Published by Van Schaik Publishers

A division of Media24 Books

1059 Francis Baard Street, Hatfield, Pretoria 0083 South Africa
All rights reserved
Copyright © 2017 Van Schaik Publishers
Please note that reference to one gender includes reference to the other.

Website addresses and links were correct at time of publication.

This book has been reviewed by independent peer reviewers.

Preface
This first edition of Entrepreneurial skill equips learners with a fundamental understanding of
entrepreneurial skills and not only the management principles related to entrepreneurship.
The need to develop this textbook arose from the somewhat dated and limited range of South
African textbooks that specifically address the skills required for successful entrepreneurial
practice.

Readers will be empowered with the knowledge, values and concepts required to manage and
run their own entrepreneurial ventures successfully. The book is necessary because many
entrepreneurial ventures fail, not because the entrepreneurs lack technical skills, but because
they lack conceptual skills. New approaches in this book include self-evaluation questions
that require students to apply aspects of theory to practical aspects of their intended or current
businesses.

Part 1 (Chapters 1 to 6) focuses on what entrepreneurship means and the competencies

related to entrepreneurs. In this part of the book the focus is on the skills set that an
entrepreneur needs in today’s environment. Chapter 1 describes the skills set that
entrepreneurs should develop. Chapter 2 deals with networking and Chapter 3 explains how
to set business goals. Chapter 4 looks at entrepreneurial leadership and management. Chapter
5 explains and discusses creativity and innovation. Chapter 6 details the driving forces in
entrepreneurship.

Part 2 (Chapters 7 to 10) addresses common managerial aspects of a business, namely

marketing and sales, business operations, legal issues and finance. Marketing is
contextualised for the small business in Chapter 7. The importance of operations planning is
discussed in Chapter 8. The dynamics of registering a business and applicable small business
legislation are detailed in Chapter 9. The book ends with Chapter 10 which requires learners
to demonstrate an understanding of various financial aspects of running a business.

The learning outcomes of every chapter are placed at the beginning of each chapter. Content
and case studies that are relevant and current are used in this textbook. Additional
recommended reading that strives to broaden learning horizons is included in most chapters.

The editors
January 2017
About the Contributors
Shepherd Dhliwayo is an Associate Professor in the Department of Business Management at
the University of Johannesburg. He lectures and researches in the fields of Management and
Entrepreneurship. He has published research articles in local and international journals and
has co-authored several books. He has been involved with small business and
entrepreneurship development in various capacities for over 20 years.

Marcia Mmashakoane Lebambo is an Entrepreneurship lecturer in the Department of

Management and Entrepreneurship at the Tshwane University of Technology. Her research
specialisations are in the areas of technological entrepreneurship, innovation,
entrepreneurship development and entrepreneurship policies. Marcia is also pursuing a PhD
in entrepreneurship. In addition, she serves as a Senior Campus Officer at the Tshwane
University of Technology, Ga-Rankuwa Campus.

Nthabeleng Mmako is an MCom Business Management graduate from the University of

South Africa. She is currently the Section Head of Entrepreneurship in the Department of
Entrepreneurship, Supply Chain, Transport, Tourism and Logistics Management (DESTTL)
at UNISA. She previously served as the Chairperson of the Marketing and Communication
Student Society for the Faculty of Economic and Management Sciences at the University of
Pretoria. She is also a member of the Golden Key International Honour Society. Ms Mmako
is involved in various community engagement projects which include the Chance2Advance
community outreach programme, as well as a mentorship and entrepreneurial skills
programme with the Automotive Industry Development Centre. She is currently pursuing her
PhD with a study titled The migration of AltX listed companies to the JSE mainboard: An
analysis of annual reporting responses of SMEs to upscaling.

Simon Radipere is an Associate Professor in the Department of Applied Management at the

University of South Africa, with over 15 years of university and academic experience. He
also serves as an external examiner at different universities. He is supervising Master’s and
Doctoral students. He has contributed chapters in books that are prescribed by higher
academic institutions. Simon has published a number of articles in accredited international
journals and presented papers at both national and international conferences. He has a passion
for academic work, research and SMME development.

Wise Sambo lectures in Entrepreneurship in the Department of Entrepreneurship, Supply

Chain, Transport, Tourism and Logistics Management (DESTTL) at UNISA. He has more
than 10 years’ experience in the higher education sector and is a Doctor of Business
Leadership candidate. He possesses a Master of Philosophy in Entrepreneurship, viia Master
of Technology in Education, two other degrees and a Diploma in Business Management. He
is also an enterprise development consultant and has consulted with the Small Enterprise
Development Agency (seda). In addition, he is a Supplier Development Consultant to the
United Nations Development Programme (UNDP). He is accredited by the United Nations as
a specialist consultant. He is highly involved in Entrepreneurship and SMME development
programmes and has published in accredited journals with topics in the field of
entrepreneurship and small business development.

Richard Shambare is a Senior Lecturer in Business Management at the University of

Venda, where he teaches Entrepreneurship, Business Research and Management. Dr
Shambare has published and presented papers at international conferences in the disciplines
of entrepreneurship, consumer behaviour and the entrepreneurship– marketing interface. His
research focuses on the sustainability of microenterprises and, in particular, how these
businesses (and entrepreneurs) utilise mobile-based technologies to leverage their marketing
practices.

André van den Berg is a lecturer in the Department of Entrepreneurship at the Cape
Peninsula University of Technology. His focus is on Entrepreneurship, Business
Administration and Strategic Management. He believes in quality teaching and learning to
ensure a marketable end product to the benefit of the business world. Community
engagement – the upliftment, training and development of entrepreneurs – is his passion.
Abbreviations/acronyms
AIM – Associate in Management
ARM – African Rainbow Minerals
BA – Business Angel
BUSA – Business Unity South Africa
CAT – computerised axial tomography
CC – close corporation
CEO – chief executive officer
CFO – chief financial officer
CIPC – Companies and Intellectual Property Commission
CIPRO – Companies and Intellectual Property Registration Office
CSBD – Centre for Small Business Development
CT – computerised tomography
DNS – domain name system
dti – Department of Trade and Industry
EOQ – economic order quantity
FABASA – Family Business Association of Southern Africa
FABCOS – Foundation for African Business and Consumer Services
FDC – Free State Development Corporation
GDP – gross domestic product
GGDA – Gauteng Growth and Development Agency
GIBS – Gordon Institute of Business Science
IBASA – Institute of Business Advisors of South Africa
ICT – information and communication technology
IDC – Industrial Development Corporation
IoD – Institute of Directors
IP – intellectual property
ISP – internet service provider
IT – information technology
LEDA – Limpopo Economic Development Agency
MD – managing director
MIT – Massachusetts Institute of Technology
MOI – Memorandum of Incorporation
NAFCOC – National African Federated Chamber of Commerce and Industry
n.d. – no date
NEF – National Empowerment Fund
NSBC – National Small Business Chamber
NYDA – National Youth Development Agency
OCIPE – Office of Companies and Intellectual Property Enforcement
PAYE – Pay As You Earn
QC – quality control ix
ROI – return on investment
SACCI – South African Chamber of Commerce and Industry
SACOB – South African Chamber of Business
SARS – South African Revenue Service
Sata – SA Taverners Association
SAWISE – South African Women in Science and Engineering
SDL – Skills Development Levy
seda – Small Enterprise Development Agency
sefa – Small Enterprise Finance Agency
SITE – Standard Income Tax on Employees
SMMEs – small, medium and microenterprises
THUD – The Hookup Dinner
UIF – Unemployment Insurance Fund
WIPO – World Intellectual Property Organization
Contents
1. Part 1
2. Chapter 1 The entrepreneur
3. Overview
4. 1.1 Introduction
5. 1.2 The entrepreneur and entrepreneurship
6. 1.2.1 Conceptualising the entrepreneur and entrepreneurship in South Africa
7. 1.3 Characteristics of an entrepreneur
8. 1.4 Types of entrepreneur
9. 1.5 Barriers to entrepreneurship
10. 1.5.1 Environmental barriers
11. 1.5.2 Personal barriers
12. 1.5.3 Social barriers
13. 1.6 Factors affecting entrepreneurial growth
14. 1.6.1 Psychological factors
15. 1.6.2 Cultural factors
16. 1.6.3 Social factors
17. 1.6.4 Economic factors
18. 1.6.5 Personality factors
19. 1.7 The risks to the entrepreneur
20. 1.8 The entrepreneurial process
21. 1.8.1 Identify and evaluate the opportunity
22. 1.8.2 Develop the business plan
23. 1.8.3 Determine the resources required
24. 1.8.4 Start and manage the enterprise
25. 1.9 Motivation for entrepreneurship
26. 1.9.1 Types of entrepreneurial motivation
27. 1.10 Entrepreneurship versus a small business
28. 1.11 Summary
29. Recommended reading
30. References
31. Chapter 2 Skills set of an entrepreneur
32. Overview
33. 2.1 Introduction
34. 2.2 Entrepreneurial skills
35. 2.3 Entrepreneurial competencies
36. 2.4 Creativity and innovativeness
37. 2.4.1 Creativity
38. 2.4.2 Innovativeness xi
39. 2.5 Networking
40. 2.5.1 Communication skills
41. 2.5.2 Negotiation skills
42. 2.6 Leadership and management
43. 2.6.1 Leadership
44. 2.6.2 Management
45. 2.7 Summary
46. Websites
47. References
48. Chapter 3 Setting business goals
49. 3.1 Introduction
50. 3.2 Goal achievement
51. 3.3 Self-efficacy
52. 3.4 The importance of goal setting
53. 3.4.1 Guidelines for goal setting
54. 3.5 Motivation and commitment
55. 3.5.1 Motivation
56. 3.5.2 Commitment
57. 3.6 Vision, mission and goals
58. 3.6.1 Vision
59. 3.6.2 Mission
60. 3.6.3 Goals
61. 3.6.4 Objectives
62. 3.6.5 Analogy of goals
63. 3.7 Summary
64. Recommended reading
65. References
66. Chapter 4 Networking in entrepreneurship
67. 4.1 Introduction
68. 4.2 Defining networking
69. 4.3 Networking dilemma: who to talk to? Where to start?
70. 4.4 How networks drive business development
71. 4.4.1 Types of network
72. 4.5 Social media and business networking
73. 4.5.1 Benefits of social media networking
74. 4.6 Networking strategies
75. 4.7 The benefits of networking
76. 4.8 Developing effective networks
77. 4.9 Forms of business networks
78. 4.10 South African business chambers
79. 4.11 Business support structures
80. 4.12 Summary
81. Websites
82. References xii
83. Chapter 5 Entrepreneurial leadership and management
84. 5.1 Introduction
85. 5.1.1 Leadership in business
86. 5.2 Why does leadership matter?
87. 5.3 Entrepreneurial leadership: a balance between management and leadership
88. 5.4 What do entrepreneurial leaders do?
89. 5.4.1 Entrepreneurial leaders define an organisation’s vision
90. 5.4.2 Entrepreneurial leaders develop networks
91. 5.4.3 Entrepreneurial leaders develop motivated leaders
92. 5.5 Leadership (and managerial) hierarchies in a business
93. 5.5.1 Top managers
94. 5.5.2 Middle managers
95. 5.5.3 First-line managers
96. 5.6 Qualities of an entrepreneurial leader
97. 5.6.1 Vision and dissatisfaction with the status quo
98. 5.6.2 Ability to sell a vision to others
99. 5.6.3 Ability to learn quickly
100. 5.6.4 Persistence and execution
101. 5.6.5 Effectuation: the ability to know and exploit one’s unfair advantages
102. 5.7 Ethics and business leadership
103. 5.7.1 The nature of business and the difficulties in providing ethical leadership
104. 5.7.2 Some common ethical issues in management and leadership
105. 5.7.3 The seven steps to ethical leadership
106. 5.8 Summary
107. Recommended reading
108. Websites
109. References
110. Chapter 6 Creativity and innovation: the driving force in
entrepreneurship
111. 6.1 Introduction
112. 6.2 Understanding creativity and innovation in entrepreneurship
113. 6.2.1 Defining creativity
114. 6.2.2 Defining innovation
115. 6.3 The innovation process in entrepreneurship
116. 6.3.1 Generating new ideas through creativity and creative thinking
117. 6.3.2 Evaluating and selecting new ideas
118. 6.3.3 Implementing creative ideas through commercialisation
119. 6.4 Characteristics of creative people
120. 6.5 Fostering creative thinking
121. 6.5.1 Barriers to creativity in entrepreneurship
122. 6.5.2 Strategies to promote creative thinking
123. 6.6 Case study exercise
124. 6.7 Summary
125. Recommended reading
126. Websites
127. References
128.
129. Part 2
130. Chapter 7 Marketing and sales
131. 7.1 Introduction
132. 7.2 Purpose of marketing
133. 7.3 Market analysis
134. 7.3.1 Market segmentation
135. 7.3.2 Target market
136. 7.3.3 Differentiation
137. 7.3.4 Positioning
138. 7.4 Marketing strategy (The marketing mix)
139. 7.4.1 Product or service
140. 7.4.2 Place (distribution)
141. 7.4.3 Price decision
142. 7.4.4 Promotion strategy
143. 7.5 Sales and selling skills
144. 7.5.1 Different ways of selling a product or service in the market
145. 7.5.2 Managing the buyer/seller relationship
146. 7.5.3 Customer service
2.4 Creativity and innovativeness
Creativity and innovation, though related and usually discussed together, do not mean the
same thing. We will explain creativity first, then innovation, and show the common elements
and the differences between the two terms.

2.4.1 Creativity

Creativity is the production of novel and useful ideas. For creativity to take place, three
components, i.e. expertise, creative thinking ability and motivation, need to be in place
(Amabile 1998). It is the presence of these three attributes that enable an individual to “think
out of the box”. Without these three elements, there is no creativity.

These elements are now briefly explained:

Creativity relies heavily on a sound knowledge base. Expertise is sound knowledge of what
things are and how they work. This knowledge not only aids idea generation, but also
supports the valuation component of creativity (Heerwagen 2002). Intellectual ability
(expertise) is required to put ideas into context, to see linkages between things, redefine
problems and envision and analyse possible practical solutions (Dorf & Byers 2008).
Knowledge can be acquired through interactions with other experts, practical experience or
formal education.

Creative thinking ability, as an act or behaviour, refers to how an individual approaches

problems and solutions. This usually involves combining existing ideas together in new
combinations. It includes both lateral and vertical thinking. Lateral thinking, on the one
hand, is concerned with breaking away from old ideas and old ways of doing things, and
generating and trying new ones. Lateral thinking is encouraged since it is generative,
explorative and change oriented (De Bono 1992). Lateral thinking is also synonymous with
divergent thinking. This is thinking outwards and looking at the bigger picture as opposed to
thinking inwardly (convergent thinking). On the other hand, vertical thinking is step-by-step,
unidimensional thinking which tends to be selective, mathematical and analytical in nature.
One should bear in mind that lateral 29and vertical thinking are complementary; lateral
(divergent) thinking generates ideas while vertical (convergent) thinking analyses and
develops the ideas to provide solutions to the problems at hand (Dhliwayo 2013).

Motivation is that drive or energy within people that spurs them to act. Motivation often
determines what a person will actually do. It can be internally driven (intrinsic motivation) or
it can be driven by external factors (extrinsic motivation), such as workplace practices and
conditions. Intrinsic motivation, i.e. a person’s passion and interest (internal desire) to do
something (Amabile 1998), is more important for creativity than extrinsic motivation.
Internal energisers are relatively better drivers. A creative thinker is motivated to make
something happen and is willing to take risks and advocate change (Dorf & Byers 2008).
2.4.2 Innovativeness

Innovativeness is the successful conversion of ideas into new products, services or processes.
To enhance the chances of successful innovation, the individual should experiment, explore
and engage in forward-looking actions targeted at the exploitation of opportunities (Sharma
& Dave 2011). For innovation to take place, an individual should be risk taking and
proactive. Innovativeness reflects a fundamental willingness to depart from existing practices
and venture beyond the current status quo (Baker & Sinkula 2009).

Proactiveness. Proactiveness relates to forward-looking, opportunity or advantage-

seeking behaviours that enable one to see or create gaps in the environment that others
do not yet see. Proactiveness relates to taking the initiative and pursuing new
opportunities which may or may not be related to the present line of operations, and
the introduction of new products and brands ahead of the competition (Sharma &
Dave 2011).
Risk taking. Risk taking is the extent to which an individual or firm is willing to
make large and risky resource commitments to projects, ideas or processes whose
outcomes are uncertain and for which the cost of failure would be high (Wickland &
Shepherd 2005; Baker & Sinkula 2009).

2.5 Networking
One of the most important skills of an entrepreneur is networking. The ability to network is
critical for an entrepreneur to build support structures for the enterprise. These structures are
in the form of all the stakeholders that the business needs in order to take off and succeed.
Networking can be formal or informal, ranging from family and friends (informal),
customers, suppliers, bankers, government agencies, other entrepreneurs and competitors
(formal). Networks made up of individuals can be viewed as social networks while those
made up of organisations are considered as interorganisational networks (Stokes, Wilson &
Mador 2010). 30

Good networking skills enable the entrepreneur to build win-win relationships with
stakeholders. Such relationships are underpinned by mutual respect and benefits and usually a
long-term focus. According to Aldrich and Zimmer (1986), networking (the process) allow
entrepreneurs to enlarge their span of action and influence, save time and gain access to
resources which otherwise would not have been available to them. These ties act as bridges
between the entrepreneur’s limited knowledge and a diverse source of information which the
entrepreneur would not have been able to access (Granovetter 2002). Networks are also a
source of ideas and a key means to finding customers, partners and other collaborations
(Stokes et al. 2010).

Networks are built on the strength of good interpersonal skills. Interpersonal skills is a large
subject area and we will limit our discussion to just two of these skills: communication and
negotiation. Let us start by exploring communication skills.

2.5.1 Communication skills

Communication is the act of transferring information (a message) from one person (the
sender) to another (the receiver). This information in its different forms or structures is
transmitted via different forms or mediums, i.e. written (emails, books, websites), visual
(maps, logos, pictures), verbal (using voice), or non-verbal (dress, body language, gestures).
Listening is the ability to accurately receive and interpret messages in the communication
process. Listening is key to all effective communication, because without the ability to listen
effectively, messages are easily misunderstood – communication breaks down and the sender
of the message can easily become frustrated or irritated. Good listening skills can lead to
better customer satisfaction, greater productivity with fewer mistakes, and increased sharing
of information which in turn can lead to more creative and innovative work. In other words, it
means being aware of both verbal and non-verbal messages (SkillsYouNeed 2015).

Effective communication includes good speaking and listening skills. Good communication
includes being able to speak appropriately with a wide variety of people. This is done by
being able to tailor one’s language to the audience, listen effectively, present one’s ideas
appropriately, write clearly and concisely and being able to appropriately interpret the
feedback.

Effective communication is achieved through some of the following activities (Van

Schalkwyk 1996):

Speak effectively, express oneself and convey information clearly

Listen well
Provide sensible feedback
Maintain sound personal relationships (networks)
Minimise and resolve conflict
Motivate others to achieve goals

2.5.2 Negotiation skills

Negotiation is a method by which people settle differences. It is a process by which

compromise or agreement is reached while avoiding argument and dispute. From time 31to
time, conflict and disagreement will arise as the differing needs, wants, aims and beliefs of
people are brought together. Without negotiation, such conflicts may lead to argument and
resentment, resulting in one or all of the parties feeling dissatisfied. The point of negotiation
is to try to reach agreement without causing future barriers to communications. In any
disagreement, individuals understandably aim to achieve the best possible outcome for their
position or what they stand for. However, the principles of fairness, seeking mutual benefit
and maintaining a relationship are the keys to a successful outcome (SkillsYouNeed 2015).

Assertiveness is an element of negotiation skills. Being assertive means being able to

communicate what one stands for (ideas and values) without fear or favour in a calm, non-
aggressive way. This is asserting one’s rights or those of others in a direct, honest and
respectful manner without trampling on the rights of others.

One other important skill related to networking is the ability to pitch. An elevator pitch is a
very brief summary presentation of your business opportunity accompanied by a request for
some kind of assistance (Stokes et al. 2010). Since the pitch needs to be delivered
unexpectedly at times, the entrepreneur should always be prepared to eloquently “sell” an
opportunity in the shortest possible time. Due to the element of surprise and speed, there is a
genuine need by the entrepreneur for discipline and preparation always to deliver an excellent
pitch (Stokes et al. 2010). “Pitching” is selling one’s business opportunity in different
environments to potential investors. It is also important to note also that it is possible to learn
communication skills (discussed in Section 2.5.1) and practical networking skills, such as
joining social and professional networks; attending events; getting, keeping and maintaining
contacts; and being prepared to deliver a pitch when an opportunity arises (Stokes et al.
2010).

2.6 Leadership and management

An entrepreneur wears many hats, one of which is the leader’s hat. The following sections
address leadership and management. Leadership and management are at times treated as if
they are synonymous. They are, however, completely different skills. Let us analyse
leadership first.

2.6.1 Leadership

Leadership is the ability to influence people to work willingly towards a desired vision. Good
leadership is underpinned by a mutually supportive relationship between the entrepreneur and
those with whom he works. Employees should be willing to go the extra mile under good
leadership.

The ultimate measure of good leadership lies in the achievement of organisational and
follower goals. Goals ultimately need to be achieved in all businesses. 32

There are certain qualities that distinguish leaders from non-leaders. They are the following:

Passion. Not all leaders are charismatic. This is a common misconception about
leaders. While leadership is a valued entrepreneurial trait, entrepreneurial leaders are
passionate about what they do. It is this passion (enthusiasm) for their ideas that they
often use to develop a vision for those who follow them.
Good communication skills. Leaders work with people. To do this successfully,
good leaders are able to communicate well. Successful leaders provide
communication that is honest, timeous and effective. Good leadership involves
networking skills (discussed in Section 2.5).
Spirit of empowerment. Good leaders empower those with whom they go on their
journey. Employee needs are considered and employees are empowered with skills
and opportunities to develop their potential.
Competence. Good leaders are knowledgeable in their subject field and have the
ability to lead people in that area well. Competence is what provides them with
credibility among their followers. Knowledge gives the leader “expertise power”,
which helps in influencing followers, and the capacity to create winning strategies.
Confidence in their abilities. Leaders believe in themselves. If they do not, they
cannot convince followers to believe in what they do. Self-confidence improves their
 trust in their abilities to make good judgement about certain risks. If you believe in
yourself, others will believe in you too.
Integrity. Good leaders have strong, moral principles. Their adherence to sound
moral and ethical principles inspires trust in their followers.

Leaders can inspire or demotivate those with whom they work. This is dependent on the type
of leadership style that they employ. Although there are a number of leadership styles, we
will limit our brief discussion to only two, namely transactional and transformational
leadership. James MacGregor Burns (1978) popularised the distinction between these two
styles. Refer also to Table 2.2.

Transactional leadership. Transactional leaders are more concerned with

maintaining the status quo. This is often done by exercising their discipline over
followers. The relationship between leaders and followers is one of exchange, that is,
give and take. When transactional leaders use incentives, this is to ensure that
followers perform at their best. As a leadership style, transactional leadership uses
rewards and punishment to motivate followers to act in a certain way.
Transformational leadership. Transformational leaders are often charismatic and,
unlike transactional leaders, use their charisma to motivate followers to make a
meaningful contribution in realising the vision of the business. Transformational
leaders empower and encourage followers to reach and maximise their full potential.
This type of leadership is proactive and change focused.

33

Table 2.2 Comparison of transactional and transformational leadership

Source: Odumeru and Ifeanyi 2013

Different types of leadership style can be applied to achieve the goals of the organisation.
However, one should bear in mind that these types of leadership style are stereotypical and
should not be viewed as mutually exclusive. A combination of types may be used to achieve
best results. It is important to assess the situation at hand and apply an appropriate leadership
style to it.
Operating in uncertain and various environments may force entrepreneurs to evaluate what
kind of leaders they want to be. Choosing a leadership style requires an understanding of
one’s personal strengths and weaknesses. It is also important to understand the environment
in which one will be operating as a leader. Rabinowitz (2013) suggests evaluating the
following factors when developing a leadership style:

Start with yourself. It is important to use what you know about your personality and
how you have practised leadership in the past. It is important to be clear on what you
naturally tend to do. Knowing and understanding who you are is important in
choosing a primary leadership style and what improvements you need to make in
effecting your ideal leadership style.
Think about the needs of the business. Leadership styles can be adapted to suit most
situations but the entrepreneur should not neglect the real needs of the organisation. It
may be necessary to start out with a certain type of leadership style and adapt it along
the way in order to solve problems or to get people on board.
Observe and learn from other leaders. Think about leaders you admire and those
you do not. Evaluate what makes them good or bad leaders. One can then consider
which aspect of the admired qualities to incorporate and create one’s own leadership
style. Finding a mentor may also be helpful. This person should be someone you
admire and who will be accessible to you. The world is constantly 34changing. It is
important that one should be prepared to hear the negative as well as the positive, and
to evaluate it objectively. Corrections to poor leadership practices also have to be
made when necessary.
Figure 2.1 Entrepreneurial skills

Case study

Yossi Hasson: SYNAQ’s rock star geek

I heard Yossi speak for the first time about a year ago and was inspired by his story. Yossi is
the cofounder and managing director of SYNAQ, a company he started in 2004 with an old
school friend, Jacobson. When I was doing research on Yossi for this article, I found many
interviews and stories – all telling how successful he is at a young age, but when he told his
own story, it was not always an easy ride. They struggled as a service business, had to make
difficult decisions and transformed the business into one selling products. Since then it has
become a prominent company and attracted the attention of big players in the internet service
provider (ISP) market with Internet Solutions acquiring 50% of the business in 2011.
SYNAQ was also ranked as the sixth fastest-growing company in South Africa by
AllWordNetwork in 2011. Definitely a technology entrepreneur to look out for!

“From a very young age I knew I wanted to be an entrepreneur or a business owner,” Hasson
says when I ask how he got started in the technology industry. “I thought that was the best
thing you could do — never mind being a doctor or a fireman or anything else.”
35

Hasson says he developed certain skills himself when he was young. His father was self-
employed, and Hasson saw entrepreneurship as the best way “to control my destiny and make
money”.

“I got my first computer when I was 14, a red Stallion XT. I fell in love with computers and
the tech world and the infinite possibilities they presented. I took the machine apart the day I
got it, and couldn’t put it back together, but eventually I learnt how to. I got entrenched in
technology from there.”

SYNAQ launched on 1 September of that year (2004), with Hasson and Jacobson having
raised R1 million to start the business. The advantage of using one’s own funding was that
there was little red tape, but the investment risk rested solely with Hasson and Jacobson.

SYNAQ has clearly attracted the right sort of attention. In May, Dimension Data’s Internet
Solutions (IS) acquired 50,1 per cent of SYNAQ. Hasson says that although a controlling
stake was one of the conditions of the acquisition, “we retain full management control”.

Having been an avowed capitalist since his youth, Hasson says the notion of a community
developing software for free, as in the open-source world, intrigued him. “They were so
passionate and, even though they worked for free, they could create better software than
companies were making. I also saw the business potential of having access to amazing
software for free.”

Asked what the largest challenges are for the local information technology (IT) industry,
Hasson says it is the shortage of skills, of developers in particular. “We need more
Shuttleworths, more rock star geeks. Maybe we just need more role models”.

Another problem is a lack of vision by local entrepreneurs. “US start-ups think about global
domination, raise funding to do it and aren’t scared to chase a good opportunity, even if they
sometimes get it wrong.”

Source: Adapted from:

http://www.mweb.co.za/Entrepreneur/ViewArticle/tabid/3162/Article/7987/10-South-
African-entrepreneurs-under-35.aspx and http://www.techcentral.co.za/yossi-hasson-synaqs-
rock-star-geek/24180/
Questions

1. Yossi Hasson displays some competencies often found in successful entrepreneurs.

Describe these entrepreneurial competencies.
2. Describe the impact that networking had on Yossi Hasson’s entrepreneurial journey.
3. What kind of leadership can Yossi Hasson provide for the future of the local IT
industry?

2.6.2 Management

Entrepreneurship and management are often regarded as polar opposites. It is often said that
entrepreneurs cannot be managers. However, in many entrepreneurial ventures, the
entrepreneur wears many hats. This includes managing the business where often the
resources to do so are limited. Taking on the manager role as an entrepreneur includes
determining and directing how these resources will be spent. This can be done through the
use of the four basic management functions.

Table 2.3 The management functions

Source: Adapted from: Erasmus, Strydom and Rudansky-Kloppers 2013

We will now briefly explain the basic management skills (Table 2.3) and will then focus
more on personal management (time management). 36

Planning involves setting goals for the business venture. Goals can be long term, medium
and short term, and these different planning horizons should be taken into account. The
entrepreneur should try to ensure that the goals for the business are shared by the employees
(and other stakeholders) to ensure successful implementation.

Organising entails deciding who does what, when and with what resources. It ensures the
optimum allocation and utilisation of resources to achieve the goals set. This means that the
entrepreneur/manager should have a thorough understanding of the functional and operational
processes of the business venture.

People are any business’s most important asset. The way they are managed (interpersonal
skills) and led (motivated to archive goals) is critical in determining the success of the
business.

Controlling is important in that it evaluates the whole management function, from the setting
of standards and goals to checking whether these goals have been achieved. The whole
business process is evaluated and corrections recommended.
One of the biggest elements in successful personal management is time management.
Effective time management ensures good management of resources and enhances possible
success of the business.

Sometimes one feels as though there are too few hours in the day to achieve one’s goals, but
one cannot increase the number of hours in a day. Entrepreneurs therefore 37need to learn to
manage their time efficiently and effectively.

Time management refers to the way that you organise and plan how long you spend on
specific activities. In essence, time management is self-management.

Good time management does not mean being busy, but effectively using your time to achieve
desired results. Effective time management goes hand in hand with proper planning and
learning how to prioritise issues and tasks at hand.
The entrepreneur’s day can easily be consumed by the many tasks that require his/her
attention. In effect, poor time management can have adverse effects on the entrepreneur.

Failing to manage one’s time effectively can have the following negative consequences:

Missed deadlines
Inefficient workflow
Poor grasp of tasks
Poor work quality
A poor professional reputation and a stalled career
Higher stress levels
Failure to deliver product or service at all completely

In contrast, good time management can have the following benefits for the entrepreneur:

Greater productivity and efficiency

A better professional reputation
Less stress
Increased opportunities for advancement
Greater opportunities to achieve important life and career goals

Learning to effectively manage your time is something that does not happen overnight.
Effective time management often occurs through a series of learning from mistakes. Time
management can be tied to our goals, since how we manage our time directly affects which
goals we achieve.

Time management is a skill everyone can learn. To do this, however, requires assessing how
we mismanage our time.

Nieuwenhuizen (2008) defines time-wasters as activities that eat up your time, preventing
you from starting a task immediately so that it can be completed on time. Time-wasters can
be classified as either internal or external. Examples of internal 38time-wasters include
procrastinating, an inability to delegate, lack of objectives and poor planning. External time-
wasters include, for example, telephone calls, meetings, interference from other people and
the administration of paperwork.

Time management does not necessarily mean working harder, but working smarter. The three
Ps of time management is a technique one can apply to use one’s time productively.
The three Ps, i.e. planning, prioritising and procrastination, will now be discussed.

1. Planning

Failing to plan is simply planning to fail. Entrepreneurs need to identify what it is that they
need to work on. If you do not plan, you go blindly into executing your tasks. This might lead
you not to achieve what you had set out to achieve. Planning helps the entrepreneur to
achieve a clearer sense of what it is that has to be done and how it should be done. Planning
should not be overwhelming for the entrepreneur. Planning should be broken down into
smaller action items.

2. Prioritising
It is easily possible for the entrepreneur to become overwhelmed by what he or she has to do.
One needs to determine what is important and what should be attended to as a priority.

Prioritising to achieve efficient time management can be done by determining the following
about the task that needs to be done:

Important and urgent: these tasks require immediate attention in a short amount of
time.
Important and not urgent: these tasks require action but can be put off, however not
indefinitely. 39
Urgent but not important: these tasks are not top priority but receive immediate
action.
Not important and not urgent: these tasks are often distractions that prevent you
from doing your work.

3. Procrastinating
Procrastinating is putting off doing something important in favour of doing other
things that are more pleasurable. It can be a challenge to remain committed to the plan
when you encounter time-wasters. Things should not be put off for too long because
when they build up they can lead to being overwhelmed and therefore negatively
affect overall execution of the task.

It will be to the entrepreneurs’ advantage to periodically review how they are using their time
and if they are achieving their goals. Create reminders that you can see. These can be:

Daily to-do lists

Weekly planning schedules
Calendar reminders
Using a year planner
Setting reminders on your laptop, phone and tablet
Keeping a progress journal
The entrepreneur should be cautious of getting lost in his or her thoughts and start doing what
should be done today.

2.7 Summary
In this chapter, the entrepreneurial skills required for successful business start-ups and
operations were discussed. These skills include innovation and creativity, leadership,
networking and management.

Even though creativity and innovation are often used interchangeably, the differences
between these two concepts were explored. 40

In this modern age, networking allows entrepreneurs to build support structures for their
businesses. However, such networking relationships should be mutually beneficial. On the
part of the entrepreneur, this requires a good set of interpersonal skills which were discussed.

Since it is established that entrepreneurs work with people, they sometimes also have to lead
followers within their enterprises. Effective leadership requires developing certain traits.
Depending on the needs of the enterprise, the entrepreneur needs to develop an effective
leadership style.

Management in entrepreneurship comprises self-management and resource management.

Good time management helps to ensure that the goals of the organisation are achieved. When
managing the resources of the enterprise, the entrepreneur directs how these resources will be
effectively allocated.

Questions

1. Discuss in detail the three components of creativity.

2. Explain the benefits of networking.
3. What are the key skills required for a successful “elevator pitch” presentation?
4. Describe the different types of leadership styles.
5. Discuss in detail the 3 Ps of time management.

1. _________ may be defined as the combination of skills and abilities of the

entrepreneur to perform well.
a. Goal achievement
b. Entrepreneurial skills
c. Time management
d. Efficiency orientation
2. A leader who uses his or her power to motivate others to make a meaningful
contribution to realising the vision of the business may be described as a/an
_________ leader.

a. transformational
 b. transactional
c. coercive
d. organised
3. Evaluating the achievement of goals against the set standard describes the
___________________ management function.

a. planning
b. organising
c. leading
d. controlling
4. It is easily possible for entrepreneurs to become overwhelmed by what they have to
do. Deadline-driven problems may be categorised as _____________________.

a. Important and urgent 41

b. Important but not urgent
c. Not important but urgent
d. Not important and not urgent
5. Successful entrepreneurs possess certain entrepreneurial competencies. Which
entrepreneurial competency is an entrepreneur displaying when he looks for or finds
ways of doing things faster or at a lower cost?

a. Initiative
b. Systematic planning
c. Efficiency orientation
d. Assertiveness

1. Describe the common stages in the negotiation process.

2. Describe the different negotiation styles.

Websites
Communication skills: http://www.skillsyouneed.com

Edward de Bono’s website: http://www.edwdebono.com

Innovation network: http://www.thinksmart.com

Social media: http://www.linkedin.com; http://www.youtube.com; http://www.facebook.com

and other websites for social and business networking

Time management quiz: https://www.mindtools.com/pages/article/newHTE_88.htm

References
Aldrich, H.E. & Zimmer, C. 1986. Entrepreneurship through social networks. In Sexton, D.
& Smilor, R. (Eds). The art and science of entrepreneurship. Cambridge, MA: Ballinger, 3–
23.
Amabile T.M. 1998. How to kill creativity. Harvard Business Review on breakthrough
thinking, September-October: 1–28.

Baker, W.E. & Sinkula, J.M. 2009. The complementary effects of market orientation and
entrepreneurial orientation on profitability in small businesses. Journal of Small Business
Management, 47(4): 443–464.

Burns, J. M. 1978. Leadership. New York: Harper & Row.

Dara, P. 2013. Personal entrepreneurial competencies (PECs). Available at:

http://www.tankonyvtar.hu/en/tartalom/tamop412A/0007_b_team_academy_scorm/personal_
entrepreneurial_competencies_pecs__91LvBivZxuJCgZnY.html (accessed on 23/01/2016).

De Bono, E. 1992. Serious creativity. Using the power of lateral thinking to create new ideas.
London: Harperbusiness.

Dorf, R.C. & Byers, T.H. 2008. Technology ventures: from idea to enterprise, 2nd ed. New
York: McGraw-Hill.

