3.4 Influences of Business Decisions Flashcards
How is Asset Stripping defined?
The practice of buying businesses and breaking them up. The profitable parts are sold for cash and the rest are closed down.
How is Evidence-based Decision Making defined?
An approach to decision making that involves gathering information and using a systematic and rational approach to reach a conclusion.
How is Long Term defined?
The time period where decisions have an impact on the vision, mission and objectives of a business. Typically longer than five years.
How is Short Term defined?
The time period where decisions only have an impact on the operational activities of a business – typically less than five years.
How is Strategic Decisions defined?
Decisions concerning policy that can have a long-term impact on a business. Can be risky.
How is Subjective Decision Making defined?
An approach to decision making where the personal opinions of the key decision maker strongly influence the course of the action chosen.
What are some influences of business decisions?
- Corporate Influences
- Corporate Culture
- Stakeholder Perspective
- Business Ethics
How does Corporate Influences affect Business Decisions?
- Short term goals conflicting with long term objectives.
- Focus on need for immediate profit can affect long term growth
- For example - limiting pay rises
- Another Corporate influence is whether business decision are based on evidence or the subjective view of key decision makers
- Subjective decision making is likely to carry more risk
How does Corporate Culture influence Business Decisions?
- The corporate culture can affect decision making.
- Open cultures will be more flexible and innovative
- More restrictive cultures can lead to being more cautious, leading to being less competitive
How does Business Ethics influence Business Decisions?
- Some businesses will focus on corporate social responsibility
- Others will have less consideration for factors such as environmental or local issues
How does Stakeholder Perspective influence Business Decisions?
- Businesses focused on shareholder opinions tend to leave other stakeholders marginalized.
- Others will consider a range of stakeholders, such as customers or workers, this focus may appeal to more customers
What courses of action are Short-Termist Businesses likely to take?
- Maximise Short-Term Profits
- Invest Less Money in Research and Development (R&D)
- Invest less in Training
- Return Cash to Shareholders
- Engage in Asset Stripping
- Arrange more Short-Term Contracts
- Pursue External Growth rather than Organic Growth
Why would a Short-Termist Business want to Maximise Short-Term Profits?
- Most companies that pursue short-term objective aim to increase shareholder value
- They are likely to do this by trying to maximise short-term profits
- For example. they might try to maximise revenue by charging higher prices, invest in advertisement, use cheaper resources etc.
Why would a Short-Termist Business want to Invest Less Money in Research and Development (R&D)?
- This is because research and develop can be a big drain on cash reserves.
- A company will prefer to use this to help fund short -term objectives
- Investment in R&D is also risky, returns could be negative if R&D projects are fruitless
- Even if R&D is successful, the financial returns can take many years to reap
Why would a Short-Termist Business want to Invest Less in Training?
- Training staff is also expensive and the returns are not immediate
- The returns from training are likely to be positive because workers will be better motivated, better equipped to do their job and staff turnover will be lower
- However, it will take time for the benefit to materialise
Why would a Short-Termist Business want to Return Cash to Shareholders?
- A business with a large cash reserves may pay special dividends to shareholders instead of investing for the long-term
Why would a Short-Termist Business want to Engage in Asset Stripping?
- Once the other business has been asset stripped, the profitable parts are sold for cash and the loss-making sections are closed down.
- This practice is often considered unethical because there is no regard for the future of the company and its stakeholders
- However, in the short term it can generate a quick cash return for shareholders of the predator
Why would a Short-Termist Business want to Arrange more Short-Term Contracts?
- They may also employ more agency and temporary staff, and favour short-term leases for machinery and other essential assets.
- entering short-term contracts obviously does not really commit a business to any long-term objectives
Why would a Short-Termist Business want to Pursue External growth rather than Organic Growth?
- Organic growth may be considered too slow for companies with a short-termist approach
- growth through mergers and acquisitions is much faster and may generate swifter returns, if successful
What are the Drawbacks of Short-Termism?
- Long term profitability of a business could be threatened by focusing on short term goals.
- Companies can lose competitive edge, particularly in overseas markets
- Requirements of financial reporting – particularly quarterly reports – mean that too much time is spent by executives focusing on non productive activities.
- Over reliance on short term contract – can lead to inefficient use of resource in long term
How is Long-Termism different from Short-Termism?
- Essentially, the benefits of long-termism is the opposite of short-termism.
- Businesses less likely to miss profitable long term products as will be willing to accept longer payback periods
- Increases in R&D spending will lead to greater chances of developing new products and other innovations
- With increased training budgets, long term will lead to more qualified, experienced staff, improving productivity
What are the Two Types of Decision Making?
- Evidence-based decision making –> requires a systematic and rational approach to researching analysing all the available information before a conclusion is reached
- Subjective decision making –> is where the personal opinions of the key decision maker strongly influence the course of action chosen
What is the process of Evidence-based Decision Making?
- Setting/Identifying Objectives
- Gathering Ideas and Data
- Analysing Ideas and Data
- Making a Decision
- Implementing the Decision
- Monitoring and Evaluation
What is the Identifying objective stage in Evidence-Based Decision Making?
- identify the objective a business wants to achieve
- The objective might be a corporate objective, such as growth or survival in a poor trading period –> decisions are likely to be complex and might be taken by the board of directors
- For lower-level objectives, such as filling a part-time vacancy, decisions may be taken by junior managers
- Objectives might be different at different stages in its growth
- government owned companies will have different objectives from PLCs
- The business also needs to develop criteria to measure whether it has achieved its objectives
- Quite often the objective is to solve a problem