimately cause a business to fail. Accordingly, it is important for every business to have a strong financial and management accounting function. (iii) Answers may vary. The following serves as a guide. • Financial accounting and management accounting functions should be separated. • Each of these functions should have personnel with the professional qualifications required to execute their job. • Mr Bingotho should be replaced or formally retrained to meet the new challenges facing the business. • A qualified accountant should retrain the accountants to perform their tasks in either the financial accounting function or management accounting function. • Mr Sibodo should investigate why there is a lack of responsiveness to customers’ needs.

• Mr Sibodo and other senior managers should conduct a workshop to align operational plans with strategic plans. • Better costing methods, such as activity-based costing, should be used to eliminate cross-subsidisation of unprofitable products by more profitable products. • The management accounting function should be tasked with correcting the defective budgetary system based on realistic targets. • The management accounting function should be tasked with correcting the defective cost control system. • Mr Bingotho should hire a professionally qualified accountant or accounting firm for technical support. • Mr Bingotho should not perform both the financial and management accounting functions. These two functions should be separated. • The management accounting function should be tasked with cost control by, for instance, using budgets for this purpose. • With the separation of the financial accounting function from the management accounting function, the financial accounting function should be staffed with adequate and qualified personnel to eliminate delays in the preparation of financial statements and annual reports. 580 ACTIVITY SOLUTIONS ACTIVITY 8C (i) Statement of profit and loss for Nyanga Suppliers Limited for the year ended 28 February 20.5 Rand

Revenue 4 330 000 Cost of sales (W 1) (2 630 000) Gross profit 1 700 000 Distribution expenses (590 000) Administration costs (500 000 + 148 000) + depreciation (W 2) (648 000) Profit from operations 462 000 Finance costs (50 000) Interest received 2 000 Investment income 30 000 Profit before tax 444 000 Income tax expense

(330 000) Profit for the year 114 000 Other comprehensive income Gain or loss on revaluation 200 000 Gain or loss on fair value through other comprehensive income financial 0 assets Total comprehensive income for the year 314 000 (ii) Statement of financial position for Nyanga Suppliers Limited as at 28 February 20.5 Assets Rand Rand Non-current assets Property plant and equipment (W 2) 1 412 000 Investments

0 Intangible assets 0 1 412 000 581 ACTIVITY SOLUTIONS Current assets Inventories 170 000 Trade receivables 466 000 Prepaid expenses 0 Cash and cash equivalents 6 000 642 000 Total assets 2 054 000 Equity and liabilities Equity

Share capital 540 000 Share premium 160 000 Retained earnings (470 000 + 114 000 – 54 000) 530 000 Revaluation reserve surplus (40 000 + 200 000 ) 240 000 Investment reserve 0 Total equity 1 470 000 Non-current liabilities Long-term loan 200 000 Provision for warranties 0 Deferred tax 0 200 000

Current liabilities Trade payables 54 000 Short-term borrowings 0 Tax payables 330 000 Accrued expenses 0 384 000 Total equity and liabilities 2 054 000 Total Opening inventory R 280 000 Add purchases R 2 520 000 Less closing inventory (R 190 000 – R 20 000) (R 170 000) Total

R 2 630 000 582 ACTIVITY SOLUTIONS Land and Plant and Total buildings equipment Cost R 960 000 R 800 000 R 1 760 000 Revaluation R 200 000 R 200 000 Accumulated depreciation as at 1 Mar. 20.4 (R 60 000) (R 340 000) (R 400 000) Depreciation (R 10 000)

(R 138 000) (R 148 000) Accumulated depreciation as at 28 Feb. 20.5 (R 70 000) (R 478 000) (R 548 000) Balance as at 28 Feb. 20.5 R 1 090 000 R 322 000 R 1 412 000 (iii) Gross profit margin = Gross profit × 100 Net sales Gross profit margin = 1 700 000 × 100 4 330 000 Gross profit margin = 39.26 per cent A 39.26 per cent gross profit margin means that for every rand of sales, a gross profit of 39 cents is made. 583 ACTIVITY SOLUTIONS

CHAPTER 9 BUILDING A TEAM ACTIVITY 9A (i) Entrepreneurs often hire ‘generalists’. More specifically, they tend to hire employees who are capable of doing various jobs/roles within an entrepreneur’s small/medium business. Often specialists are not hired permanently but rather outsourced – this is because small startup businesses usually cannot afford to pay proper permanent salaries to experts/specialists. (ii) Often, entrepreneurs must take on the role of human resource managers. This is because their small business may not be able to afford a human resource manager or have too few employees to manage for a full-time human resource manager. This means an entrepreneur may have to find (and interview) possible employee candidates, hire them, dismiss employees, manage employee salaries, perform the inductions, create the business policies and rules as well as the employment contracts. Entrepreneurs are not often trained in human resource management and therefore find this role taxing – especially when they have the responsibility of all their other roles to fulfil in their company. This may result in incompetent human resource management, which could lead to the entrepreneurs not anticipating possible big problems and trying to fix them on the spot. (iii) Entrepreneurs in small/medium businesses

Employers who run large companies • Typically run smaller organisations with • More hierarchical in nature less hierarchical (bureaucratic) layers • More employees who occupy specifi c • Need employees who can multitask and roles that are less fl exible in nature fulfi l multiple roles, as there are fewer • Job descriptions are structured and rigid employees at their disposal in nature • Broad job roles are emphasised • Have specialised HRM departments, • Generalists are hired with separate divisions for payroll, labour • Might conduct the HRM function relations, recruitment etc themselves, even if not trained in HR • HRM is a proactive role • HRM is a reactive role 584 ACTIVITY SOLUTIONS (iv)

• Enlist, empower and encourage employees • Create a respectful workplace • Care about one’s fellow employees • Live by the culture one wishes to create • Be inclusive of all employees • Be the example • Communicate properly with one’s employees • Repeat the company’s message and goals via the senior leadership team • Remember the purpose of the company • Establish trust with all employees • Ensure that humanity is emphasised • Create a core values statement • Focus on what is going right in the company • Ensure that the same vision is shared • Create a common story of the organisation and its products, services and customers (iv) Answers may vary. The following serves as a guide. Eveready has applied the following guidelines of creating a positive company culture: 1. Enlist, empower and encourage employees: Eveready provides the employees with a positive environment. They offer various development opportunities, which will help grow and empower the