Dhliwayo, S. 2013. Innovation and creativity. In Mahadea, D., Youngleson, J. (Eds).

Entrepreneurship and small business management. Cape Town: Pearson Education.

Erasmus, B.J., Strydom, J.W. & Rudansky-Kloppers, S. 2013. Introduction to business

management, 9th ed. Cape Town: Oxford University Press.

Granovetter, M. 2002. A theoretical agenda for economic sociology. In Guillén, M.F.,

Collins, R., England, P. & Meyer, M. (Eds). The new economic sociology: developments in
an emerging field. New York: Russell Sage Foundation, 35–59.

Heerwagen, J. H. 2002. Creativity. In Organizational creativity, Ch15. Available at:

http://www.au.af.mil/au/awc/awcgate/doe/benchmark/ch15.pdf (accessed on 26/01/2016).

Kaur, H. & Bains, A. 2013. Understanding the concept of entrepreneur competency. Journal
of Business Management & Social Sciences Research, 2(11): 31–33.

Kumar, S. 2012. The three Ps of time management. Available at:

http://www.slideshare.net/drsk/three-ps-of-time-management (accessed on 15/01/2016).

McBer & Co. 1986. Entrepreneurship and small-enterprise development. Second Annual
Report to the United States Agency for International Development, March 25. Boston, MA:
McBer & Co.

Nieuwenhuizen, C. (Ed.). 2008. Entrepreneurial skills, 2nd ed. Cape Town: Juta.

Odumeru, J.A., & Ifeanyi, G.O. 2013. Transformational vs. transactional leadership theories:
evidence in literature. International Review of Management and Business Research,
2(2): 355–361.

Rabinowitz, P. 2013. Styles of leadership. Available at: http://ctb.ku.edu/en/table-of-

contents/leadership/leadership-ideas/leadership-styles/main (accessed on 12/01/2016).
Sharma, A. & Dave, S. 2011. Entrepreneurial orientation: performance level. SCMS Journal
of Indian Management, October-November.

SkillsYouNeed. 2015. Available at: http://www.skillsyouneed.com (accessed on 31/01/2016).

Stokes, D., Wilson, N. & Mador, M. 2010. Entrepreneurship. Australia: South-Western

Cengage Learning.

Van Schalkwyk, M.J. 1996. Communications for management and secretarial students.
Parow, Cape Town: M.J Van Schalkwyk.

Wickland, J. & Shepherd, D. 2005. Entrepreneurial orientation and small business

performance: a configurational approach. Journal of Business Venturing, 20(1): 71–91.
 3
Setting business goals
Learning outcomes

After studying this chapter, you should be able to do the following:

Explain the concept goal achievement

Describe self-efficacy
Explain the importance of goal setting
Discuss the guidelines of goal setting
Apply guidelines for setting SMART goals
Evaluate the relationship between motivation and commitment
Explain the relationship between the vision, mission and goals
Differentiate between goals and objectives
Describe the factors to consider before goal setting

Key terms

Goal achievement
Self-efficacy
Goal setting
SMART goals
Motivation
Commitment
Vision
Mission
Short-term goals
Medium-term goals
Long-term goals
Objectives

Success story

“Success is not a number”, so don’t chase goals that leave you unsatisfied

Defining “success” in terms of revenue is like jousting with windmills or trying to nail jelly
to a wall. While it is important for businesses to generate profits for their continued existence,
there are many other ways to measure success. Pursuing goals we are passionate about,
making a difference in society and finding our purpose in life are other ways of measuring
success. “My goal is to see young people, especially people who have not been introduced
into business, be inspired, creative and goal driven,” said Limor Fried, the CEO and founder
of Adafruit, an engineering-kit manufacturing company. “As long as that is happening, I am
successful.”
Fried launched Adafruit out of her dorm room at Massachusetts Institute of Technology
(MIT) in 2005. She says building and mailing engineering kits was a way for her to avoid
working on her thesis project. What was a way for Fried to procrastinate has 44become a full-
time job for her and another seven dozen people. Today, Adafruit works from a 4 645 m2
facility in lower Manhattan and is on track to reach R600 million in sales in 2015. Fried grew
the company without taking any outside funding.

But Fried is motivated by more than money, and she says that is what keeps her happy and
Adafruit growing. “It separates me from, I think, what happens to some company owners
where they start chasing goals that are a little counterproductive. They just want a revenue
play,” Fried said during an interview at the Entrepreneur 360 Conference in New York City.
Ultimately, that may lead to profit, but it may very well also lead to feelings of emptiness and
eventual burnout.

Source: Adapted from: Clifford 2015.

3.1 Introduction
While many people will say that they want to be successful, this is often said without a
specific plan of action to achieve this desired vision of success. Proper goal setting is
important in order to actively turn a vision into a reality. However, goal achievement is not a
linear process that leads to success. The entrepreneurial journey is a constant learning process
that requires constant monitoring of set goals and, where necessary, making adjustments.

3.2 Goal achievement

Goals are the desired results to which effort is directed. Goals, whether personal or
professional, require effort and commitment to achieving them. To constantly want to pursue
set goals requires motivation. Many entrepreneurs feel as though they are working hard on
their businesses and do not always see the rewards of it. For this reason the set goals need to
be well defined and measurable. This allows one to measure the progress one makes in
achieving the goals.

It is simply not enough to say “I want to be successful”. This vision does not have an action
plan and does not acknowledge the strengths and weaknesses of a person. However, self-
confidence and belief in your abilities is an important factor in the achievement of goals.
People’s belief in themselves influences their success. A strong belief in yourself and your
abilities can influence the outcome of your efforts.

The next section explains the relationship between goal achievement and self-efficacy.

3.3 Self-efficacy
Successful entrepreneurs are often characterised by high levels of self-efficacy. Self-efficacy
is an individual’s belief in his or her own abilities and skills to perform tasks (Piperopoulos &
Dimov 2015). Self-efficacy generally determines business performance, which in turn results
in success for entrepreneurs. Entrepreneurs’ belief in themselves are often influenced by their
level of self-confidence. For entrepreneurs, 45this greatly determines the goals they set for
themselves and their businesses, those that they pursue and how they stay motivated in
pursuit of these goals. To this effect, Hechavarria, Renko and Matthews (2012: 688) state that
individuals with high self-efficacy do the following things better:

Persevere in the face of difficulty

Invest more effort in order to meet their commitments
Do not attribute failure to things beyond their control
Recover more quickly from setbacks
Achieve personal goals

3.4 The importance of goal setting

Entrepreneurs are driven by a great need for achievement. This need propels them to set
reasonably high personal and business goals. Goals help entrepreneurs to mark the points
they need to make on their business journey. While a vision may be an idealistic picture of
the future, goals help turn the vision into tangible actions that need to be taken to realise this
vision.

Goals direct attention, resources and actions. The importance of setting goals can be summed
up by the following five points:

1. Setting goals helps develop a blueprint for the success of the business

Setting goals ensures that a detailed plan of action is in place for the entrepreneur. While the
vision is the ideal picture of the businesses future, entrepreneurs need to set goals that allow
them to realise their visions. A blueprint guides the entrepreneur in understanding where he
or she is heading and what skills will be required in his or her endeavour in realising the
vision for the business.

2. Setting goals sharpens entrepreneurs’ focus

Setting clear, specific and measurable goals helps entrepreneurs to sharpen their focus.
Entrepreneurs have to be all-rounders, but clear goals allow them to prioritise certain aspects
of the business that will enable them to achieve the bigger picture for the business.

For example, when Thabo’s business grows, setting goals that accommodate this new growth
will help him to identify areas of his business that need attention.

3. Setting goals sets in motion an entrepreneur’s plan

A big vision can be overwhelming for the entrepreneur. However, realistic goals allow the
entrepreneur to make incremental steps towards his or her desired future. Goals help break
the big vision into smaller parts that the entrepreneur can pursue step by step.

For example, a vision like “To becoming the leading cosmetics company in the world” may
be an overwhelming goal to achieve. Breaking this vision into realistic goals such as “To
launch a women’s lipstick range in local stores by 2017” is breaking the goal into smaller
steps that the entrepreneur can achieve incrementally. 46
 4. Goals help measure and track progress

In line with the entrepreneur’s desired vision for himself, setting goals can help the
entrepreneur to measure and track progress towards the desired vision.

For example, Melusi set the goal that his software company would be listed on the
Johannesburg Stock Exchange’s Alternative Index (JSE AltX) by 2017. So far, due diligence
has been performed for his company. Melusi can measure how far he currently is in achieving
his goal of listing his company on the JSE’s AltX.

5. Goal setting helps the entrepreneur discover knowledge about the business and
self

Everything will not always go according to plan. Pursuing goals may be a journey of learning
and self-discovery for the entrepreneur. Realising that some things will work while others
will not, may teach entrepreneurs something about themselves and the types of business they
operate. This knowledge can be ploughed back into refining the vision and goals of the
business to improve the chances of success.

For example when Ian embarked on starting a business, he thought that everything would be
systematically checked off like a to-do list. However, he learned that it is always good to
have an alternative plan. He also learned that his networking skills needed improvement in
order to secure the support of key people in his field.

3.4.1 Guidelines for goal setting

Entrepreneurs operate in difficult and uncertain environments. This does not mean that they
need to go with the flow and take everything as it comes. MindTools.com (2015) proposes
the following rules for goal setting:

1. Choose a business that interests you

One should set goals that are important to oneself and also relevant to the type of business
one is in. If one sets goals that are not important or inspiring, little interest in the outcome of
these goals is inevitable. Motivation is important in goal setting. An entrepreneur needs to
commit to the goals he or she sets, and to do this well requires motivation.

2. Set specific, measurable, attainable, relevant and timeous (SMART) goals

Entrepreneurs have to consider certain factors when setting goals. Entrepreneurs often
operate in an environment unique to them. They need to consider various factors when setting
goals. Considering the factors that may affect goal setting is useful in ensuring that those
goals are actually achieved. The entrepreneur should consider the following factors when
setting goals for the business:

The goals should be achievable. It is no use to set goals that are impossible to
achieve. Even though the entrepreneur needs to have a positive mind-set, the goals
that he or she sets should be achievable. It is pointless to aim at a destination that does
not exist or cannot be reached. This means that the goals should be realistic. For this
reason goals that are set can be achieved.
 Goal setting should be aligned to the overall business picture. The goals that the
entrepreneur sets need to fit into the bigger picture of the business. If the goal is not
aligned to the bigger picture, it may distract the entrepreneur and hinder progress
towards the desired destination. To determine if there is a fit between the goals, the
entrepreneur should break down his vision into smaller parts (goals) and bring them
together to determine a fit to the big picture.
The goal should be measurable. As previously stated, goals need to be SMART.
The entrepreneur needs to know how he or she will measure achievement of goals.
One needs to bear in mind that measurements help the entrepreneur to establish when
he or she has achieved the goals and allow him or her to pursue other relevant goals.
Passion drives goal achievement. Passion is a strong driving force for many
entrepreneurs. Passion is what supports commitment and motivation. If an
entrepreneur does not pursue goals that they are passionate about, then the desire to
achieve these goals will fizzle out. Passion drives the entrepreneur to go out and
achieve the goals that they have set out to achieve.
Determine the resources required to achieve the goal. Understanding what is
required to achieve goals helps the entrepreneur to plan and collate resources.
Resources allow goal achievement and these resources often need to be organised in
advance. The entrepreneur should think broadly about the resources that he needs to
achieve goals.
Realistically, how long will it take to achieve this goal? Goals should not be set
with an indefinite timeline. Realistically determining the time required to achieve the
goal can serve as a motivation when that particular goal is achieved. Setting timelines
also helps monitor the progress one is making as well as setting alternatives that may
arise.

From the above discussion it is evident that setting SMART goals ensures structure and
monitoring. More so, it aligns the entrepreneur’s efforts to his or her desired vision. Figure
3.1 summarises the concept of SMART goals.
Setting goals allows effective planning to take place even though things may change
unexpectedly. To achieve your goals, it is helpful to know how to set them. Foster (2013)
proposes the following steps for successful goal setting:

1. Believe

One needs to believe in what one is doing. Many successful ideas we see today began as
thoughts and it is up to the entrepreneur to believe in himself or herself and turn the positive
thoughts into realities.

2. Visualise what you want

Think deeply about what it is that you want to achieve. This could be six months from now or
even five years from now. Imagine the changes that have to take 48place in order to realise
these visions. Entrepreneurs need to be clear about which aspects they need to address in
order to realise their goals. The clearer the vision, the easier it will be to focus on making it
happen.

3. Write it down

Writing down your goals is key to success. By so doing you will remember them and will
focus on achieving them. Write down your goals and put them where you can see them
regularly. This serves as a constant reminder to yourself about what it is you want to achieve.

4. Identify the purpose

Identifying the purpose of your goal helps you instantly recognise why you want that
particular goal and whether it is worth working towards realising it. Knowing why you want
to achieve something serves as a motivation to see the goal through to finalisation. Strive to
understand how every goal fits into the overall scheme of things.

5. Commit

It is useful for entrepreneurs to write down what they are committing to and how they are
committing to their goals. Without strong commitment you are unlikely to follow your goals
through.

6. Stay focused

You may not know how you will reach your goals but when you make a daily practice of
focus, they become easier to reach. If you happen to lose focus you can get back on track by
refocusing. Without a regular practice of focusing on your goals you may be distracted by
something. 49

7. Plan your action steps

Being really clear about what you want, knowing your purpose, writing your goals down,
committing to them, and staying focused gives you the power of clarity to write down a list of
action steps. You may not know all the steps ahead of time but you will know the next steps
that take you in that direction.

8. No time like the present

Start now with achieving your goals, even if it is something small like making a call to gather
information about your goal. The desire to start now can keep one motivated because a
simple step to start can reinforce previous steps and move the entrepreneur towards the
desired goal.

9. Accountability

The entrepreneur has to hold himself or herself accountable when things get tough. In the
end, the goal is yours to achieve and the responsibility lies with the entrepreneur.

10. Review

The entrepreneur needs to keep his or her goals alive. Goals should be reviewed and if
necessary, corrective action should be taken. Doing this helps the entrepreneur to monitor the
progress and detect the goals that are lagging behind.

3.5 Motivation and commitment

Motivation and commitment towards goal achievement are what set the vision of the business
in action. One cannot think of goal achievement without motivation and commitment.
Entrepreneur and motivational speaker, Jim Rohn (1994), states “Motivation is what gets you
started. Habit is what keeps you going.” Habit can be interpreted as consistency and
commitment from the entrepreneur. This commitment to achieving goals can be thought of as
dedication to the achievement of one’s set goals.

3.5.1 Motivation

It is easy to set goals. What is not easy is sticking to these goals. Motivation is the reason to
act in a certain way in order to accomplish something. The entrepreneurial journey is not an
easy one and many things can demoralise entrepreneurs. In addition to doing and overseeing
a lot of things, the entrepreneur also has to remain motivated. Motivation comes from the
desire to do things that entrepreneurs find fulfilling to their goals.

Entrepreneurs have to be motivated to wake up and do what they set out to do. When
motivation is low, entrepreneurs have to stay committed to achieving their goals.
Commitment is when the desire to go out and make things happen is not there but the
commitment to the overall goal keeps the entrepreneur going.

3.5.2 Commitment

Motivation has its peaks and dips. It is not always possible to be highly motivated. This is
where commitment comes in. Commitment keeps entrepreneurs going, especially when
motivation is at its lowest. Entrepreneurs will experience various challenges along the way.
Some of these challenges might force an entrepreneur to accept defeat. However,
commitment is what keeps one going. You cannot accomplish your goals if you are not
motivated. Neither can you achieve your goals if you are not committed to them. Both
commitment and motivation are required to ensure successful and persistent achievement of
goals.

Case study

Khanyi Dhlomo: South Africa’s golden girl

Khanyi Dhlomo is anything but ordinary. In 1995, when she was just 20 and a journalism
student at the University of the Witwatersrand, she made history as the first black newscaster
for SABC1, South Africa’s national broadcaster. But she had other goals for her career. She
particularly loved the print media and the prospects of editing held a special attraction for her.
Even while she was still an anchor at the TV station, she was “still more interested in the
editorial side” as she once said during an interview with the South African newspaper
Business Day. She was looking for an opportunity to work as an editor, and the opportunity
came.

Khanyi Dhlomo was a petite young girl, hardly out of her teens, when the boss of South
Africa’s largest media empire decided to make her editor of his top black women’s magazine,
True Love.

Nevertheless, she left for Paris in 2003 with a BA degree in communications and industrial
psychology. She had acquired her qualification while simultaneously being an editor and the
mother of two babies.

It was while she was manager of South African Tourism in France and strolling the
fashionable streets of Paris, gazing at their stunning stores that the idea of Luminance first
began to glimmer in her mind.

She wanted to start her own magazine and set up her own company, and she felt the need for
a sound business education, so she headed to the Harvard Business School for an MBA. It
was one of the smartest decisions of her life. While at school, she met Jonathan Newhouse,
chairman of Condé Nast International (publisher of Vogue magazine), who became her
mentor. Newhouse gave her insights into the workings of the magazine business, from where
she was able to form the blueprint for her own magazines.

She returned home to South Africa and founded Ndalo Media – a joint venture with Media24,
the publishing arm of Naspers, Africa’s largest media company. Through Ndalo, Khanyi
publishes Destiny Magazine and Destiny Man, two thriving high-end magazines that combine
business and lifestyle content to cater for successful, professional, stylish and intellectually
curious men and women.

But the future of media lies online, and Dhlomo knows that. In 2008, Ndalo Media founded
DestinyConnect.com, a website that serves as the online extension of Destiny’s publications.
The website integrates an interactive social media platform with original and exclusive
content, video footage, blogs, forums, and business and personal profile listings.
DestinyConnect.com is a custom-designed content and social networking site that connects
and encourages networking, mentorship and information sharing. This networking site has
established Ndalo Media as a leader in digital communication in South Africa.
Following her decade-long dream of owning a Parisian-style boutique store, Dhlomo opened
the doors of Luminance in Hyde Park in 2013, a chic boutique store that stocks imported
designer items, as well as local pieces under the Ndalo brand. Luminance set tongues
51wagging in the press with questions raised about the financing of the store, purportedly
involving the National Empowerment Fund (NEF). However, it has since been established
that Dhlomo paid back the loan to the NEF in full.

It could be argued that Khanyi Dhlomo has been the “poster girl” for transformation and
liberation in South Africa’s media industry, but whether her rise to fame can be attributed to
being in the right place at the right time, sheer hard work, persistent pursuit of goals and
determination, or a bit of all three, there can be no doubt she has inspired a nation of aspiring
entrepreneurs to keep looking forward and to follow their dreams.

Source: Adapted from: Inspiring Women. Khanyi Dlomo.

Discussion questions

1. From this case study, why do you think it is important to always be guided by a vision
for your future?
2. From Khanyi Dhlomo’s story it is evident that goals are not achieved through vague
terms but require persistent pursuing. Why do you think that so many people give up
on their goals along the way?
3. Khanyi Dhlomo’s journey to achieving her goals has not been an easy one. She is a
mother, wife, business woman and director. She applies herself fully to the challenges
she encounters. What do you think this has done for her success?

3.6 Vision, mission and goals

3.6.1 Vision

Entrepreneurs often develop visions for their businesses from the business ideas they come
up with. A vision is the ultimate desired picture the entrepreneur strives to create. A vision is
often written as an idealistic statement about the desired future of the business. Entrepreneurs
can use the vision to do the following in the business venture:

Develop the mission and business goals

Understand in which segments they want to operate and compete
Develop a competitive proposition for the business
Inspire action and direct their own effort
Develop goals and objectives for the business

3.6.2 Mission

The mission statement describes the current activities of the business. The mission statement
helps entrepreneurs to answer “why” they are doing what they are doing. Well-formulated
mission statements help entrepreneurs to understand what it is they should be involved in to
realise the business vision. A mission statement can be used by the entrepreneur to direct the
priorities of the business and understand what it prioritises as it describes the business’s
current activities.
Table 3.1 describes the vision and mission of well-known African companies.

3.6.3 Goals

Goals are the aims that the business/entrepreneur wants to achieve. They refer to the purpose
towards which efforts in the business are directed. Goals can be classified as short, medium
or long term. This classification is dependent on the nature of the business. What may be
short term for one business could easily be defined as medium term for another. The
following classification of the types of goal gives the general understanding of what short,
medium and long-term goals are (see Table 3.2):

five years or List the business on the Johannesburg Stock Exchange in six years by
more. developing a solid investor base.

3.6.4 Objectives
Objectives are specific, quantifiable and realistic targets the entrepreneur strives to achieve.
This is often done within a specified time frame. The terms “goals” and “objectives” 53are
often used interchangeably. However, these two terms do not mean the same. Knowing the
difference can help an entrepreneur to develop an implementation plan for the goals he or she
sets for the business.

Objectives stem from goals and more specifically refer to the plan of action to achieve the
goals. Objectives can be seen as the steps one needs to take to achieve goals. Entrepreneurs
need to establish a series of objectives to ensure goal achievement.

Objectives help to:

ensure that there is a determined destination at which the entrepreneur needs to arrive
ensure that the journey to reach the desired destination can be measured
formulate tactics to achieve goals
compile to-do lists against which progress can be measured and checked
create the necessary change from the set goals
provide tangible measures for employees and the entrepreneur to use.

The Saylor Academy (2012) states that goals and objectives provide the foundation for
measurement. However, goals should be seen as a set of related programmes reflecting major
actions of the business. Goals can be seen as an umbrella with spokes coming out from the
centre.

3.6.5 Analogy of goals

In contrast to goals, The Saylor Academy (2012) sees objectives as time-based, measurable
actions that support the completion of the goal. Objectives must typically

be related directly to the goal

be clear, concise and understandable
be stated in terms of results 54
begin with an action verb
specify a date for accomplishment
be measurable.
Figure 3.2

3.7 Summary
This chapter begins by explaining the concept goal achievement and its relevance to
entrepreneurs who believe they are putting a lot of effort into their businesses but do not often
achieve the goals they set for themselves.

A major contributor to successful goal achievement is self-efficacy, the belief in one’s own
skills and abilities to perform tasks. For this reason people with high self-efficacy are better
able to do some things than those who do not possess this trait.

Understanding the importance of goal setting can help the entrepreneur to chart a plan for
what it is he wants to achieve for himself and the business.
The guidelines for goal setting provide a framework for entrepreneurs who often have to
operate in uncertain and dynamic environments. The goals they set should therefore be valid
enough to see them realise their visions.

In dynamic and difficult environments, it is impossible to achieve your goals without 55being
motivated and committed to realising them. Motivation has its peaks and dips, but staying
committed is seeing your goals through, even when the desire to do so is at a low.

The vision, mission, goals and objectives are explained.

Factors to consider when setting goals are detailed. Certain factors need to be considered as
they could affect whether or not the goal is achieved.

The chapter concludeds with a description of the steps entrepreneurs can follow to help them
set goals. This should help them plan sufficiently and understand what is needed to actually
achieve their goals.

1. Explain what the concept “goal achievement” means.

2. It is said that self-efficacy is related to goal achievement. Provide a definition of self-
efficacy.
3. Discuss the concept of setting SMART goals.
4. It is almost impossible to achieve your goals if you are not motivated or committed to
them. However, these two terms do not mean the same thing. Differentiate between
motivation and commitment.
5. Certain steps can be applied to goal setting. List the steps of goal setting.

Questions

1. Self-efficacy refers to _________.

1. the desired results in which effort and aims are directed
2. an individual’s belief in his or her own abilities and skills to perform tasks
3. setting clear, specific and measurable goals that help entrepreneurs to sharpen
their focus
4. an idealistic picture of the future of the business
2. One cannot ignore the importance of proper goal setting. Which one of the following
options highlights the importance of goal setting?

1. Setting goals distorts focus.

2. Setting goals moves the entrepreneur backwards.
3. Setting goals helps the entrepreneur track progress.
4. Setting goals prevents entrepreneurs from discovering knowledge about
themselves.
3. Entrepreneurs are often encouraged to set SMART goals. The acronym SMART
stands for ____________________________________.
 1. Specific, Medium, Attainable, Relevant, Timeous
2. Strict, Measureable, Attainable, Reviewed, Timeous
3. Soft, Measurable, Attainable, Relevant, Tedious
4. Specific, Measurable, Attainable, Relevant, Timeous
4. A _________ describes the current activities of the business. 56

1. vision
2. mission
3. goal
4. objective
5. Themba is an entrepreneur. He has set the following goal for his business: “To obtain
certification that will allow his business to assess houses in the next 20 months.” This
type of goal can be described as a _________ goal.

1. short-term
2. medium-term
3. long-term
4. monetary

Recommended reading
Lunenburg, F.C. 2011. Goal-Setting Theory of Motivation. International Journal of
Management, Business, and Administration, 15(1).

Mankeltov, J. 2015. Personal goal setting planning to live your life your way. Available at:
https://www.mindtools.com/page6.html (accessed on 16 January 2016).

Mitchell, D. 2015. 3 Ways to Stay Motivated to Lead Your Business. Entrepreneur. [Online]
Available at: https://www.entrepreneur.com/article/243170

Tracy, B. 2009. Flight Plan: The Real Secret of Success. San Francisco: Berrett-Koehler
Publishers.

Vermeeren, D. 2007. Why people fail to achieve their goals. [Online] Available at:
http://www.reliableplant.com/Read/8259/fail-achieve-goals

References
Clifford, C. 2015. ‘Success is not a number,’ so don’t chase goals that leave you unsatisfied,
22 December. Entrepreneur. Available at: http://www.entrepreneur.com/video/253480

Foster, B. 2013. 10 steps to successful goal setting. The Huffington Post, 4(10). Available at:
http://www.huffingtonpost.com/bradley-foster/how-to-set-goals_b_3226083.html (accessed
on 05 January 2016).

Hechavarria, D.M., Renko, M. & Matthews, C.H. 2012. The nascent entrepreneurship hub:
goals, entrepreneurial self-efficacy and start-up outcomes. Small Business Economics,
39: 685–701.
Inspiring women. n.d. Khanyi Dlomo. Inspiring Women Magazine. Available at:
http://www.inspiringwomen.co.za/khanyi-dhlomo

Piperopoulos, P. & Dimov, D. 2015. Burst bubbles or build steam? Entrepreneurship

education, entrepreneurial self-efficacy, and entrepreneurial intentions. Journal of Small
Business Management, 53(4): 970–985.

Rohn, J. 1994. Excerpts from the treasury of quotes. Dallas, TX: Sucess Books.

The Saylor Academy. 2012. Principles of management. Available at:

http://www.saylor.org/site/textbooks/Principles%20of%20Management.pdf (accessed on 22
December 2015).
4

Networking in entrepreneurship

Learning outcomes

After studying this chapter, you should be able to do the following:

Define the term networking

Describe the methods for developing effective networks in entrepreneurship
Identify the sources and benefits of networking
Identify ways to develop effective networks
Identify government and non-governmental support institutions that can be used to
network with other entrepreneurs

Key terms

Networking
Networks
Social media networking
Chamber of commerce

Case study 1

Business on networks of people

Koena Selolo, 22 years

Polokwane, Limpopo Province, South Africa
Business: Kgošigadi (A Pedi name for queen) women’s jewellery

Koena Selolo is a third-year student studying local government finance at the Tshwane
University of Technology. Driven by her passion for arts and crafts; she started a handmade
jewellery collection and named it Kgošigadi, a Pedi name for “queen”. She used old buttons
and copper wires, and later progressed to using materials such as pins, beads, chains and
pendants. Invited to pitch at a campus start-up activation event, competing with over fifteen
students with different ideas, Koena won a cash price of R1 000 and an opportunity to
compete with students from other universities for a grand prize of R10 000. Despite the cash
prize, the biggest highlight for Koena was a chance to receive mentorship from industry
experts. The event was hosted by a popular South African entrepreneurship networking
movement, The Hookup Dinner (THUD), which hosts various entrepreneurial campus tours
across South Africa. The networking group gave Koena an opportunity to interact with other
student entrepreneurs from other universities and grow her business networks. Thanks to the
start-up activation pitch, today she has been mentored on the know-how of the jewellery
industry and has learned, among other lessons, the importance of packaging to attract
58customers. Currently, she makes around 100 units monthly and sells to different clients,
using different channels including social media. Her vision for Kgošigadi is to embrace every
woman’s authenticity and create jewellery that befits a woman’s beauty.
Source: Selolo 2015

4.1 Introduction
This chapter focuses on the role of networking in entrepreneurship. It is a given that today’s
constantly changing business environment requires business leaders to keep abreast of
developments that may have potential impacts on the business. Among the strategies
important to the success of a business is the ability to network. Networking is used as a tool
to identify new market opportunities by acquiring market trend knowledge and information.
This refers to knowledge of your business and its industry, to ensure the business’s
competitive advantage and survival. The phrase “your network determines your net worth” is
often used to demonstrate the notion that having networks is no longer an option but a
requisite for all businesses. This is because customers’ preferences continue to change,
forcing businesses to find methods of improving their prospects in the market.

So, what is networking and how does one build networks? This chapter presents in-depth
knowledge of what networking entails and its importance to entrepreneurship. We use Case
study 1 to explain the importance of networking in business.

Let us use Koena’s case study to calculate how networking has multiplier effects that benefit
entrepreneurs:

Figure 4.1 Multiplier benefits of networking

The case study highlights the importance of networking in building relationships and bringing
about value in resources, information and knowledge necessary to give the business a
competitive advantage. Surrounding yourself with skilful people who share your vision is
vital for the growth of an enterprise. They say coordinated effort towards a defined goal
makes a bigger impact and mentors are a great example of people who can assist you in your
business journey.

Using the networking multiplier effect in Figure 4.1, list five important lessons we can learn
from Koena’s case study.

4.2 Defining networking

Burke and Segaloe (in Nieman & Nieuwenhuizen 2014: 212) define networking as the
process of meeting people, building relationships that can benefit all those involved, sharing
information and ideas and getting one’s business on the map.

Whether you are networking for the purposes of securing that much-needed start-up capital or
information about competitors, marketing opportunities or entry to new markets, the most
distinctive feature of networking is its ability to create a conversation between two parties.
Conversations are important to facilitate exchange of information. As a result, networking
give access to heterogeneous knowledge to strengthen innovative flexibility and
competitiveness (Rodan & Galunic 2004; Özcan 1995).

Networking

Networking is simply talking to people, making connections and developing long-term

relationships in order to gain personally or professionally.

Take, for example, a network of small business entrepreneurs in the tourism sector with the
purpose of learning marketing strategies to attract more tourists and other business
approaches from one another in the same industry.

Networks

The network links two or more people for a specific purpose for each person involved.

In the previous example of tourism businesses, the purpose is to learn from one another on
how to drive tourism businesses successfully.

4.3 Networking dilemma: who to talk to? Where to start?

Networking may be conducted in different contexts, but the most important thing is to start
where you are, with what you have. For instance, your workplace colleagues, friends,
community members, neighbours, religious and political groups. All of these points of
contact have the potential to connect and expand your network. However, it is important to
determine networking purposes and goals. By doing so, you are able 60to concentrate your
networking efforts on relevant contacts in line with your business objectives. For example, if
you are running a catering business and hear a friend complaining about the poor quality of
food at wedding venues in the surrounding area, that information could be the perfect link
between your business and the market. Therefore, the wedding venue managers should form
part of your network. This will allow the catering business to expand to new markets.

Figure 4.2 illustrates different common networking spheres that are vital to the success of a
business.

Figure 4.2 Business networking spheres

1. First contact: family members. They are often the first point of contact and day-to-
day communication; they play an important role in sharing information and
connecting you or your business to others that they already know.
2. Second contact: friends. They say everyone needs a friend. A conversation over
shoes in the market or the weekend’s soccer match could be just what your business
needs to get the latest update on the next networking business opportunity.
3. Third contact: colleagues, church members, classmates and neighbours. These
are the people to whom you talk on a daily basis, just like family. A conversation with
colleagues over coffee could connect you to your next big investor.
4. Fourth contact: business associates, referrals, mentors. These are the people to
whom you do not talk on a daily basis, but who play a very important role in your
networking circles. They may be the people to sign that important business deal for
you or to provide important information crucial to your business growth, or connect
you to someone who can.

4.4 How networks drive business development

Research clearly indicates that networking provides many benefits and encourages success
for an enterprise (Birley, 1985; Hite & Hesterly 2001; Setyawati, Shariff & Saud 2011). Hite
and Hesterly (2001) find that networking generates profit from increasing access to resources
and growth opportunities, particularly for newly founded companies. Emerging firms use
external networks to discover opportunities and mobilise resources that will sustain long-term
business objectives (Hite 2005; Havnes and Senneseth 2001). 61

Business networking
Business networking is the practice of creating a mutually beneficial relationship with other
business people and potential clients or customers. You could be networking for new
customers, business partners, potential suppliers, tenders and contracts, or information to get
access to new markets.

Lechner, Dowling and Welpe (2006) argue that the use of external relationships is considered
an important developmental factor for entrepreneurs. The authors use the relational mix
model to illustrate the changes in a firm’s development. They recommend that firms should
use different types of network in different developmental phases to ensure that the business
networks go beyond economic relationships to add value across the business.

Figure 4.3 illustrates the different types of network that a business will use.

Figure 4.3 Relational mix model

Source: Adapted from Lechner et al. 2006

4.4.1 Types of network

1. Social networks: relationships with other firms based on strong personal

relationships with individuals such as friends, relatives and colleagues
2. Reputational networks: made up of partner firms that are market leaders, or highly
regarded firms or individuals, and where one of the main objectives in entering into
this relationship is to increase the entrepreneurial firm’s credibility
3. Marketing information networks: relationships that allow for the flow of market
information through distinct relationships with other individuals or firms
4. Competition networks: relationships with direct competitors
5. Cooperative technology networks: technology alliances involving joint technology
development or innovation projects 62
4.5 Social media and business networking
The difference between social media marketing and traditional marketing

Social media marketing: talk with prospects and clients

Traditional marketing: talk at prospects and clients

(Merrill, Latham, Santalesa & Navetta 2011)

The networking landscape looks a lot different since the arrival of social media. The ever-
increasing number of social media tools used as networking and advertising platforms cannot
be ignored by the business world anymore. With a rapidly growing user base across all
demographics, this form of network has forced businesses to use the tools it makes available
to market products and interact with customers. As a result, networking has changed from the
traditional and rigid approach to a much lighter and less formal approach.

But what are the benefits of networking using social media? Access to the entire world and
the opportunity to interact with anyone, anywhere, anytime (Merrill, Latham, Santalesa &
Navetta 2011). In other words, one does not need to conduct door-to-door campaigns or
conduct radio interviews to interact with the world. The most distinctive feature of
networking using social media sites is that access to the world is at the click of a button. The
platform facilitates communication with millions of participants from across the world, in the
comfort of your home – saving time, saving money.

While it is important to exploit the more traditional avenues of business networking, such as
attending business seminars and meetings, it is cost effective to use the new available tools,
such as social media platforms, to make networking effective and efficient for your business.

Social media networks

Web-based services that allow individuals to create a public profile, create a list of users with
whom to share connections, and view connections within the system.

The following are available social media networking platforms that facilitate cost-effective
and efficient communication and networking between a business and its customers.

Social media networking platforms

The exponential growth of social media, from blogs, Facebook and Twitter to LinkedIn and
YouTube, offers organizations the chance to join a conversation with millions of customers
around the globe every day.

(Harvard Business Review 2010)63

Facebook

“If Facebook were a country, it would be the most populous nation on earth”. It is the largest
social networking service in the world with more than one billion daily active users and 1,55
billion monthly active users, all liking posts, commenting or just scrolling through status
updates. With such a presence, it is no surprise that many businesses are using the site to
advertise and keep in touch with their customers and other important stakeholders of the
business.

LinkedIn

With more than 400 million users, LinkedIn has grown to become a leading database of
professionals, designed specifically for the business community. The site allows registered
members to establish and document networks of people they know professionally. This
includes finding and reconnecting with colleagues and classmates, learning about other
companies, and getting industry insights. The site is also used to discover new career
opportunities.

WhatsApp

With an estimated user base of 990 million subscribers, WhatsApp is a proprietary cross-
platform instant-messaging client for smartphones. It uses the internet to send text messages,
images, videos, user location and audio messages to other users using standard cellular
mobile networks. Entrepreneurs often use the group’s chat features to keep in contact with
clients.

Twitter

With over 300 million monthly active users, Twitter is a great way to connect on a more
personal level with employees and customers. It is also used to help build brands by using
hashtags that can trend worldwide: #Networking #Entrepreneurship

Blogging

Blogging is one of the most valuable tools that businesses use to engage with customers
(Watts 2015). A blog is an easy-to-use platform for connecting and sharing timely and
relevant information with customers. It creates a place to talk about new products or services,
comment on timely news topics or market trends, and share company initiatives.

Source: Harvard Business Review 2010; Watts 2015

4.5.1 Benefits of social media networking

Benefits of social media networking are the following:

Cost effective; saves time and money

Fast method of communication anytime, anywhere
Ability to reach a large number of audiences
Immediate response with participants
Easy to use; no need for training
Options to add, edit, change profiles

4.6 Networking strategies

There are many ways to create networks for business purposes. The following are some of the
strategies that could be used in getting you started:

The first point of networking is in conversations. Be open and willing to start the
conversation. There is no need to look any further on this one, use your existing
contacts to make more contacts.
Be active. Get involved with organisations in which your best contacts and potential
clients are involved and maximise your visibility. Let your presence be known.
Do research on your potential networks and be willing to make the first move. This
strategy assists in matching your networks to a specific business purpose.
Keep in mind that the network may not benefit the business now, but could be what
the business needs in future. Keep your contacts safe, you might need them sooner
than you think.
Be a good listener. Business grows by learning from others.
When given an opportunity to present your business or ideas to a particular audience,
be it potential funders or investors, always be confident in your delivery. The business
community will pay attention.
Always be the best advocate of your business. Carry your brand everywhere you go.
Do not forget your business card.

4.7 The benefits of networking

The benefits of networking include

access to information and knowledge

opportunities for funding or investment
exposure to new market opportunities
facilitating skills development by learning from others in the same industry
promoting a culture of sharing among entrepreneurs
increasing business reputation and recognition; as the level of business exposure
increases, so does the level of trust
assisting in building the business profile; business profiles facilitate easier credibility
for future reference

4.8 Developing effective networks

Developing effective networks is an important element of networking. Several places can be
used to create effective networks.

These include but are not limited to

attending community forums that facilitate networking

affiliating with business associations and actively participating in their programmes
hosting your own networking events and inviting others to attend 65
attending industry-related events hosted by others
using the media for networking events available near you
creating a business profile on social media sites and actively participating with others
such as LinkedIn
4.9 Forms of business networks
1. Chambers of commerce: local associations that promote and protect the interests of
the business community, such as Business Leadership South Africa and the National
Small Business Chamber
2. Civil organisations: such as the Black Chartered Accountants of South Africa, the
Association of South African Women in Science and Engineering (SAWISE) and
Agri SA, a South African agricultural industry association
3. Social clubs: stokvels, book clubs, sports clubs
4. Business seminars: marketing and advertising conferences, creativity and innovation
seminars

4.10 South African business chambers

Business chambers work to promote growth and investment, build new enterprises and forge
stronger links between business communities. The following are some of South Africa’s
business organisations that facilitate networking:

Business Leadership Foundation. This is an association of South Africa’s largest

corporations and major multinational companies with a significant presence in South
Africa. Members address challenges facing South Africa such as poverty, inequality
and unemployment.
Gordon Institute of Business Science (GIBS). Based at the University of Pretoria,
GIBS deals with improving the competitive performance of individuals and
organisations through business education, supplying a wide range of activities and
programmes.
Business Unity South Africa (BUSA). The Black Business Council and Business
South Africa merged in October 2003 to create BUSA. It is a confederation of South
African chambers of commerce and industry, professional and corporate associations,
and sectoral employers’ organisations. The body represents South African businesses,
tackling macroeconomic and high-level issues affecting it at national and international
levels.
South African Chamber of Commerce and Industry (SACCI). This is the
country’s largest business organisation with a membership of close to 20 000
businesses, from the largest corporations in South Africa to sector-specific business
associations. It has almost 50 constituent chambers. SACCI addresses economic,
social and political issues affecting the business community. It also publishes the
monthly Business Confidence Index. SACCI was formerly known as the South
African Chamber of Business (SACOB). 66
National African Federated Chamber of Commerce (NAFCOC). This is an
independent business support organisation that primarily, but not exclusively, serves
the interests of black economic empowerment companies and small businesses.
Family Business Association of Southern Africa (FABASA). FABSA acts as the
official mouthpiece of family-owned businesses in southern Africa, and promotes the
overall interests of this economic sector.
Foundation for African Business and Consumer Services (FABCOS). It was
established in 1988 with a mandate of ensuring that informal black businesses become
part of the mainstream of the South African economy. It focuses on township and
rural-based formal and informal businesses. FABCOS is a member of BUSA.
 Affiliated sector associations include the African Builders Association, the African
Farmers Association, the African Hair and Beauty Association, the Black Association
of Travel Agents, the Foundation for Informal Business Association, the National
Cottage and Textiles Association, the National Traders Association, the SA Taverners
Association, and The Profs, an association for black professionals.
National Small Business Chamber (NSBC). It represents South Africa’s small- and
medium-sized business sectors. It offers expert advice and other benefits to self-
employed and small-business owners, and publishes a weekly e-magazine. The NSBC
runs the annual Small Business Champion awards.
Minara Chamber of Commerce. It represents and assists South African Muslim
businesses and entrepreneurs. The constitution and workings are based on an
adherence to an Islamic code of conduct and ethics.

4.11 Business support structures

In 1994, the newly elected government recognised the need to use the promotion of small,
medium and micro enterprises (SMMEs) as a mechanism to create jobs, upgrade skills,
redistribute income, democratise the economy, reduce poverty and ensure economic growth.
Subsequently, a number of entrepreneurship policies and support structures were introduced
to assist the development of small businesses in South Africa. The following support
structures can be used to network with other entrepreneurs and get support for your business,
such as funding and mentorship.

The Department of Trade and Industry (DTI). It is responsible for implementing

most of government’s business-related policies, including that of small business
promotion. The services that the DTI offers are aimed at industrial development,
export development, broadening participation in the economy and the development of
small businesses. Website: http://www.thedti.gov.za; email: contactus@thedti.gov.za
Small Enterprise Development Agency (seda). It provides business development
support to small enterprises ranging from start-ups to well-established businesses.
Many useful services are offered in partnership with specialised providers in the small
enterprise support industry. Entrepreneurs and potential entrepreneurs may approach
seda to gain access to the business support services. Website: http://www.seda.org.za;
email: info@seda.org.za

Small Enterprise Finance Agency (sefa). This is the government’s primary small
business funding agency, which was launched recently as a result of the merger
between agencies such as Khula and Samaf. Sefa’s role is to promote the growth and
survival of small businesses through business financing. Website:
http://www.sefa.org.za; email: helpline@sefa.co.za
Industrial Development Corporation (IDC). The IDC is a national development
financial institution set up to promote economic growth and industries by identifying
and funding high-impact and labour-intensive projects. Website: http://www.idc.co.za
National Empowerment Fund (NEF). It offers different types of funding in order to
provide for the different needs of business owners. The NEF supports black
entrepreneurs and businesses by making various types of funds in different sectors
available to the entrepreneurs. Website: http://www.nefcorp.co.za; email:
info@nefcorp.co.za
National Youth Development Agency (NYDA). It supports youth between the ages
14 and 35 through various programmes. The following services are available to young
 entrepreneurs: career information and guidance; mentorship; skills training;
entrepreneurial development and support; loan funding; health awareness programmes
and involvement in sport. Website: http://www.nyda.gov.za
Companies and Intellectual Property Commission (CIPC). This was established in
2004 after the merger of the Office of Companies and Intellectual Property
Enforcement (OCIPE) and the Companies and Intellectual Property Registration
Office (CIPRO). The CIPC’s role is to provide accessible registration services for
business entities, intellectual property and regulated practitioners, and to maintain and
disclose relevant information regarding business entities, business rescue
practitioners, corporate conduct and reputation, intellectual property rights and
indigenous cultural expression. Website: http://www.cipc.co.za; email:
info@cipc.co.za

Case study 2

A business networking revolution

Lebogang Selebogo (Dr Lifesgud), 36 years

Business: The Hookup Dinner (THUD)
Membership: 22 000 Twitter handle: @Thehookupdinner

A former hairstylist and a labourer with an income of about R420 a month, Lebogang
Selebogo never imagined that one day he would be leading one of South Africa’s fast-
growing networking groups, The Hookup Dinner (THUD). Lebogang, known as Dr Lifesgud
by fellow entrepreneurs, describes the enterprise as a revolution in entrepreneurship
networking because of its prevalence among young aspiring entrepreneurs in the country.
When the group was first launched in 2012, it was focused on getting people together and
sharing ideas about life in general. The networking group shifted its focus to business after
members constantly referred to entrepreneurship as a solution to socioeconomic problems
facing South Africa today. These include unemployment, poverty and inequality. Lebogang
describes the initiative as a stepping stone for the ideas of small-business owners to receive
opportunities in the market. 68

THUD hosts weekend business networks in Pretoria, Johannesburg, Durban and

Bloemfontein, and has recently grown in other parts of Africa such as Botswana, Swaziland,
Lesotho, Zimbabwe and Rwanda. The events include workshops, seminars, motivational talks
and business idea pitches. Topics that are often covered include how to get funding,
marketing, advertising negotiations, etc. The events cause significant traffic or buzz on social
media platforms such as Twitter and Facebook with people commenting and sharing with
millions across the world. THUD has gained the partnership of well-known South African
organisations and companies, such as South African Breweries (SAB) Kick Start, Standard
Bank, Telkom and IBS, and some of South Africa’s leading entrepreneurs such as Sibusiso
“DJ Sbu” Leope, chief investment officer of MSG Afrika Andile Khumalo, South Africa’s
Dragons’ Den star Lebo Gunguluza, Vusi Thembekwayo, Polo Leteka Radebe, Gil Oved and
Vinny Lingham, who assist in mentorship and securing funding for aspiring entrepreneurs’
big business ideas.

Source: Selebogo 2015

Case study questions
Using The Hookup Dinner’s case study, answer the following questions: 

1. Identify the different ways that can be used to facilitate effective business networking.
2. List the benefits of joining a network of business leaders.
3. List three business support structures available in South Africa that can be used to
support your business idea.

4.12 Summary
This chapter introduced the importance of networking in entrepreneurship. The benefits of
networking in entrepreneurship such as access to new markets, access to information and
knowledge, access to funding and investments were discussed. We learnt about the use of
social media to network with potential customers, suppliers and investors. We also
highlighted different platforms such as chambers of commerce meetings, family gatherings
and entrepreneurship seminars as platforms that entrepreneurs can use to expand their
networks to benefit their businesses. The chapter also used local business cases to accentuate
the importance of networking in business.

Questions

1. Define the term ‘networking’ and give examples.

2. List and explain six methods for developing effective networks in entrepreneurship.
3. Identify five benefits of networking.
4. Name two social media platforms that can facilitate business networking. Discuss
how you can use them to your business’ advantage.
5. List five South African institutions that offer financial and non-financial support to
entrepreneurs.
6. Describe the four forms of networks. 69

1. Which one of the following statements about networking is incorrect?

1. Networking promotes information sharing.
2. Networking is costly and requires an expert.
3. Networking facilitates access to investment.
4. Networking is a process of communicating between two parties.
2. __________________ are relationships that allow for the flow of market information
through distinct relationships with other individuals or firms.
1. Social networks
2. Reputational networks
3. Marketing information networks
4. Competition networks
3. Which of the following statements represent social media networks?
1. Creating a business profile on Facebook
2. Volunteering in community services
3. Hosting your own networking event
4. Attending industry-related events
 4. The following government agency targets South African young entrepreneurs
between the ages of 14 and 35 through various programmes such as business
mentorship and funding:
1. Small Enterprise Development Agency
2. Trade and Industry Agency
3. South Africa Youth Finance and Mentorship Agency
4. National Youth Development Agency
5. A/an ________________ is the practice of creating a mutually beneficial relationship
with other business people and potential clents or customers.
1. Social network
2. Business network
3. Advisory network
4. Operational network

Websites
http://www.thedti.gov.za

http://www.thelazymakoti.co.za

http://www.skinnysbu.co.za

http://www.alurcia.co.za

http://www.minara.org.za

http://www.nsbc.org.za

http://www.fabcos.co.za

http://www.businessleadership.org.za

http://www.busa.org.za

http://www.gibs.co.za

http://www.sacci.org.za

http://www.nafcoc.org.zawww.fabasa.co.za

References
Birley, S. 1985. The role of networks in the entrepreneurial process. Journal of Business
Venturing, 1(1): 107–117.

Harvard Business Review. 2010. Report. The New Conversation: Taking Social Media from
Talk to Action.
Havnes, P.A. & Senneseth, K. 2001. A panel study of firm growth among SMEs in networks.
Small Business Economics, 16(4): 293–310.

Hite, J.M. 2005. Patterns of multidimensionality among embedded network ties: a typology
of relational embeddedness in emerging entrepreneurial firms. Strategic Organization,
1(1): 9–49.

Hite, J.M. & Hesterly, W.S 2001. The evolution of firm networks: from emergence to early
growth of the firm. Strategic Management Journal, 22(3): 275–86.

Lechner, C., Dowling, M. & Welpe, I. 2006. Firm networks and firm development: the role
of the relational mix. Journal of Business Venturing, Special issue on Alliances and
Networks, 21(4): 514-540.

Merrill, T., Latham, K., Santalesa, R. & Navetta, D. 2011. Social media: the business benefits
may be enormous, but can the risks reputational, legal, operational be mitigated?
Available at: http://www.acegroup.com/us-en/assets/ace-progress-report-social-media.pdf

Nieman, G.H & Nieuwenhuizen, C. 2014. Entrepreneurship a South African perspective,

3rd ed. Pretoria: Van Schaik.

Özcan, G.B. 1995. Small business networks and local ties in Turkey. Entrepreneurship and
Regional Development, 7(3): 265–282.

Rodan, S. & Galunic, C. 2004. More than network structure: how knowledge heterogeneity
influences managerial performance and innovativeness. Strategic Management Journal,
25(6): 541–562.

Selebogo, L. 2015. Verbal communication with the author on 25 September. Pretoria.

(Transcript/notes in possession of author.)

Selolo, K, 2015. Verbal communication with the author on 18 September. Pretoria.

(Transcript/notes in possession of author.)

Setyawati, S.M., Shariff, M.N.M. & Saud, M.B. 2011. Effects of learning, networking and
innovation adoption on successful entrepreneurs in Central Java, Indonesia. International
Journal of Business and Social Science, (2)5, Special issue March: 149–153.

SouthAfrica.info. 2013. Available at:

http://www.southafrica.info/business/trade/help/sachambers.htm.VqcY3GYcTIUixzz3yMcC
2 (accessed on 06 January 2016).

The Hookup Dinner. Info. Available at: http://www.thehookupdinner.com/ (accessed on 15

December 2016).

Watts, D. 2015. Reasons why your business should be writing a blog. Available at:
http://www.sproutcontent.com/blog/19-Reasons-Why-Your-Business-Should-Be-Writing-a-
Blog (accessed on 12 January 2016).
 5
Entrepreneurial leadership and management
Learning outcomes

After studying this chapter, you should be able to do the following:

Distinguish between leadership and management

Identify qualities of leadership
Describe the management capabilities of the entrepreneur
Explain how leadership skills can be used to address conflict resolution
Discuss ethical issues related to leadership and management

Key terms

Effectuation
Ethics
Leadership
Management
Motivation
Network
Persistence
Vision

Opening case study

An entrepreneurial success story: entrepreneurial leadership

Nonkululeko Gobodo: An entrepreneur with a passion for leadership

Nonkululeko Gobodo was the first black woman to qualify as a chartered accountant in South
Africa. She is the founder of Gobodo Incorporated – the first South African black-owned
chartered accounting and auditing company. Gobodo Inc. later merged with SizweNtsaluba
VSP to form SizweNtsalubaGobodo, the fifth largest accounting and auditing1 company (by
revenue) in South Africa (Gyorkos, 2011). SizweNtsalubaGobodo is the “largest black-
owned and first fully home-grown South African accounting firm”.

Despite her parents’ wishes for her to pursue a career in medicine, she instead chose to
become an accountant. Being an accountant was part of Nonkululeko’s dream and her vision
was to start her own chartered accountancy company. Nonkululeko qualified as a chartered
accountant in 1987, and took up various posts in the accounting industry – which, at the time,
was dominated by men and white people. In spite of the segregation and the many challenges
she experienced in her career, Nonkululeko excelled to become a top accountant. 72In 1989,
KPMG offered her a partnership position2 in its South Africa operations. Gobodo declined
this offer, as she had bigger plans of her own. In 1992, she realised her dream and started
Gobodo Inc., a small accounting and auditing company, in the Eastern Cape. From 1992 to
2011, Gobodo Inc. grew to become a big brand within auditing circles.

However, the company experienced numerous challenges. Gobodo Inc. was a black-owned
enterprise headed by a woman, which was not well received in the corporate world. Gobodo
Inc. struggled to secure business from big companies or even from government. The
company was just too small and did not enjoy the trust of powerful players in the market. One
of the biggest challenges that Nonkululeko had to deal with was that her black-owned
company did not have the required skills and manpower to tackle big projects. To deal with
this, she partnered with SizweNtsaluba VSP in 2011. Both Gobodo Inc. and SizweNtsaluba
VSP were facing similar challenges. The strategy to partner was intended to pool resources
and increase their capabilities, and this strategy paid off. In 2012, the new company
SizweNtsalubaGobodo secured the tender for Transnet’s internal auditing account.
Nonkululeko, her company, and her associates had made history once again in South Africa
by beating established big players including KPMG, PricewaterhouseCoopers, Ernst &
Young, and Deloitte to be the first black-owned company to be awarded such a large
contract. Through its reputation of excellent work, SizweNtsalubaGobodo is accredited by
the Johannesburg Stock Exchange, the New York Stock Exchange and the Luxembourg
Exchange (Gyorkos 2011).

Nonkululeko’s success was no accident. She believed in herself and also in her dream. She
did not allow other people, including family, to stop her from achieving her dreams. In the
first instance, her (Gobodo’s) family urged her to pursue a career in medicine, but she refused
to be sidetracked and instead chose to become an accountant. Then she further declined an
offer to become a partner in an existing large accounting company, opting instead to start a
business with an uncertain future in the Eastern Cape. She worked hard, she was resilient, and
above all, she was determined. Gobodo capitalised on her unique personal brand of being the
first black woman chartered accountant in South Africa – a country trying to deal with racial
injustices of the past. All these she used to build her company and realise her dream.

Source: http://www.SNG.com

5.1 Introduction
In this chapter we will study entrepreneurial leadership and management. Entrepreneurial
leadership makes a huge difference in the management of entrepreneurial ventures, both at
the start-up and developmental stages. Some entrepreneurs believe that leadership and
management are business imperatives only for big corporations such as McDonald’s,
Vodacom and South African Airways. Consequently, the practice of leadership and
management is often ignored by small businesses. As a consequence, it is not uncommon that
many entrepreneurs fail to fully maximise the role that effective leadership and efficient
management can play in their organisations. This chapter therefore highlights the role and
scope of both leadership and management in entrepreneurial ventures. Special emphasis is
placed on not only defining entrepreneurial leadership, but also providing some strategies for
developing leadership and management skills. To 73study entrepreneurial leadership, we first
consider a real case in which entrepreneurial leadership and management are applied. Next,
we discuss the importance of leadership in business. Thereafter, we define and conceptualise
the terms leadership and management. The qualities of an entrepreneurial leader are then
explained, together with some strategies for developing leadership and management skills.
5.1.1 Leadership in business

Leadership is the process of providing guidance and direction to a group of organised people
such as a company, church or country. Leadership in general involves four critical functions,
namely:

a. Defining the purpose of an organisation. This involves the setting up of specific

goals and objectives of the organisation. Different types of organisation would,
invariably, have different purposes. For instance a stokvel’s purpose is generally to
assist its members in time of need, e.g. a funeral, whereas a grocery shop’s purpose
would be entirely different – to make profit. Generally, the purpose of an organisation
determines the form the takes.
b. Defining a structure for the organisation. The structure of an organisation refers to
the arrangement and interlinkages of its different elements. A structure defines the
required constituent parts or resources (e.g. financial and human resources) of the
organisation.
c. Allocating resources and budgets. Once a structure is in place, the next requirement
is to make sure that the structure becomes operational. This requires allocating
resources to the various structures. For instance, a supermarket requires a building
that stores groceries and people who sell those groceries. In addition, employees
require salaries and wages so that they can continue their work.
d. Controlling actions and processes. To ensure that the purpose of the organisation is
achieved, from time to time leaders need to correct deviations to realign with expected
outcomes.

5.2 Why does leadership matter?

Working with people is not easy. Consider how difficult it is for a small group of people to
make any single decision or to agree on any one issue. Reaching a consensus among people
usually gets more complicated as the size of the group grows. In other words, the more
people involved in a task or in decision-making processes, the higher the chances that their
diverse opinions, objectives and tastes will clash with each other. Thus the more people there
are within a group, the more challenging it becomes for that group to make decisions.

Leading and managing a business venture is among the most challenging tasks that any
entrepreneur has to undertake. Two important factors make leadership and management
daunting tasks. Firstly, entrepreneurs rely on buy-in of various stakeholders (e.g. financiers,
suppliers, customers and employees) for their business ideas to come to fruition. To get buy-
in requires a high degree of skill and competence on the part of the entrepreneur, as selling
new ideas is not easy. These skills and competencies range from technical competence to
organisational skills to communication skills.

Secondly, the fact that entrepreneurs depend on other people whom they employ (also known
as employees or human resources) poses a unique challenge. While human resources3 is a
very valuable resource of the organisation, employees do not always act in the best interests
of the business (Institute of Leadership & Management 2014). Human resources is the only
resource that can vary its input into the business. Human resources is also the only asset with
the ability to recombine and transform all other resources into output. It is for this reason that
human resources can be seen as an organisation’s “double-edged sword” which can be used
to defend or to destroy the company. It is also important to note that this dual positive and
negative nature of human resources cannot be attributable to other resources. For instance, a
pen will not unilaterally decide that it is too tired and will not write, unless of course the ink
is finished it will keep on writing.

Therefore, to ensure that an organisation’s stakeholders and its employees will continue to
support the ideals of the business, entrepreneurs require a special skill called entrepreneurial
leadership. Simply put, entrepreneurial leadership is the balance between leading and
managing (Kotter 2001). Too much of one and too little of the other almost always leads to
disaster.

5.3 Entrepreneurial leadership: a balance between

management and leadership
Entrepreneurial leadership is a concept that confuses many people. However, this is a very
simple concept if properly explained. There are three aspects to entrepreneurial leadership
that are worth mentioning. First, entrepreneurial leadership is an important skill required of
an entrepreneur. Second, it is the single skill that mostly determines the success or failure of
an enterprise. Third, although there are salient differences between management and
leadership, entrepreneurial leadership is a combination of these two forces.

Within the context of business, entrepreneurial leadership is the consolidation of resources,

processes, ideas, innovations and people’s collective efforts towards the establishment of a
business venture. Management involves the promotion of the status quo and stability.
Managers try to preserve the manner in which things and processes are at any given point in
time. On the other hand, leadership is a process of championing change. Leaders are
primarily concerned with how to move from point A to point B. Although the logic behind
management and leadership may seem to be divergent, they act like two sides of the same
coin. There is a time and place that each of these has to be practised.

In the execution of their jobs, entrepreneurial leaders are concerned with three fundamental
issues. These are:

Determining what needs to be done

Creating networks and relationships to accomplish the set tasks and targets
Ensuring that the people recruited to perform a job actually do perform

75Table 5.1 demonstrates how managers and entrepreneurial leaders differ with respect to
these issues.
Table 5.1 Management versus entrepreneurial leadership

Entrepreneurial leadership, therefore, is a combination of both management and leadership.

5.4 What do entrepreneurial leaders do?

Leadership is fundamentally is concerned with making sure that organisations achieve their
goals and objectives (Kotter 2001). From Table 5.1 the job description of entrepreneurial
leaders is, therefore, to define a vision for the company, create a network of people for the
business, and develop people into motivated leaders. In Sections 5.4.1, 5.4.2 and 5.4.3 the
functions of entrepreneurial leaders are explained.

5.4.1 Entrepreneurial leaders define an organisation’s vision

Formulating and defining an organisation’s vision is the key function of a leader. A vision is
a futuristic plan or an idea of how an organisation is supposed to look. It is that single ideal
that everyone in the business tries to accomplish and achieve. As leaders entrepreneurs are
constantly looking for new and better solutions to life’s recurring problems. Therefore, to
define a vision for an organisation means that entrepreneurs set the direction and map out
how the company could move forward into the future. For instance Nonkululeko Gobodo had
a vision of a black-owned accounting firm. From a very early age, she developed this vision
and set the direction for achieving it. First, she ensured that she had formed the vehicle for
this vision – her company Gobodo Inc. Second, she invested in the company, ensuring that it
was the best it could be. Third, she formed partnerships with other like-minded individuals
and formed SizweNtsalubaGobodo. Ultimately, the latter is in building a brand – a big brand
of being a top black-owned accounting company in South Africa.

5.4.2 Entrepreneurial leaders develop networks

Since entrepreneurship is mostly about delivering change and creating new ventures, it
involves the communication of ideas among different stakeholders. Entrepreneurial 76leaders
ideally create networks of people (i.e. employees, suppliers, consultants, sales
representatives, politicians, etc.) who need to be linked together to accomplish the goals and
functions of the business. Aligning people transcends just organising people within
structures, but also involves creating efficient networks. This means that the entrepreneur
needs to find suitably qualified people to do particular jobs and also to link up people with
other stakeholders within the organisation and beyond.

5.4.3 Entrepreneurial leaders develop motivated leaders

Motivation can be defined as the continued persistence and drive to enhance performance. To
motivate people thus means that entrepreneurial leaders provide employees and other people
related to the business with incentives to continuously perform at their peak. Motivation can
take various forms. Generally, there are two forms of motivation: intrinsic and extrinsic.
Money and promotion are examples of extrinsic motivation. Having a sense of self-worth,
achievement and belonging are examples of intrinsic motivation. Depending on the
circumstances, entrepreneurs can use a combination of these forms of motivation.

5.5 Leadership (and managerial) hierarchies in a business

Leaders play the important role of ensuring that the objectives of the organisation are not
only pursued but also achieved. Thus to ensure that objectives are achieved effectively and
efficiently, leaders define the structure of the organisation. This could involve hiring people
to perform certain tasks or buying equipment like stationery and computers for the business.
Whenever necessary, when the objectives of the organisation are not being achieved, leaders
(management) need to take corrective action, which can vary from informal warnings to
written warnings to dismissing employees.

It is important to highlight that there are different levels or hierarchies of management within
organisations. Depending on the size of the organisation, there might be just one level of
management (as in small organisations) and many levels (in larger organisations). All the
same, the function of managers is fundamentally the same, i.e. to ensure that an organisation
achieves its objectives. Management and leadership experts generally speak of three levels of
management. These are first-line, middle and top management. Figure 5.1 illustrates these
three levels of management in the form of a pyramid. At the bottom of the pyramid are first-
line managers. Top managers occupy the position at the apex of the pyramid and middle
managers are shown to be in between the top and first-line managers.
The two axes – the x-axis (number of managers) and the y-axis (authority) – of the pyramid
are important in interpreting the power and levels of management. The y-axis (top to bottom)
of Figure 5.1 shows the relative power and authority of managers. First-line managers, at the
bottom, have the least amount of power. Top managers, by their highest position on the top of
the pyramid, have the highest level of power within an organisation. The x-axis (from left to
right) shows the relative numbers of managers. From studying Figure 5.1, it becomes clear
that the number of managers 77decreases as one moves from the bottom to the top of the
pyramid. Next, the different levels of management are briefly discussed.

5.5.1 Top managers

This is the highest level of management within a business and entrepreneurial leadership.
Examples of top-manager positions include chief executive officers (CEOs), managing
directors (MDs), and chief financial officers (CFOs). The primary function of top managers is
to define the overall strategic direction of the company. This means that top managers or
leadership determine the specific objectives to be pursued by a company.

5.5.2 Middle managers

These are the managers to whom first-line managers report. As shown in Figure 5.1, they are
in the centre of the pyramid. Above them are top managers and below them are first-line
managers. They are primarily dealing with processes such as the interpretation of strategies
developed by top management and presenting them in an understandable form to first-line
managers. Middle managers very rarely interact with general staff. Examples of middle
managers are branch managers, regional managers and human resources managers.

5.5.3 First-line managers

Examples of these managers are supervisors. They work directly with non-management or
general staff and direct operational work. For instance at restaurants such as McDonald’s and
KFC, shift supervisors are a perfect example of first-line managers. Their duties include
making sure that there is enough product to sell and that all the staff within a particular shift
have reported for work.

5.6 Qualities of an entrepreneurial leader

Although there is not a set of prescribed guidelines or characteristics that a leader is supposed
to follow, there are common traits that most effective leaders share. Todd 78Warren (2012),
an entrepreneurship specialist with Forbes Magazine, found that most leaders share five
qualities:

A well-defined vision
Ability to sell their vision
Ability to learn quickly
Persistence
Effectuation

These qualities are now discussed in Sections 5.6.1, 5.6.2, 5.6.3, 5.6.4 and 5.6.5.
5.6.1 Vision and dissatisfaction with the status quo

By now it should be clear to you that entrepreneurs are not ordinary people. They are a
unique breed of individuals who are not easily satisfied with the world around them. In
everyday language, they are best described as people who demand to have it “their way or the
highway.” Any second-best choice can never be good enough. Like most people, leaders are
dissatisfied with the present situation, but what differentiates them from others is that they act
on their feelings of dissatisfaction to change the status quo. This is the single quality that
mostly differentiates leaders from non-leaders. Within the context of entrepreneurship,
having a vision involves three aspects:

Dissatisfaction with the present situation

Having a well-defined vision for what the future should be or look like
A clear plan of action for moving from the present to the future

To illustrate the power of a vision, we look at Cassper Nyovest, a South African rapper,
musician and entrepreneur.

Case study

Cassper Nyovest: an example of a visionary entrepreneur

Cassper Nyovest is a South African rapper, musician, recording artist and music producer.
His real name is Refiloe Maele Phoolo, and he was born in Mahikeng in the North West
province. He is one of the many musician entrepreneurs in South Africa such as Zahara,
Oskido, Yvonne Chaka Chaka, DJ Cleo and many others. Yes, Cassper is an entrepreneur!
Just like any other entrepreneur who produces a product or service to sell later for a profit,
Cassper Nyovest and many other musicians produce a unique product called music, and sell it
for profit. If you cannot directly link music and entrepreneurship, think about the following:
how do musicians make money? If they do not sell records and tickets at live performances,
how would they earn a living? Why are musicians always trying to stop music piracy?

While most people recognise that being a musician requires talent, they fail to acknowledge
that music is a serious business. It is not just about talent, a good voice, cool dance moves
and videos; it involves careful planning and proper management. Besides, to sustain all this
requires lots of money – for advertising, paying for venues, salaries for musicians and several
other expenses.

The performance venue the Ticketpro Dome (or just the Dome) is situated in Northgate,
79Johannesburg. With a maximum capacity of 19 000 people, the Dome is well known for
hosting numerous music concerts, and both local and international artists (Ticketpro Dome
2016). Some of the big names to perform at the Dome include the likes of Roxette, Lionel
Richie, Mariah Carey and George Benson. Many of these international superstars easily fill
up the Dome to capacity. But such a feat had never been achieved by a solo local South
African artist. Casper saw an opportunity: filling up the Dome was his vision. Cassper saw
that local artists’ shows were not as effectively marketed as international gigs. His plan was
to leverage social media marketing under the hashtag #FillUpTheDome. Soon, Twitter,
Facebook, WhatsApp and Instagram were all abuzz, and it was not long before the
mainstream media picked up the story. After appealing to South Africa to “support local
talent,” many heeded the call. On 31 October 2015, Cassper realised his dream and filled up
the Dome.

Source: casspernyovest.com 2016

This example clearly demonstrates how entrepreneurs act out of dissatisfaction with the status
quo. Entrepreneurs develop a vision and leverage on that vision to change the present
situation. As you might have noticed, a vision is only as good as the plan to execute it. In
other words, a vision without a plan to execute it is not a vision.

5.6.2 Ability to sell a vision to others

A vision that is not communicated to others is not a vision, but just a pipe dream or a wish.
To bring their vision to life, entrepreneurs need to communicate it to stakeholders.
Communicating the vision alone is not enough, they need to communicate it effectively and
get acceptance or buy-in from partners, banks, financiers, customers, and regulators. The
ability to sell a vision requires both communication and the convincing skills of a
salesperson. Today, leaders use a variety of communication tools such as social media and
graphics to get their messages across. For example, Cassper Nyovest fully utilised social
media to get buy-in for his successful concert at the Dome.

5.6.3 Ability to learn quickly

Entrepreneurship is all about learning (Kotter 2001). It requires from the entrepreneur
learning about the challenges that are facing the community or market, learning new
techniques and approaches to solve problems. Leaders generally have to be fast learners in
order to stay ahead of the competition. Despite whatever situation entrepreneurs find
themselves in, they need to be able to adapt. Failure to adapt, which is basically failure to
learn, means that they or their businesses cannot survive. Taking the example of Gobodo Inc.,
Nonkululeko quickly realised that if she was to continue in the industry only as Gobodo Inc.,
her company would continue to experience restrictions in terms of capacity and size. After
studying the market, she learnt that she had to position herself to play the game at a different
level, and therefore needed to collaborate with other people. The result of this was the
formation of SizweNtsalubaGobodo. Similarly, Cassper Nyovest also realised that his career
as a musician would continue to be hampered if he did not find creative mechanisms to
increase the listenership of his music. He learnt that social media was cost effective and
powerful in spreading messages to millions of people, so he started the Twitter tagline
#FillUpTheDome. 80

5.6.4 Persistence and execution

Starting a business takes time and effort. Similarly, it takes time to develop a business, to
refine the product and for customers to get used to the product. To survive the time from
product development to success, entrepreneurial leaders therefore need to be persistent.
Persistence refers to the character of being faithful to one’s vision by continuing to devote
effort and hard work to a cause. To understand persistence consider the Maponya Mall case.

Richard Maponya took close to 30 years planning his mall. He was faithful to his vision of
building an economic hub in Soweto. Persistence and execution are two of the qualities that
differentiate leaders. As seen in the case of Maponya Mall, a plan can take up to 30 years to
execute, but entrepreneurs are resilient and will always try to see their plans through.

Case study

Richard Maponya: the persistent entrepreneur

Richard Maponya is a South African serial entrepreneur and the owner of Maponya Mall in
Soweto, a township south of Johannesburg. Soweto is the largest township in South Africa
and home to over five million inhabitants. Because of apartheid laws that classified
residential areas according to race, Soweto was designated as a township reserved for black
people. Back then, black people were prohibited from engaging in any economic activity
including entrepreneurial activities. As a result, there were no formal shops, shopping centres
or malls in townships. Since it opened its doors in 2007, the mall has become the economic
hub of Soweto. By the end of 2015, it was estimated that over 900 000 customers visit the
over 200 shops in the mall every month (Maponya Mall 2016). These include a variety of
supermarkets, shops, banks, and even a cinema.

But how did it all begin? Although Maponya Mall was officially opened on 27 September
2007 (Maponya Mall 2016), its planning took close to 30 years (Moya 2005). Richard
Maponya was very dissatisfied with the status quo in the 1970s when Soweto had no
economic activity and its residents had to travel to the Johannesburg CBD to shop and to
work. The young Maponya saw the opportunity that building a shopping mall in the township
would centralise economic activities, and transform Soweto into a thriving “city” (Moya
2005). In the late 1970s Maponya started working towards his vision. In 1977 when he
acquired land on which the mall stands, the apartheid government denied him a trading
licence. Despite countless attempts and failures, Richard Maponya did not give up on his
dream. Instead, throughout this time – between 1977 and 2007 – Maponya honed his business
and entrepreneurship skills. It was only in 2007, under the new democratic government that
Maponya managed to secure the required authorisation and financing to finally open the
Maponya Mall.
Case study questions

From the above case study, answer the following questions:

1. Provide examples of the five qualities of an entrepreneurial leader.

2. Based on the case study, provide any three examples of entrepreneurial leadership
shown by Richard Maponya.

5.6.5 Effectuation: the ability to know and exploit one’s unfair advantages

It goes without saying that entrepreneurs are conscious people. By being conscious, it is
meant that an entrepreneur is well aware of his or her own personality, likes and dislikes. In
other words, entrepreneurs have a very good understanding of who they are, what they like to
do, what they do not like to do, as well as of the world around them. Entrepreneurs are
usually highly skilled people and often they excel, more than anybody else, in one area.
Understanding one’s unique competences and being able to use them is called effectuation
(Sarasvathy 2009). Unique in this sense refers to knowledge or expertise that only you
possess. Put simply, effectuation is knowing your unfair advantage and being able to exploit
it to your advantage (Warren 2012). Sarasvathy (2009) demonstrates that effectuation is a
trait common among highly effective entrepreneurial leaders. Table 5.2 depicts how the
South African entrepreneurs described in this chapter have applied effectuation to their
advantage.