employees. The 360° assessment may also help empower the employees as it helps them to improve their work performance. 2. Create a respectful workplace: Eveready promotes an apolitical culture where discrimination and positional power is avoided. 3. Care about one’s fellow employees: The positive work environment at Eveready encourages an apolitical culture underlined by strong ethical values. 4. Live by the culture one wishes to create: Eveready has a strong ethical leadership culture, whereby supportive leaders provide strong direction and exhibit ethical values. Such positive leadership in management allows them to encourage a positive company culture. 5. Be inclusive of all employees: Eveready has an apolitical supportive culture. 6. Be the example: The company has encouraged strong positive leadership in the workplace. The positive supportive work environment encourages an ethical culture characterised by innovation, continuous learning and a collective environmental conscience. 7. Communicate properly with employees: Eveready developed a culture of communication where they try to encourage effective open

communication from everyone in the business. 8. Repeat the company’s message and goals via the senior leadership team and remember the purpose of the company: Eveready conducts 360° assessments for their employees which reminds and encourages them to work towards their goals (and the company’s goals). 585 ACTIVITY SOLUTIONS 9. Establish trust with employees: Management’s open-door policy and the company’s strong communication and ethical culture, as well as their emphasis on employee empowerment, may foster trust between management and their employees. In addition, Eveready’s supportive environment can also encourage the trust within the workplace. 10. Ensure that humanity is emphasised: Eveready’s supportive environment tries to ensure that the employees are satisfi ed and happy. A strong communication channel also encourages happy employees. Overall, Eveready’s management do try to provide a strong positive company culture. However, there is always room for improvement and Eveready can aim to implement the following guidelines as well: 11. Remember the purpose of the company, through creating a vision statement and writing down clear goals that are communicated to employees.

12. Create a core values statement, which emphasises both the rules and values of the fi rm. This will ensure order and good behaviour. 13. Focus on what is going right in the company, rather than its failures, so that positive behaviours are celebrated and encouraged. 14. Ensure that the same vision is shared, so that all employees know how they can contribute to making the vision a reality. This will create a sense of purpose and mission. 15. Create a common story of the organisation and its products, services and customers, so that employees become emotionally connected to these stories. Often people become easily attached to stories and would like to think that they helped play a part in a good success story for a company. Entrepreneurs can encourage their employees to play key roles in the story. This will spur them on to greater success and ensure that the culture that is created is truly authentic. ACTIVITY 9B (i) • Recruitment: The process of searching for candidates that the company needs in order to fill vacancies. These candidates are ‘reached’ through job advertisements, by which they are encouraged to apply for the jobs. Recruitment methods include electronic job postings, newspaper advertising, campus university recruitment and poaching staff from rival firms.

• Selection: The steps by which the candidates are screened and shortlisted after they have applied for the job, so that the most suitable persons for the vacant posts can be hired. Selection usually involves CV checking, interviews, psychometric testing, background checks and reference checking. (ii) Contracts are required by law, as certain employment details need to be recorded in writing according to the Basic Conditions of Employment Act. Additionally, contracts clarify expectations from both the employer and employee’s perspectives, and there 586 ACTIVITY SOLUTIONS are therefore fewer ‘surprises’ in employment. The employee would know what is expected of them in terms of job duties and would have agreed to their remuneration and working conditions as per the contract. This helps managers to manage their performance and conduct disciplinary hearings if the contract is breached by the employee (i.e. if employees fail to fulfil their duties). If the contract is breached by the employer, it aids the employee’s case at the CCMA. (iii) • Job description: An actual summary of the tasks, duties, responsibilities and roles of which the specific job comprises. For example, a waitron’s job description could be to greet customers, seat them, get their orders, deliver their food, clean the tables, describe the items on the menu, provide their own cash float, make sure the water jugs are always full etc. • Job specification: A summary of the qualifications, experience, personal characteristics and skills required for the job. For example, a waitron’s job specification could be three months of previous relevant experience, have a welcoming and friendly demeanour, able to work in a stressful fast-paced environment, can write quickly, have good recollection skills, able to get along with others etc.

(iv) • Essential criteria • Desirable criteria (v) The following processes are important when recruiting new staff: • Conduct a job analysis of the vacant position (waitron): Create a job description and job specifications for the waitrons. Use this to develop a job advertisement for possible candidates. • Select appropriate insourcing method: Identify who the target market is for potential job candidates and select the best external source to access candidates through job advertisement. • Selection process: Execute a good reliable process (using appropriate selection tools) to help select the job candidates who have applied for this position. • Interview the top candidates and appoint the best-suited candidates for the position: After they have been appointed, lead them through a thorough induction process of the company and their specific job. • Determine the waitrons’ renumeration and discuss this with them: Outline the financial and non-financial rewards that the restaurant will provide. • Employment contract: Create a comprehensive employment contract and ensure that the waitrons sign these at the start of their employment at the restaurant. 587 ACTIVITY SOLUTIONS ACTIVITY 9C

Answers may vary. The following serves as a guideline. No, Candice has not complied with the Basic Conditions of Employment Act 75 of 1997. She has erred in the following ways: • Working hours: Candice’s employees are working ten hours per day, for six days a week. This equates to 60 hours a week, which is over the maximum of 45 hours per week that can be worked, equivalent to working eight hours per day (if working more than five days per week). • Overtime: No overtime is currently being paid. • Sick leave: Only four days a year are given. Based on the above, Candice should do the following: • Reduce working hours to eight hours per day, with a maximum of ten hours a week as overtime (equal to 50 hours per week). This will require a reduction of five hours per week for each employee. • Pay one-and-a-half times their rate for overtime, compared to no overtime pay at present. Candice will also need to backpay her employees for overtime. • Ensure that weekly rest periods of at least 36 consecutive hours are given. • Give a minimum sick leave period of six weeks on a three-year cycle, which equals approximately two weeks per year compared to four days currently being given. ACTIVITY 9D (i) Employers need to conduct regular performance appraisals with their staff, to encourage improved behaviours and try to avoid disciplinary

action. They should clarify goals and targets in advance of performance appraisals, through setting appropriate performance standards. Rating scales should be developed in line with these performance standards, so that employee performance can be objectively assessed. Management should clearly communicate these standards to employees, and gain feedback on performance from multiple stakeholders. Performance feedback should be confidential and provided in private, in the form of a two-way conversation related to the employee’s performance. The focus should not only be on employee weaknesses, but on strengths and constructive feedback for improvement. Such discussions should be recorded and signed by both management and the employee. (ii) Four stages of team development occur, namely forming, storming, norming and performing. 588 ACTIVITY SOLUTIONS (iii) The layout of offices, tools and technology and company policies/processes could influence the manner in which employees interact with one another. This is because physical office layouts result in noisy/silent spaces that may or may not support the way in which employees prefer socialising and being most productive. Having access to or a lack of appropriate equipment, machinery and so forth will directly affect whether the employee can complete their job effectively or not, and may result in unfairness if all employees are not treated in the same manner. Not adhering to company policies/ processes, or having employees inconsistently disciplined due to such policies, might also influence team dynamics by creating an impression of fair or unfair labour practices.

(iv) Annual leave, sick leave, family responsibility leave, maternity leave (v) The CCMA is an independent body (i.e. institution) which resolves labour disputes as well as provides advice on labour-related matters to employers and employees. It plays a role in the workplace by allowing both employers and employees the right to have labour disputes resolved in a fair and unbiased manner, protecting both their rights objectively away from the workplace environment. 589 ACTIVITY SOLUTIONS

CHAPTER 10 MAKING IT RUN SMOOTHLY ACTIVITY 10A (i) ‘Operations management’ can be defined as a set of disciplines and procedures administered to ensure that an organisation achieves the highest level of efficiency that it possibly can. (ii) • Product and service management: This means that companies must provide services and products that remain attractive, useful, affordable and effective at all times. • Quality control: This means that products and services must meet specific customer expectations. • Inventory control: This refers to the way that companies manage the items (products and services) that they sell to their customers. • Storage: This refers to the physical place where items such as finished goods and products are kept until they are sold to customers. • Logistics: This refers to the processes and procedures to procure and deliver products or finished goods to a customer. • Evaluation of processes: This refers to the review of procedures, such as product steps or work steps, so that the most efficient work activity can be assured at all times. (iii)

• The power to create value for customers • The power to capture value for shareholders • The power to share value with stakeholders (iv) Lean thinking teaches that organisations must be on the constant lookout for ways to improve processes and procedures, so that customers can get the best possible value for their money. (v) 1. Specify value 2. Identify the value stream 3. Create value steps 4. Establish pull 5. Pursue perfection 590 ACTIVITY SOLUTIONS ACTIVITY 10B

(i) • An affordable telephone and email service to stay in touch with customers • A basic filing system for business records (sales, taxes, customer details) • A basic desk and chair where you can work • A basic reception area in case a customer wants to visit your home office (ii) • Machinery and equipment • Transportation • Lighting (iii) • Stay clutter free: Loose carpets, cables over the floor, and objects that are stacked too high are all accidents waiting to happen. • Stepping on things: Standing on office chairs is dangerous – especially when these chairs are equipped with castor rollers. Moving chairs can cause people to lose balance and fall. • Clear lines of vision: Blind corners and cubicle walls could cause collisions between people as they walk along corridors. Cubicles should not be so high that people cannot see who is coming around a corner. • Slip-free: Loose carpets could become tripping hazards, as could elegant tiles. • Protruding objects: The open drawer of a desk or a filing cabinet could cause injuries if someone walks into it. Similarly, objects protruding from shelves could cause eye or head injuries.

ACTIVITY 10C (i) Information technology is the science of acquiring, processing, storing, retrieving, presenting and transmitting all forms of electronic data by means of computers, or other forms of telecommunications, from one user to another. (ii) Any five of the following challenges can be listed: • Decisions relating to whether to build or buy software • Protection against malware and ransomware • Overall reliability and quality of IT equipment • Cost of IT equipment – especially telecommunications • Centralisation or decentralisation of IT solutions • Scalability of IT solutions • Ubiquity of IT solutions 591 ACTIVITY SOLUTIONS (iii) • Computer viruses • Trojan viruses • Ransomware • Spyware and adware

• Computer worms (iv) Having backed-up data is important because of the risk of lost or damaged data. Organisations are usually the ones that suffer the most when it comes to data being lost or damaged, since company data is a valuable asset used to run operations smoothly. (v) Any five of the following principles can be listed: • No customer will tolerate poor quality software: There is no reason why entrepreneurs should compromise and accept inferior software products from anyone. • Quality is in the eye of the customer: No matter what elaborate terms and words software developers use to convince you that they have a superior product, insist to ask for references and listen to what other users say about the product. Poor-quality software cannot be tinkered into acceptable levels of performance – no matter what the software vendor tells you. • Poor reliability is worse than poor efficiency: Products that crash often, or that take a long time to respond, do not help the entrepreneur to be efficient. • State your needs clearly: It helps to spend time writing out what you expect from a product. Start your sentences with phrases such as, ‘The software must be able to do […]’ Specify what functions you expect and why you need those functions. Once you have committed your expectations to paper, it is easy to check later whether you bought what you said you needed. • Resist the ‘and there is more!’ argument: Specify only what you need, and avoid the temptation to buy any additional functions that

you do not need in the next three to five years. However, ensure that additional functions are available at an attractive price for when you need those. • Beware the thick manual: Software should be intuitive and almost self-explanatory. Big, complicated manuals are a sign of big, clumsy software systems that may take so much time to understand, that you cannot do much real business. • Beware the shortcuts: More often than not, complex problems cannot be solved with a few simple steps or shortcuts. Shortcuts are not consistent and do not cover unexpected eventualities. On the other hand, a thick troubleshooting guide is not necessarily indicative of a bad system. Well-organised and well-written troubleshooting guides could be very valuable timesavers to solve issues. • Align reputation with organisation: Anybody can make a mistake or produce inferior work from time to time. However, a vendor that hides bad quality or hides serious software performance issues cannot be trusted, no matter how big or well known that vendor is. 592 ACTIVITY SOLUTIONS • Determine the problem before committing to any software solution: Clearly state (in writing) the business problems you want to be solved by software. State the reasons why solutions to those problems are needed. • Use natural language: Do not fall into the ‘technobabble trap’. Use ordinary business language to state your needs and why you want a specific solution. • Management above technology: Davis (1995: 146) says that ‘[g]ood management is more important than good technology’. Often, entrepreneurs think that they can hide bad management habits by

using technology. Good management of meagre resources is far better than the attempt to manage vast resources with meagre technology. Buying or building software costs time and money. Entrepreneurs must decide whether the software they think they need is necessary. (vi) Cloud computing refers to the practice whereby users store, manage and process data, using a network of remote servers hosted on the Internet, rather than using a local server or a personal computer. (vii) Advantages Disadvantages Accessible from anywhere via the Internet Does not work without access to the Internet Relatively easy to use System response times could be slow – especially if the remote server is in another country Mostly free of charge, but pricing could be Credentials of the system owner are not based on the number of users on the system always known No need to have expert programmers create Could be vulnerable to attacks from cyber software solutions criminals No need to buy large computers to store Requires specific login details that users different databases and applications needed could

forget, causing delays while resetting to run a business passwords ACTIVITY 10D (i) No business can afford suppliers that do not deliver the same quality product or service all the time. Suppliers that suddenly make excuses or demand more money so that they can keep on delivering the same quality of product or service should be treated with scepticism and caution. (ii) Entrepreneurs must have a clear idea of the following: • What exactly is needed from the supplier in terms of function, reliability, warranties, guarantees etc. • How much the entrepreneur is willing to pay for the supplier’s product or service 593 ACTIVITY SOLUTIONS • Whether there are other suppliers that could provide the same product or service • What the supplier’s reputation in the market is (iii) A productive relationship ensures service from your suppliers that meets your specific needs. (iv)