Table 5.2 Entrepreneurs and effectuation

5.7 Ethics and business leadership

Ethics in leadership is one very important matter that entrepreneurs have to consider in the
course of business management. Ideally, an entrepreneur must be an ethical leader. An ethical
leader, to all intents and purposes, is someone who does the right things all the time. It is
acknowledged that ethical behaviour is a moral standard; however, achieving it in practice is
difficult. It is one of those aspects that are easier said than done. Even ethics specialists such
as Makadok (2003) concede that “doing the right thing is not always simple”. As difficult as
it may be, it is still possible to become an ethical entrepreneurial leader. Sections 5.7.1, 5.7.2
and 5.7.3 provide insights into the nature of ethics and propose some strategies entrepreneurs
can implement in acting more ethically. First, the definition of ethics is presented. Next, the
complexities of business that give rise to ethical dilemmas are discussed. Thereafter, common
ethical issues associated with leadership are described, followed by an explanation of the
seven steps of becoming an ethical leader.

Despite the multiplicity of definitions of the word “ethics”, most definitions revolve around
differentiating behaviour that can be considered to be right (or acceptable) from that which is
wrong and unacceptable. Naturally, because of the diversity in cultural, historical and
religious orientation, not all people will perceive ethics in the same way. Nevertheless, ethical
leadership refers to actions that are directed by the respect for ethical beliefs and values, and
for the dignity and rights of others. Ethics, therefore, embodies concepts such as trust,
honesty, consideration, charisma and fairness.

Within the context of business and entrepreneurship, ethics can be divided into two aspects.
Firstly, an entrepreneur must act ethically by making ethical decisions. Secondly,
entrepreneurs should lead ethically. This means that their attitudes and interactions with
others must be in a manner that espouses high levels of morality and ethics. Business
managers or entrepreneurs therefore act as ethical compasses for their organisations. 82

5.7.1 The nature of business and the difficulties in providing ethical leadership

The major difficulty in providing ethical leadership, according to Makadok (2003), is

knowing “what is the right thing to do”. In a business scenario distinguishing what is right
from wrong is more challenging than in civic (i.e. everyday) life. To understand this
principle, consider the very nature of business, which is to maximise profits. In order to
achieve this, the famous economist Milton Friedman (1970) asserts that the “business of
business is business”. By this, Friedman means to say that any business is not founded for the
sole purpose of “doing good” for the sake of doing good, but to make profit. At the same
time, Friedman (1970) further explains that, notwithstanding its purpose of maximising
profits, the purpose of a business, on the other hand, is “not to do evil either”. Friedman
continues to explain that the conflict between social-life expectations and business
obligations results in many of the ethical dilemmas faced by managers and entrepreneurs.

Ethics and morality in a business are different from what would generally be considered
acceptable behaviour in social life. As an illustration, consider the following: 83most, if not
all, societies teach their children always to be honest, friendly, faithful, helpful and law-
abiding citizens. In contrast, a business operates according to a different code of conduct.
Table 5.3 presents some examples where business norms contradict societal norms. It
becomes apparent that to succeed in business, managers are not necessarily bound by societal
norms such as openness and becoming team players within society. The business
environment is more like a “dog-eat-dog” environment, i.e. where you are not ahead of the
pack – by eating your competitor – you will be eaten.

Table 5.3
To summarise the various examples shown in Table 5.3, it becomes clear that in business,
“the kinds of virtue appropriate to the family or social relations will not be the kind [of
values] which ought to be practised in business”.

5.7.2 Some common ethical issues in management and leadership

In the day-to-day operations of a business managers come across many issues relating to
ethics that they have to deal with. Some of the most common issues are the following: 84

Price-fixing. This is the practice of intentionally increasing your products’ prices. In

most cases, price-fixing involves a group of businesses operating within the same
industry agreeing to increase their prices at the same time. This way, customers have
no option but to accept the new prices.
Quid pro quo and sexual harassment. Unemployment in South Africa is a huge
problem. As such there are many people who are desperately looking for jobs. Some
managers take this opportunity to extort job seekers. They either ask for money or
sexual favours in return for employment or promotion.
Tampering with measurements. To increase profitability, some businesses tamper
with units of measurement. For instance, a petrol station might falsely calibrate its
pumps so that consumers do not receive the correct quantities of petrol.
Falsification of finances. Some businesses resort to creative accounting mechanisms,
ranging from the falsification of customer bills to overstating expenses to tax
authorities to hiding certain expenses from shareholders.
Bullying and abuse. It is not uncommon for managers to bully employees at work.
Bullying at the workplace is quite a common phenomenon, and takes on various
forms. This could be pure physical abuse, in which managers beat up employees.
Some managers abuse their employees verbally and psychologically.
Use of company resources. Undoubtedly the most common form of ethical issues at
the workplace is abuse of company resources for private purposes. Examples can
range from the use of office telephones and internet to do assignments for school and
church to using company vehicles for unauthorised personal household chores.

5.7.3 The seven steps to ethical leadership

From the foregoing sections it is clear that the question of ethics and leadership is not a
simple and straightforward matter. Leaders constantly need to be aware of the positions that
they hold within business and society, and try to act in the best interests of both. However,
sometimes these two forces (societal and business) often conflict with each other. To promote
ethical leadership, Thornton (2013) (cited in Brooks 2013) proposes that leaders should take
the following seven steps:

1. Acknowledge and openly discuss the complexities involved in making ethical

choices. Openly discuss the ethical grey areas and acknowledge the complexity of
work life with subordinates. Be a leader who talks about the difficult ethical choices,
and help others to learn to take responsibility for making ethical decisions.
2. Make ethics part of the day-to-day business. Leaders must make it clear to their
employees that ethics is the order of the day at the organisation. All activities within
the organisation should involve conversations of ethics.
3. Promote respect and trust. Build a culture of respect and trust. Be an ethical leader
who cultivates a respectful environment in which people can speak up about ethics
and share the responsibility for living it. Build trust, demand open 85communication
and share the ownership of organisational values.
4. Ethical behaviour goes beyond just following laws and regulations. Ethical leaders
need to take action and show stakeholders (e.g. consumers, employees, shareholders)
that they actively engage with ethical issues in an appropriate manner. These leaders
should also prove that they are committed to promoting ethical behaviour including
human rights, social justice and sustainability.
5. Expect and demand high ethical standards. When it comes to ethics, do not allow
for excuses. Make sure that no one is exempt from meeting the ethical standards that
are adopted. Hold each and every employee, especially senior managers, accountable
for all their actions.
6. Celebrate positive ethical moments. Become a proactive ethical leader by taking
time to celebrate positive ethical choices. Managers should talk about what positive
ethics looks like in practice as often as they talk about what to avoid.
7. Constantly remind all stakeholders of the importance of ethics. Integrate ethics
into every action of the business. Talk about ethics as an ongoing learning journey.
Always be on the lookout for new dynamics and trends in your business that might
affect ethics. Remind the organisation always to remain vigilant on ethical issues.

5.8 Summary
This chapter introduced the importance of leadership and management in developing
entrepreneurial leaders. We also learnt that management is mainly the function of
maintaining the status quo, whereas leadership involves managing change. Both of these
attributes are important in entrepreneurial leadership. The chapter also highlighted the five
attributes or qualities of entrepreneurial leaders. These were explained to be a general
dissatisfaction with the status quo and having a vision for the future; the ability to
communicate and sell one’s vision to others; the ability to learn; the persistence to execute
the vision; and being able to capitalise on one’s special and often unique skills. The concept
of ethics in business was also discussed. Several ethical issues pertaining to leadership,
including ethical dilemmas to watch out for as well as some strategies to promote ethical
behaviour, were discussed in this chapter.
Questions

1. List the four (4) qualities of an effective leader.

2. Explain how management can make an organisation more effective.
3. Compare and contrast leadership from management.
4. Explain why entrepreneurs should be persistent in pursuit of their vision.
5. Describe the seven (7) steps of promoting ethical leadership.

the ability to define a company’s v

the ability to capitalise on one’s special skills

Christensen, C.M. 1997.

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http://www.johnmaxwell.com/store/products/Leadership-101.html

http://www.druckerinstitute.com

http://www.richdad.com

https://www.hbr.org

Brooks, C. 2013. 7 steps to ethical leadership. Business News Daily, 2 December. Available
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May 2016).

Casspernyovest.com. 2016. Fill up the dome. Available at: http://casspernyovest.com/

(accessed on 25 January 2016).

Erasmus, B.J., Strydom, J.W. & Rudansky-Kloppers, J. 2013. Introduction to business

management, 9th Ed. Oxford University Press: Cape Town

Friedman, M. 1970. The social responsibility of business is to increase its profits. The New
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(accessed on 29 May 2016).

Gleeson, M. 2013. PSL CEO passes the buck. Sowetan LIVE. Available from:
http://www.sowetanlive.co.za/sport/2013/11/08/psl-ceo-passes-the-buck (accessed on 15
April 2015).

Gyorkos, A. 2011. SizweNtsaluba, Gobodo merger creates Top 5 firm. International

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http://www.internationalaccountingbulletin.com/news/sizwentsaluba-gobodo-merger-creates-
top-5-firm (accessed on 23 January 2016).

Institute of Leadership & Management. 2014. Employees behaving badly. Press release, 3
November. Available at: https://www.i-l-
m.com/~/media/ILM%20Website/Documents/Information%20for%20media/employees-
behaviing-badly-press-release%20pdf.ashx (accessed on 22 August 2015).

Kotter, J.P. 2001. What leaders really do. Harvard Business Review, December: 3–11.
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is greater than the sum of the parts. Strategic Management Journal, 24(10): 1043–1055.

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(accessed on 11 January 2016).

Moya, F. 2005. I will die with my boots on. Mail & Guardian, 17 August. Available at:
http://www.mg.co.za/article/2005-08-27-i-will-die-with-my-boots-on (accessed on 27 August
2015).

Plummer, Q. 2016. Apple refuses to help FBI unlock iPhone in New York drug case: who
will have the last laugh? Tech Times, 17 April. Available at:
http://www.techtimes.com/articles/150994/20160417/apple-refuses-to-help-fbi-unlock-
iphone-in-new-york-drug-case-who-will-have-the-last-laugh.htm (accessed on 29 May 2016).

Sarasvathy, S.D. 2009. Effectuation: elements of entrepreneurial expertise. Cheltenham, UK:

Edward Elgar Publishing.

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our story. Available at: http://www.sng.za.com/about-us/celebrating30years-ourstory
(accessed on 23 January 2016).

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Available at: http://www.fin24.com/Tech/Companies/former-mtn-ceo-in-r24m-golden-
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Warren, T. 2012. 5 Essential qualities for entrepreneurial leadership. Available at:

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entrepreneurial-leadership/4eea8cdf5fd8 (accessed on 15 June 2016).88

1 The top four accounting and auditing firms in South Africa are KPMG,
PricewaterhouseCoopers, Deliotte and Ernst & Young.

2 A partner in an accounting firm refers to the highest rank an accountant can be offered. A
partner is entitled to a share of profits of the company.

3 Other resources of an organisation include financial, technical and physical resources.

 6
Creativity and innovation: the driving force
in entrepreneurship
Learning outcomes

After studying this chapter, you should be able to do the following:

Define the terms creativity, innovation, and commercialisation

Explain the link between creativity and innovation within an entrepreneurship context
Describe the importance of creativity and innovation in business
Identify different approaches to generating creative ideas
Explain the steps to follow in order to enhance creative thinking

Key terms

Commercialisation
Creativity
Innovation
Market
Sustainability
Value proposition

Opening case study

Idea generation and spotting a gap

Sbusiso Ngwenya, 24 years

Ekurhuleni, South Africa
Business: Skinny Sbu Socks

Sbusiso Ngwenya is a 24-year-old entrepreneur from Ekurhuleni in South Africa. He is the

founder of Skinny Sbu Socks, the country’s first premium socks brand. As a creative genius
Sbusiso does not leave things to chance; he manages the entire process of production at
Skinny Sbu Socks. To ensure that his unique style of ingenuity flows into each pair of his
designer socks, Sbu also assumes the role of head designer for the Skinny Sbu Socks
products. He believes that it is this meticulous attention to detail that differentiates his
product and maintains the Skinny Sbu Socks brand as a household name among South
African consumers.

Like with many creative minds, a problem within Sbu’s environment sparked his creativity.
His most undesirable chore as a young boy was washing his socks. His mother would insist,
“Socks should be washed inside out”. As fate would have it, his mother unwittingly
90inspired this young entrepreneur’s love for socks. Unknowingly, the experience of
spending countless hours with socks afforded Sbu the opportunity to learn everything he
needed to about socks. His mother’s attention to detail had rubbed off onto him, and as a
result, he started being conscious of what socks he was wearing, how he was wearing them
and if they matched with what he was wearing. As a young man of 1,9 m, Sbu often found
that his pants were not long enough to reach his shoes. As a way to compensate for the gap
between his trousers and shoes, Sbu wore colourful socks and over time, it grew into a
fashion statement.

By 2013, Sbu’s collection of colourful socks had reached over 70 pairs. It soon dawned on
him that most socks in his collection were international brands. At that stage he spotted a gap
in the local market – there was no premium proudly South African socks brand. “I had just
bought 13 pairs of socks at a retail store and my mother was like, ‘actually why don’t you
start selling these socks since you have so many of them?”. On that day, he repackaged the
socks he had bought and started reselling them. Attending South African Fashion Week and
networking with local celebrities gave him a boost as some started tweeting about his
colourful socks. Sbusiso Ngwenya’s wish was always to design what he calls “home-grown
superior quality socks”. He sold his first pair of socks for R50. He then decided to turn his
newly found passion and creativity into a business, and founded Skinny Sbu Socks in 2013.
By 2016, Skinny Sbu Socks were available in some major clothing shops such as Stuttafords
and online at http://www.spree.co.za www.skinnysbu.co.za

Source: Mdaka 2015; Ngwenya 2015

6.1 Introduction
From the previous chapters we have learnt that entrepreneurs work extremely hard to
establish business ventures. We also established that even after its formation, a business only
achieves sustainability(including profitability) if its value proposition continues to appeal to
the market. In other words, a company will continue to make a profit only if its products
continue to satisfy customers’ wants and needs. Thus, to remain profitable, such products
must be better and/or cheaper than substitute products.

Following this line of thinking, one can conclude that successful entrepreneurship is nothing
more than the continual satisfaction of the wants and needs of a particular market. Having
said that, it is, however, important to note that customers’ tastes, wants and needs are not
static – they change frequently over time. Therefore, entrepreneurs need to keep up with the
latest trends and ever-changing customer needs. To keep up with market trends, entrepreneurs
need to produce new products. From this, one key question arises: “How do entrepreneurs’
products keep up with changing trends and dynamic customer needs?” Simple – the answer is
“creativity.” New products develop from creative thinking.

Creative thinking can best be described as “thinking outside the box”. Others such as the late
Steve Jobs indicate that it is solving a problem before people become aware of the problem. It
is not always the entrepreneurs keeping up with the market, but the market that follows the
entrepreneurs’ trendsetting. In either case, it is clear that new products or services will either
solve existing problems or create “new” needs that did not exist previously. Think about
Facebook. What started first: Facebooking or Facebook? Using Facebook in all the ways we
do was only possible after Mark Zuckerberg 91created Facebook. Similarly, many products
(e.g. cellphones, WhatsApp and Netflix) continue to shape, reshape, define and redefine
market trends. In all these and countless other products, there is one commonality – creativity
and innovativeness.

It is against this background that entrepreneurship specialists (such as Schumpeter 1934;

Drucker 1985; Baumol 1993; Carree & Thurik 2003; Nieman & Nieuwenhuizen 2009)
consider creativity and innovation as the bedrock of entrepreneurial venture creation.
Changes in customers’ preferences, technology, globalisation and increased competition all
create an environment in which creativity and innovation are necessary in order to cope with
the situational and economic dynamics that exist in the world today.

In this chapter we are going to learn the fundamentals of creativity and innovation in the
business life cycle. We will also learn how to develop and how to think more creatively. The
next section (see Section 6.2) considers the definitions of creativity and innovation.
Thereafter we look at how creativity and innovation are applied in building a successful
business, followed by a discussion on barriers to creative thinking. The chapter concludes by
presenting some exercises on stimulating creative thinking.

6.2 Understanding creativity and innovation in

entrepreneurship
6.2.1 Defining creativity

There are many definitions of creativity provided in the literature. Creativity is the generation
of new ideas or the new use of existing knowledge to solve existing problems. Amabile
(1996) defines creativity as the generation of new and usable ideas to solve life’s recurring
problems. On the other hand, Okpara (2007) contends that creativity involves the ability to
create, to invent and to produce solutions through imaginative skill. Similarly, Jacobs (2008)
sums up creativity as a person’s imagination and the ability to think of something original. In
other words, to be creative refers to a quality through which an individual generates new
ideas towards solving a particular problem. The ability to view things in new ways or from
fresh perspectives is required in the creativity process (Jacobs 2015).

In trying to understand creativity, as provided by the foregoing definitions, three key

common features can be deduced, namely the existence of a problem that requires solutions,
developing new ideas, and using these ideas to find a solution to the existing problem. These
three features of creativity will now be briefly discussed.

1. The existence of a problem needing a solution. From economics we learn that

human beings have an unlimited number of needs. Naturally, these problems need
solutions. In entrepreneurial terms it means that every problem equals a business
opportunity, and any opportunity exploited equals an entrepreneurial venture. To
illustrate this relationship, consider Facebook. Historically, university students, after
graduating, always found it difficult to keep in touch with their friends and
classmates. Sharing experiences and just communicating was difficult. Having noted
this problem, Mark Zuckerberg created Facebook, an internet-based social media
platform to address this problem.
The identification of a new idea.
 “new invention” per se. It u

The formulation of a solution.

marketing Facebook, ensured the usability of the “Facebook” idea.

The process of creating ideas differs according to the problem at hand and the anticipated
solution. The Facebook example simply illustrates how the creative process eventuates. Some
creative ideas are astonishing and brilliant, while others are just simple, good practical ideas
that no one has thought of yet (Harris 1998). The key to creativity is in exploring ideas that
others have not explored, and interpreting the ideas that arise from your imagination into
meaningful business solutions that will separate your business from the rest. Although many
definitions are provided for creativity, the one by Amabile (1996) is preferred. It is practical,
encompassing, simple and straightforward. For that reason, Amabile’s (1996) definition is
applied in this chapter.

The ability to bring into existence something new to solve a particular problem or need.

The concepts of creativity and innovation are related. Innovation is a function of creativity.
Simply put, innovation is described in terms of creativity. Therefore, if there is no creativity,
there can never be innovation. Innovation is being described here as the transformation of
creative ideas into products and services. Thus, the simplest way to conceptualise innovation
is to think of it as the commercialisation of a creative concept (see Figure 6.1).
Figure 6.1 Innovation versus creativity

For the realisation of innovation a creative concept has to exist. In other words, innovation
could only have happened with the transformation of creative thinking into a usable and
sellable product or service. A typical example of innovation is Facebook (see Section 6.2.1).
The first step in this innovation was the combination of technologies, 93including the
internet, pictures, videos and communication, into one coherent product known as Facebook.
Other examples of creative concepts that have been successfully converged into useable
products in the information and communication technology industry are Yahoo, Google,
WhatsApp and Amazon.com.

At a higher level, the ultimate goal of innovation is the commercialisation of a creative idea
by building a business around it. Since innovations seek to advance or develop businesses,
there are three approaches through which businesses can be advanced: creation of an entirely
new product; enhancing services, and improving processes. By definition, these three
represent the three forms through which entrepreneurs can exercise innovation within their
businesses.

As already indicated, entrepreneurs can exercise their innovativeness in three distinct

approaches, which in themselves represent the different forms of innovation. There are three
types of innovation: product, service and process.

1. Product innovation

Product innovation refers to the development of new products, changes in the design of
established products, or the use of new materials or components in the manufacture of
established products (PSI 2016). In short, it is an intentional effort to improve on existing
products. Reasons for product innovation can range from making products more efficient, to
making them cheaper, to attempts to make them easier for consumers to use. Product
innovation takes on four levels (PSI 2016):

A modified version of an existing product range. An example of a modified

product within an existing product range is the cellular telephone.
 A new model in the existing product range, for example a 2017 model of VW Polo
to replace the 2016 model.
A new product outside the existing range but in a similar field of technology An
example of this type of product is WhatsApp. When it was first developed, WhatsApp
was among the first smartphone-based applications that facilitated free instant
messaging, which was a modification of existing social media applications.
A totally new product in a new field of technology. When the telephone was first
invented in 1876 by Alexander Graham Bell, it represented a new field of technology.
94

Evidently, as one moves from the first to the fourth level, the degree of innovative effort as
well as creativity on the part of the business is likely to increase significantly.

2. Service innovation

As with product innovation, service innovation is a form of innovation related to services.

Services are intangible and therefore differ from tangible goods. This means that customers
cannot touch or feel a service, but can only observe a benefit of the service. For instance,
when visiting a doctor in her surgery, a patient cannot touch or quantify the service rendered,
but the improvement in health can be noticed. Thus, service innovation denotes a new or an
improved service concept adopted by a business or an entrepreneur.
Most service innovations take the form of new customer interaction channels (e.g. a call
centre), a distribution system or a new technological concept (e.g. mobile banking) or a
combination of them. Usually, a service innovation benefits both the service producer and
customers, and it improves the competitive edge of the business. In South Africa, two
common approaches to service innovation are often used by businesses:

Innovation in services. These are new or improved (intangible) service products.

One common example of innovation in services that is widely used in South Africa is
the call centre facility. Through a call centre, customers can contact a service provider
by means of a telephone conversation rather than physically consulting a service
provider’s employee at a building or office.
Innovation in service processes. This refers to new or improved ways of designing
and producing services. It may include innovation in service delivery systems. This
type of innovation involves the restructuring of work between the service provider
and its customers. Examples of these are the smart queueing systems used at service
outlets such as Capitec Bank and the South African Revenue Service (SARS). These
smart queueing systems allocate a number to clients, and automatically queue
customers depending on the services that they require. Each customer’s number is
called by an electronic system, which advises clients which counter they should go to.
The biggest advantage for the service provider is that it is relatively easier to monitor
queues and may reduce waiting time. From the customer’s side, the jumping of
queues is eliminated.

3. Process innovation

Although different from service innovation, process innovation contains elements of service
innovation. Process innovation is the implementation of a new or significantly improved
production or delivery method (Chiluk n.d.). When it relates to intangibles (i.e. services), it is
the same as service innovation. However, there are differences in other cases. Since we have
already discussed service innovation, we turn our attention to the non-service process
innovation. In this regard, we define process innovation as the implementation of a new or
significantly improved production or delivery method in techniques, equipment or software.

One common example of process innovation is the use of tractors in agriculture. Before its
invention, farmers would use hoes and mechanical labour to till the land. However, with
tractors, there has been a considerable change in how activities at a farm take place. Another
example is the mechanised assembly line in factories that enables manufacturers to optimise
the production process. To illustrate, within assembly lines such as those for manufacturing
cars, mechanised robots and computerised gadgets perform work that was previously done by
factory workers, such as welding and joining components.
Within an intangible (i.e.service) setting, there are other process innovations that have
changed as a result of technological innovations, for example the invention of medical
imaging techniques, such as computerised tomography (CT) and computerised axial
tomography (CAT) scans and X-rays, assist health care practitioners in detecting diseases and
making diagnoses.

Innovation

The transformation of creative ideas into products and services.

6.2.2.2 Schumpeter’s five criteria of innov

The entrepreneurship guru Schumpeter (1936) defines innovation as the setting up of a new
production function, which involves creating customer value from a creative idea, packaging
it in a scalable form and selling it for a profit. In pursuing profit from an innovation,
Schumpeter (1936) explains that setting up a production function or a business around an
innovation encompasses five key entrepreneurial aspects, namely:

1. The introduction of a new product

2. The introduction of a new method of production
3. The development of a new market
4. The conquest of a new source of supply of new materials
5. The creation of a new organisation of any industry

Table 6.1 demonstrates how each of these five entrepreneurial moments was applied by
different South African entrepreneurs.
Table 6.1 The innovation process

From studying the examples in Table 6.1, one can conclude that innovation refers to
exploiting a creative idea and building a business around it. Effectively, innovation results in
the process known as commercialisation (Bessant & Tidd 2007). Commercialising a creative
idea is the process by which an entrepreneur identifies a creative idea or a combination of
creative ideas and then develops a product or service from the idea. Thereafter, the developed
product or service is put up for sale within the marketplace.

6.3 The innovation process in entrepreneurship

Entrepreneurship experts explain that innovations are at the centre of all entrepreneurship
ventures; without innovation, there cannot be entrepreneurship (Schumpeter 961936; Bessant
& Tidd 2007). To understand the link between innovations and entrepreneurship, the
information and communication technology (ICT) industry provides us with the best case
study. Within the last two decades, products such as Amazon.com, Yahoo, Google, Facebook
and WhatsApp, among others, have developed from creative ideas based on the internet. All
these products have various elements of creativity. The respective entrepreneurs developed
these products and commercialised them into some of the biggest brands in the world today.

Owing to intensifying competition in the global marketplace, Bessant and Tidd (2007)
caution that in effecting innovations, entrepreneurs must always cautiously select the best
ideas to commercialise. The latter authors found that at the heart of successful
entrepreneurship is successful innovation. In turn, successful innovation is a combination of
three core processes, namely generating new ideas, evaluating and selecting new ideas, and
implementing creative ideas. These processes will be discussed in Sections 6.3.1, 6.3.2 and
6.3.3.

6.3.1 Generating new ideas through creativity and creative thinking

Case study 1
The Lazy Makoti (lazy bride)

Mogau Seshoene (the risk taker), 25 years

Polokwane, Limpopo province South Africa97

For Mogau Seshoene, a 25-year-old Consumer Science graduate from the University of
Pretoria, leaving her 9-5 job at an established company such as KPMG to start her own
business was a daunting decision to make. It was her friend’s poor cooking skills that gave
her the idea for her business. When her friend was getting married, she had to spend two
months at her in-laws, as required in the African culture. Prior to that Mogau spent two weeks
preparing her for her journey of life as a Makoti (bride) by teaching her how to cook. It was at
that stage that she spotted a business opportunity – cooking lessons. She realised that many
South African career women are caught between juggling work life, motherhood, marriage
and social life, and as a result do not know how to cook traditional African foods as expected
of an African Makoti. She turned her skills into a business venture. The Lazy Makoti offers
tailor-made solutions for customers from all backgrounds and with different needs. They also
provide locally made kitchen accessories including aprons, chopping boards and wooden
spoon sets. The business was officially registered in May 2014 and has gone from strength to
strength. In 2016, Mogau became one of South Africa’s top five Forbes Africa’s ‘30 under
30’, making her the only female on the list. Adding to her success, she became one of the
2016 Young African Leaders Initiative (YALI) Mandela Washington fellows and spent six
weeks of academic coursework, leadership training and networking at U.S. universities.

Source: Seshoene 2016

From this case study we learn that generating new ideas through creativity usually involves
studying the market, especially current product offerings, and identifying gaps and
deficiencies in the market. Entrepreneurs then try to develop better and more efficient
products that fill these gaps.

A range of different circumstances, such as inspiration, imagination, a need and even a

simple surprise, can trigger the creative process. This chapter adopts Rossman’s (1931)
seven-step approach to assist in stimulating creative thinking in an entrepreneurial context.
Herewith then a discussion of the seven steps:

1. Observing a need or difficulty. The creative process starts with a search for a
challenge or need. The problems or needs are around us every day. In the context of
entrepreneurship, this refers to opportunity finding or opportunity recognition. They
could be from everyday activities at home, school, shopping or just travelling the
world. Let us use The Lazy Makoti business as an example. The business offers
lessons to modern African women who cannot cook well but are willing to learn and
improve their cooking skills using simple recipes. The entrepreneur used common
day-to-day problems such as cooking to start a creative business venture.
2. Analysing the need. Gather all relevant information to help you understand the
problem you are attempting to solve. Questions such as what are the causes and
effects of the problem are important when investigating the need. Moving on with the
example of cooking lessons, The Lazy Makoti business had to analyse what causes
most modern African women to lack cooking skills and what effects this has on their
families.
 3. Surveying the available information. Market research is essential. You need to
examine the gathered information that will help in formulating solutions. How many
businesses offers such services, at what cost and benefit. In this case, how many
women would be interested in attending the cooking classes.
4. 98
5. Formulating solutions. When you think outside the box, the problem will dictate the
solutions. Seek alternatives and think from fresh perspectives. How to package the
cooking classes. How to reach the clients and what teaching methods will be
applicable.
6. Critical analysis of these solutions for their advantages and disadvantages. What
is the best and worst thing that could happen and how do you prevent the latter from
happening? What are the major benefits of the business and will the clients like the
recipes? Will they be willing to attend classes and pay for them? These are some of
the questions that should be asked.
7. Developing a new idea – the invention. At this stage, the entrepreneur needs to put
together all the resources that are imperative in making the idea a reality. In the case
of the cooking classes business venture, it would include the recipes, modules, variety
of foods, kitchen utensils and all ingredients required to produce a well-equipped and
functioning cooking class.
8. Experimenting with the idea. The purpose is to test out the most promising solution
and to perfect the final embodiment, taking the idea to the market. Your first client,
the first cooking lesson, becomes very important in making or breaking the business
venture.

Figure 6.2 illustrates how these steps are interlinked:

Figure 6.2 Rossman’s model of creative thinking

We will now illustrate how the Rossman Model can be used to help improve your creativity
skills. We use two examples of innovation: The Lazy Makoti, a business started by Mogau
Seshoene, and Headboy Industries, a business started by Ludwick Marishane. Read through
these Case studies and refer to Table 6.1 to see how these entrepreneurs used innovation
strategies to build a business.

6.3.2 Evaluating and selecting new ideas

The process of selecting new products usually involves several steps, which may vary
depending on the type and nature of the product. However, most entrepreneurs use a three-
step evaluation process:99

Identification of gaps in the markets. These gaps could be poor product design of
current offerings or even customers’ feelings of dissatisfaction with current products
or services. Again, depending on the product, this might involve research and
development to establish the exact nature of the problem. An example of this is the
introduction of IMO, a mobile instant messaging app and considered the rival to
WhatsApp (Versus.com 2016). IMO has optimised its voice calling features in a way
that subscribers experience fewer delays and distractions compared to WhatsApp.
Development and testing of prototypes. A prototype is a demonstration or a sample
product that a manufacturer produces for the purposes of evaluating the quality of the
product design.
Product development. This step follows if the prototype is considered to be of
acceptable quality. At this stage, manufacturing processes are designed.

6.3.3 Implementing creative ideas through commercialisation

The implementation of creative ideas through commercialisation is the last stage of the
innovation process. This involves setting up a business to market the innovation. The
marketing process involves two key functions, i.e. setting up a business entity to market the
new product or service, and branding and marketing the product. A brand is a unique
identifying mark by which a product is known in the market.

From Bessant and Tidd’s (2007) line of thought, the innovation process can be illustrated
diagrammatically as depicted in Figure 6.3, which presents the relationship between
creativity and innovation. It is clear that commercialisation is the ultimate objective of any
innovation endeavour. The three-step innovation process begins with creativity, which leads
to innovation that in turn culminates in commercialisation.

Figure 6.3 The innovation process

An entrepreneur thus commercialises a creative solution to a well-defined problem and builds

a business around it. Creativity alone refers to the ingenuity, inventiveness and imagination to
solve a particular problem. Innovation, therefore, takes creativity a step further by
commercialising it into a scalable, usable and sellable product or service. First, a group of
people experiencing that particular problem (a market) is identified. Second, an approach to
sell the solution to that group of people is devised. The first and the second approaches result
in the formulation of a business model.100
Commercialisation

The process of developing new products and services from concept to its successful
introduction into a given market to generate economic benefits.

A business model is the grand scheme of how a business proposes to create value for its
customers by satisfying their needs from its innovation. The business model outlines the tools
and processes used to create such value. Over and above, a business model defines how an
entrepreneur designs his or her business in order to make a profit in the process.

In defining their business models, entrepreneurs must first determine if there is enough
demand to cover not only the costs for producing the product or service, but also to make a
profit. In formulating the business model, entrepreneurs should answer eight fundamental
questions that seek to determine business viability. These questions are:

1. What product or products will the business sell?

2. How and from where will raw materials be sourced? In addition, how will these raw
materials be transformed into finished goods?
3. With which resources (e.g. human resources, technical and natural) will the business
produce its intended product?
4. To whom will these products be sold?
5. At what price will the product be sold?
6. How will the company ensure that its products are known in the marketplace?
7. What are the differentiating factors that would encourage customers to buy the
products, as identified in (1)?
8. How will the products be distributed to customers?

Effectively, answers to the above questions define a business model. A business model is the
overall plan that a business makes, as well as a value proposition made in order to make
revenue from its operations. It is the single most important factor that either makes or breaks
a business. Commenting on the importance of business models, Chesbrough (2010: 354)
acknowledges, “a mediocre technology pursued within a great business model may be more
valuable than a great technology exploited via a mediocre business plan”.

Business model

The overall plan of how a business proposes to create value for its customers by satisfying
their needs from its innovation and make revenue from its operations. 101

6.4 Characteristics of creative people

Creative people come from all walks of life and have many different characteristics. From
studying highly creative people, it appears that some qualities are common among them, such
as the following:

1. Seeing possibilities. They see possibilities that others do not see. They are not the
average thinkers, they are game changers, and they set their own rules and help solve
complex problems.
 2. Quest for knowledge. Information is a powerful tool for entrepreneurs. They
therefore continuously seek new information and knowledge. This helps them to stay
ahead of their competitors.
3. Insatiable desire for solutions. The world’s best innovators started with a dream that
later developed into ideas to solve a particular problem or achieve a particular goal.
Successful entrepreneurs have a desire to work towards finding solutions for existing
and future problems.
4. Imaginative. Imagination sets your mind free from the restrictions that may prevent
you from conceiving the best ideas to solve the most complex problems.Think outside
the box.
5. Future oriented. Creative people are always focused on the future. They are forward
thinkers who use today’s solutions to solve tomorrow’s problems.

6.5 Fostering creative thinking

At this stage, it is critical to emphasise that anybody can become creative. What differs,
however, is the degree to which people are creative. Some people are more creative than
others. Creativity often arises from personal and other social experiences. The important
thing is that creative people have the ability to identify both problems and solutions to issues.
Now that we have discussed creativity and innovation, the focus of the chapter turns to
providing you with practical solutions to enhance your creative and innovative thinking.
However, before attending to those strategies, we will first look at the seven barriers to
creative thinking.

6.5.1 Barriers to creativity in entrepreneurship

In total, seven barriers reduce or stop creativity and creative thinking. These barriers, as
adapted from Matthews (2007), and Nazari and Shahdadnejad (2011), are:

1. Negative attitude. The tendency to focus and spend time and energy on negative
thoughts and negative aspects of products retards creativity and creative thinking.
2. Fear of failure. Fear of failure, usually associated with the lack of business
experience, forces people to be extra cautious and less adventurous to try something
new. This barrier is also associated with that of lacking self-confidence. Sometimes
entrepreneurs are hesitant to try something because they fear that others will laugh at
them.

1. Stress. Feeling stressed and mentally exhausted reduces the quality of creative
thinking. Usually stress results in negative attitudes, which in turn reduce objective
thinking.
2. Overreliance on rules. To become creative usually requires bending and
disregarding rules and the status quo. Thus, if an individual relies on rules and
policies to solve new problems, it grossly diminishes creative thinking.
3. Intolerance to criticism and conflict. Usually within a group, certain individuals
(including senior managers) fear criticism. Others fear raising different opinions
because of the possibility of conflicts from holding opposing views. This inhibits one
from trying out ideas.
 4. Overreliance on logic. Investing time and effort on logic and analytical thinking that
is mechanistic in nature prohibits creative thinking. To be creative usually requires
fluid and free thinking.
5. Making assumptions. Making assumptions about the way phenomena are is contrary
to creative thinking. Most assumptions and biases that people hold are conscious.
However, subconscious assumptions also determine people’s behaviour. Assumptions
have to be proved right or wrong through actions or tests.