Trust, collaboration, management, performance review skills and good negotiation (v) Entrepreneurs are expected to negotiate the following: • Salaries • Labour relations • Pricing • Goals and performance (vi) 1. Talk the talk: Understanding the unique industry jargon will earn you respect and make the negotiating process easier, as all parties involved are talking the same language. 2. The first offer is not the best offer: Never settle for the first offer set on the table. Instead, prepare yourself to negotiate back and forth until you have reached a good deal. 3. Gather quotes from various suppliers: Before negotiating with a supplier, gather some quotes from their competitors. Be upfront with the suppliers about the quotes you have obtained, and let them know that the supplier that offers the best deal will secure the contract. 4.

Have a deposit available: Having a large amount of money available to make a deposit is beneficial during negotiation. This shows the supplier how serious you are about making the purchase. It also shows the supplier that you are easy to work with. 5. Identify areas of mutual benefit: In cases where suppliers are unwilling to lower their price, closely inspect the contract, and try to find areas in which both parties can benefit from renegotiated terms. ACTIVITY 10E (i) Stock control refers to the way that managers handle raw materials and finished goods in a cost-effective way. (ii) Answers may vary. The following serves as a guide. Economic ordering quantity (EOQ) is about ordering the most economic quantity of raw materials at a time. In other words, one orders just enough to use for a given period. The 594 ACTIVITY SOLUTIONS problem with this approach is that a sudden spike in orders may not be fulfilled, because there is not sufficient raw materials available to make more goods. In addition, ordering more material at short notice may not guarantee quick delivery. Materials requirements planning (MRP) involves estimating how much material will be used in a specific production cycle. A production cycle is the amount of time that it takes to manufacture products from start to finish. Typical production cycles involve the manufacturing of the same objects for a specified period. For example, in a production cycle, 1 000 000 A-widgets are

manufactured over eight hours. Thereafter, the machines are retooled, so that 1 000 000 B-widgets can be manufactured over the next eight hours. Because the A- and B-widgets have different sizes, they require different quantities of material. MRP systems are therefore designed to take into consideration the number of each widget to be manufactured, and the quantity of material to be used in the manufacturing process. Besides being used to order the right quantity of materials, MRP systems are used to calculate the best way to cut materials, so that waste is eliminated. Just-in-time (JIT) is a waste reduction philosophy that states that material should only be delivered as and when needed in a manufacturing process. The main assumption of JIT is that businesses do not hold big inventories of raw materials. For example, if a business is going to make A-widgets for a whole month, there is no sense to keep the raw material for B-widgets on hand. In addition, if a certain clamp is part of the A-widget’s manufacturing and is installed in step 25 of the manufacturing process, there is no need to order that clamp until one is ready to start step 25. (iii) • There must be a strong relationship with service providers to ensure that materials are delivered on time, and that their delivery does not delay the manufacturing process. • High traffic volumes and high incidents of road accidents and hijackings in South Africa could mean that on-time delivery of raw materials cannot always be guaranteed. • Labour strikes could influence the delivery of raw materials. • Keeping a small quantity of stock on hand should be considered, to ensure that late deliveries or non-deliveries have less of a negative impact on production processes.

(iv) • Performance: Whether the product does what it is supposed to do • Features: Whether all the functions expected from the product are present • Reliability: The ability of a product to survive over a specified time and under specific usage conditions • Conformance: The degree to which a product meets specific standards or specifications • Durability: The level of use expected from a product over a specified time before the product breaks or deteriorates • Serviceability: Whether the product can easily be repaired or serviced • Aesthetics: Whether the product has and look and feel acceptable to the user • Perceived quality: The level of quality a user believes a product possesses 595 ACTIVITY SOLUTIONS (v) Any five of the following dimensions can be listed: • Time: How long someone must wait before they get attention from a service provider • Timeliness: Whether someone will do what they promised on time • Completeness: Whether the service provider can deliver all that was promised to the customer

• Courtesy: Whether employees greet customers and are they friendly to them • Consistency: Whether service providers deliver on promises to all customers in the same way • Accessibility and convenience: The ease of getting access to a service provider and their management team • Accuracy: Whether the service is performed right the first time • Responsiveness: The extent to which service providers act quickly and resolve unexpected problems as they occur ACTIVITY 10F (i) 1. Perception of opportunities: The starting point of planning is perceiving the opportunities available within the organisation or external environment. 2. Establishing objectives: Major and minor objectives are set up for long- and short-term goals. These objectives are important, as they emphasise what must be accomplished. 3. Determining planning premises: Planning premises are the conditions under which the activities will be accomplished. These can be either internal or external. The former includes political, technological, social etc. factors, and the latter includes the policies of the organisations itself, resources available in the organisation, the organisation’s ability etc.

4. Identifying alternative courses: Look at the various alternative ways in which objectives can be achieved. 5. Evaluating alternative courses: The available alternatives should be analysed in search of the one that will generate the most profit at the lowest cost. 6. Selecting the best course. Here, the plan that fits the organisation best is selected. 7. Formulating supporting plans: After selecting and formulating the main plan, supporting plans are developed to assist in its realisation. 8. Establish the sequence of plans: The sequence of activities is established, and the plans are put into action. (ii) Forecasting is about the prediction of a future event, and the estimation of that future event’s effects on a business. (iii) Reporting is an important measurement tool, and is at the heart of sustainable and efficient businesses. It allows for a professional and cohesive explanation of a business’s 596 ACTIVITY SOLUTIONS

conduct, and helps businesses engage with their various stakeholders, both internal and external, while promoting better business decision-making. (iv) Internal reporting refers to the type of reports that are circulated inside the company. Most internal reports act to inform the business owners, managers and workers about the detailed state of the business. Internal reporting could be considered ‘live reporting’, because the information in the report changes in step with activities and actions in the business. Internal reports can show entrepreneurs what happens in the business on an hourly, daily, weekly or monthly basis. External reports are prepared and submitted to shareholders, investors, government and credit institutions. Generally, external reports do not contain as much detail as internal reports. External reports provide a snapshot of the business at a given time in the past. External reports typically group information into monthly, quarterly, half-yearly and yearly arrangements. (v) • Production dashboards: These dashboards indicate the level of production and sales in a business. • Control dashboards: These dashboards indicate who owes money to the business and to whom the business owes money. In addition, control dashboards show how actual sales compare to forecasts, and how actual costs in the business compare to the budgeted cost forecasts. They deal with debtors, creditors, open invoices, action items, and follow-up items. • Performance dashboards: These dashboards often indicate the overall health of the business in terms of income, expenditure, profit

and loss, and cash flow. These types of dashboards could also indicate performance levels of staff in the business at any given time. 597 ACTIVITY SOLUTIONS

CHAPTER 11 BORING BUT IMPORTANT STUFF A CTIVITY 11A (i) a. The National Treasury determines the tax regime. The Minister of Finance delivers an annual budget speech, which contains the rates of normal tax. The South African Revenue Service (SARS) is headed by the commissioner for SARS, which is a government body tasked with the collection of taxes. SARS is established in terms of the South African Revenue Service Act 34 of 1997. It is as an autonomous agency. The head office of SARS is in Pretoria, with various offices throughout the country. b. South Africa has a progressive income taxation system, which means that the wealthy pay more taxes – i.e. the more that you earn the more tax you will pay. South Africa has a well-developed and regulated taxation regime with laws that are continually being revised and amended. (ii) c. (iii) b. (iv) True.

(v) The two types of supplies are taxable supplies and non-taxable supplies. Taxable items can be 15 per cent or zero per cent (zerorated) goods and services. Non-taxable items, on the other hand, include exempted goods and services. 598 ACTIVITY SOLUTIONS Taxable supply Non-taxable supply Standard rate Zero-rated No VAT Exempted goods @15 per cent @zero per cent and services (Source: EDGE Learning Media (Pty) Ltd, 2019) Figure 11.1: Types of supplies and their respective VAT rates (vi) Benny cannot claim output tax, as he is not a VAT vendor – R 0. Thembi cannot claim input tax, as she is not a VAT vendor – R 0. (vii)

No, Moses does not need to register as a VAT vendor. Moses is not carrying on a business enterprise; he will be earning a salary, and therefore it does not matter that he earns above the threshold. ACTIVITY 11B (i) Employees’ tax Provisional tax Employees’ Tax refers to the tax required Provisional tax is not a separate tax. It is a to be deducted by an employer from an method of paying tax due, to ensure that employee’s remuneration paid or payable. the taxpayer does not pay large amounts on assessment. The tax liability is spread over the relevant year of assessment. The process of deducting or withholding It requires the taxpayers to pay at least two tax from remuneration as it is earned by an amounts in advance, during the year of employee is referred to as PAYE. assessment, which are based on estimated taxable income. The amounts deducted or withheld must be Any person who receives income (or to paid by the employer to SARS on a monthly whom income accrues) other than a salary, is basis. a provisional taxpayer. 599

ACTIVITY SOLUTIONS It must be paid within seven days after the The amount of provisional tax payable is end of the month during which the amount worked out on the estimated taxable income was deducted. for that particular year of assessment ACTIVITY 11C (i) For SARS e-filing, you are required to provide: • your personal details; • your ID number; and • your tax registration number/s. (ii) You would use the ‘Income tax rates’ link. There, you will find that the calculation is: R 100 263 + 36% of taxable income above R 423 300. (iii) Electronic fund transfers (including Internet banking), and th e filing of return and payment via SARS e-filing. ACTIVITY 11D (i) Answers may vary. The following serves as a guide. Indemnity Insurance covers the amount of actual loss suffered. Cover is against an uncertain event. Examples include damage to property insurance, fire insurance, motor vehicle insurance and burglary insurance. With non-indemnity insurance, the insurer undertakes to

pay a specified amount if an event occurs, the timing of which is uncertain. The sum insured is not related to the loss suffered. Examples include health insurance, contracts of life insurance and sickness insurance (ii) Any two of the following types of cover can be listed. • Theft cover • Motor cover • Business interruption cover • Public liability cover • Key person insurance • Employees’ insurance (iii) You should take out key person insurance. The jeweller is someone who is skilled in an art, and therefore an employee with ‘know how’ who is crucial to the functioning of your business. 600 ACTIVITY SOLUTIONS ACTIVITY 11E (i) An organ of state must adhere to the Constitution and the Preferential Procurement Policy Framework Act when procuring goods or services.

The Constitution provides, in section 217: When an organ of state in the National, Provincial or Local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and costeffective. In addition, it states that a Procurement Policy must be implemented that will provide for categories of preference in the allocation of contracts; and the protection or advancement of persons, or categories of persons disadvantaged by unfair discrimination. The PPPFA was enacted in response to section 217 of the Constitution. It seeks to regulate the procurement policies and processes of Government. The PPPFA seeks to advance the interests of historically disadvantaged individuals (HDIs) and small, medium and micro enterprises (SMMEs) in conducting business with organs of state. Every organ of state and public entity or enterprise must adhere to the provisions of the PPPFA and its regulations whenever undertaking a procurement process. (i ) The municipality will use the 90/10 preference point system, as the bid is over R 50 million. This is in accordance with the amended Preferential Procurement Regulations, which came into effect on 1 April 2017. (iii) a. The type of enterprise is determined by the turnover, which is produced by the enterprise each year. The enterprises are subdivided into three groups, based on their annual turnover. Gloria’s business would qualify as an exempted micro enterprise (EME), as Gloria’s annual turnover is below R 1 million. b.

An enterprise’s B-BBEE level or rating is influenced by the size of the enterprise. With regard to EMEs, they are not required to be assessed on the BBBEE scorecard criteria, but are scored instead on their percentage of black ownership. ACTIVITY 11F (i) a. 4. b. 2. c. 1. d. 3 601 ACTIVITY SOLUTIONS (ii) Contract of sale. There are three requirements that must be satisfied for there to be a valid contract of sale. These three requirements are that there must be an intention to buy and sell, the item for sale must be identified, and a price must be agreed upon. Sean and Thami enter into an agreement together – the first element of intention is therefore satisfied. Sean and Thami agree on the thing being exchanged; they agree that Sean will purchase one lathe machine and one angle grinder – the second element of identification is therefore satisfied.