6.5.2 Strategies to promote creative thinking

After having established the barriers to creativity and innovation, we will now focus on
providing you with practical solutions to enhance your creative and innovative thinking. To
this effect, Burrus (2013) proposes ten strategies that individuals and entrepreneurs can
follow.

1. Creative people have developed their ability to observe and to use all of their senses.
To sharpen their senses, highly creative people take time to observe and analyse
situations. Thus, to be creative, one has to be observant and analytical.
2. Innovation is based on knowledge. Therefore, you need to expand your knowledge
base continually. Read widely, especially the literature (e.g. books) that people do not
normally read.
3. People’s perceptions often limit their reasoning. As such, try having an open mind
because your perceptions, world views and biases affect your judgements and
reasoning about the world around you.
4. Practise guided imagery so you can see a concept come to life. Try as much as
possible to write and draw your ideas so that they seem more real.
5. Let your ideas “incubate” by taking a break from them. For example, include resting
time and time to relax. Relaxing shifts one’s brain into another place and helps with
creativity.
6. Experience as much as you can. Exposure puts more ideas into your subconscious.
Actively seek out new experiences to broaden your experience portfolio.
7. Treat patterns as part of the problem. Recognising a new pattern is very useful, but be
careful not to become part of it.103
8. Redefine the problem completely. When you define the real problem, you can solve it
and move on. After all, if you had correctly defined the real problem, you would have
solved it long ago because all problems have solutions.
9. Look where others are not looking to see what others cannot see.
10. Come up with ideas at the beginning of the creativity process and then execute them.
Many times, ideas generate more ideas. If this process continues, it becomes difficult
to execute a single idea. At some point, you have to turn off the idea-generating part
of the process and start working on the execution part in order to bring a project to
life.

Case study 2

Innovatively solving a problem

Ludwick Marishane, 25 years, South Africa

Business: Headboy Industries
What do you do when you are too lazy to bath? Invent something that will replace taking a
bath using water. That is how DryBath® was born: gel that does all the work of a bath
without water. This body sanitiser allows users to apply it to the skin and offers the same
hygienic protection found from bathing using water. This invention is the brainchild of
Ludwick Marishane, a young South African from rural Limpopo with a passion for
simplifying life problems. Ludwick was in high school when he came up with DryBath.
Within a year, he launched DryBath with his company Headboy Industries. The idea for
DryBath was inspired by a friend of Marishane. His friend was too lazy to bath and was
wondering about an invention that could replace the traditional way of bathing. A
conversation about laziness to take a bath resulted in a solution for not only lazy people, but
also a solution to global hygiene problems experienced by the poor, especially in
communities where water supply is limited, a common phenomenon in many countries in
Africa. The invention won Ludwick an award for best student entrepreneur in the world from
the Entrepreneurs’ Organisation. Google also named him as one of the most intelligent young
brains in the universe.

Source: Spector 2013

6.6 Case study exercise

Using inspiration from The Lazy Makoti in Case study 1, think about a problem that you
have identified. It could relate to your schoolwork, social life or anything else that you would
like to solve. Follow the example in Table 6.2 to generate your own process of finding
solutions.

Table 6.2 Exercises to improve creative thinking

6.7 Summary
In this chapter, we have learnt that everyone has creative potential. Creativity is the desire to
make life processes better by devising new solutions to existing problems. These solutions
result from developing new ideas or using existing ideas in a new way. The trick is to
understand what the problem is and who is experiencing it (the 104market). It was also
explained that innovation emerges when creative ideas are commercialised. The processes of
commercialisation create value for both the community and the entrepreneur. As
demonstrated in the example of Skinny Sbu Socks, almost any creative idea can be
commercialised. However, to enhance your creativity, you need to start by becoming more
aware of your environment, be inquisitive and analytical. It should, however, be appreciated
that this chapter cannot exhaustively cover all aspects of creativity and innovation. Consider
reading the literature suggested under Recommended reading.

Questions

1. List five common characteristics that resonate among the entrepreneurs used in this
chapter.
2. Using the Lazy Makoti and DryBath case studies, explain how the entrepreneurs (a)
identified their problem, (b) introduced the new idea, and (c) turned the idea into a
solution. 105
3. Using the case studies (Skinny Sbu Socks, The Lazy Makoti and DryBath), discuss
the importance of creativity and innovation in entrepreneurship.

1. Describe the three key features of creativity common in all three definitions.
2. Differentiate creativity from innovation.
3. Using a diagram, illustrate the innovation process from creativity to
commercialisation.
4. Discuss the barriers to creativity in entrepreneurship.
5. Discuss the ten approaches that individuals and entrepreneurs can use to boost
creativity and innovativeness.

1. Which one of the following statements is not true about innovation?

1. Innovation is the same as creativity.
2. Innovation and creativity are related.
3. Innovation depends on creativity.
4. Innovation is the commercialisation of creativity.
2. The innovation process involves three core themes, which are:
1. Generating ideas, selecting ideas and implementing ideas
2. Selecting ideas, implementing and making a profit
3. Making goods, services and generating revenues
4. Talent, sustainability and profit
3. _______is the generation of new ideas or the new use of existing ones to solve
existing problems:
1. Innovation
 2. Creativity
3. Marketing
4. Business model
4. The term ________ refers to the grand scheme of how a business proposes to create
value for its customers by satisfying their needs from its innovation.
1. value proposition
2. cost
3. business model
4. core competencies
5. The first step in the seven-step approach to creative thinking is ___________
1. formulating solutions.
2. developing a new idea – the invention.
3. observing a need or difficulty.
4. analysing the need.

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Nussbaum, B. 2013. Creative intelligence: harnessing the power to create, connect, and
inspire. New York: Harper Collins.

Sawye, R.K. 2012. Explaining creativity the science of human innovation. 2nd ed. Thousand
Oaks, CA: SAGE.

Boyd. D. & Goldenberg, J. 2013. Inside the box: a proven system of creativity for
breakthrough results. New York: Simon & Schuster.

http://www.druckerinstitute.com

http://www.forbes.com

http://naturalfamilytoday.com/uncategorized/5-techniques-that-build-creative-thinking-skills

http://www.creativecorporateculture.com/11-useful-tricks-to-improve-creative-thinking

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http://observer.com/2015/10/the-10-best-books-on-innovation

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Baumol, W.J. 1993. Formal entrepreneurship theory in economics: existence and bounds.
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Sons.

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and-innovation_b_4149993.html (accessed on 11 July 2016).

Carree, M.A. & Thurik, A.R. 2003. The impact of entrepreneurship on economic growth. In
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Chesbrough, H. 2010. Business model innovation: opportunities and barriers. Long Range
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Chiluka, P.K. n.d. Focus on process innovation. Available at:

http://www.google.co.za/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwi
HtO-Z-
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sers%2Fanilg%2Ffiles%2FArticles%2FPavan%2520Kumar%2520Chiluka.ppt&usg=AFQjC
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Drucker, P.F. 1985. Innovation and entrepreneurship: practice and principles. Drucker
Series. New York: Harper and Row.

Harris, R., 1998. Introduction to creative thinking. In Creative problem solving: creative
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Jacobs, H. 2008. The identification of feasible small business idea, Ch. 3 In Nieuwenhuizen,
C. (Ed.). The basis of entrepreneurship. Cape Town: Juta.

Jacobs, H. 2015. The identification and development of business idea, Ch. 3. In

Nieuwenhuizen, C. (Ed.) Entrepreneurship and how to establish your business. Cape Town:
Juta.

Matthews, J.H. 2007. Creativity and entrepreneurship: potential partners or distant cousins?
In Chapman, R. (Ed). Proceedings, Managing Our Intellectual and Social Capital, 1-17,
Sydney, Australia.

Mdaka, Y. 2015. Skinny Sbu Socks: the story behind the brand. Destiny.com, 4 May.
Available at: http://www.destinyconnect.com/2015/05/04/skinny-sbu-socks-the-story-behind-
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Nazari, M.Z.& Shahdadnejad, N. 2011. Barriers to creativity and innovation in the

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Economics IPEDR,(25) IACSIT Press, Singapore.107

Ngwenya, S. 2015. Important lessons in entrepreneurship. Keynote address. Entrepreneurship

day,13 May. Tshwane University of Technology, Pretoria.
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PSI. 2016. Product innovation. Available at:

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Okpara, F.O. 2007. The value of creativity and innovation in entrepreneurship, Journal of
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Rossman, J. 1931. The psychology of the inventor: a study of the patentee. Washington, DC:
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(accessed on 29 June 2016).
 7
Marketing and sales
Learning outcomes

After studying this chapter, you should be able to do the following:

Contextualise the marketing process

Discuss the marketing strategy
Explain the target market
Describe the elements of marketing mix
Explain how the internet and social media are changing promotional practices
Describe sales and marketing skills that an entrepreneur needs

Key terms

Small business marketing

Marketing strategy
Market segmentation
Target market
Marketing mix
Breakeven analysis
Customer service
Internet
Social media

Opening case study

South Africa’s first black-owned vodka empire on the rise

For the past three years, Sibusiso Sibisi and his four friends from Kagiso on the West Rand
had been working hard to create their own brand of premium vodka called Distinkt. It was
launched in September 2016.

Sibisi, a chemistry graduate, was instrumental in the basic production and sourcing of raw
materials such as potatoes, fruits, wheat and grain from farms around the country.

Sibisi is responsible for the mixing of chemicals which he does from a Durban laboratory
sponsored by the University of KwaZulu-Natal, where he also works. His business partners at
the Durban laboratory were responsible for marketing, managing finances and other
technicalities including market research.

The idea to make Distinkt Vodka came after Sibisi and his friends saw a gap in the market
and an opportunity to create a legacy for themselves. “We realised that the liquor industry
was a multibillion [rand] industry in this country, but unfortunately we import most of our
alcohol. We are one of the leading alcohol-consuming countries in the world but we don’t
have much stake in the alcohol industry”.

“My friends and I wanted to create something that would create a legacy for our families
112and their next generations. We are passionate about Africans doing things for
themselves,” Sibisi said. He said they had targeted vodka because it was an easily accessible
drink of choice for most people, starting from young entry-level employees to company
executives. Research has shown that 60 per cent of executives in companies prefer to drink
vodka. He added that it was also easier and quicker to make than other drinks like beer,
cognac and whiskey. “It takes a couple of hours to mesh raw materials together, boil it at
extreme temperatures and later ferment it up to six hours. This is followed by filtration, a
process which is done three times. The distillation process, which takes two hours, is done
three times to make sure that the right quantity of alcohol has been used,” Sibisi said.

Distinkt has an alcohol volume of 44 per cent. Sibisi said they did a market study to
understand how their potential clients would respond to their vodka. “Previous studies have
shown that brands with African names don’t usually sell as much as they should in South
Africa. We used an English word for ours but then broke it [by using a K] to show that we do
not conform to anybody’s standards,” Sibisi said.

He said Distinkt had met laboratory safety requirements and they were working on getting
proper certificates. They had already approached celebrities to endorse Distinkt after its
launch in September of 2016.

Source: Sifile 2016

7.1 Introduction
Deciding on the product to be offered to customers is a process that requires much thinking
and deliberation as this will determine the success or failure of the business. If the market
does not like what you offer, this might be the end of your business. Although entrepreneurs
are passionate about their products or services, they sometimes forget that customers buy
products because they benefit from them. As long as entrepreneurs understand why
customers buy their products, they will start to have a marketing plan.

All new small businesses must begin with a consumer orientation. That is to identify
customer needs and satisfy those needs. Once a small business commits to a customer
orientation, it should be ready to develop a marketing strategy to support this goal. The small
business owner can do that by locating and describing potential customers by the process
called market analysis. The marketing plan will describe the market that the owner is
targeting. The owner must have a customer profile to help identify the key demographic and
psychological characteristics of the customers likely to purchase the products of the business
(Bendeman et al. 2014: 295).

Marketing is defined as the process by which companies create value for customers and
build strong customer relationships in order to capture value from customers in return. Small
business marketing refers to business activities that direct the creation, development and
delivery of a bundle of satisfaction from creator to the target market. The business owner
must understand the needs, demands and wants of its target, and provide these customers with
quality products so that customers will keep on coming back to the business rather than going
to a competitor.

Amstrong and Kotler (2012) developed a model of a marketing process that put more
emphasis on the customer. 113

Figure 7.1 A simple model of a marketing process

7.2 Purpose of marketing

The primary purpose of marketing is to sell a product or service by positioning its value in
the market. This process involves five questions:

1. What is the business selling (product/service)?

2. To whom is it selling (market segment/demographics, market income and purchasing
power)?
3. Why is it selling this to them (satisfaction gap – specify unmet needs/expectations)?
4. Why would they prefer it (value proposition/difference – think customer
demand/response)?
5. How does it aim to sell it (marketing strategy)?

The purpose of marketing in a nutshell is to

introduce a product or service to a customer

convince customers to prefer the products or services of a business over those of
competitors
remind customers that a business still offers its product or service
encourage loyal customers to be ambassadors through word of mouth.

7.3 Market analysis

Before the entrepreneur can decide to start a business, he will first ask himself or herself who
will buy from that business. He or she will further ask how the business product can satisfy
customers’ needs and wants, and what opportunities exist in the current market. The owner
must therefore conduct a customer analysis to segment the total market so that he can focus
on the profitable segment and develop a strategy to serve the targeted segment. According to
Amstrong and Kotler (2012), the process involves market segmentation, market targeting,
differentiation and positioning. 114

7.3.1 Market segmentation

The market consists of different types of customer who also have different needs and wants.
Through segmentation, the market can be divided into groups of similar needs and wants. The
customer profile can be developed in a segment. A market can be divided into four segments:

a. Geographic variables: geographic region, size of city, density of the population,

climate, etc.
b. Demographic variables: gender, age, family size, family life cycle, personal income,
household income, occupation, religion, race/ethnicity, education, language,
household size, marital status, occupation, life stage (infant, preschool child, youth,
adult), etc.
c. Psychographic variables: life style, (conservative or liberal), personality
(compulsive, impulsive, ambitious, aggressive), social class (lower, middle or upper),
values (innovators, thinkers, achievers), etc.
d. Behavioural variables: purchase occasion (regular use or on special occasion),
benefit sought (economy, convenience, prestige, speed or service), user status (first-
time user, regular user, potential user, non-user, ex-user), usage rate (heavy, medium
or light), loyalty status (none, medium, strong or absolute), readiness stage (unaware,
aware, informed, interested, desirous), attitude to product (positive, indifferent,
negative or hostile), etc.

(Bendeman et al. 2014)

7.3.2 Target market

After dividing the market into distinct segments, the entrepreneur must compare the different
segments to determine the one the business will serve. This segment is called the target
market.

Five criteria that should be taken into consideration when selecting the target market:

1. Market size. You need to determine the size of the market that you are interested in
serving. Check if the market is big enough to sustain your business.
2. Expected growth. Determine whether the target market is promising to grow and if
not, consider another market.
3. Competitive positions. Identify the competitors operating in your market segment to
position your product. Determine how strong these competitors are and whether you
stand a chance against them.
4. Cost of reaching the segment. A segment that cannot be reached by the promotional
activities of the business would not be an option. It is therefore important to choose a
segment that your business can easily reach. 115
5. Compatibility with company objectives and resources. A segment may appear
attractive but your business may not have the resources to serve that segment. The
chosen segment should also be one that your business can serve with its resources.
7.3.3 Differentiation

Differentiation is a strategy used by a business to build customer loyalty by positioning its

goods or service(s) in a unique or different fashion. Differentiate your product or service
from that of your competitors in the same segment so that your product can look different.
Differentiate your market offering to provide benefits that are highly valued by customers.
An entrepreneur must differentiate his or her market offering to ensure that he or she provides
benefits that are highly valued by the customers.

Businesses that follow a differentiation strategy seek to build customer loyalty by positioning
its goods or services in a unique or different fashion. A business tries to be better than its
competitors at something that its customers value. The key to creating a differentiation
strategy is to be special at something that is important to customers and offer them unique
value like quality, convenience, flexibility, performance or style. Any small business that can
offer products that larger competitors cannot – for example by improving a product’s
performance, reducing the customer’s risk of purchasing it or enhancing the customer’s status
or self-esteem – has the potential to differentiate.

7.3.4 Positioning

Product positioning refers to the way consumers perceive a product in terms of its
characteristics and advantages, and its competitive positioning. Positioning gives a product or
service a distinctive identity. For example, Standard Bank positions itself with the slogan
“yesterday, today and tomorrow”. The benefit that is most valued by customers is emphasised
in the marketing campaigns and becomes associated with the product or service. The
marketing mix can follow after one has decided on the marketing strategy and selected the
target market.

Repositioning strategies

The position chosen must reflect customer preferences and the position of the competitive
brand. Specific positioning strategies are discussed.

a. Gradual repositioning: involves a planned and continuous adaptation to the changing

market environment.
b. Radical repositioning: utilised when there is an ever-increasing gap between what the
brand offers and what the market wants and entails that managers think about a major
strategic change in the positioning.
c. Innovative repositioning: where the planner finds a new strategic position that offers
market opportunities not previously exploited or utilised.
d. Zero positioning: where the organisation maintains its current positioning and
therefore presents an unchanged face to the market over a long period of time.

7.4 Marketing strategy (The marketing mix)

The business owner creates the marketing strategy by developing a plan to create customer
value and generate profits for the business through customer-driven relationships. The
marketing mix consists of a set of four marketing tools or instruments, namely product
(which will transform the basic product idea into a bundle of satisfaction); place or
distribution (which the company designs and combines in such a way that the target market
would purchase the offering); price (which will set acceptable exchange value on the
product), and promotion (which will communicate the necessary information to target
markets).

Information on the marketing strategy explains why customers will buy that product from
you.

7.4.1 Product or service

The product is a tangible or an intangible service or item which is mass manufactured or

produced in a certain number of units with the purpose of being sold to customers. Examples
of tangible goods are your personal computer, books, pens and paper that are physically
exchanged for money. Intangible products or services are health care, tourism, lodging, etc.

A major responsibility of marketing is to transform a basic product concept into a total

product. To be marketable, the basic product must be named, must have a package and be
supported by other product features. Components of a total product offering are branding,
packaging and labelling, which will now be briefly discussed.

Branding and trademarks help in distinguishing the product from the competitor’s products.
A brand is a name, design, symbol or any feature that distinguishes your product from that of
a competitor. Branding is used to identify your products to your customers. When a good
reputation for a brand is build, it becomes easier for you to introduce a new product to the
market by using the same name.

A trademark is a brand that has been granted legal protection – in other words it protects the
seller’s exclusive rights to use the brand. The business that registered the trademark gets
exclusive rights to use that trademark and no competitor is legally allowed to use it. Example:
Nokia, Samsung, Adidas, McDonald, Nivea, etc.

The small business owner can use different types of brand:

Manufacturer brand. This is owned and used by the manufacturer of a product and
mostly sold nationally, e.g. Nescafé coffee, Ford, etc.
Private brand. Products are sold under a brand name created by the retailer or
wholesaler. Most South African supermarket chains offer products in their own
private brands, e.g. Woolworths, SPAR, etc. 117
Family brand. The seller uses the same brand on an entire line or mix of product
items, e.g. Apple sells all its products like iPad and iPod under the Apple name.
Individual brand. The product is known by its name instead of the company making
the product. Individual branding allows businesses to expand into new unrelated
product areas without confusing customers.
Company name with product. Other manufacturers prefer to use their name together
with an individual product brand name. Individual name differentiates the product
from others while company name adds a company’s reputation to the product.
Packaging is the design and production of the container of the product item so that it can be
protected, stored, handled, transported, identified and marketed successfully. Packaging is
important as many products rely on their packaging (size, shape and colour) to attract
customers on the shelf. It is a significant tool for increasing the value of the total product. If
two products are similar, packaging may create the distinctive impression that makes the sale.
The look and design of the packaging and presentation increase consumer interest and this
can be very important to a small business.

Packaging can be used in different ways to achieve the objectives of a business:

Product item: the lowest denominator in the product mix of a business. It refers to an
individual item like one brand of bar soap.
Product line: the sum of related individual product items, but the relationship is
usually defined generally. For example, two brands of bar soap are two product items
in one product line.
Product mix: the collection of all product lines within the ownership and control of a
business. The product mix of a business may consist of a line of bar soaps and a line
of shoe polishes.

Packaging serves as a tool in promoting the product. Among a plethora of different products
held in stock by retailers, packaging is evidently an indispensable means of attracting
consumers’ attention, conveying the necessary information and eliciting positive action from
consumers. As the average packaging on the shelves of supermarkets is observed only for a
fraction of a second by the scanning eye of a consumer, it is essential that every aspect of it
(such as the name, shape, colour, label and copy) provide sufficient stimulation to attract the
consumer’s attention and get fixed in his or her memory.

Case study

Papi Enterprise limited

Papi Enterprise produces and sells dairy products, such as cheese, milk, butter and milk
shakes. The firm is located in Mabopane, Pretoria and its major customers are located in
Gauteng, North West, Mpumalanga and Limpopo. Papi Enterprise plans to market their
118products on local radio stations and in local newspapers. The company also engages in
personal selling, using catalogues at the Soshanguve annual soccer tournament. The
enterprise is the main sponsor of the soccer tournament and puts up banners with its branding
and products. The company recently conducted a few surveys in tertiary institutions in South
Africa on the extent of students’ knowledge of healthy eating habits. Papi Enterprise
constantly endeavours to manage the introduction of its products’ packaging and branding. In
order to constantly improve the quality of its products and service, the company also takes it
seriously to get feedback and comments from its suppliers and customers.

Source: Adapted from: Nieuwenhuizen (2014)

Activity 1
Identify the marketing activities in the scenario above to show that you understand the
marketing function in the organisation.

7.4.2 Place (distribution)

A place in marketing refers to the physical or virtual locations where products or services are
produced and made available where customers want them. Place therefore refers to the
movement of the product or service from the producer to the customer. This movement is
referred to as a distribution channel and is the system used to get the products or services
from the producer to the final consumer. Therefore a decision has to be made on the
distribution channel to be used.

There are businesses that help to get the product to the final customers, like wholesalers and
retailers. We call them the middlemen or intermediaries. A middleman or intermediary is a
business that helps move the product or service from the producer to the customer through a
distribution channel or marketing channel.

A distribution channel is a system of relationships established to guide the movement of a

product. A distribution channel can either be direct or indirect. In a direct channel, there is no
intermediary – the product goes directly from producer to user. In an indirect channel there
are one or more intermediaries between producer and user.

Figure 7.2 shows the direct and indirect channels of distribution. In indirect channels of
distribution, it shows a channel with two or three stages of intermediaries. Small businesses
that produce products with a geographically large market can use this type of distribution.
Small businesses that use a single distribution channel or direct distribution may switch to
dual distribution (more than one channel of distribution).

Figure 7.2 Distribution channel

Source: Longenecker, Petty, Palish & Hoy 2014

7.4.3 Price decision

A price can be defined as the amount that consumers are prepared to pay for a product or
service. This amount is directly related to the perceived value that the product or service has
for the customer. The value of a product or service is determined by 119its benefit to the
consumer, and the sacrifice required in terms of money and effort to obtain the product. For
the small business owner, the price helps to influence how much of a product the customer
purchases and it also influences whether the product will be profitable.

The following factors could affect the price of a product or a service:

Costs, which include the cost of the goods purchased

Price charged by competitor
Type of product or service
Image that you want to attach to the product or business
Supply and demand
Profit expectations
Environmental factors
The objective of pricing is to ensure that the business generates the sales needed to achieve its
overall aims. This requires that you identify three broad areas related to objectives: 120

Increasing or maximising profits: the aim is to make the most profit possible in the
long term.
Increasing market share: the owner can do this by trying to get a bigger percentage of
the customers than the competitors: the aim is to strengthen one’s position in the
market relative to that of competitors.
Increasing sales volume: the aim here is to increase the overall sales figure.

After you have analysed factors affecting price and have established what you want to
achieve through pricing, you can set the basic price level for the products or services. In order
to achieve a basic price, you need to consider three areas: cost-orientated pricing, customer-
oriented price and pricing relative to competition.

Cost-oriented pricing

Some small businesses determine their basic price according to their costs. The aim is to set
the price high enough to cover the costs of producing or acquiring the product or service and
still make profit. There are two types of cost if one is to use cost as a basis for pricing: fixed
costs and variable costs.

Fixed costs: costs that remain constant with any increase or decrease in production,
e.g. salaries and wages, rentals and equipment costs.
Variable costs: those costs that increase proportionately with the amount of products
produced, e.g. costs of materials and components.

The three cost-oriented methods for setting a basic price are:

1. Cost-plus pricing

The owner determines the cost of the product and then adds a set percentage to the cost for
the profit margin. In setting a price you have to first determine your direct and indirect costs
as your price should at least cover all the costs plus allow for profit.
Price = total cost profit margin, where total cost = variable cost + fixed cost In cost-plus
pricing setting a price is based on the average unit costs and planned mark-up percentage.
The following formula is used:
Selling price = average unit cost/1 mark-up percentage

(Nieuwenhuizen 2014)

Activity 2

Assume that you are a manufacturer of steel braais. After some financial analysis you find the
following:
Variable costs: R240
Fixed costs: R60 000
Expected sales: 6 000 braais

a. Calculate the unit cost for each braai.

b. Assume that you want a profit margin of 20% (also called the mark-up). Calculate
how much you will charge the customers and what profit you will make per unit.

2. Rate of return pricing

The idea is to set a price that gives you a certain rate of return on your total investment. This
method gives you a certain profit margin per item sold.

3. Breakeven analysis

This method shows you how many units you will have to sell in order to cover your costs. At
the breakeven point, the money brought in exactly equals the total costs to make that number
of units. Anything sold over that amount at that price means that the business makes money,
and any sales of units less than that amount at that price means that the business is losing
money. This type of pricing is therefore known as breakeven analysis. In the past breakeven
analysis did not consider an organisation’s return on investment. However, businesses now
take breakeven analysis further and think about profit planning as well. Businesses use the
following formulae to calculate the breakeven:

Breakeven point (units) = total fixed costs

1 – variable costs (per unit)

Breakeven point (rand sales) = total fixed costs

variable costs (per unit)/price

Customer-oriented price

The owner sets the price that is perceived by customers to be of value relative to what they
get for the price.

Methods of customer-oriented pricing are:

Backward pricing

The owner estimates prices that customers will be willing to pay for a product. The owner
can ascertain this by doing market research, using surveys or focus groups. Once you have
these estimates, you work backwards to calculate the price at which you will sell to your
distributors so that the price plus the distributors’ margin equals the price customers expect to
pay.

Prestige pricing

Here the owner sets a high price assuming that customers think a high price means high
quality. One can use this method when one’s target market is high-income earners. 122
 Odd-number pricing

This refers to the method of using prices ending in odd numbers or less than a round figure,
e.g. R4,99 instead of R5,00. Customers may think that R4,99 is much lower than R5,00
because it seems closer to R4,00 than R5,00. Again, owners use this method to force the
salespeople on the till to ring up the sale on the cash register and give customers change.

Price lines

This is a technique that sets a range of several distinct merchandise price levels. The method
involves using a few prices for each of your product lines. One can use this method to
indicate the levels of quality within your product line (economy line, value line and high-
quality line). Customers have a choice in this method, e.g. a store selling paint can stock three
lines: an economy paint priced at R49,99 for six litres, a medium-priced line at R69,99 for six
litres and a high-quality-priced paint line at R89,99 for six litres.

Skimming price

This is a technique that sets very high prices for a limited period before reducing them to
more competitive levels. This strategy assumes that certain customers will pay a higher price
because they view a product as a prestige item.

Penetration price

This technique is based on setting lower than normal prices to hasten market acceptance of a
product or service, or to increase market share. This method can sometimes discourage new
competitors from entering the market. Businesses that use this method sacrifice some profit
margin to achieve market penetration. One can follow this method if one does not have too
many potential competitors and if customers do not accept high prices easily.

Bundle price

This is a technique where the owner combines two or more products in a single price, e.g. if
you own a bottle store, you might sell a bottle of red wine and a bottle of white wine at a set
price for both. Or you sell a bottle of red wine with a wine glass and a copy of a wine guide
for a set price. The aim is to provide the customer with a high-value product at a better price
than if he were to buy the products individually.

Pricing relative to competition

Another approach to setting your price level is to establish the level compared with
competing products and services. The following options can be used:

Pricing above the market

This means pricing your products higher than similar products sold by competitors. You need
to justify the high price in the customer’s mind by offering better quality or up-market image
for the product. 123

Pricing below the market

This means pricing below similar products that are offered by competitors in order to
compensate for the lower profit through higher sales volume.

Pricing at the market

This means pricing to match your competitors’ prices.

7.4.4 Promotion strategy

If you want people to buy what you are selling, you need to inform them that you are open for
business, what you have to offer and why they should buy from you. They must get the
message through promotion.

Promotion reinforces the differentiation and positioning of the marketing strategy. It is the
marketing communications that inform and persuade consumers to buy from you. The
promotion strategy involves the seller’s communication of information to the potential target
market and relevant others to influence their attitudes and buying behaviour. Small business
owners must know who their markets are and which media would be the best to reach them
before they decide on the best combination of promotional mix elements.

The three generally accepted communication objectives for promotion are:

To inform the target customer about your product to generate awareness

To persuade customers to take some specific action that will lead to sales for you
To remind customers about your products

A promotional mix consists of methods that can be considered by small business owners.
These methods are the following:

a. Advertising: a paid form of non-personal communication about a product, service or

idea directed at a large target audience, e.g. radio, TV, newspapers, magazines and the
internet.
b. Sales promotions: marketing activities designed to act as incentives and provide
extra value to the customer, usually for a limited period of time. Such incentives
include coupons, free samples, prizes, sweepstakes, etc.
c. Publicity: refers to public information about the company. It is a form of non-
personal communication and is not directly paid for. A good publicity programme
requires regular contacts with the news media. Publicity is not always free; the return
on a relatively small investment can be substantial.
d. Personal selling: involves interpersonal communications between the buyer and
seller but the aim is to persuade the buyer to make a purchase. It involves direct
contact with customers.

a. Public relations: assists organisations in communicating better with their customers,

stakeholders, employees, suppliers and community. Organisations must create a
favourable attitude and positive image of themselves. This is the management task
that aims to build good relations with the public.
b. Sponsorship: an organisation supporting an event or activity, either financially or
through provision of their products and services.
c. Direct marketing: involves communicating directly with customers to encourage a
response, e.g. direct mail, telemarketing, direct response advertising and online
shopping services.
d. E-communication: involves reaching the consumer by using new technology that
will enable the business to reach the customer with greater impact and increasing
frequency.

a. Location of customers. If customers are widely scattered over a broad geographical

area, advertising may be the best option, otherwise use personal selling.
b. Characteristics of the target market. The small business marketer must understand
and define his or her target market. Once identified, this targeted market will
influence all decisions of the business regarding the particular market.
c. Nature of the product. The nature of the product will determine the best method for
its marketing methods, e.g. a business that sells a low-priced product will advertise in
a local community newspaper that is available free of charge.
d. Available budget. The selection of advertising media will be influenced by the
availability of funds.
e. Stage in the product life cycle. The promotional mix changes as the product goes
through its life cycles, e.g. during the introductory stage, the aim is to make customers
aware of the product and so extensive advertising is required to inform the target
audience about the product.

a. Perform a situation analysis. Analyse the organisation in terms of what promotion is

currently being done, what competitors are doing and what industry trends are. The
organisation will then be able to do a SWOT analysis (analysis of strengths,
weaknesses, opportunities and threats) and determine its plans.
b. Determine the objective of the promotion. The owner must decide on the objective
that he or she wants to achieve with promotion. Communication objectives are: to
inform customers of the product or service, location, and specials in the business; to
persuade customers to buy the product; and to remind customers of the product.
c. Decide on the target audience. Once you know what you want to achieve, you can
decide on a specific group and target your communication at them. Determine what
each target audience already knows about the business so that you can know how to
improve their existing knowledge. 125
d. Decide on the message you want to convey. Once you know your target audience,
you have to decide on the message that you want to convey. The content of the
message is important because you have to show why your product is different; the
benefits that you offer to the customer and why the customer should rather buy your
product and not the competitor’s product.
e. Select the promotion mix elements. After selecting the message the business can
decide on the promotional mix to deliver that message. The promotional mix consists
of advertising, sales promotion, publicity, personal selling, public relations,
sponsorship, direct marketing and e-communication (see Section 7.4.4.1.).
 f. Determine the promotion budget. The business now has to set the promotion budget
at levels that maximise profitability and return on investment. The organisation should
ensure that the budget is allocated to different promotional mix elements. This
includes: spending what you can afford, spending what competitors are spending, and
spending a percentage of last year’s sales.
g. Develop the promotion campaign. First determine the specifics of the campaign
including media to be used, expenditure and time schedule; secondly, ensure that
these specifics are assigned to people for successful implementation; thirdly, ensure
effective performance of the promotion activities.
h. Evaluate the results. The plan should indicate how the campaign must be controlled
and performance evaluated.

Small businesses that fail to recognise how the internet and social media are changing the
way people communicate and process information are not likely to prosper in business. We
will first look at creating and managing websites and then discuss promotional opportunities
offered by social media.

There are three critical start-up tasks that are related to the promotional success of a website:

a. Creating and registering a site name. The domain name system (DNS) allows users
to find their way on the internet. Popular domain designations are .com; .net; .biz;
.info; .org; etc. Domain names have a minimum of three and maximum of 63
characters preceding the designation. They begin with a letter or number and end with
a letter or number. It is important to follow the rules when you register to avoid
problems. Most small businesses prefer to use their business name as their online
identity.
b. Building a user-friendly website. Good first impressions are important and they last.
Most websites fail to retain customers, mostly because of slow downloads. Online
shoppers are impatient and slide inconvenience sends them away.
c. Promoting the website. The web address can be promoted to existing customers and
prospective customers including the URL on print promotions, business cards,
letterhead and packaging. It can be promoted through radio campaigns or through
direct mail to customers. 126

Any communication from a business must be carefully planned and controlled to support the
objectives of the business. This means that even blogging should be formally managed by the
business to be in accordance with its overall strategy. Business owners must always keep
their website fresh; review it frequently to remove outdated material, introduce new links,
experiment with new formats and update the website to keep it alive. Supply contact
information by ensuring that visitors know who you are and how to get in touch with you.

Social media refers to social networking and microblogging websites as well as other means
of online communication where users share personal messages, information, videos and other
content. Social networking refers to interacting online with other users who share common
interests. Microblogging involves posting short messages or photos on a blog or social
networking site by using cellphones or instant messaging. Smartphones, tablets and other
mobile devices help business owners to find new ways of reaching customers and prospects.
Entrepreneurs can reach customers through online communication.

Social networking sites

There are a number of social networks available and accessible to small businesses to join
communities, make contacts, introduce products and services, build customer relationships
and promote business. The business owners must decide which network to use that will
connect them with current and prospective customers and will help them to discover their
competitors. Examples of these networks are Facebook, Twitter, LinkedIn, Viadeo, YouTube,
etc.

Image 7.1 Social networks

Facebook. This is a social networking website launched in February 2004, operated

and privately owned by Facebook Inc. Users can add people as friends and send them
messages and update their personal profiles to notify friends about themselves.
127Anyone over the age of 13 can become a Facebook user. It is a smart move for a
business to build a Facebook page.
Twitter. This is a social networking and microblogging service that enables its users
to send and read messages known as tweets. Tweets are text-based posts of up to 140
characters displayed on the author’s profile page and delivered to the author’s
subscribers who are known as followers. The sender can restrict delivery to those in
their circle of friends or by default allow open access. The messages are public and
you can decide what sort of messages you want to receive.
 LinkedIn: This is a business-oriented social networking site that was launched in
May 2003 and mainly used for professional networking. LinkedIn provides members
a professional group with excellent professional information and assistance.
YouTube: This is a video-sharing website on which users can upload, share and view
videos. It was created in February 2005 and uses Adobe Flash Player video
technology to display a wide variety of user-generated video content, including movie
clips, TV clips and music videos. Unregistered users can watch the videos while
registered users are permitted to upload an unlimited number of videos.

Direct email promotion

Email is used to deliver a company’s message. Many companies use this media since it is a
low-cost way to pinpoint customers and achieve high response rates.

Image 7.2 Email

Source: http://www.shutterstock.com

Hyperlink

This facility enables a user to click on a word, phrase or image to access another part of a
document or website, or a new document or website. It is a promotional tool that 128enables
readers to move from one website to another that may have information that relates to their
original search or complements what the original website is offering, e.g.
http://www.facebook.com.

Blogs
The name “blog” originates from a combination of the words “web” and “log”. Weblog then
became blog. A blog is a live website that any user can edit quickly with little or no technical
skill. This is an online journal that offers a writer’s experiences, opinion, etc. Bloggers often
include hyperlinks to complement or supplement the ideas they have presented. The website
allows readers to leave comments.

Mobile devices

This is a generic term used to refer to a variety of wireless handheld computing devices that
allow people to access information from wherever they are. For a business owner who likes
to promote his business on mobile devices, the website may need to be reformatted to fit the
smaller screens of portable or handheld devices.

Image 7.3 Website design

Apps

Image 7.4 Software application

App is short for application. It is an abbreviation for a software application for business or
entertainment. Small businesses can use apps to make sure that their customers can reach
them. Owners must use this method of communication to compete and promote their
companies.

7.5 Sales and selling skills

No business can survive without sales. The sales process is the completion of commercial
activity with the transferral of a product or service in exchange for money or other
compensation.

7.5.1 Different ways of selling a product or service in the market

The business can sell its products or services in different ways to the market through:

Direct sales: involves face-to-face contact during the selling process.

Agency-based sales: done by outsourcing the product or service through a third
party.
Consultative selling: the salesperson becomes the consultant for those buying goods
or services.
Telemarketing: selling done manually over the phone or through an automated voice
response system.
Retail: a traditional selling method through stores, outlets or other marketplaces.
 Travelling salesperson: the salesperson goes door-to-door to sell products or services
assigned to him or her.
Request for proposal: the seller approves the proposals of buyers when the number
of buyers is high and the product cannot be marketed through other distribution
channels.
Business-to-business sales: one business becomes the supplier to another business.
Electronic or internet sales: sales done over the internet.

(Van Aardt et al. 2013)

7.5.2 Managing the buyer/seller relationship

The seller must always ensure that he or she manages the sales process professionally to
satisfy the buyer. The relationship between the two has a significant impact on the buying
decision process.

The following factors are important:

Questioning skills. Effective selling is about asking the customers the right questions
at the right time. The seller must ask customers questions at every sales cycle in order
to build a strong relationship and gain customer loyalty.
Planning for sales calls. Salespeople must adequately plan for sales calls as this will
help them to gain customer commitment. This leads to increased market share.
Planning sales calls also improves sales results dramatically. 130
Presentation skills. Good presentation of the product improves sales. Presentation
skills allow salespeople to present a powerful product for customers to buy.
Gaining commitment. Salespeople gain customer commitment through effective
selling and willingness to take action to improve the sales process.

7.5.3 Customer service

There are a number of activities designed to improve customer satisfaction with the product.
Good customer service could improve and change customer perception about the business
(Van Aardt et al. 2013).

High-touch customer service. This is observed at high-end stores where customers

are warmly welcomed and approached in a friendly manner, and interest is shown to
entice them to buy a product.
Low-touch customer service. Here customers are not offered any assistance unless
they want to return a faulty item.
Bad-touch customer service. In this case employees are present in the store but are
not helpful or have no authority to help customers.
Inflexible customer service. This is when the customer service person listens to
customers, understands their problems and acknowledges their issues but does
nothing to remedy the situation.
Unfocused customer service. This is experienced when customer service agents are
not trained and read from a script to help customers.
 Invasive customer service. Companies continuously send spam to customers to buy a
product without taking no for an answer. These companies use email spam or
telephone calls to urge customers to buy.
Perfect customer service. This kind of customer service aims at ensuring that every
need or want of each customer is met every time.

Case study

Entrepreneur gets township communities surfing the World Wide Web: the case of Luvuyo Rani

When Luvuyo Rani opened an internet café in Khayelitsha, many people told him he was
mad. Two years later, with customers queueing up to make use of these precious resources,
he has proved his critics wrong. In fact, his internet café in the new Khayelitsha Mall cannot
keep up with customer demand and Rani is looking to expand his business both locally and
around the country. “There is such a high demand for the services we offer here – printing,
emailing, internet access and other services to small businesses – that we are struggling to
keep up,” explains Rani. “Currently we only have 15 PCs available, so during the morning
and afternoon rush you see people queueing up for a free computer. There is a real need to
expand this business further and that is my vision,” he adds. 131

An inspiration to the community, Luvuyo Rani’s story is the ultimate rags-to-riches

entrepreneurial tale. In addition, his business is improving the lives of many people in
Khayelitsha who, without him, would be left to watch the digital age pass them by. “By
opening up communities to the world of computers and the internet we are offering people
the power of education and information, which is priceless,” says Rani, who believes that the
social element of his business is just as important as his own entrepreneurial success. Born
and bred in the Eastern Cape, Rani came to Cape Town in 1996 to study and pursue a career
in teaching. The entrepreneurial seed was always present, however, as Rani had looked up to
his self-employed mother from a young age. “My mom ran a successful shebeen from home
when I was growing up and her flair for business had a big influence on me,” says Rani. After
graduating from the Cape Peninsula University of Technology with a National Diploma in
Commercial Education and a BTech in Commercial Education, Rani started teaching
accounting and entrepreneurship at a Khayelitsha high school while continuing to study a
BTech in Business Administration. After three years he decided to take the risk and resigned
to start his business – Silulo Ulutho Technologies – with his brother Lonwabo in 2004. They
started out by selling refurbished computers and soon expanded to include basic IT training
and writing business plans and profiles for local businesses. “From my experience I knew
that many teachers in the area would buy computers, only for them to become ornaments on
their desks. There is a massive IT skills gap in township communities, which needs to be
addressed if we want to reduce unemployment in this country. Last year we expanded the
business and started a school that provides computer training to the public – 12 hours a day,
seven days a week – to help bridge this gap a little bit,” explains Rani. In the school’s first
year 100 students completed the six-month course and last year 140 people enrolled. Rani
and his partners are struggling to keep up with the demand with only 15 computers available
for teaching purposes – hence the long hours.

But Rani can be proud that most of the 100 people from last year are now working. “I am
really happy that this business is having an impact. We follow up with past students and find
that most of them are now working and putting their new skills to good use,” he says. In 2006
Rani was looking to improve his own skills and enrolled in the Associate in Management
(AIM) programme at the UCT GSB on a full Institute of Directors (IoD) bursary to add some
concrete business know-how to his natural entrepreneurial flair. He maintains that AIM
prepared him to grow his business with confidence. “The AIM experience shaped me a lot,”
says Rani. “I was exposed to the full business environment and can now plan my business
strategy with confidence.” Rani adds that the three arms of Silulo Ulutho Technologies –
training, retail and business consulting – are now fully integrated and operating successfully,
thanks to his improved business knowledge. Silulo Ulutho Technologies now employs a total
of ten people and Rani believes that this number will grow. “This year we plan to open one or
two satellite shops in the Khayelitsha area and I also want to open two more internet cafés –
one in Queenstown and another in Mtatha in the Eastern Cape,” says Rani, who is passionate
about increasing internet access and computer literacy in impoverished areas.

Source: Adapted from: Herrington, Key & Key 2009

Questions

1. Rani is looking to expand his business both locally and around the country. As a
business consultant, advise Rani on the social network sites that are available to
promote his business.
2. Explain in detail the three products Silulo Ulutho Technologies is offering to the
market. 132
3. “There is such a high demand for the services we offer here – printing, emailing,
internet access and other services to small businesses – that we are struggling to keep
up,” explains Rani. Highlight to Rani on the different activities he can design to
improve customer satisfaction with the product.

7.6 Summary
For a rapidly growing number of small businesses, marketing a business product is the key to
future success. Marketing positions and popularises the value of a product or a service in the
market. This endeavour aims for the outcome of an emotional bond between a customer and a
product/service and subsequently brand loyalty, repeat business, competitive advantage,
profitability and growth. In all of these, the four Ps (product, place, price and promotion) play
a crucial role, albeit in their traditional mode of operation.

Questions

1. Define the concept small business marketing.

2. Briefly discuss the four purposes of marketing.
3. Describe the five criteria that should be taken into consideration when selecting a
target market.
4. The marketing mix consists of a set of four marketing tools or instruments. Identify
these four marketing tools.
5. List the five factors affecting pricing.
 1. Although entrepreneurs are passionate about their products or services, they
sometimes forget that customers buy products because of what they stand to benefit
from them. As long as entrepreneurs understand why customers buy their products,
they will start to have a ________.
1. marketing strategy
2. marketing plan
3. marketing mix
4. business plan
2. What is the first question that an entrepreneur should ask when starting a business?
1. Where can I start my business?
2. With whom should I start my business?
3. Who will benefit from my product or my service?
4. What products do I have that I can sell?
3. The term ________ refers to goods or services offered by the company to the target
market to satisfy a need or want.
1. price 133
2. place
3. product
4. promotion
4. The ________ strategy involves the seller’s communication of information to the
potential target market and relevant others to influence their attitudes and buying
behaviour.
1. marketing
2. promotion
3. pricing
4. product
5. Which pricing method does a business owner use when he or she sets a high price
assuming that customers will think that a high price means high quality?
1. skimming price
2. backward price
3. price lines
4. prestige price

Recommended reading
Wiid, J. 2014. Strategic marketing. Cape Town. Juta.

Klopper, H.B. & North, E. 2015. Brand management. Cape Town: Pearson Education South
Africa.

References
Amstrong, G. & Kotler, P. 2012. Marketing. An introduction. Global edition, 11th ed. Upper
Saddle River, N.J: Pearson.

Bendeman, H., Booysen, K., Clarence, W., Massyn, C., Moos, M, Naidoo, P. et al. 2014.
Entrepreneurship & new venture management, 5th ed. Cape Town. Oxford University Press.

Cant, M. 2013. Marketing: an introduction. 2nd ed. Cape Town. Juta.

Herrington, M., Key, J. & Key, P. 2009. Global Entrepreneurship Monitor: South African
Report. Cape Town: UCT Centre for Innovation and Entrepreneurship, p.18.

Nieuwenhuizen, C. 2014. Basics of entrepreneurship, 3rd ed. Cape Town: Juta.

Sifile L. 2016. -owned vodka empire on the rise. Available at:

http://www.sowetanlive.co.za/news/2016/04/06/sa-s-first-black-owned-vodka-empire-on-the-
rise (accessed on 01/02/2016).

Van Aardt, I., Barros, M., Clarence, W., Janse Van Rensburg, L., Radipere, S. et al. 2013.
Principles of entrepreneurship and small business management. Cape Town: Oxford
University Press.
 8
Operations management
Learning outcomes

After studying this chapter, you should be able to do the following:

Explain the importance of operations planning

Be able to plan the operations of a start-up or an operating business venture
Make appropriate decisions regarding the choice of where to locate your business
Make appropriate decisions regarding the facilities required for a business
Be able to determine the equipment required to operate a business
Be able to determine the raw materials inputs required for the operations of a business
Explain the product or service production processes
Be able to determine or predict the capacity of a business

Key terms

Location factors
Facilities
Equipment
Infrastructure
Ownership
Processes
Capacity

Success story

BBL Media Company

BBL Media Company was formed in 2015 as a merger between Entle Interiors (interior
decorating company founded by Busisiwe Buyeye) and GATE Business TV (photography
and videography company founded by Bongane Madonsela). BBL Media’s mission is to
provide integrated marketing and communication solutions through various online platforms.
They design projects that drive sales and build client relations for both big corporates and
small to medium enterprises (SMEs). 136

The two cofounders met at the Raymond Ackerman Academy for Entrepreneurial
Development at the beginning of 2015. With the marketing and sales management, project
management and corporate communications skills and experience acquired by them in the
five years prior to forming BBL Media, clients are assured of a professional team.

BBL Media is a growing consultancy built on a close and firmly cemented working
relationship between the partners and clients. In the few months it has been operational, the
company has already undertaken projects in corporate communications, which include
videography, website development and social media management for both big corporates and
small companies. The feedback received has been excellent. One of the satisfied customers is
the University of Johannesburg’s Centre for Small Business Development (CSBD). A
number of other projects are on the company’s books already.

Asked about the future of BBL, Mr Madonsela says he “can only see a big BBL” since he is a
“big picture person”. Ms Buyeye also adds that BBL “is the future”. Why? “Because it gets
the job done, on time and on budget, without fail”.

8.1 Introduction
The operations function of a business is very important because it ensures that the product or
service is produced and gets to the consumers. It ensures that the inputs to the production
process are procured, the production process takes place in an efficient way, and the products
and services produced are of the required standard or quality. It is important to note that
without operations, a business cannot exist.

In this chapter we will approach operations management from a business start-up point of
view. We will study the different operations decisions the entrepreneur needs to make to
establish his or her business. The critical operational decisions needed to run a business
venture successfully are also identified and discussed. In addition, important information
required to ensure effective operations is analysed. This whole chapter can be viewed as an
operations or a production plan. The words operations and production are used
interchangeably in this chapter.

8.2 Operations management

It should be pointed out from the onset that both goods and services are produced or
manufactured. What is operations and what is production? Operations is a process where a set
of tasks or jobs is performed to produce an output. Production (producing) also consists of
tasks performed that will result in an output. In business, these outputs are goods and
services.

Operations management refers to the planning and control of a conversion process that
includes bringing together inputs (such as raw materials, equipment technology and labour)
and turning these into outputs (products and services that the business produces) (Petty,
Palich, Hoy & Longenecker 2012). An operations process is required whether it produces a
tangible product such as a laptop or an intangible one such as dry cleaning or operating a
school. 137

The operations/production decisions that a business has to make answer some of the
following questions: where are we going to locate our business or from where are we going to
operate; what type of premises and equipment will we need to be able to produce the goods
and services we are planning to produce; how are we going to produce the goods and services
(the production processes) and the quantities that we need to produce? If the business is
already operational, the same questions still apply, because the owner will still have to
ascertain if current operations are optimum or if changes have to be planned or implemented
in future. We start off by discussing the factors that need to be considered when deciding
where to locate the business.
8.3 Location factors
If an entrepreneur plans to establish a new venture, he or she has to decide and indicate where
the business will be located. Location is chosen primarily for its strategic contribution to the
business. On many occasions the first choice for many new businesses is the entrepreneur’s
home town because it offers convenience and a familiar setting where several important
networks are already in place (Katz & Green 2014). To decide whether a specific location is
good for one’s business one has to consider the nature of the business, the business
philosophy, the amount of money the business can afford to budget for the location, and the
marketing niche chosen.

Location choice is dependent mainly on the factors of production, among a host of others
such as availability of raw materials or proximity of the market. Some of these key factors for
determining a good business location are premises (such as site availability and costs, and
proximity of customers), resource availability (raw materials, labour and entrepreneurship),
and business environmental conditions, such as government policies or security (Petty et al.
2012; Dorf & Byers 2008). Other location considerations include population growth or
decline and income levels (Katz & Green 2014). Closely related to location are the business
premises or facilities from where to operate. These will now be discussed.

8.4 Business premises (facilities)

Business premises are an area or place that an entrepreneur designates from where to carry
out business operations. The premises usually represent the physical location of the business
in terms of the land and buildings occupied by that business. A business can have a single
location or multiple locations. This may imply different production and distribution premises
in a single location or multiple geographic locations. Premises can be in the form of a
building, such as factories, an open shed (for a car wash) or an open yard for agricultural
implements or timber products. Premises can also be represented by a caravan or office block
where business is being conducted from. Even if the businesses are home based, the
suitability of the premises still has to be ascertained. In today’s world of ecommerce, the
virtual office (web-based) locations still need to take into account the same production plan
decisions. And as pointed out by Petty et al. (2012), the internet, for example, blurs
geographic boundaries and expands a small company’s reach to customers almost anywhere.

8.4.1 Adequacy and suitability

Premises have to be of the right size (adequate space), price (purchase or rentals) and suitable
for the business activities that are planned to take place there. Suitability also involves factors
such as state of repair (physical condition), and accessibility to infrastructure such as
electricity, water and telecommunications. The absence or limits in access to these critical
business elements may render the location unsuitable.

Current and future size and suitability of premises should be considered. Adequacy is in terms
of whether the premises will be able to accommodate raw materials, equipment and processes
and finished goods. The premises should also be able to accommodate the customer traffic,
including parking.
The size of the premises is a measure of capacity, measured in terms of square metres (floor
space) or cubic metres (floor space plus height). The capacity of a conference centre would
be measured in terms of the number of conference halls it has and the volume (or seating
capacity) each of the halls can hold. Size enables the entrepreneur to calculate production
levels, a critical element in any business.

The condition of the premises also represents the suitability of the premises. The premises
might be run down, may need renovations or improvements. If the premises are owned, the
costs of the improvements should be calculated and decisions taken on whether the
improvements have to be made now or in future. If buildings are to be bought, the price
should take into account the condition of the building. If the premises are to be rented, it
should be agreed as to who will renovate or repair the premises and who will pay the bill.

8.4.2 Ownership

Premises can be owned or rented. They may be in existence (owned/leased) or still to be

bought, constructed or still to be leased. If premises are owned, they form part of the owner’s
assets (equity) and if they are rented or leased, the business pays rent to the owner. This
becomes an operating expense for the business and affects the business’s cash flow.

If the premises are leased, a lease agreement has to be signed between the business
(entrepreneur) as the lessee and the owner (lessor). The lease agreement should outline the
lease period, rental amounts and the lease obligations of both the lessee and lessor. The
conditions for termination and the notice periods should be clearly stated. It should also state
whether the lease is renewable or not.

It is important for the entrepreneur to have reasonably long lease periods depending on the
nature of the business. Long leases are good for the business especially if the location is good
and rents are reasonable. On the other hand, an entrepreneur should remember not to tie
himself to a long lease, since business circumstances might change, making either the rental
amounts higher or the location unsuitable.

Owning premises is preferable, because premises represent an asset. Such an asset can be
used as collateral security in case the entrepreneur wants to raise money at the bank. They
can also be leased out to generate income for the entrepreneur. Ownership also saves the
business from paying rent, and therefore improves cash flows. 139

Leasing is usually lower in cash outlay and the only feasible choice for a new business.
However, in leasing the renovations you can do are limited, and leases tend to get higher with
each renewal of the contract. The landlord may also choose not to renew the lease, forcing
you to move to another location (Katz & Green 2014).

8.5 Equipment
Three major decisions have to be made about equipment: the type of equipment needed, the
source and establishing the capacity (size) of the equipment. The term equipment will be used
to refer to plant and machinery as well.

8.5.1 Equipment types

The entrepreneur should identify the type of equipment that will be needed to start business
operations. Equipment identification means being able to assess what type of plant and
machinery is needed to produce the products and services.

8.5.2 Sources of equipment and costs

Suppliers can be local or foreign. Nowadays, the internet can make searching and comparing
sources and prices easier. In determining the conditions of sale of the equipment, the
entrepreneur should consider the following factors about suppliers (Dhliwayo 2013):

Does the supplier deliver (transport) the equipment to the premises?

Does the supplier provide guarantees?
Does the supplier install, especially plant and machinery, and at whose cost?
Who is responsible for maintenance?

The entrepreneur should bear in mind that the plant and equipment may be bought new or
used. Either decision has its advantages and disadvantages. Plant and equipment can also be
bought or leased and alternatively leased to buy.

8.5.3 Equipment capacity

Machine capacity refers to the quantities a machine can produce. This is also a function of the
rate of production. Capacity is negatively affected by production bottle-necks. It is important
to relate equipment/machine capacity to the demand side of the business. Spare capacity may
be needed if there are potential market developments. Production decisions should therefore
be planned in conjunction with market considerations. This will help solve either capacity
underutilisation or overutilisation.

The product demand levels should be taken into account when determining equipment
size/capacity. Buying equipment with higher capacity that will not be used does not make
business sense. Idle capacity is an unnecessary expense to the business (see Section 8.10.1).
140

8.6 Raw materials (inventory purchasing)

Purchasing constitutes a key part of operations management for most small businesses. This
is because the quality of the finished goods depends on the quality of the raw materials or
components used (Petty et al. 2012). The purchasing plan does not include the acquisition
(purchasing) of equipment. The difference between the purchasing of equipment and that of
raw materials is that the former is usually one-off transaction while the latter is frequent and
ongoing.

Raw materials (inventory) can be in the form of finished goods such as the stock that is
bought by the wholesaler or retailer for sale or the raw materials bought by a manufacturer
for further processing, or the work-in-process, which is semiprocessed goods. Other raw
materials purchasing decisions would include selecting good suppliers whose service is
reliable and flexible (on time and can meet quantities demanded). It is wiser to have a number
of suppliers to reduce dependency and to have suppliers who can bend backwards to meet
your requirements. This will ensure that at all times you have adequate inventory to meet
your customer requirements. This decision, which is concerned with the optimum acquisition,
control and use of materials needed, and you have the flow of goods and services, is usually
termed materials management.

Inventory decisions in operations determine what to order, how much and when to order. For
example, the economic order quantity (EOQ) is calculated to find out the order quantity that
minimises the total holding and ordering costs. Inventory control systems should be put in
place so that the different types of inventory and storage are thoroughly planned.

8.7 The administration (human resources)

The production process involves manpower as well as management and leadership. The
entrepreneur has to select (recruit) skilled and qualified employees to execute the production
function. The quantity or number of employees is determined by the duties to be performed.
Job descriptions are therefore important for they enable the entrepreneur to outline the duties
to be performed, the skills needed as well as to determine the numbers to be employed.
Employees may be employed on a full-time or part-time basis. They can also be outsourced.

In assessing the quality of an employee, education, skills, experience and attitude have to be
taken into account. Better qualified and skilled employees tend to be more productive, but
they also tend to cost more. The entrepreneur should also consider training and developing
less qualified employees who may be affordable to hire, especially when the business is
starting and cannot afford higher salaries.

Employees have to be recruited professionally irrespective of the business size. The

entrepreneur has to follow all relevant labour legislation such as the drawing up of
employment contracts and meeting minimum remuneration levels. This should apply to all
employees, be they family or friends. Failure to do so may result in lower productivity or
litigation.

8.8 The production process

The production process comprises a system. In its simple form, the system comprises
141three stages: inputs, processes and outputs. An example of these stages is shown in Figure
8.1.

Figure 8.1 Production systems

The production process starts with the input of items such as raw materials, labour and
information into the process. The inputs then undergo a transformation process through
product designs and production processes into the final outputs, which are goods and
services. The output stage should be considered as that point where the final product leaves
the premises for delivery to the customer or that point where the customer exits the service
encounter. A production process usually follows a sequence (steps). For example, in visiting
the hospital for treatment the following steps may be followed: (Step 1) making an
appointment; (Step 2) presenting oneself at the reception; (Step 3) consultation with the
doctor; (Step 4) tests; (Step 5) consultation with the doctor; (Step 6) dispensary; (Step 7)
payment at cashier, and (Step 8) leave for home.

Why should an entrepreneur understand the production process? This is important in order to
eliminate any step in the process that does not add value to the production of the product or
service. For example, delays in transportation and processing are identified and at times
processes are combined in order to simplify the entire operation.

The main aim of the process design is to minimise wastage from the following:

Raw materials spillage or damages

Manpower and materials movement from one station to the other (reduce movement)
Idle or downtime of machines
Defects on products or service errors 142

Downtime of machinery may result from breakdown due to poor servicing schedules or age.
Process decisions include the type of equipment and technology, process flows, facility
layout, job design and workforce policies. These processes are normally long range; it is
therefore important that they be designed in relation to the long-term strategic posture of the
business and the available capacities of the inputs (Schroeder 2008).
8.8.1 Production methods

There are four main production methods (Chase, Jacobs & Aquilano 2006), namely job shop
production, batch production, mass production and continuous flow. The entrepreneur should
decide which method best suits the nature of his or her business. The methods to be adopted
should be planned in advance before implementation. Production methods and their
differences will now be discussed.

This involves the production of single, individual products at a time. The one-at-a-time
production process makes it labour intensive. The product is often produced to customer
specifications or made to order. The products are usually unique and expensive. In this
format, similar equipment or functions are grouped together and the part that is being worked
on travels according to the established sequence of operations, from area to area where the
proper machines are located for each operation (Chase et al. 2006). The machines may then
be shifted to a different production set-up to produce a different set of products (Petty et al.
2012).

Other characteristics include:

High variety of products and low volume

Use of general-purpose machines and facilities arranged into different departments
Highly skilled operators with varied unique skills
Large inventory of materials, tools and parts
Batch job has unique technological requirements

In job shop production, production planning is complicated due to the variety of jobs and the
frequent set-up changes that take place due to the non-standardisation of products or services.

This is when a small quantity of similar products is made (in batches) at regular intervals and
not in a one-off process or a continuous production process. Newspapers and bread are
produced by this method.

The batch production system is suitable

when there are shorter production runs

when plant and machinery are flexible

(Kumar and Suresh 2008) 143

This method has better utilisation of plant and machinery and has the flexibility to process a
number of products. The problem with this method is the downtime when changes are made
in the settings between the different batches. The labour is highly skilled and flexible to make
different products. A batch process uses the process layout.
This is also known as assembly line production. In this system parts or subassembled parts
from one stage of production move in a step-by-step regular flow. The best known example
would be the car assembly line. The machines are arranged using a product layout and all
outputs follow the same route. Production is fast and runs continuously.

Some of the characteristics of this method are the following:

Standardisation of product and process sequence

Large volume of products
Flows of materials, components and parts are continuous and without any
backtracking
Production planning and control are easy

The special-purpose machines have higher production capacities and output rates. The main
constraint is that the interruption or breakdown of one machine will stop the entire production
line. Mass production also requires very high capital investment in plant and facilities.

This involves producing products on a large scale. The difference between this method and
mass production is that the production line is kept running 24/7 to maximise output. The level
of automation is usually very high. An example of this process is a bottling plant. Schroeder
(2008: 55) notes that a continuous process is commonly used to make commodity products,
and as a result production tends to be highly automated, operates at capacity and minimises
total manufacturing costs.

Most businesses do not implement a pure version of any of these process types but rather mix
and match in order to gain the benefits of each (Petty et al. 2012).

8.9 Process layout

Layout refers to the way the equipment or work stations are arranged in the
factory/production facility or how the goods or services are arranged by the business. Layout
normally forms part of the product/service production process and differs depending on what
is being produced.

The interior layout has to be seriously considered, mainly for two reasons: a good design is
needed in order to eliminate unnecessary and excessive employee movement, and secondly,
layout says a lot about who you are to your customers, employees and visitors (Katz & Green
2014).

Katz and Green (2014), and Moore, Petty, Palich and Longenecker (2008) point out that in
production, two main types of layout are used. These are the process layout 144and the
product layout. The process layout is a factory design that groups similar functions or
machines together; the product layout, on the other hand, arranges machines along a
production line in the sequence in which they are used in production. The production line
layout works well in mass production and high-volume manufacturing, while the process
layout approach is more appropriate for low-volume, flexible manufacturing.
In a retail store layout, there is a grid pattern and a free-flow pattern. A grid pattern provides
for good merchandise exposure and simplifies security and cleaning, while a free-flow
pattern is a flexible store layout that is normally appealing and gives customers freedom of
movement. In addition, retailing layout should be planned in such a way that it minimises
pilferage and should be aligned to modern technologies such as closed-circuit television
monitors. It should also maximise net profit per square metre of store space (Chase et al.
2006). A good factory layout should facilitate materials and information flows, and in
services it should facilitate a memorable service encounter.

Case study

Moroka Bakery

Moroka Bakery (Pty) Ltd is located at 21 Main Street, Midway Industrial Park in Soweto and
expects to start operations at the beginning of the coming year. It is owned by brothers Oupa
and Peter Jonas who stay in the area and are well known in the community. The project will
initially produce only bread and later muffins and cakes. There is a big market potential for
these products in the targeted community.

The specific location was chosen due to its centrality and proximity to the market to be
served. It is also easily accessible by road and rail. Midway railway station is only 500 m
away should this mode of transport be considered in future. Raw materials and finished
products can easily be transported to and from the factory. The industrial area is well
connected to water, electricity and telecommunications infrastructure. In addition, the
production operations can easily be supervised by the owner who resides in the area and
operates a grocery shop only 5 km away from the bakery.

The business will be producing mainly bread. Other products such as doughnuts, cakes and
muffins will be added in the second year of operations. Moroka Bakery will stand out from
its competitors due to its outstanding quality. The bread will be unique in that its formula
uses no yeast, fats, sugar or preservatives. The formula used makes the bread very delicious
and it remains fresh for an extended period of time when compared to other brands. The main
raw material for bread making is wheat flour. The other ingredients are water, salt and milk.
Wheat will be sourced from North West Flour and Farmers Corporation. These two
companies are reliable suppliers. They deliver to smaller bakeries who order smaller
quantities while others do not. In addition to the wheat, they also supply salt. Milk is bought
from a number of farmers in the Fochville area who deliver to the factory. The selected
suppliers are reliable, flexible, and offer competitive prices. A one-month buffer stock of raw
materials will be kept in order to maintain independence of operations, absorb variations in
product demand and variation in raw materials delivery and therefore allow flexibility in
production scheduling. The monthly raw materials usage will be in line with the capacity
utilisation of 50 dozen per day.

The factory’s floor size is 100 m2. In addition, the factory comprises three offices of about 6
m2 each. It will be constructed by the company at a value of R120 000 on land valued 145at
R60 000. The land is owned by the company. The land and building are the owners’ equity
contribution to the project. There is adequate parking space for customers, suppliers and
employees. The premises are adequate for now and any future planned expansions.
The product layout process will be used in the bakery. The machines will be arranged along a
production line in the sequence in which they are used in production. This good factory
layout will ensure an efficient production flow process in the way the raw materials and
machines are used, and for those employees involved in the production of the product. The
plant and equipment have capacity to produce 50 dozen loaves of bread per eight-hour day
shift. It can also produce an additional five dozen doughnuts and five dozen muffins in the
same eight-hour shift. The bakery will start off producing only standard loaves of bread.

Source: Adapted from Dhliwayo 2013: 194

Case study questions

1. Discuss the location factors that were considered by the Jonas brothers in locating at
Midway, Soweto.
2. Discuss the factors that the Moroka Bakery considered in selecting their suppliers.
3. Which layout process is used in the making of bread by Moroka Bakery?

8.10 Production planning and scheduling

If production exceeds demand, market development should be embarked on. Where sales
demand exceeds production capacity, methods have to be found to increase capacity. In either
case there is a minimum threshold (breakeven point) that should be met, be it sales or
production, otherwise the business will not survive.

8.10.1 Capacity flexibility

As noted by Chase et al. (2006), capacity flexibility means having the ability to increase or
decrease production levels rapidly or to be able to shift production capacity quickly from one
product or service to another. The flexibility is achieved through flexible plants, processes
and workers, as well as through strategies that use the capacity of other organisations.

In manufacturing, production planning and scheduling procedures are designed to achieve the
orderly, sequential flow of products through a plant at a rate that matches deliveries to
customers. To reach that objective the manufacturing process must be well planned to avoid
production disruptions. Machines and personnel should be utilised efficiently (Petty et al.
2012). Scheduling has to be planned with product demand in mind. Production has to be
matched with market demand.

Though marketing is not one of the responsibilities of operations management, it is important

to match production with marketing as well as to consider the cost implications of the
production decision for the business as a whole. It is also important to avoid overproduction
or underproduction, because of the costs involved. Note the following examples in this regard
(Schroeder 2008):

Overproduction results in the piling up of unsold finished goods and at times raw
materials that costs the business money in terms of storage and maintenance costs.
Cash that could have been used in more productive ways will then be tied up in stock
and this may result in cash flow problems.
 Underproduction causes product shortages and this is not good for the credibility of
the business. Idle capacity or underutilisation of buildings, equipment and labour is a
cost to the business which adds to the inefficiency of the business.
It is advisable always to start with a smaller capacity since capacity can be rented or
outsourced and can be doubled or tripled through “shifts” when the need arises.
Though the consumer defines quality, the operations function is responsible for the
quality of goods and services produced and this requires total organisational support.
Quality should be built into the product at all stages of operations. Standards must be
set, people trained, and product and service inspection methods set – preferably by
those who will produce the product – so that all the quality requirements are met.

8.11 Product and service quality

Quality can be defined as the product and service characteristics that determine its ability to
satisfy stated and implied needs (Petty et al. 2012).

Quality is said to depend on the customer. The quality management efforts of the business
should therefore focus on the needs of the customers since they are the ones who will buy or
not buy the product. Customers’ service needs relate to speed of delivery, friendliness,
respect, empathy, etc., while product attributes could include durability or actual
performance.

8.11.1 Quality control

Quality Control (QC) is a system used to maintain a desired level of quality in product or
service offerings. QC is strictly adhered to through inspections. The control process follows
three phases, namely inspecting the inputs (e.g. raw materials), the process itself (e.g.
equipment downtime) and the outputs (e.g. product performance). These phases are normally
termed “preprocess, concurrent and postprocess controls”.

However, the producer also has to establish a standard for what it expects to produce. For
example, the prevention of defects at source relies on effective feedback systems and
corrective action procedures to be taken to correct the mistakes.

8.11.2 Customer feedback

Feedback is information about how well a production system is achieving its objectives
(Grütter 2010). Customer feedback is critical in product service quality. Since “the customer
is king” and he or she is the one who determines quality, it is important always to get
feedback in terms of the business’s service offerings. This will inform the business about
what it is doing right, what needs to be improved and what the 147customers are expecting
from the business. Without continuously getting customer satisfaction feedback, the business
is doomed.

A company will compete very well with quality goods and services. Without good-quality
goods, a company will not be able to satisfy customer needs. The production of goods and
services of high quality builds customer goodwill, confidence and your reputation as a
manufacturer.
8.12 Comparison of manufacturing and service businesses
The production of goods and the production of services follow a very similar process. The
main distinction is that manufactured goods are physical and can therefore be transported and
stored in anticipation of future demand. In contrast, services are intangible and perishable
(Krajewski & Ritzman 1996; Grütter 2010), and are often produced when the customer is
present. Therefore it is so important that they are produced or offered right the first time.

Table 8.1 Comparison between manufacturing and services

Manufacturing is characterised by: tangible outputs (products); outputs that customers

consume over time; jobs that use less labour and more equipment; little customer contact; no
customer participation in the conversion process (in production); and sophisticated methods
for measuring production activities (Kumar & Suresh 2008).

Service is characterised by intangible outputs: outputs that customers consume immediately;

tasks that use more labour and less equipment; direct consumer contact; and frequent
customer participation in the conversion process (Kumar & Suresh 2008). 148

8.13 Operations management plan checklist

Operations management decisions should focus closely on the following areas:

Location factors
Premises
Equipment
Production methods and processes
Production planning and scheduling
Product and service quality

When operating any type of business, information has to be collected and analysed about
each of these factors. Sound business decisions can only be made based on a thorough
analysis of reliable information. All operations management issues should be taken into
account since, at the end of the day, the quality of the product or service is shaped by the
various decisions the business makes.
8.14 Summary
In this chapter we briefly looked at what operations management is. We emphasised the fact
that there was no difference between the production of services and the production of goods.
We discussed operations management from a business start-up focus where decisions to set
up a business were discussed. These include deciding where to locate a business venture, the
premises, and the equipment needed to produce the goods and services. The other operations
factors discussed include the purchasing (raw materials) factors and the processes of how to
produce the products and services. Quality control issues were also discussed. The production
of quality goods and services is critical since this increases the business success. A distinction
was also made between goods and services.

Questions

1. Discuss the advantage of owning premises as opposed to leasing.

2. What is the main difference between the purchase of equipment and the purchase of
raw materials?
3. Identify the skills an entrepreneur should look for in a prospective employee.
4. Explain the characteristics of the job shop production method.
5. Explain the characteristics of the batch production method.

1. The production system comprises these three stages:

1. Services, feedback and outputs
2. Inputs, processes and feedback 149
3. Outputs, inputs and processes
4. Outputs, processes and products
2. Which one of the following is not part of quality control (QC)?
1. Sales
2. Equipment downtime
3. Performance rewards
4. Complaints
3. Which production system is also known as assembly line production?
1. Job shop
2. Batch
3. Mass
4. Continuous flow
4. Which two production methods require large capital investments in plant and
facilities?
1. Job shop and mass
2. Job shop and continuous flow
3. Mass and continuous flow
4. Job shop and batch
5. If the demand for goods exceeds production levels, the company should
1. increase production capacity.
2. not produce the demanded goods.
 3. always start with a bigger capacity.
4. employ fewer sales people.