Sean and Thami did not agree on a price to be paid by Sean in exchange for the goods, however – the final element of price is therefore not satisfied. Since the final requirement has not been satisfied, there is no valid contract of sale. (iii) Answers may vary. The following serves as a guide. When assessing the requirements of a valid contract, it is not always necessary to evaluate and discuss every single requirement in your answer. For some scenarios, certain elements are automatic or implied. In other words, we can assume that the requirement has been satisfied. The first step to answering a question like this would be to establish which elements are in question, or which elements might be problematic. It is also important to address the elements that the scenario expressly answers through the facts. In this scenario, the elements that must be addressed, based on the facts, are consensus and certainty, and the element that is problematic is legality. • Consensus: For the element of consensus to be satisfied, there must be a meeting of the minds. In other words, both parties must have been aware of what they were contracting to, and must have agreed on the conditions of the contract. • Certainty: The element of certainty is not met if the agreement is vague. • Legality: If the agreement that is being entered into is against the law, the contract will be void or unenforceable for illegality. In order for there to be a valid contract, all six requirements have to be satisfied. We can assume that the elements of capacity, formalities

and possibility have been satisfied. The requirements that are in question are consensus, certainty and legality. There was a meeting of the minds, which would validate the requirement of consensus. Ryan offered 1 kg of cocaine to Vaughn for R 5 000. Vaughn agreed to the terms of the 602 ACTIVITY SOLUTIONS agreement by drafting a written agreement to enforce the contract. Both parties signed the contract, which means that they both consented and agreed to the terms of the contract. The requirement of consensus has therefore been satisfied. The written agreement recorded the product being sold, the parties to the agreement, and the price to be paid by Vaughn. There is therefore no vagueness. Both parties are aware of their obligations. Vaughn is obligated to pay R 5 000, and Ryan is obligated to deliver 1 kg of cocaine in return for payment. The requirement of certainty is satisfied. The final requirement is legality. Cocaine is illegal in South Africa. For a contract to be valid and enforceable, the agreement or the substance of the agreement cannot be illegal. Since Ryan is selling a product that is illegal, it renders the agreement illegal. The requirement of legality is therefore not satisfied Five out of the six requirements have been satisfied. It is, however, required that all six requirements be satisfied in order for there to be a valid contract. There is therefore no valid contract between Vaughn and Ryan. ACTIVITY 11G (i)

a. Copyright: A novel is considered a literary work. It is therefore protected by copyright, as it falls within the nine categories of work in the Copyright Act. b. Copyright: A song is considered a sound recording. It is therefore protected by copyright as it falls within the nine categories of work in the Copyright Act. c. Trademark: A sign falls within the scope of trademark protection. The Trademark Act protects all distinguishing marks. A sign is considered a mark that could distinguish one product from another. d. Trademark: A slogan falls within the scope of trademark protection. The Trademark Act protects all distinguishing marks. A sign is considered a mark that could distinguish one product from another. e. Copyright: A painting is considered an artistic work. It is therefore protected by copyright, as it falls within the nine categories of work in the Copyright Act. (ii) After clicking on the ‘Apply’ link (on the bottom-right corner of the web page), you will find the procedure detailed as follows: 1. Register as a customer

2. Deposit funds of R 590 3. Conduct a search 4. Lodge trademark manually or electronically 603 ACTIVITY SOLUTIONS (iii) Copyrights do not have to be registered. Unlike trademarks, copyright protection is obtained automatically if the work falls within the nine categories of works set out in section 2 of the Copyright Act. ACTIVITY 11H (i) A policy is a written set of rules and guidelines that assist employees in the workplace, and informs them of the way to conduct themselves in certain instances. It also allows for an organised and efficiently run company. A procedure, on the other hand, is an official way of handling certain situation in the workplace. It regulates how these situations are dealt with, step by step. (ii) An employer should have clear rules and guidelines (i.e. policies and procedures) in place in order to avoid disputes, and to support a positive working environment.

(iii) Tina could use a whistle-blowing policy. This would provide for the procedure available to an employee to report illegal acts or misconduct within a company, which is what Tina neds to do. This type of policy will encourage employees to report issues by ensuring that procedures are in place, which will protect them from possible harassment or victimisation. (iv) Any two of the following policies would be considered correct. • Code of conduct • Sexual harassment policy • Information technology policy 604 ACTIVITY SOLUTIONS

CHAPTER 12 GROWING THE BUSINESS ACTIVITY 12A (i) Any of the following factors can be listed. • Bringing out unique products at the right time • Offering a range of products that are unique • A strong marketing strategy • Growth that was managed well (ii) No. The growth was not ‘overnight’, so to speak. Rather, it was gradual and done in phases. For example, the physical stores have opened up slowly, and Yuppiechef has gradually, over the years, gained a position in the e-commerce market. (iii) It can be argued that Yuppiechef has adopted both organic growth and strategic growth. We could argue for organic growth on the basis that the business naturally flourished, and the next steps for growing the brand were taken from there. However, it could also be strategic, as the brands that were introduced were done so in a strategic way, so as to stay ahead of competition, and has been done gradually with long-term goals in mind.

This is evident through the way in which the stores have been opened – one by one. ACTIVITY 12B (i) The task team could have consulted staff more during the process, and developed entirely new workplace systems for pay, performance etc., rather than trying to combine approaches. While it may be impractical, each separate institution could even have maintained their own approach to pay, performance and so on. There could have been more team building exercises to merge the various organisational cultures better, and orientation and training could have been provided to staff once the merger was over. (ii) It is evident that the reason for this change was based on a potential decline in profitability for all the institutions separately, or based on a desire to grow to be a bigger organisation. 605 ACTIVITY SOLUTIONS (iii) The task team could have organised an orientation to explain new organisational policies and procedures, team building so that employees may better get to know and understand one another, a brainstorming session to come up with new ideas together, and trust exercises to help understand that employees are all working toward a common goal. ACTIVITY 12C (i)

Entrepreneurs take risks and bring creativity to a business, while CEOs try to manage risk and ensure that a business is in good financial standing. The entrepreneur is generally the brains behind a different and fresh idea, while a CEO is an individual who is focused on maintaining the status quo, not rocking the boat, and ensuring that the business stays financially sound. (ii) The general argument around this topic suggests that entrepreneurs struggle to go on to occupy the position of CEO. It is in their nature to be creative, passionate and a risk taker, whereas being a CEO requires a more methodical, sensible person who can manage risk. These two roles can often be contradictory. (iii) Any two of the following factors can be listed. • Adequate resources: A lack of resources can make meeting a certain goal overly challenging. • Leadership: To function effectively, a group always needs an effective leader. • Trust: Group members should trust each other fully, in order to be most successful. • Members’ abilities: Each member should stick to a role that best matches their skill set. • Personality: Not all personality types work together well, and this should be considered when forming groups. • Size of teams: Research shows that the bigger the team, the tougher it is to manage. The optimal size is between six and 12 people.