References
Chase, R.B., Jacobs, E.R. & Aquilano, N.J. 2006. Operations management for competitive
advantage with global cases, 11th ed. New York. McGraw-Hill/Irwin.

Dhliwayo S. 2013. Business planning and the Business Plan. In Mahadea, D. & Youngleson,
J. (Eds). Entrepreneurship and small business management. Cape Town: Pearson.

Dorf, R.C. & Byers, T.H. 2008. Technology ventures; from idea to enterprise, 2nd ed. New
York: McGraw-Hill.

Grütter, A. 2010. Introduction to operations management: a strategic approach. Cape Town:

Pearson Education.

Katz, J. & Green, R. 2014. Entrepreneurial small business, 4th ed. New York: McGraw-Hill
Education.

Krajewski, L.J. & Ritzman, L.P. 1996. Operations management: strategy and analysis, 4th
edition. Reading, UK: Addison-Wesley.

Kumar, S.A. & Suresh. N. 2008. Production and operations management, 2nd ed. New
Delhi: New Age International (P) Limited.

Moore, C.W., Petty, J.W., Palich, L.E & Longenecker, J.G. 2008. Managing small business:
an entrepreneurial emphasis, 14th ed. Cincinnati: South-Western Cengage Learning.

Petty, J.W., Palich, L.E. Hoy, F. & Longenecker, J.G. 2012. Managing small business: an
entrepreneurial emphasis, 16th ed. London: South-Western Cengage Learning.

Schroeder, R.G. 2008. Operations management: contemporary concepts and cases, 4th ed.
New York: McGraw-Hill/Irwin.
 9
Handling legal issues
Learning outcomes

After studying this chapter, you should be able to do the following:

Demonstrate sufficient knowledge of the process of registering a business in South

Africa
Discuss the different types of business ownership available in South Africa
Familiarise yourself with registration authorities relevant to your business
Understand the fundamentals of small business legislation
Show an awareness of tax obligation for entrepreneurial ventures
Understand intellectual property and its implications for businesses

Key terms

Companies Act
National Small Business Act 102 of 1996
Intellectual property (IP)
South African Revenue Service (SARS)
Forms of business ownership

Opening case study

Managa Funeral Parlour Pty (Ltd)

Sipho Mabunda and Solly Mukwevho are friends and also colleagues at Telkom. After
identifying a business opportunity they decided to start a funeral parlour and registered it as a
private company. Instead of starting from scratch, they bought a share in Gift Neo’s funeral
parlour and renamed the business Managa Funeral Parlour. The areas that they service
include Ga-Motla, Hammanskraal, Lebotloane, Kgomo-Kgomo, Mathibestad, Moeka, Bela
Bela up to the far north (Polokwane) to KwaMhlanga and Tafelkop. Managa Funeral Parlour
has offices in Lebotloane, Bela Bela and Ga-Motla and recently opened another office in
Soshanguve Block G, which is used as the company’s head office. As part of their package
they also offer 30 bottles of still water for the immediate family and 500 bottles of tap water
for the mourners. These water bottles contain the company’s trademark, which is not
registered. They initially had a verbal agreement with Gift Neo’s Funeral Parlour to continue
using the storage in Mabopane as it was built to accommodate the Managa’s market in 152the
geographic areas mentioned. However, the agreement was not part of the purchase deal and
later things did not work out as planned. Consequently the partners had to look for storage
elsewhere.

Like many other small business owners Sipho and Solly did not have enough capital and had
to obtain a loan of R120 000 using individual credit facilities from their respective
commercial banks, finance two cars and further use their salaries to sustain the business. At
the moment they rent storage at Samo Funerals in Mabopane and sometimes at Gift Neo.
They also subcontract tents and rent additional cars as and when required. The demand for
their services is high but limited resources are hindering the profit potential of the business.
They need additional financial resources to finance the growing (but still unprofitable)
business; they need storage; graveyard equipment (such as lowering devices); tents and many
more. During its first year of operation, the business was operating below breakeven point;
only in its second year was Managa able to cover its costs. The company has thus far
submitted a business plan to two funders and the applications were not successful, citing the
lack of a share certificate at the time of application. They were disappointed with this
challenge of obtaining funding, but a prominent businessman from the Soshanguve area (who
previously sold a similar business) offered to buy shares in their business and invest resources
from his previous business. A financial injection into the business was promised by this
businessman. The opportunity was short-lived due to the legislation governing the chosen
form of ownership and the investor could not wait any longer.

9.1 Introduction
This chapter is aimed at introducing the reader to the dynamics of registering a business and
the complexities thereof. It further unpacks the forms of business ownerships and the factors
to consider (benefits and disadvantages) before choosing the most appropriate and suitable
type of ownership for the business. Small business legislation and the taxation obligation of
entrepreneurs are also discussed in brief to provide the reader with a desktop knowledge of
their legal requirements. Furthermore, the concept of intellectual property is explained and a
supporting case study presented to enhance the reader’s understanding. It is strongly
recommended that prospective entrepreneurs consult professional tax and legal practitioners
for assistance with these complex matters.

9.2 Business registration

Business registration is an important aspect of starting and effectively running a business.
According to the Companies and Intellectual Property Commission (CIPC 2016), it is not
necessary for all businesses to formally register with the CIPC. For some businesses, such as
unincorporated businesses, there may not be sufficient benefits. However, businesses that
wish to transact with government and the formal sector, or that wish to access certain types of
government support, are generally required to be registered with the CIPC. For these
businesses, there may also be tax benefits as registered businesses have a lower tax rate than
individuals. Even though your business may not be registered with the CIPC, you will still
have to be registered with the South African Revenue Service and will still be liable for tax if
your turnover exceeds the prescribed threshold. 153

9.2.1 How to register a business

Business registration may be done in one of the following ways in South Africa:

Establishing an unincorporated business

Establishing an incorporated business
Sole traders and partnerships are subject to a few statutory requirements, but traders and the
partners generally do not have the protection of limited liability. Registration is not required
and there are no statutory reporting requirements, except for tax purposes in which case
financial statements must be produced in sufficient detail to enable tax assessments to be
made by the South African Revenue Service (SARS). The main feature of most
unincorporated businesses is personal liability for the sole trader, partner or member of the
management committee. That means that those individuals enter into obligations, such as
contracts, on behalf of their organisation and they are responsible for its debts and other
liabilities.

Sole proprietorship

A sole proprietorship is a business that is owned by one person. It is the simplest and most
common form of business ownership conducted by a single individual owner. This type of
business can conduct business under its owner’s name by simply doing business, for example
as “Thulani Ndlazi”. A sole proprietor can also do business under a trade name such as
“Thulani’s hair salon”. As stated earlier, the sole trader has no limited liability for the owner,
so it is important to note that the business owner’s liability includes his own personal assets.
Net profit of the sole proprietorship is viewed as personal income of the business owner and
taxed in his personal name according to the income tax tables of South African Income Tax
Law. If a sole proprietor operates under a trade name or fictitious name, he is usually required
to file a form (a “trade name certificate”) in the city/province where the business is located
(Integrate Immigration 2016).

Some notable benefits/advantages of a sole proprietorship are:

The business is easy to establish and operate.

The owner is able to make quick decisions.
The business has a minimum of legal requirements.
All the profits belong to the owner.
It is easy to discontinue or sell the business.

Some disadvantages of a sole proprietorship are:

Unlimited liability for the owner. The individual owner is legally liable for all the
debts of the business. Not only the investment, but any personal and real property may
be attached by creditors.

Limited ability to raise capital. The business capital is limited to whatever the
owner can personally secure. This limits the expansion of a business when new capital
154is required. A common cause of failure of this form of business organisation is
lack of funds. This restricts the ability of a sole proprietor to operate the business
effectively and survive at an initial low profit level, or to survive an economic “rough
spot”.
Limited skills. One individual has limited skills, although the owner may be able to
hire employees with other skills.

Partnerships
A partnership is an association of at least two persons, but not more than twenty who join
together to carry on a trade, business or profession with the aim of making a profit. If the
number of members exceeds 20, then the partnership becomes illegal and may not carry on
business. Each person contributes money, property, labour or skills, and each expects to share
in the profits and losses of the business. It is like a sole proprietorship except that a group of
owners replace the individual owner. A partnership is quite cheap to set up, as it does not
have to be legally registered (at the Registrar of Companies). The government only requires
that a stamp duty be paid in connection with the partnership agreement, and this is minimal.
When you are in a partnership, it is highly advisable to have a formal, written partnership
agreement. While it is not required by law, a partnership agreement can provide a framework
for defining each partner’s obligations, and settling the conflicts, disagreements and other
difficult-to-resolve issues that naturally occur in nearly every business relationship.
Ultimately it will help to ensure the long-term wellbeing of the business (Business Partners
2016). A partnership is also not a separate legal person or taxpayer. Each partner is taxed on
his or her share of the partnership profits. Each person may contribute money, property,
labour or skills, and each expects to share in the profits and losses of the partnership. With
regard to the partnership business, any name can be used as long as it is not blasphemous or
registered to trade by somebody else.

A partnership agreement will ordinarily cover the following key areas:

Decision making
Responsibilities, performance and remuneration
Contributions and profit sharing
Withdrawal of partners/admission of new partners
Dispute resolution

Some benefits/advantages of a partnership are:

It is easy to start as no formalities are required.

It has greater financial strength because partners combine capital.
It combines different skills of the partners.
It has a definite legal status.
Each partner has a personal interest in the business.

Some shortcomings/disadvantages of a partnership are:

Unlimited liability of the partners. Each partner may be held liable for all the debts of
the business. 155
One partner not exercising good judgement can therefore cause the loss of the assets
of the partnership as well as the personal assets of the remaining partners.
The authority for decisions is divided and decision making can always be delayed
since all partners need to be consulted.

A business trust

A business trust is an unincorporated business organisation created by a legal document, a

declaration of trust, and is used in place of a corporation or partnership for the transaction of
various kinds of business with limited liability. A trust is a legal arrangement whereby
control over property is transferred to a person or organisation (the trustee) for the benefit of
someone else (the beneficiary). It is governed by the terms of the trust document, which is
usually written and governed by the law. Trusts are governed by common law and the Trust
Property Control Act 57 of 1988. Previously, trusts have been used for many years to protect
the assets of their beneficiaries, but they can also be used as a format under which to conduct
business. If structured correctly, a trust can be the most practical and appropriate legal entity
for your venture.

Advantages of a business trust:

The trust protects your assets against personal creditors, because the assets of the trust
belong to the trust alone.
The administrative costs of a business trust are less than that of a company or close
corporation (CC).
A trust is not legally required to hire an auditor, disclose financial statements, pay
annual fees to the Registrar, and so on.
Taxes related to trusts are less complicated.
It is cheaper and easier to dissolve a business trust than a CC or company.

Disadvantages of a business trust:

The founder of the trust loses control as all the assets belong to the trust.
The earnings from the assets in the trust are taxed at 40 per cent and interest
exemptions do not apply to trusts.
It generates additional administrative costs and complexity in your affairs while
enjoying no direct benefits.

A business becomes incorporated when the company’s founders file incorporation

documentation with the government. This means a separate and distinct legal entity is
created. An incorporated business is a business that has gone through the formal legal process
of becoming a corporation. A corporation (the most common business entity) is formed as a
separate legal entity that is wholly controlled by the company’s shareholders. A company is
referred to as a business organisation that earns income by the production or sale of goods or
services.

In terms of the Companies Act 71 of 2008, a company may be registered with or without a
company name. When a company is registered without a reserved name, its registration
number automatically becomes the company name. This is the quickest way to register a
company. Such a company may transact with a trading (business) name, or may apply to add
a reserved name at a later stage. In this case, the company will need to first reserve a name
and then apply for a name change, which constitutes a change to its Memorandum of
Incorporation (MOI). If the company’s initial name reservation application is not approved,
then it needs to apply for new names. It may apply for between 1 and 4 names during each
application process. In 2015 the cost of each name reservation application was R50. This
amount may increase from time to time with inflation. A company registration varied
between R125 and R475 (R125 for a private company and R475 for a non-profit company
registered without members) in the same year (CIPC 2016).
Public companies may offer their shares for sale to the public, although they need not be
listed on the stock exchange for the public to hold an interest in their shares. The number of
shareholders is unlimited, there are no restrictions on the transfer of their shares, and they
must file a copy of their annual financial statements with the registrar of companies. These
statements are available for public inspection. Private companies, on the other hand, may not
offer their shares for sale to the public. The right of transfer of their shares is restricted and
the number of members is limited to 50. Private companies are not required to file their
annual financial statements with the Registrar of Companies; thus they are not available to
the general public. They must include the word “Proprietary” or (Pty) at the end of the
registered name immediately before the word “Limited” or “Ltd”. For both types of
company, an audit by a registered accountant and auditor is obligatory.

Private company

A private company is limited to a minimum of one and a maximum of 50 members. With a

private company shares are not freely transferable and this form of ownership is easily
identifiable by the abbreviation Pty (Ltd) at the end of its name. The abbreviation Pty (Ltd)
represents the words proprietary limited.

Public company

A public company must have a minimum of seven members and there is no limit on the
maximum number of shareholders of the company. In this form of company ownership shares
are freely transferable, meaning the public can buy shares direct. The abbreviation Ltd at the
end of the business name means limited.

Company registration documents

The following documents are required before a business may operate as an entity:

COR9.4: Name Reservation Certificate

COR14.3: Company Registration Certificate (this used to be called the CK1 document
for CCs) 157
COR14.1 and CoR14.1A: Appointment of Incorporators and Directors
COR15.1A: The Memorandum of Incorporation (MOI). The MOI was introduced in
2008 and has replaced previous legislation that was under the Companies Act 61 of
1973 (“the old Act”). Under the old Act there were two documents known as the
M&A:

– The Memorandum of Association which was the founding document of a company.

– The Articles of Association which dealt with the internal arrangements relating to control,
administration and any other matters of considerable substance. The CIPC has since made
certain standard Memoranda of Incorporation (MOIs) available.

Share certificate

Once the registration process is complete it is required by the Companies Act 71 of 2008 that
each shareholder in a company have a registered share certificate. If not, a shareholder has no
legal evidence that he or she owns any shares in a company, even though he or she is the
director of a company. A share certificate is a certificate issued by a company certifying that
on the date the certificate was issued a certain person is the registered owner of shares in the
company. The key information contained in the share certificate is the name and address of
the shareholder and the number of shares held.

A share certificate is required for the following:

Banks. Most banks require a new company to have a valid share certificate when
opening a bank account.
Change of shareholding. When shareholders are added or removed, the original
share certificate will be required.
In court. If a dispute arises and the case is taken to court, this document will make
the difference between a shareholder’s success or failure in proving ownership of a
company.

Table 9.1 Summary of the differences and similarities between the two types of company
(private and public)

Close corporation (CC)

The new Companies Act 71 of 2008 came into operation on 1 May 2011. This Act replaced
the previous Companies Act of 1973. The Act stipulates that no new close corporations
were to be registered as from 1 May 2011; only companies can be registered with legal status.
Furthermore, the Act stipulates that no company conversions to close corporations will be
registered. The new Act makes provision for close corporations to convert to companies
without any payment.
However, those registered before the cut-off date in 2011 are still in existence and continue to
enjoy the benefits attached to this form of business ownership. When a close corporation was
discontinued, the government of the Republic of South Africa undertook to start with the
process of converting CCs to private companies. Nevertheless, the existing CCs that wish to
continue operating as close corporations are still able to do so. Information regarding close
corporations is still available on the CIPC website. 158

Cooperative

A cooperative is yet another form of business ownership. It is based on the philosophy of

self-help and mutual help. What makes the cooperative different from other forms of business
ownership is that it aims at rendering services instead of earning profits. We will now refer to
a few definitions to get clarity on the meaning of cooperatives.

The Co-operatives Amendment Act 6 of 2013 (Republic of South Africa 2013) defines a
cooperative as an autonomous association of persons united voluntarily to meet their common
economic, social and cultural needs and aspirations through a jointly owned and
democratically controlled enterprise organised and operated on co-operative principles. They
come together, not to earn profits, but to improve their common 159economic interests
through business propositions. The basic objectives of such organisations are self-help and
mutual help. A cooperative must be registered with the Registrar of Co-operatives located in
Pretoria. It should have a minimum of ten members and there is no limit on the maximum
number of members. The members are the owners. They contribute capital to the organisation
and get dividends while they all have equal voting rights regardless of their level of
involvement or investment. The liability of the members is limited. The managing committee
elected by the members at the annual general meeting manages the affairs of the co-operative.

Furthermore, cooperatives are registered with the Companies and Intellectual Property
Commission (CIPC) and each year an annual return must be submitted to them to ensure that
the cooperative remains trading. Smaller companies must have an annual accounting review
done by an accountant, which is a much simpler and cheaper version of an audit. A
cooperative may only be registered manually. Before a cooperative is registered, a formation
meeting has to be held in order to decide on its common purpose. At this meeting the
members have to decide on the form and type of cooperative. There must be at least five
founding members (people) in order to form a primary cooperative.

The benefits of operating as a cooperative business are:

A cooperative business is owned and controlled by its members.

It has democratic control: one member, one vote.
This type of organisation has a limited liability.
Profit distribution (surplus earnings) to members is done in proportion to the use of
service; surplus may be allocated in shares or cash.

Some of the disadvantages of a cooperative business are the following:

A cooperative organisation entails longer decision-making processes.

For it to be successful, members are required to participate.
Extensive record keeping is necessary in this form of organisation.
 It has fewer incentives, and there is also a possibility of development of conflict
between members.

Three types of cooperative – primary, secondary and tertiary – are identified:

Primary. If a cooperative is made up of a group of five or more individual members,

and the purpose is to provide services and employment for one another and promote
community development, the business falls in the category of a primary cooperative.
Secondary. Secondary cooperatives are formed when two or more primary
cooperatives come together because they are involved in similar activities and want to
promote their services in the sector in which they are active.
Tertiary. Tertiary cooperatives are formed by secondary cooperatives that come
together to promote the interests of their members to government bodies, the private
sector and other stakeholders.

9.3 Registration with the appropriate authorities

Before commencing with business activities it may be necessary to register with certain
appropriate authorities in order to comply with legislation or regulations pertaining to your
specific area of operation. The purpose of this section is merely to bring to your attention
some of the authorities that might require your registration. It will be in your business
interests to make enquiries in this regard and to comply with all the requirements that might
apply. Some of these requirements are mentioned in Sections 9.3.1, 9.3.2 and 9.3.3.

9.3.1 Registration with the South African Revenue Service (SARS)

According to SARS (2016), the South African Revenue Service (SARS) is the nation’s tax
collecting authority. Established in terms of the South African Revenue Service Act 34 of
1997 as an autonomous agency, SARS is responsible for administering the South African tax
system and customs service.

The responsibilities of SARS include the following:

Collecting and administering all national taxes, duties and levies

Collecting revenue that may be imposed under any other legislation as agreed on
between SARS and a state entity entitled to the revenue
Providing a customs service that facilitates trade, maximises revenue collection
and protects our borders from illegal importation and exportation of goods
Advising the minister of finance on all revenue matters.

As an entrepreneur and employer, you may have to register for one or more of the following:

Income tax

As soon as you commence business, you are required to register with your local SARS office
in order to obtain an income tax reference number.

Employee’s tax
Employee’s tax is money that is deducted by an employer from an employee’s wage or salary
on a regular (usually monthly) basis. Under normal circumstances, amounts that you pay to
employees for services rendered by them are taxable, and registration with SARS in this
regard is necessary. The employer must register with SARS as an employer and submit an
EMP201 return with the payment every month. Two types of employee’s tax are standard
income tax on employees (SITE) and pay as you earn (PAYE):

– Standard income tax on employees (SITE): employers deduct SITE from the wages of
employees who earn less than R60 000 per year and have no other form of income. In this
case employees do not need to submit a tax return.

– Pay as you earn (PAYE): employers must deduct PAYE from employees’ wages where
they earn more than R60 000 per year. Employers must pay the tax that has been deducted to
SARS. 161

The amount of tax that should be deducted for both SITE and PAYE is given in tables that
are issued by the South African Revenue Service (SARS).

At the end of each year of assessment the employer must issue an IRP5 certificate to each
employee from whom employee’s tax (PAYE) has been deducted. The IRP5 certificate is
proof that tax was in fact deducted from the salaries and wages of employees. Employees will
require this certificate when completing their annual income tax returns. If an employee
leaves the job during the course of the year of assessment, the employer must immediately
issue him or her with an IRP5 certificate on termination of service.

Value-added tax (VAT)

VAT must be included in the price of every taxable supply (i.e. the sale of goods and/or the
supply of services).
Value-added tax is an indirect tax levied under the Value-Added Tax Act 89 of 1991 (the
VAT Act). It is levied on the supply of goods or services by a registered vendor in the course
or furtherance of his or her enterprise. VAT is also levied on the importation of goods and
certain services into South Africa by any person, whether or not a vendor, as it is in effect a
tax on the consumption of goods or services in South Africa. According to SARS (2015) it is
mandatory for any business to register for VAT if the income earned in any consecutive 12-
month period exceeded, or is likely to exceed, R1 million. Any business may choose to
register voluntarily if the income earned in the past 12-month period exceeded R50 000. A
small business that is registered as a microbusiness under the sixth schedule of the Income
Tax Act 58 of 1962 may also register for VAT and may choose to submit returns and
payments every four months, ending on the last day of June, October and February. At the
moment VAT is levied at 14 per cent.
When your taxable supplies exceed, or are likely to exceed R150 000 per annum, you are
obliged to register for VAT at your local SARS office. Comparative tax structures each of the
four forms of business organisation. In order to understand the tax consequences of each of
these organisations, you will need to understand the basic steps in determining the profit or
loss of your business. This is explained in Part II of the South African Revenue Service tax
guide available at http://www.sars.gov.za. A simple diagram comparing the different tax
consequences is also given. The tax figures can be changed from time to time by the Minister
of Finance following approval by Parliament.
 Skills Development Levy (SDL)

An employer is obliged to register for SDL purposes with SARS, unless there are reasonable
grounds for believing that the total leviable amount paid or payable by the employer to all its
employees during the following 12-month period will not exceed R500 000. This compulsory
levy scheme was introduced with effect from 1 April 2000. The following employers are
exempt from the payment of SDL but are not absolved from the obligation to register for
SDL purposes:

– Any public service employer in the national or provincial sphere of government. 162

– Any national/provincial public entity if 80 per cent or more of its expenditure is paid
directly/indirectly from funds voted by Parliament.

– Any public benefit organisation exempt from the payment of income tax in terms of section
10(1)(cN), which solely carries on certain welfare, humanitarian, health care, religion, belief
or philosophy public benefit activities or solely provides funds to such a public benefit
organisation and to which a letter of exemption has been issued by the SARS tax exemption
unit.

– Any municipality in respect of which a certificate of exemption is issued by the minister of

labour.

9.3.2 Registration with the Department of Labour

An employer who is obliged to register for employees’ tax purposes is obliged to register for
UIF contribution purposes. When completing the form EMP101 (for employees’ tax
purposes), the registration for UIF is activated. This fund provides for the insurance of
employees against the risk of loss of earnings arising from unemployment. This can be as a
result of termination of their employment due to illness, maternity leave, etc. Within 14 days’
of commencing business an employer has to submit a notification to the Unemployment
Insurance Fund. This can be done online at http://www.labour.gov.za. The fund is
administered by the Department of Labour and all correspondence should be addressed to
them.

The Compensation for Occupational Injuries and Diseases Act (COIDA) 130 of 1993
stipulates that it is mandatory for businesses that have one or more full-time employee(s) to
register with the Compensation Fund. This fund provides compensation for employees who
are injured at work, become ill from diseases contracted at work, or die as a result of these
injuries or diseases. The Compensation Fund is covered by the Compensation for
Occupational Injuries and Diseases Act 130 of 1993 and the Compensation for Occupational
Injuries and Diseases Amendment Act 61 of 1997. The Compensation Commissioner is
appointed to administer the fund and approve claims of employees. Where an employee is
entitled to receive compensation, the Compensation Fund and not the employer will pay the
employee.
Entrepreneurs or small business owners (as employers) have to comply with the following
important legislation. (More detailed information regarding these Acts is available on the
website of the Department of Labour at http://www.labour.gov.za).

Labour Relations Act 66 of 1995. This Act regulates the organisational rights of
trade unions and facilitated collective bargaining at the workplace. It also regulates
the right to strike and the recourse to lock out in conformity with the Constitution.
Employee participation in decision making is encouraged through the establishment
of workplace forums and also provides for the resolution of disputes and establishing
of the Commission for Conciliation, Mediation and Arbitration.

Employment Equity Act (EEA) 55 of 1998. The purpose of this Act is to achieve
equity in the workplace by promoting equal opportunity and fair treatment in
employment. This is achieved through elimination of unfair discrimination and
implemention of affirmative action measures to redress the disadvantages in
employment experienced by designated groups, in order to ensure equitable
representation in all occupational categories and levels in the workforce. The Act
provides for additional reporting requirements to employers with the additional
burden of submitting an annual Employment Equity Report. All designated employers
must, in terms of section 21 of the Employment Equity Act 55 of 1998, submit their
reports annually.
Basic Conditions of Employment Act (BCEA) 75 of 1997. The primary objective of
the Act is to stipulate and regulate relevant conditions of employment and the
variations of such conditions, contribute to the creation of a secure, equitable, non-
exploitative and a harmonious work environment, and give effect to and regulate fair
labour practices in line with the Constitution. The Act applies to all employers and
employees (except for members of the South African National Defence Force, the
National Intelligence Agency, the South African Secret Service, persons employed at
sea or persons working as unpaid volunteers). It also applies to anybody who is doing
vocational training. If a person (not an independent subcontractor) works for a
temporary employment service, the temporary employment service is their employer.
The BCEA provides a basic guideline on BCEA regulations regarding the following
aspects:

– Working times: including shift work, weekend work, public holidays and any other
overtime

– Payment: including payment in kind, deductions, and so on

– Leave: annual leave, sick leave, maternity leave, family responsibility leave, unpaid leave
and absence without leave

– Deductions: including those required by law and those you are allowed to make

– Notice periods

– Administration: documents needed by employees and record keeping

– Prohibition of victimisation and exploitation of workers by the employer and co-workers

9.3.3 Registration with other authorities

It may also be necessary to register with other authorities, such as the following:

Local licensing authorities

Certain businesses require a trade licence before they can commence operations in South
Africa. The Businesses Act 71 of 1991 governs which businesses need a trade licence as not
all businesses require one. There are certain types of business which may not trade without
proper business licensing, e.g. businesses selling liquor, health facilities, food outlets,
entertainment facilities, etc. Persons who wish to establish a business should contact the local
authority in their home town or city. Trading licences are issued by local municipalities. 164

Health authorities

One important requirement of starting a new business is to ensure that you have all the
associated permits and licences required by the specific industry. The food service industry
comprises restaurants, hotels and inns, as well as catering and vending companies. The most
important regulations that business owners in this sector have to comply with are health and
safety permits, licences for the selling of liquor and tobacco as well as zoning permits to
operate in certain locations. The Health Act 63 of 1977 has set out regulations governing
general hygiene requirements for food premises and the transport of food, in terms of which
any person who handles food or permits food to be handled (such as a restaurant) is required
to possess a certificate of acceptability.

9.4 Legal definition of a small business

A small business is defined in terms of the National Small Business Act 102 of 1996, which
aims to provide for the “establishment of the Advisory Body and the Enterprise Promotion
Agency; to provide guidelines for organs of state in order to promote small business in the
Republic; and to provide for matters incidental thereto”. The National Small Business Act
102 of 1996 defines small businesses as medium, small, very small and microenterprises
based on certain characteristics. The Act has been amended by the National Small Business
Amendment Act 26 of 2003 which aims to update and further define businesses according to
five categories established by the original Act, namely standard industrial sector and
subsector classification, size of class, equivalent of paid employees, turnover and asset value
(excluding fixed property). See Table 9.2.

Table 9.2 A quantitative definition of a small business in South Africa

9.5 Intellectual property (IP)
Intellectual property (IP) is the product of independent thought in developing something new
or original. Intellectual property can be defined as the creations of the mind such as
inventions, literary and artistic works, designs, and symbols, names and images used in
commerce (WIPO 2016). IP exists in various forms, e.g. patents, registered designs,
copyright, trademarks and know-how. Intellectual property (IP) law protects the products of
the intellect that are capable of commercial exploitation (Matthewson 2015).

IP is an important asset in today's knowledge economy and should be strategically managed.

Some IP rights require a formal process of application, examination and registration.
Registered IP rights serve as an incentive to reward innovation by providing IP creators and
owners with the time and opportunity to exploit their creation. However, IP rights exist in
many forms and in some cases they do not need to be registered in order to be of value (literal
works, music, etc.). Each type of IP provides different competitive advantages for its owners
and new commercialisation opportunities for businesses. IP has many of the same ownership
rights as physical property. It is therefore important that businesses effectively manage their
IP to ensure that they get the best protection and the most out of their idea/invention. The
creator of IP is not necessarily the owner. It is therefore important that ownership is
addressed through appropriate contractual arrangements.
9.5.1 Patents

A patent is an agreement between an inventor and the government of a country, in which the
inventor agrees to publish his or her invention, and in return the government agrees to give
the inventor exclusive use of the invention for a limited time. It protects ideas in industrially
realisable form. A patent can protect a new product, a new process or a new use of a product.
The term of a patent is generally 20 years from the date of filing.

In order to be patentable, an invention must be

novel
inventive
useful
suitable subject matter.

In short, anything that solves a problem in a new non-obvious manner and is not specifically
excluded by law is patentable. These requirements are further explained in Section 9.5.1.1.

The requirements for patentability are:

Novelty. The invention must never have been made public in any way (e.g. by oral
disclosure, use, trial, printed publication in any language) anywhere in the world before the
date on which an application for a patent is filed. 167

Inventive step. Would someone with a good knowledge and experience of the subject (“the
person skilled in the art”) think that the invention was obvious when comparing it with what
was already known (“the prior art”)?

Useful. A useless invention may be new and non-obvious but will not be granted the status of
a patent.

Suitable subject matter. The technicality requirement placed on a product confines

patentable subject matter to practical processes and products.

The patentee has the right to exclude others from performing the following acts:

Making
Using
Exercising
Disposing of (selling)
Offering to dispose of (advertising)
Importing

9.5.2 Registered designs

Essentially a “design” is about shape and features that appeal to the eye. Designs must be
registered before an individual or company has rights to them. In South Africa, there is a
specialised law for design protection that applies, even if the original and innovative design is
protected under the copyright, patent or trademark laws. This law, called the Designs Act 195
of 1993, grants separate protection and different protection periods to the aesthetic and
functional features of designs.

There are two types of design that can be registered:

1. An aesthetic design

has to be new and original

has beauty in its shape, configuration or ornamentation
can be produced by an industrial process.

2. A functional design

has to be new and not commonplace

has a shape or configuration necessitated by the function
can be produced by an industrial process.

In order for a design to be registered in South Africa, an application must be lodged with the
CIPC. The application should include at least a diagram of the design for which registration is
sought, or in some cases a model. An application and a registration fee will have to be paid
for each design application. Once an application is successful, applicants are given a specific
period of design protection.

The process of applying for registration of designs involves the following steps:

Protection is afforded to aesthetic designs for one period of 15 years, and to functional
designs for one period of ten years. Registered designs have to be renewed annually before
the expiration of the third year, as from the date of lodgment. 168

9.5.3 Trademarks

A trademark is a brand name, a slogan or a logo. It identifies the services or goods of one
person and distinguishes it from the goods and services of competitors. A registered
trademark can be protected forever, provided it is renewed every ten years upon payment of a
renewal fee. The main purpose of a trademark is to enable the public to recognise the product
as originating in a particular company or being a particular product. A trademark is registered
under the Trade Marks Act 194 of 1993.

A good trademark must

suit the product

appeal to the consumers
be appropriately designed for the target market
communicate a specific message to the consumers
reflect the attributes of the product.
Registering a trademark

provides greater protection

deters others from using your trademark
provides the trademark owner with greater remedies
offers additional protection that can be used as a defence in infringement proceedings.

An example of a distinctive trademark is the following image:

Image 9.1 Example of a distinctive trademark

9.5.4 Copyright

Copyright is an exclusive right granted by law for a limited period to an author, designer, etc.
for his or her original work. Unlike other forms of intellectual property, copyright does not
need to be registered, except for cinematographic films. Copyright protects “works”, such as
artistic or literary works. 169

The Copyright Act 98 of 1978 protects certain classes or categories of works. The following
are eligible for copyright in South Africa:

Literary works, e.g. books and written composition novels

Musical works, e.g. songs
Artistic works, e.g. paintings and drawings
Cinematographic films, e.g. programme-carrying signals that have been transmitted
by satellite
Sound recordings
Broadcasts, e.g. broadcasting of films or music
Programme-carrying signals, e.g. signals embodying a programme
Published editions, e.g. first print by whatever process
Computer programs

For a work to be eligible for copyright protection, it must be original and be reduced to
material form.
Making photocopies for private use or copying a public speech or a lecture is not an
infringement of copyright.

No infringement results if work is acknowledged when one is copying or citing from another
author’s work. Generally, in respect of written material, the following guidelines apply:

Wherever possible, the author’s permission should be sought to reproduce his or her
work.
In an article, paper or speech, when referring to the work of another, it is required that
details of the reference be provided in the form of the name of the author and details
of his or her publication, i.e. title of book or magazine, publisher, date of publication,
etc.
If only a small portion of the work is used, e.g. a few sentences or a paragraph, and
provided that an acknowledgement is made, permission is not needed.
If a “significant” section is reproduced, such as a chapter, then permission should be
obtained.
It is generally accepted that work that is being used in academic institutions, or in
research or for private use may be reproduced.

Copyright infringement does not occur if you copy a public speech or lecture, made for
information purposes, or photocopy government publications for public usage.

The lifespan of copyright depends on the type of work protected:

The copyright of literary works lasts for 50 years after death of the author. 170
The copyright of computer programs lasts for 50 years after the first copies were
made available to the public.
For sound recordings, the copyright lasts for 50 years from the day the work was first
broadcast.
For films, the copyright lasts for 50 years from the date the film was first shown.
IP management case study: Mbube

1939: Solomon Linda records “Mbube” and assigns copyright to Gallotone

1949: The Weavers record “Wimoweh”

1961: The Tokens record “The lion sleeps tonight”. The songs rack up three centuries of
radio play in the US alone.

1994: The song used in the musical version of Disney’s “The Lion King”.

2000: Rolling Stone magazine estimates that “Mbube” and its progeny have earned at least 20
m USD in composer royalties over the decades.

In 1962 Solomon Linda passes away a pauper, his family too poor to afford a headstone for
his grave.

The British Copyright Act of 1911 (the Imperial Copyright Act) was incorporated into the
South African Copyright Act of 1916 which was in force in 1939. The Imperial Copyright
provided a so-called reversionary interest whereby copyright reverted to the deceased estate
25 years after the death of the author.

In 1987, the copyright in “Mbube” reverted to the executor of Solomon Linda’s estate who
could then enforce the rights in South Africa and in any country which was formerly part of
the British Empire, including the UK. But Abilene Music (claimed owner of “The lion sleeps
tonight”) was located in the US and could not be sued in South Africa, or could they? Spoor
and Fisher opted to sue the most prominent and high-profile licensee of the song against
which it was possible to secure jurisdiction before a South African court, i.e. Walt Disney
Enterprises Inc. This could be done by “attaching” some 200 registered trademarks owned by
171Walt Disney Enterprises in South Africa, in effect holding the Disney trademarks hostage
to provide security for the enforcement of payment of a debt. After much legal wrangling,
discussions took place and a settlement agreement was reached which included the following:
 Abilene undertook to pay the executor an undisclosed amount for compensation of
past uses and to pay royalties going forward.
It was acknowledged that Solomon Linda would henceforth be designated as co-
composer of “The lion sleeps tonight”.

And finally in 2006 a trust fund for the heirs of Solomon Linda was set up.

Source: Adapted from: Matthewson 2015

Case study questions

1. In your view, why did Spoor and Fisher institute action against Disney and certain
other licensees in the Solomon Linda case?
2. What lesson does this teach heirs of other authors who never benefited from from the
copyrighted works of their forbears?