• Team roles: There should be no ambiguity surrounding who is responsible for what within the group. • Common purpose: All team members should share one goal, toward which they are all working. • Specific goals: Group members should all be completely clear on exactly what is expected of them and what they are aiming for. • Conflict levels: Conflict is not necessarily a bad thing, but should never get to the point where it becomes destructive and offensive. 606 ACTIVITY SOLUTIONS

CHAPTER 13 ONLINE START-UPS ACTIVITY 13A (i) True (ii) False. There are many examples from history of entrepreneurs using new technologies to launch successful businesses. (iii) True (iv) False. Technopreneurs can often be characterised as looking for problems that their already-developed technologies could be applied to. (v) False. Technopreneurs, like all entrepreneurs, are interested in applying their technological solution in a sustainable business model. ACTIVITY 13B (i) The five requirements are: 1. There must be demand or a market for the technology. 2.

The entrepreneur must be passionate about the technology and business. 3. The entrepreneur must have technical and industry experience. 4. The start-up must aim to grow and expand quickly. 5. The IP of the business, which is the design, prototype and features of the product, must be protected. (ii) The ‘three-year rule’ states that a successful tech start-up should move from design to market in under three years. This is because the tech industry requires start-ups to run lean, and produce viable versions of their product quickly. Longer development periods may suggest that the idea needs to be refined. (iii) A tech start-up requires both business and technical know-how. As a result, it is often the case that an entrepreneur needs assistance in one of these areas. For this reason, teams of technical- and business-orientated people are brought together. 607 ACTIVITY SOLUTIONS (iv) Technology is knowledge that is applied to address a need or problem. Ideas, and the resulting product’s design, features,

prototype and related services, are all the intellectual property of the business. It is important for this IP to be protected against competitors who may seek to imitate it, and put out a similar product to compete with a new idea. This can harm the business’s chances to grow and succeed. ACTIVITY 13C (i) The three categories are: 1. Non-technology 2. Low-technology 3. High-technology (ii) An e-commerce business makes use of various new technology for the operation of the business. The business is conducted and operated remotely, or through online portals where customers can access the goods and services via online platforms. This targets customers who wish to make purchases from the comfort of their own home, and seeks to meet their desire for instant purchases and speedy delivery. Payments are made remotely through EFT or online card purchase. These types of businesses are advertised using new media, such as social media and online advertisements. In most instances, there is no physical store that customers can visit. These businesses do not operate from a building or store, but rely mostly on delivery services and constant transportation. A brick-and-mortar business is an older and more familiar business model. These businesses operate primarily from a physical store (i.e. all transactions, interactions and purchases happen in the physical store). The option of online purchases is not made available to the customers. They are required to come into the actual store to

purchase a product, and to get assistance and personal guidance from staff. These businesses make use of traditional advertising, such as print adverts, billboards and promotional banners. (iii) Answers may vary. The following serves as a guide. Lindiwe should focus her efforts on starting a brick-and-mortar store, because there is clearly a strong demand from her local community. While e-commerce could connect her to more customers elsewhere, she already has a client base who will come to her store. Many of the people in her target market are older, and may be more comfortable with the traditional model of a brick-and-mortar store. As the products are her own, she can make specific recommendations to customers, and help them to make their decisions. 608 ACTIVITY SOLUTIONS OR Lindiwe should expand her business using an e-commerce model. She wants to reach customers over a wider area than a single location can serve. She has been selling from home, which means she does not yet have premises for a brick-and-mortar store. This would be a significant expense, whereas an e-commerce approach means she can continue to sell from home. She already has online experience, which she could use to promote her business online. (iv) Any one of the following advantages can be listed. • A combination can advance customer relationships. Customers have the option to make purchases online, but they are also able to come into a store for face-to-face interaction and assistance.

• There is an integration of networks, as a dual system allows you to combine operations. For example, the e-commerce store can be used to advertise promotions. Customers will then be able to come into the store, and purchase the goods or services that were advertised. • A dual system will promote trust and loyalty with customers. Physical outlets build trust, while e-commerce allows for flexibility and convenience. • A dual system establishes a competitive advantage, especially against businesses that only have one model in place. • There is access to a wider market compared to a conventional brickand-mortar store. • It is more convenient for customers who cannot visit physical stores because of their jobs. An online option makes it easier for them to shop after-hours. Any one of the following disadvantages can be listed. • The cost of renting or buying a building is still an issue. Additional costs are added because the business has to pay for an e-commerce system and additional delivery services. • In-store staff have to be paid, while expenses for deliveries must also be paid. • Dual models require a bigger investment to start up and to maintain. ACTIVITY 13D (i) The three main approaches are: 1.

Free: The technology (e.g. website or app) is offered to users for free, and revenue is earned through selling advertising space, which other companies pay for. 2. Paid: The product is sold either in once-off or subscription payments, which is the primary source of revenue for the business. There is usually no functionality offered unless the user has paid. 609 ACTIVITY SOLUTIONS 3. Freemium: The company delivers ‘just enough’ functionality for users to access a working product, but many core features or elements are limited to premium (paid) users. (ii) Any two of the following advantages can be listed. • Funds can be raised quickly by drawing on a large number of people. • A successful crowdfunding campaign shows that there is a market for a product or service. • It can raise money for projects that traditional investors or financiers may avoid. Any two of the following risks can be listed. • There is a risk that a prototype or idea may be copied if IP has not been protected with copyrights or patents.

• Investors face risks of fraud, and may be unwilling to support many projects. • There can be limits on the types of projects allowed by certain platforms. (iii) An incubator is an enterprise or a group of skilled individuals who support and nurture promising start-up ideas. Because the start-up environment is risky, and there is a high chance of failure, incubators provide necessary knowledge about the technical and business aspects of creating a technological enterprise. Incubators can focus on helping with the entrepreneurial side of a start-up, or on assisting with innovation, design and production. This expertise and assistance helps new businesses to flourish, while cutting down on some initial costs (such as rent), and allowing technopreneurs to network. (iv) A pivot occurs when a business rapidly changes its focus, either in terms of strategy or the way in which products or services are created, marketed or deployed. This is done in order to increase efficiency and change, and to avoid spending time and money on unprofitable aspects. In this case, Jehan and Andile should make a customer-need pivot, as their early release revealed that their app could better fulfil a different need for customers, as seen in their early reviews. ACTIVITY 13E (i) Answers may vary. The following serves as a guide. Risk-averse is a risk appetite that aims to avoid or limit risks where possible. This can involve minimising the most impactful risks, or only tolerating risks where the losses can be afforded. In other words, risks need to be mitigated.

OR 610 ACTIVITY SOLUTIONS Risk-neutral is a risk appetite that accepts risks where the negative impacts are well balanced with rewards. If possible, the risks should be quantified and understood, so uncertainty is avoided where possible. OR Risk-taking is a risk appetite that implies high levels of risks are taken, as long as the chance of payoff is high. The positive outcomes are the driving factor in making a decision. (ii) Any three of the following risks can be listed. • The two entrepreneurs have no prior experience in starting a business, and may lack the business expertise necessary for running a start-up. • The project requires a significant amount of money to start with, and only sees significant returns in its seventh year, if the projections are correct. • The project is dependent on a successful crowdfunding campaign to draw in a fair amount of money through donations and preorders, with a target that may not be met. • The crowdfunding preorders could mean that fewer units are sold at the launch of the product, meaning projected revenues at launch could be lower. • The entrepreneurs have not provided any evidence of market research to show demand for their product.

• The development timeline suggests they have not yet found a way to ensure that Shisa-Smart’s technology can withstand the heat from the fire. There is a risk that they may not be able to develop the technology reliably, or at all. • There is a risk that they may not be able to deliver the product within the given time frame. • They have no prior brand, so they will need to build brand loyalty. • They are spending resources to develop an app alongside their product. If they cannot deliver the product, the app may not have other functionality. (iii) Answers may vary. The following serves as a guide. I would invest in this project because the projected returns exceed the total costs, and the growth in returns is rapid after the product is launched. While there is a risk that crowdfunding may not draw in the funds expected, there is also a chance that it will boost sales and promote the product, resulting in higher revenues during development and after launch. They also plan on refining and further developing their product, which can lead to further and consistent growth in the future. Jaco and Musa have the technological know-how to develop this product. The time frame for development is generous, and they have accounted for their expenses. 611 ACTIVITY SOLUTIONS OR I would not invest in this project as the risks are quite high. The project has very high initial costs, and while there are some potential funds from crowdfunding, the project only sees real returns after five years of development. Only after seven years would it be possible to

see high returns on the investment. The developers do not have any business experience, which means that there is a high level of risk on the operations side. Their plan also shows that they do not know if they can find the technology required for the product, and it will take two years to do so. With the information provided, there is no clear indication of whether there is a market for this product, which poses another significant risk to the start-up. 612 ACTIVITY SOLUTIONS

CHAPTER 14 CASE STUDIES – MYTHS, LEADERS AND INSPIRATIONS ACTIVITY 14A (i) a. Any four of the myths summarised by Morris (1998) or Pierce (2008) can be listed. The following serves as a guide. • Entrepreneurship is about starting and running a small business. • Entrepreneurship is something that ‘just happens’. • Entrepreneurship is an ‘either/or’ thing – someone is either an entrepreneur, or they are not. • Entrepreneurship is about greed and deceit. b. Answers may vary. The following serves as a guide. Entrepreneurship is about Not necessarily true. Although many businesses start starting and running a small, this does not mean that they will remain small.

small business. Entrepreneurship is False. It is possible that some business ideas come something that ‘just ‘out of the blue’. However, the majority of new happens’. business ventures do not ‘just happen’ – they are carefully planned. An entrepreneur can spend months – even years – conceptualising a new business venture before it is launched. Entrepreneurship is an False. While natural talent may play a role, ‘either/or’ thing – someone entrepreneurship is not an innate trait in someone’s is either an entrepreneur, make-up. Entrepreneurship is the result of careful or they are not. planning and development, to ensure that a product or service meets a specific need. Entrepreneurship is about False. Some entrepreneurs may be driven by greed greed and deceit.

and deceit. However, the majority of sensible entrepreneurs understand that ethical and honest business practices are necessary to sustain the enterprise in the long run. 613 ACTIVITY SOLUTIONS (i ) The perceptions created by the entertainment industry are far removed from reality. This is because these shows aim to attract viewership, and not to portray the reality of life – which is often less entertaining, less glamorous and less appealing. Even ‘reality’ shows are carefully planned and scripted, in order to ensure high viewership. This means that anyone watching reality television will still be given a ‘skewed’ picture of entrepreneurship – sometimes romanticised, sometimes vilified, but always a deviation from reality. ACTIVITY 14B (i) Answers may vary. The following serves as a guide. Yes. Herman Mashaba did not grow up in the most favourable circumstances, and yet still made a great success of himself. This shows that people are not limited by their backgrounds – you do not need to be born into a rich family or have the most prestigious education to succeed as an entrepreneur. Additionally, incomplete or failed educational qualifications do not necessarily close the door to future success. Young entrepreneurs can overcome challenges

through determination and commitment. There is also a lot to be said for starting small, and working one’s way up. (ii) 1. Skills: Entrepreneurs have to do the right things, at the right time, in the right way. 2. Attitude: Entrepreneurs need to remain positive, even in times of difficulty. A negative mindset could lead to demotivation and failure to thrive. 3. Values: There are certain principles that are not negotiable for entrepreneurs (e.g. honesty, trustworthiness and reliability). (iii) • Roddick paid attention to the environment and atmosphere, to create a pleasant and attractive experience for her customers. • She made use of free publicity. • She sought to learn about the different customer segments that were interested in her products, and specifically designed her marketing messages around these segments. ACTIVITY 14C (i)

A unique selling point (USP) is a factor that distinguishes a business from its competitors. The USP of Walmart is its discounted prices. (ii) Walton’s two main approaches to profitability included ‘buyer power’ (buying products in large volumes) and being a ‘low cost provider’ (selling products at lower prices compared to competitors). 614 ACTIVITY SOLUTIONS (iii) Branson’s two main approaches included persistence and persuasion (i.e. getting people to buy into his ideas), as well as selling goods to customers at attractive prices. (iv) Answers may vary. The following serves as a guide. According to Swedbrand Group (n.d.), ‘sensory experience’ plays a key role in Apple Inc.’s marketing strategy. This refers to the very first tangible experience that a customer has with a product – i.e. how it looks and feels. If these aspects do not appeal to the customer, they are unlikely to buy it, even if the quality is good overall. Apple Inc. have been masterful in creating this sensory experience with their clean, simple and minimalistic designs: Anyone who has ever seen the box of an iPhone, or a brand new MacBook, will be able to picture the minimalist white box with those shimmering metallic fonts. Apple is an acknowledged master at creating an iconic sensory experience that communicates its brand without any words or even a logo. That’s because Apple makes its

packaging as artistic and visually appealing as the device inside. Every corner of the box is clean. The color is an elegant, minimalist white. Every part of the packaging is designed to be clean and direct. The design is simple in a world of clutter and constant sensory overstimulation. Apple’s iconic sensory experience is the expression of the absence of eye-grabbing colors and images. And that minimalism is exactly the thing that attracts the eye. That sensory association is reinforced by what’s inside the box: something elegantly presented, cleanly designed and straightforward to use. ( Swedbrand Group, n.d.) Steve Jobs’s attention to detail played a central role in allowing Apple Inc. to become one of the most aesthetically appealing digital brands in the world, thereby allowing the company to excel on a global scale. 615