9.6 Summary
We started this chapter by introducing you to the first step of doing business, which is
registration and its complexities. Since this is a chapter dealing with legal issues you were
referred to tax and legal practitioners for assistance – this decision will be key to your
business. It is evident from this chapter that a choice of ownership is one of the determinants
of business success. The registration of a business with CIPC is not the first and final step as
you will still have to register your business with other authorities appropriate for your
business, such as SARS, the Department of Labour, local authorities, industry associations
(where applicable), etc. You were also introduced to the National Small Business Act 102 of
1996 and the National Small Business Amendment Act 26 of 2003, which define the small
business into categories. Finally, the chapter explains intellectual property. The case
presented is public knowledge and will equip you with a better understanding of IP as you
can relate to it.

Questions

1. Briefly explain the process of registering a business when a name is not approved.
2. Having read the opening case study at the beginning of this chapter, do you think the
decision to register Managa Funeral Parlour as a private company was the correct
one? Motivate your answer.
3. Define the concept of cooperative and its purpose.
4. Explain the purpose of the National Small Business Act 102 of 1996.
5. Describe the term VAT and briefly explain who qualifies to pay VAT in South Africa.
6. Discuss the concept of intellectual property (IP) and identify various forms of IP. 172

1. When a company is registered without a reserved name

1. its registration number automatically becomes the company name
2. its name automatically generates a registration number
 3. the system automatically generates a name randomly
4. registration is placed on hold until the business receives a name approval
2. The number of names that a business can provide with each application is limited
to____
1. two (2)
2. three (3)
3. four (4)
4. no limit
3. A company must file a return/s at least _______a year to ensure you are still trading.
1. twice
2. once
3. thrice
4. four times
4. The Unemployment Insurance Fund (UIF) is administered by the ________________
1. Department of Trade and Industry
2. Department of Labour
3. Department of Home Affairs
4. labour unions
5. Which one of the following aims to provide for the “establishment of the Advisory
Body and the Enterprise Promotion Agency”?
1. National Small Business Amendment Act 26 of 2003
2. National Small Business Act 102 of 1996
3. Company and Intellectual Property Commission
4. Department of Small Business Development

Recommended reading
CIPC website: http://www.cipc.co.za/index.php/download_file/view/669/157

Companies Act 71 of 2008; also available at

http://www.cipc.co.za/index.php/download_file/view/669/157

National Small Business Act 102 of 1996; also available on the DTI website:
http://www.dti.gov.za

Strydom, J.W. & Nieuwenhuizen, C. 2012. Entrepreneurship and how to establish your own
business, 4th ed. Cape Town: Juta. 173

References
Business Partners. 2016. Investing in entrepreneurship. Available at:
http://www.businesspartners.co.za/mentorship-consulting-services/ (accessed on 24 March
2016).

Companies and Intellectual Property Registration Office (CIPRO). 2008. Gateway to formal
economic participation. 2008/2009 annual report. Available at:
http://www.cipc.co.za/index.php/download_file/view/669/157/ (accessed on 5 February
2016).
CIPC. 2016. About registering a business. Available at:
http://www.cipc.co.za/index.php/download_file/view/669/157/

Integrate Immigration. 2016. Sole proprietorship/sole proprietor. Available at:

https://www.intergate-immigration.com/sole-proprietor-south-africa.php (accessed on 15
March 2016).

Matthewson, B. 2015. Intellectual property overview. Workshop on intellectual property

(PowerPoint presentation). 18 June. Muldersdrift: Glenburn Lodge.

Republic of South Africa. 1978. Copyright Act 98 of 1978. Pretoria: Government Printer.

Republic of South Africa. 2008. Companies Act 71 of 2008. Available at:

https://www.saica.co.za/News/MediaKit/Publications/Communiqu%C3%A9/30April2009/Co
mpaniesAct71of2008/tabid/1452/language/en-ZA (accessed on 5 March 2016).

Republic of South Africa. 2013. Co-operatives Amendment Act 6 of 2013. Available at:
https://www.saica.co.za/News/MediaKit/Publications/Communiqu%C3%A9/30April2009/Co
mpaniesAct71of2008/tabid/1452/language/en-ZA (accessed on 5 March 2016).

South African Revenue Service. 2016. Available at:

http://www.sars.gov.za/ClientSegments/Businesses/SmallBusinesses/Pages/Small-
Businesses-and-VAT.aspx (accessed on 5 February 2016).

World Intellectual Property Organization (WIPO). 2016. WIPO Publication No. 450(E) What
is intellectual property? Available at: http://www.wipo.int/about-ip/en/ (accessed on 5
February 2016).
 10
Financial skills
Learning outcomes

After studying this chapter, you should be able to do the following:

Demonstrate an understanding of financing an enterprise

Identify various financial sources available to the enterprise
Compile various types of budget
Price a product
Calculate the breakeven point
Explain the breakeven concept using a graph
Evaluate the financial progress of an enterprise

Key terms

Breakeven
Compound interest
Debt factoring
Fixed costs
Incremental budgeting
Lead time
Mortgage bonds
Overdrafts
Retained profits
Simple interest
Trade credit
Zero-based budgeting

10.1 Introduction
An aspiring entrepreneur must equip himself or herself with the financial skills necessary to
start and grow a business. Not only are expert advice and assistance, expensive but external
consultants also do not have the insight that the entrepreneur has. Planning and starting the
business yourself is a great way of taking control of your financial situation. Entrepreneurs
need to develop and learn financial skills to enable them to make the right financial decisions.
The most needed skills entail understanding, accessing and managing finance.

Success story

Patrice Motsepe, the mega mining magnate, from the dusty streets of Soweto

by Craig Falck for The Africa Report

Born in 1962 to Augustine Motsepe, a school teacher in Soweto, Patrice started business at a
young age. Augustine owned a small grocery store and Patrice worked in it from an early age,
where he was inadvertently introduced to his future business – mining. The mine workers
used to buy their groceries and everything else from Augustine. The hardworking
176youngster excelled at primary and high school and was accepted at university to study
law.

He was eventually made a partner at Bowman Gilfillan, a leading corporate and commercial
law firm. Motsepe started out with a small contract mining company called Future Mining,
which basically provided various mining services to Vaal Reefs gold mine, currently a
subsidiary of AngloGold. Since he was unable to secure a business loan to launch his
company, he conducted his business from a little briefcase for the first eight months of
operations.

Basically, his start-up firm handled low-level contract manual jobs such as sweeping the
mines. Motsepe’s tiny workforce usually used brooms to glean gold dust from the rock
surface after industrial mining crews had done their work. It was not exactly what he wanted
to do, but at least he had his foot in the door. He was a part of the mining business, and
working with the miners gave him an opportunity to study the business first-hand.

Motsepe kept on studying the mining business, religiously. He discovered that the most
successful mines were not necessarily the large ones, but rather the small and lean ones – the
forgotten and neglected ones. As his small contracting business grew, Motsepe meticulously
saved his profits with a bigger picture in mind. By 1997 the price of gold was dropping
rapidly, while the rand was strengthening. The larger mining companies like AngloGold were
looking to sell off their older, low-producing mine shafts in order to concentrate their
energies on the larger and more profitable ones.

This was the opportunity Motsepe had been waiting for, and he dived into action. He
promptly founded African Rainbow Minerals (ARM) and immediately set out to acquire
marginal shafts owned by AngloGold, which were located at Vaal Reefs and in the Free
State. It was an audacious move on Motsepe’s part. The price tag for the assets was put at
$8,2 million, and of course, Motsepe did not have the money. Whenever he went to the banks
to share his plans with them, they scoffed at him. He was doing the unreasonable: no black
South African had ever owned a mining operation before, and it was apparent that Anglo had
abandoned the shafts because they were unprofitable. The banks thought it was ridiculous
that Motsepe believed he could make money on shafts that Anglo had failed to profit from.
Needless to say, none of them gave him any money.

But help came in the person of Bobby Godsell, who at the time was the chief executive of
Anglo’s gold and uranium division. Godsell was aware that Motsepe was looking to make a
foray into the business. He was familiar with the fact that the young, black upstart
entrepreneur provided contract mining services to some of Anglo’s mine shafts, and he was
impressed by Motsepe’s perseverance and resolution. Godsell wanted Motsepe to acquire the
shafts, so he decided to help him.

Consequently, Godsell handed over the shafts to Motsepe after the two had decided on a
favourable payment plan. Motsepe agreed to pay the $8,2 million over a few years and remit
a percentage of future profits to Anglo. Motsepe took over the shafts, but it was not easy. The
first few months were frightening as gold prices plunged. But he persevered and embarked on
some rather radical management initiatives, adopting a low-cost, lean, mean management
approach to running his mines. For starters, he downsized the management staff by half and
gave jobs to only 5 000 out of 7 500 employees at the Orkney mine, which was the most
profitable. Rather than taking a befitting office in one of the plush suburbs of Johannesburg,
Motsepe opted to work from a building in Orkney so that he could keep watch over his staff.
Within three years of taking over the 177mine, Motsepe was able to pay back the $8,2 million
price for the shafts. He shocked critics, sceptics and pundits because within 12 months, the
shafts had become profitable.

But Motsepe still scouted for virgin opportunities and sealed deals in quick succession. In
2000 he made his foray into platinum by embarking on a 50-50 joint venture with Anglo
Platinum, the world’s largest producer. Together they acquired and developed a mine called
Modikwa, the largest platinum-producing mine in South Africa. Early in 2002 he teamed up
with Harmony, a South African gold producer, in acquiring a number of shafts from Anglo.
These shafts collectively produced a total of one million troy ounces of platinum a year.

Motsepe listed his company, African Rainbow Minerals (ARM), on the Johannesburg Stock
Exchange in May 2002, becoming one of the first black entrepreneurs in the country to own a
controlling stake in a publicly listed company. From a low-level mining services business,
Motsepe has built one of Africa’s largest mining companies.

Patrice Motsepe spotted an opportunity in South Africa’s mining industry, shortly after the
end of apartheid, and seized it with both hands. Today, the soft-spoken mining tycoon is the
country’s first black billionaire.

Sources: http://www.venturesafrica.com/lord-of-the-mines-patrice-motsepe/;
https://en.wikipedia.org/wiki/Patrice_Motsepe; http://www.africareport.com

10.2 Understanding finance for the entrepreneurial

venture
Finance is concerned with the acquisition (raising) of funds and the application (investment
and use) of funds in the business. The raising of funds involves short-term to longer-term
sources from owners, financial institutions, investors or the government. The investment of
funds includes the buying of assets such as equipment, furniture, vehicles and business
premises as well as development costs. Money, for the operation of a start-up business, is also
required for stock/material, labour and general expenses.

10.3 Accessing finance

There are two major sources of finance to the entrepreneur, namely own capital, also referred
to as internal sources, and borrowed capital or external sources (Nieuwenhuizen 2015: 266).

10.3.1 Own capital

Own capital is also known as equity. Equity equals the assets of a business less the liabilities.
It represents the owner’s interest in the business. Equity is the liability of the business to its
owner, partners or shareholders (Jones 2014: 29). Own capital is permanent capital and the
advantage to the business is that it need not be paid back.

Start-up entrepreneurs usually put in their own funds into the business and this money comes
from their personal savings, credit card and pension pay-outs (Co et al. 2011: 224). A person
starting a business may also put owned assets (vehicles, furniture or equipment) into the
business and may even bring partners and shareholders (co-owners) into the business. These
co-owners may also be additional sources of own capital. Money borrowed by the owner in
his or her personal capacity, and invested in the business, may also be regarded as own
capital (Nieuwenhuizen 2015: 266–267).

Business Angels (BAs) is also a source of own capital. BAs are wealthy individuals who
invest in high-growth businesses in return for equity in the business, in other words a share in
the ownership of the businesses. BAs are often experienced entrepreneurs themselves and
therefore, in addition to money, they bring their own skills, knowledge and contacts to the
company (http://www.NIBusinessInfo.co.uk nd).

Retained profits is another source of own capital. Once profits have been generated, they
belong to the owners. Owner(s) may reinvest or plough back net profit (after tax) into the
business, or profits can be withdrawn. Reinvesting profits is an excellent way of financing
business expansion (Nieuwenhuizen 2015: 80).

New or existing businesses with a high growth potential attract venture capital. There are
always venture capitalists who want to buy shares in an enterprise or who commit capital in
order to gain a financial return. They are seldom involved in the everyday management of the
business as long as they receive a high return on investment (ROI) (Co et al. 2006: 225).
Venture capitalists may, however, experience losses due to poor management of an enterprise
but normally are wealthy enough to take the risk of investing in new businesses.

10.3.2 Borrowed capital

Borrowed capital, also known as foreign or external capital, is the sum of all parties who
supplied the business with assets and cash and who have not been paid in full
(Nieuwenhuizen 2015: 5267). A variety of financing sources, in the short, medium and long
term are financial institutions (banks), the government (national and provincial), private and
venture capitalists. The raising of funds depends on the type, size and the needs of a
particular business.

Various types of funding are available at financial institutions such as an overdraft, loan,
mortgage (bond), lease or debt factoring.

An overdraft is a flexible way to borrow money from a bank. The owner of a current account
may withdraw more money from the account than what is available. The limit and interest
rates are negotiated during the application stage. The advantage of an overdraft is that the
borrower only pays interest on the amount and period overdrawn, compared to a loan where
the borrower has to pay a fixed interest rate calculated for the whole period, whether the loan
is paid back earlier or not. The lender of the loan will require a contract in which the amount,
interest rate, duration, payments and security are clearly stated. A mortgage (bond) is a long-
term loan (20 years or more) secured by real estate or any other fixed assets that can be
liquidated. A lease is an agreement where the owner/lessor allows the lessee to use
equipment for a period at a specified instalment. Small businesses use this form of finance to
improve their cash flow – obtaining equipment in the start-up phase without a major
expenditure of cash. Leases are often used by businesses for expensive machinery and
equipment. A debt factoring arrangement involves the business selling its invoices to a
financial 179institution, known as a “factor”. If the factor is satisfied with the receivables, it
will buy the debts at a discount rate. The advancement can be as high as 80 per cent of the
debt. The factor will collect the debt from the debtors and forward the outstanding amount to
the business. Debt factoring allows businesses to receive cash immediately for invoices with
less administrative cost. Table 10.1 depicts the types of funding available from financial
institutions.

Table 10.1 Types of funding available from financial institutions

The promotion of entrepreneurship and small businesses remains an important priority of the
government of South Africa. Their commitment is to ensure that small businesses increase
their contribution to the growth and performance of the South African economy with the
main focus on job creation. The government, through the Department of Trade and Industry
(the dti), is supporting efforts to establish new venture funds for small, medium and
microenterprises. Their brochure named “Integrated strategy on the promotion of
entrepreneurship and small enterprises” makes provision for a wide range of key financial
services and incentives. Several financing products are available from their website
(http://www.dti.gov.za).

The Small Enterprise Finance Agency (sefa), a government initiative, is a “one-stop

finance shop” mandated to foster the establishment, survival and growth of SMMEs and
contribute towards poverty alleviation and job creation. The sefa fund is a billion-rand fund
geared towards helping young people start businesses or grow existing ones. Their lending
products are bridging loans, term loans and structured finance. A guide giving information on
how to access funds is available from http://www.smesouthafrica.co.za

The role of the Industrial Development Corporation (IDC), according to Cobbinah (n.d.),
is to enhance the industrial capability of South Africa, and the rest of the continent, thereby
boosting economic growth and industrial development. They do this by funding entrepreneurs
starting new enterprises or supporting companies 180that want to extend existing operations.
They fund start-up and existing businesses up to a maximum of R1 billion and consider debt
of R1 million. Their funding can be structured in a number of ways such as debt, equity and
quasi-equity, guarantees, trade finance and venture capital. They also have a number of
special schemes available from their website: http://www.idc.co.za

There are various provincial agencies and corporations established as special economic and
development vehicles in all of the nine provinces of South Africa. One is the Limpopo
Economic Development Agency (LEDA) with development initiatives to accelerate industrial
diversification, to increase the levels of trade and to develop sustainable enterprises
(Limpopo Economic Development Agency n.d.).

Similarly, the Free State Provincial Government has established the Free State Development
Corporation (FDC), a specialist economic development agency formed to offer the Free State
people and potential investors a wide selection of services. These services include: SMME
support – both financial (through loans) and non-financial, property development and
management, and helping investors in setting up businesses (Free State Development
Corporation n.d.).

Another provincial agency with the same vision and mission is the Gauteng Growth and
Development Agency (GGDA) whose main function is to grow the economy by positioning
Gauteng as a globally competitive province. Key to this is supporting the growth of the
cooperative economy, facilitation of trade and investment, and increased strategic economic
infrastructure (Department of Trade and Industry n.d.).

Business Partners Limited focuses on providing finance for formal small and medium
enterprises. Business Partners Limited structures unique, individualised financing solutions.
Deals are structured using equity, shareholders’ loan accounts, revenue sharing and term
loans, or any combination of these. Business Partners Limited has developed a range of
proprietorial financing models that offer entrepreneurs maximum flexibility to suit their
specific needs. Applications for finance are assessed on the viability of a business, which
comprises two important elements, namely the business and the entrepreneur. Business
Partners Limited considers financing applications up to R50 million in all sectors of the
economy – with the exception of on-lending activities, direct farming operations,
underground mining and non-profit organisations – to those formal small and medium
businesses whose gross assets are under R100 million, where annual turnover does not
exceed R200 million and/or employees are less than 500 in number. Applications for
financing below R500 000 are usually not considered; and the company does not operate in
the informal or microenterprise sectors (SME Toolkit South Africa n.d.).

A very common short-term source of financing that an enterprise can use is to buy its stock
on credit from a supplier. The arrangement between the two businesses (client 181and seller)
is known as trade credit. The client applies, after which the seller will do a credit check in
order to determine the client’s creditworthiness. If the application is approved, the credit limit
and terms will be established. Terms may normally be 30, 60 or 90 days. The benefit for the
client is “you buy now and pay later”, which in turn will have a positive impact on the cash
flow of the enterprise (Entrepreneur: Small Business Encyclopedia n.d.). For example, your
trade credit arrangement with a supplier is 90 days while you sell goods to your customers on
a 60-day term. The net benefit will be 30 days, in other words the business thus has an
amount (working capital) at its disposal for a period of 30 days.

10.4 Managing finance

Managing finance is generally concerned with financial forecasting, budgeting, pricing
products and services, and breakeven analysis.

10.4.1 Financial forecasting

Any business, whether it is a start-up or an existing business, needs a business plan. The
business plan (which will include a financial plan) is the road map for the business. The most
important aspect of the plan is the goals and objectives it sets out. A critical objective can be
the amount of sales you want to make over the short to longer term. Thorough research, not
only on sales or the market, but also on costs (start-up cost, material and premises) is
necessary. Correct information and reasonable estimates should be used in the budgeting
process.

10.4.2 Budgeting

A budget is a written document that expresses management’s goals and forecasts in financial
terms for a specific future period (Nieuwenhuizen 2014: 295). It details the projected income
or revenue and expenses for a specific period, usually a year. Budgeting is a process and
usually consists of certain steps, as depicted in Table 10.2.

Table 10.2 Budgeting steps

An entrepreneur has a choice of different budgeting methods. The two mostly used are the
incremental budgeting, also known as the add-on budget, and the zero-based budgeting
(ZBB) methods.

The incremental budget is a budget prepared using a previous period’s figures/records

(income and expenses) as a basis, with amounts added for the new budget period. For
example, a fixed percentage is added to each budget item for the next period to allow for
inflation or a rise in prices. Managers justify only variances and assume that the figures of the
previous period must continue. This method fails to take account of changing business
conditions (Tutor2u. Business n.d.).

The zero-based budget, as the name implies, starts from a “zero base” and every
function/activity/item within the business is analysed and justified for its purpose and cost
before it is approved to be included in the budget. The zero-based method involves the
preparation of a “new” budget for every period without reference to the previous period. It is
the appropriate method for the start-up entrepreneur to use, as he or she has no historic data
available to compile the budget. Each budget item should be considered and motivated
(Booysen 2015: 257; Business Dictionary n.d.).

The budget types discussed in this section are all based on the zero-based method. There are
various types of budget but for a start-up business the cash budget is critical. Before a cash
budget can be compiled it is essential to develop a sales, production and capital budget. The
sales, production and capital budgets represent the inputs for the cash budget (Co et al.
2006: 235–238).

These budgets will be explained by means of practical examples. BBQ Cape, a barbeque
equipment manufacturer, decide to manufacture an additional product at their new plant in
Bellville, namely a portable pizza oven. After thorough market research they expect sales to
be 150 units for the first and second months, and an increase of 20 per cent for the rest of the
year. The estimated selling price is R950 per unit. All purchases and sales will be cash. The
sales budget for January to March is depicted in Table 10.3.

Table 10.3 Sales budget

With the number of units known, as well as the material price of R350 per unit, the
production budget can be compiled, as shown in Table 10.4. The production manager of BBQ
Cape wants to have stock available at the end of each month, equal to 30 per cent of the
following month’s sales. 183
Table 10.4 Production budget

The capital budget details how much money BBQ Cape need to open the new plant. These
fixed assets are a building, furniture, machinery, equipment and vehicles. After quotations of
various suppliers had been received and perused by management, a summary was drafted.
This summary or capital budget (Table 10.5) indicates the amount of money needed and also
gives an indication of when the purchase should be made.

Table 10.5 Capital budget

A cash budget shows the amount of cash received (revenue/income) and payments made. The
cash budget serves as a tool for measuring variances between the budgeted amounts and
actual payments. A positive cash flow is an indication of growth and prosperity. The owners’
cash contribution to the new venture is R75 000.

A lack of a cash flow forecast is a recipe for certain disaster whatever the long-term
prospects, they mean zero the day the firm runs out of cash.

rodney schwartz

Table 10.6 Cash budget

According to Co et al. (2006: 222, 224), there are several ways of securing funds and
improving the cash flow:

Tighter credit control (less credit available to customers)

Lower stock levels
Delaying payment to creditors
Bootstrapping (buying used equipment instead of new) 185

10.4.3 Pricing a product and service

Pricing a product or service is fundamental to the success of any business. Pricing correctly
can enhance your turnover and in the end ensure good profits. Following a wrong strategy
may harm the business, resulting in its closure. The entrepreneur must remember in
formulating a price strategy that underpricing (too low to cover costs) and overpricing (much
higher than your competitors) can influence the success of the enterprise. Pricing on the one
hand is an art but thorough research is also essential.

Wasserman (n.d.) asserts that there are various factors to consider:

The first factor to consider is what you want from your business. Is it profit only or
do you want to establish a business that continuously grows, or will it be known for
its quality and customer service?
 Also ensure that you know your customers, their needs and buying behaviour.
Without customers (buyers) no business can survive. This aspect requires careful
research of your market. What needs can you fulfil with your product? Who will you
focus on, in other words your target market? What is the size, demographics and
income level of the target market?
The next factor to consider is cost. The fundamental of pricing is that it should cover
total costs (fixed costs and variable costs) and the desired profit. Careful examination
of purchase, operation, marketing, administrative and sales costs should be
undertaken. Profit is the driving force of any business owner and it represents the
return on investment (ROI). In determining the profit margin the entrepreneur has two
options: low price with high turnover (sales) or higher price with lower turnover.
You must also understand your competitors. Competition may be in terms of quality,
price or leadtime. How will established businesses react to the new entrant in the
market? They have many options to react, for example to lower their price to keep
their customers. How will you counteract if all competitors lower their prices?
Think about other influences on price. How will value-added tax (VAT) impact on
price and remember that prices can seldom be fixed for long? Costs, customers and
competitors can change, so you will have to shift your prices to keep up with the
market.

10.4.4 Pricing methods

Two pricing methods that are generally followed are cost-plus pricing and value-based
pricing. According to Booysen (2015: 197), cost-plus pricing is where you add together all
fixed and variable costs and add the mark-up percentage. Although it is a simple method, it
has the disadvantage that it ignores the competition. If you set the price too high, you may
lose customers and if it is too low, you will be giving profits away. See the following
example for product A of XYZ Ltd:

Fixed costs = R25,00

Variable cost = R5,00
Total costs = R30,00 186
Profit = R7.50 (mark-up of 25%; calculated as R30.00 25/100)
Selling price = R37.50

Products manufactured in mass and sold in large markets (motor car industry) is usually sold
using cost-plus pricing.

Value-based pricing is another approach followed by entrepreneurs where prices are set on
the estimated value of the product to the customer, rather than on the cost and profit of the
product. An example is a painting. A painting is priced much more than the price of the
canvas, paint and labour. Also, a trip to Robben Island is priced based on the value that the
experience provides to the customer (Co et al. 2006: 137).

10.4.5 Breakeven

An enterprise has broken even when its revenues equal its total expenses. At the breakeven
point, the enterprise is neither making any profit nor realising any loss. It is breaking even –
no loss, no profit. This calculation is valuable for any business owner, because the breakeven
point is the lower limit of profit when determining the selling price of an item (Richards
2016).

According to Richards (2016), to calculate the breakeven point you have to consider two
types of cost, namely fixed and variable costs as well as the selling price:

Fixed costs (also called indirect costs or overheads): these are costs that remain the
same regardless of how many items you produce. Examples would include costs such
as rent for equipment and premises, insurance instalments and wages/salaries.
Variable costs (also called direct costs): these costs are the direct expenses incurred
to manufacture a single product. For a retailer it is the cost price of a product the
retailer pays the supplier and for a manufacturer it is the accumulated cost prices of all
raw materials.
Selling price: this is the unit price and refers to the amount you plan to charge
customers to buy a single unit of your product.

Van Aardt and Bezuidenhout (2014: 240) propose the following formula to calculate the
breakeven point in units:

An example of calculating the breakeven point: John left school at the end of 20XX but
cannot find a job. He is considering opening a hamburger stall at one of the flea markets near
campus. After thorough research and calculations he has gathered the following information:
He will sell his hamburgers for R15,00 each. The accumulated prices of all the ingredients
(meat and sauces) will be R5,00. The rental for the site will be R760,00 per day; equipment
rent R500,00 and wages R740,00. Added altogether this amounts to R2 000,00 per day.
Using the figures you can construct a breakeven chart as shown in Figure 10.1. George
(1982: 231) identified three steps for constructing a breakeven chart. First you draw the sales
revenue line starting at zero (no sales – no revenue) and run the line through the point at 300
units and R4 500 (300 units R15,00). Next you draw the fixed cost line. The fixed costs are
R2 000,00. Regardless of how many products you manufacture, the fixed costs remain
constant. Therefore, you draw the line parallel to the bottom of the chart starting at the
R2 000,00 point on the vertical scale. Finally, you draw the total cost line. If you do not
produce any products, you still have a fixed cost of R2 000,00, which is the starting point on
the vertical scale. The total costs for 300 units are R3 500.00 (R2 000,00 + R5,00 × 300). You
draw the total cost line from the R2 000,00 on the vertical scale to the point at 300 units
(vertical scale) and R3 500,00 (horizontal scale).You can now read the breakeven point as
200 units at a revenue of R3 000,00. If you sell more than 200 units, you will make a profit.

Figure 10.1 Breakeven

10.4.6 Business calculations

Business calculations or numeracy is making you at home with numbers. An entrepreneur

must know the quickest and smartest way to make daily calculations. Numeracy skills are
ranked among the top skills that entrepreneurs need. In this section attention will be paid to
proportions, percentages, simple and compound interest.

Proportions can be defined as a part in its relation to the whole, for example 1 of 4, and can
be indicated by 1:4 (the ratio).

With compound interest, interest is calculated on the principal amount and on the interest it
has already earned. For example, a bank is willing to pay a 6% interest rate, compounded
yearly, on its savings accounts. You deposit R10 000 and after three years you can expect the
following (see Table 10.7):

Table 10.7 Compound interest

The difference between the two balances (R11 800 and R11 910,16) after three years is
attributed to the fact that in the second case interest was calculated on interest previously
received.

10.4.7 Financial statements and controls

Owners or managers put financial controls in place to assess the progress towards the goals of
the enterprise. Managing finance, like the management of any other function in the enterprise,
consists of four interrelated steps, namely planning, organising, leading and control. Control
has steps of its own, i.e. setting standards, measuring 189against standards and comparing the
actual status with the budget. If deviations occur, corrective steps should be taken. If the first
three aspects of the managerial role are carried out optimally, the controls put in place to
evaluate results will show that the financial goals developed at the beginning were achieved.

Sound financial control of any business starts with bookkeeping, which involves the entering
of monetary transactions into books of account. A trial balance is then extracted from which a
Statement of Profit or Loss and other Comprehensive Income, and a Statement of Financial
Position are prepared. The Statement of Profit or Loss and other Comprehensive Income is a
record of all income and expenditure of the business in the year or period under review
(Booysen 2015: 286). The Statement of Financial Position presents the financial position of
the business at a particular point in time. It reflects the assets (funds applied), equity and the
liabilities (funds generated) of the business (Van Aardt & Bezuidenhout 2014: 213).

Financial controls or the tools (financial ratios) that managers use to track progress and
evaluate results can be placed in four categories, as stated below. The first three categories of
ratios measure risk, whereas profitability ratios emphasise the return on investment (ROI):

Liquidity ratios
Activity ratios
Debt ratios
Profitability ratios

Liquidity ratios

These ratios measure the enterprise’s ability to pay its short-term debts. There are two ratios
that can be used: the current ratio and the quick ratio.

The current ratio

This is one of the most cited ratios used and it measures the enterprises’ ability to meet its
current obligations. A ratio of 2:1 or greater is recommended. A ratio of 2:1 is recommended
to ensure the current assets of a business covers the current liabilities comfortably (Co et al.
2011: 217).

Current ratio = current assets/current liabilities

The quick ratio

Similar to the current ratio, but it excludes inventory from the current assets. Inventory is
sometimes excluded in cases where the inventory cannot be easily converted into cash
(inventory becomes obsolete). A ratio of 1:1 or greater is recommended. With a ratio of 1:1 it
shows that there is R1 of assets available for every R1 in current liabilities (Co et al.
2006: 217).

Quick ratio = current assets inventory/current liabilities

However, the industry in which the business is operating has to be taken into account when
interpreting the ratios. 190

Activity ratios

The inventory turnover rate and the debtor collection period are ratios used to measure the
speed with which accounts are converted into cash.

Inventory turnover rate

This ratio measures how long it will take to convert stock into cash. It is calculated as
follows:

Inventory turnover rate = cost of inventory sold/inventory

The inventory turnover rate differs from one industry to another. For a clothing shop a ratio
of 30 (30 times a year) would be common, whereas for a motor car dealer it could be 20. In
the case of the motor car dealer it means the average age of the stock is 18,3 days (365 ÷ 20).
To determine whether the ratio is good or bad it should be compared to the norm of the
industry in which the business operates (Van Aardt & Bezuidenhout 2014: 224).

Debtor collection period

This measures the average age of debtors. The shorter the period, the better for the
enterprise’s cash flow (Van Aardt & Bezuidenhout 2014: 224).

Creditor collection period

This ratio indicates the average age of your creditors. A longer period than the debtor
collection period would be beneficial to the enterprise in terms of liquidity. If the creditor
collection period is shorter than the debtors’ collecting period, the business needs to make use
of short-term finance (Co et al. 2006: 227).

Debt ratios

The debt ratio and solvency ratio both measure the ability of the business to pay its debt over
the long run.
The debt ratio, also referred to as the debt-to-assets ratio, measures the extent of an
enterprise’s leverage. Enterprises with higher levels of debt (liabilities) compared with assets
are considered highly leveraged and more risky for lenders. It can also be interpreted as the
proportion of the assets of a business that are financed by debt (Van Aardt & Bezuidenhout
2014: 225).

solvency ratio, on the other hand, measures an enterprise’s ability to meet its debt and other
obligations. The lower an enterprise’s solvency ratio, the greater the probability that it w
on its debt obligations (Lodewyckx, Lötter, Rhodes & Seedat 2013: 337).

Profitability ratios

These ratios measure the performance of an enterprise, i.e. the ability to operate efficiently
and generate profits (Co et al. 2006: 220). All stakeholders of an enterprise pay close
attention to the maximisation of profits. This section looks at three profitability ratios:

10.5 Summary
This chapter examined how to access finance, budgeting and the management of finance. The
focus is on prospective entrepreneurs interested in starting their own first enterprise.
Although the theoretical background is of the greatest importance, the main emphasis is
placed on business skills. Without skills the owner of a business cannot get to the day-to-day
activities. The following conclusions can be drawn:

The reality is that start-up entrepreneurs do not have funds to “kick-start” an

enterprise and therefore they should explore various types and sources that are
appropriate to their needs.
Forecasting is essential to budgeting. Proper research for relevant and recent
information is a prerequisite for compiling budgets.
Managing the finances of an enterprise entails various functions and activities with
the main aim being to assess the progress towards goals set for a specific period.
Case study: Motaki

Cape Furniture is for sale. Motaki, an aspiring entrepreneur, wants to buy the enterprise. He
has asked you to advise him whether it is a good proposition and submits the following
financial statements (Table 10.8 and Table 10.9). You have decided to give him a report,
based on the financial ratios measuring the performance of a business. (Hint: Use the
following template for your feedback.)
Table 10.8 Statement of Profit or Loss and Other Comprehensive Income for Cape Furniture
Table 10.9

Questions

1. Explain the steps of the budgeting process.

2. Define the following terms:
1. Budget
2. Breakeven
3. Fixed costs 194
3. Distinguish between the zero-based budgeting and the incremental budgeting
methods.
4. List the managerial functions.
5. Discuss the factors to be considered in pricing a product.

1. The most liquid form of money is:

1. Debtors
 2. Loans
3. Assets
4. Cash
2. In which budget will you find the item “payroll for administrative staff”?
1. Sales
2. Production
3. Capital
4. Cash
3. When a bank overdraft is obtained, interest is paid on
1. the amount used
2. the approved amount
3. the unused amount
4. none of the above
4. Trade credit is a source of
1. external sources of finance
2. internal sources of finance
3. medium-term finances
4. long-term finances
5. Short-term loans can be obtained from
1. Government
2. investors
3. financial institutions
4. all of the above

Exercise 10.1: Breakeven

Ann is considering starting her own business – manufacturing and selling scarfs. The cost of
the materials needed to manufacture one scarf amounts to R30,00 and the labour costs are
R10,00 per unit. The rental of the premises amounts to R1 600,00 per month and other direct
costs will be R2 800,00 per month. She is confident that she will be able to manufacture and
sell 200 scarves per month. The selling price is R80,00 each.

Required:

1. Calculate the breakeven point in units and rand. 195

2. Verify your answer.
3. Indicate the breakeven point on a graph.

Exercise 10.2: Business calculations

No calculators allowed

1. You want to exchange rand for pound. How many pounds will you get for R250,00 at
an exchange rate of R18,00 = £1?
2. John has decided to save R10,00 in January and then double the amount each month.
How much will John need to save at the end of April?
3. In January Colin bought a TV at a sale, which had been reduced by 20 per cent. If he
paid R290,00 for it, what was the original price?
 4. Five years ago there were 25 people in the sales department and the ratio of men to
women was 3:2. Since then five more men and women have joined. What is the new
ratio of men to women?
5. What is the price of an item before VAT, if the item sells for R122,00?
6. Calculate the percentage change in price from 2015 to 2016:
2016 R20,00
2015 R25,00
7. You have R50 000,00 to invest in a bank for two years at an interest rate of 9 per cent
per year. Clients have the option of simple interest or interest compounded yearly.
Which one is the better option and why? Show your calculations.

Recommended reading
Books

Nieuwenhuizen, C. (Editor). 2008. Basics of entrepreneurship, 2nd ed. Cape Town: Juta.

Strydom, J. (Ed). 2015. Entrepreneurship and how to establish your own business. 5th ed.
Cape Town: Juta

Websites

http://www.dti.gov.za

http://www.idc.co.za

http://www.smesouthafrica.co.za

References
Badenhorst-Weiss, J.A., Cant, M., De Beer, A.A., Ferreira, E., Groenewald, D., Mabasa,
D.G. et al. 2015. Business management for entrepreneurs, 3rd edition. Cape Town: Juta.

Booysen, K. (Ed). 2015. Dynamics of entrepreneurship. Cape Town: Juta.

Business Dictionary. n.d. What is zero-based budgeting (ZBB). Available at:

http://www.businessdictionary.com/definition/zero-based-budgeting-ZBB.html (accessed on
2 June 2016).

Co, M.J., Groenewald, J., Mitchell, B., Nayager, T., Van Zyl, J. & Visser, K. 2006.
Entrepreneurship: fresh perspectives. Cape Town: Pearson Education.

Cobbinah, B. n.d. Accessing funding from IDC. Industrial Development Corporation.

Available at:
http://www.entrepreneurexpo.co.za/documents/presentations/Industrial_Development_Corpo
ration_presentation.pdf (accessed on 1 June 2016).
Department of Trade and Industry. The Provincial Government Handbook. Available at:
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