3.4 influences on business decisions Flashcards
corporate timescales:
business decisions can have long-term and short-term implications
(short-termism and long termism)
what is long-termism?
making decisions that are likely to affect the long-term mission and vision of the business over a period of many years
what is short-termism?
making decisions that are likely to impact on objectives and tactics over the next few years at most
many businesses focus on decision-making for…
the short term
↳ this is especially influenced by pay structures, e.g. where executives’ pay is linked to short-term success, such as increase in the share price
what are some influences on business decisions?
-timescales
-corporate culture
-stakeholders perspectives
-business ethics
strategies likely to be adopted by a business with a short-termist approach to decision-making:
-maximise short-term profits
-invest less in R&D and training (HR)
-return profits to shareholders
-pursue external growth strategies rather than organic growth
short-term measures of success include:
cash position, revenue, productivity, profit
issues with short-termism:
-loss of profitability and competitive edge as long-term opportunities are ignored in favour of short-term priorities
-need to produce and analyse very frequent financial reports →
managers lack time to consider longer-term corporate strategic direction
-reliance on short-term contracts with suppliers and workers is likely to lead to higher than necessary costs as benefits such as bulk buying discounts cannot be achieved
strategies likely to be adopted by a business with a long-termist approach to decision-making:
-invest in R&D and innovation
-invest in training, recruitment & retention of staff
-focus on profit quality
-take an ethical stance on decision-making
-less emphasis on frequent financial reporting
-establishing and nurturing meaningful and lasting relationships with suppliers
what is profit quality?
a high quality profit is one which can be repeated or sustained / the degree to which profit is likely to continue into the future
long-term measures of success include:
successful innovation, profit quality, employee engagement, sustainability
what are two approaches to decision-making?
-evidence-based decision-making
-subjective decision making
what is evidence-based decision-making?
taking a systematic and facts-based approach (based on evidence such as financial forecasts and business tools such as break-even analysis) when determining objectives, strategy and tactics
the evidence-based approach to business decision making (steps)
1) a business identifies the objective it wants to achieve and determines the criteria against which success will be measured
2) data is then gathered and analysed to consider available decisions
3) the appropriate evidence-based decision is made and communicated with workers
4) the decision is implemented and carefully monitored and reviewed
5) the outcome of the decision can be used to inform future decision-making
what sort of data could be analysed for evidence based decision-making?
internal data - may be gathered from sales records and market research
external market data and economic forecasts are also often used
advantages of evidence based decision-making:
-data can help reduce risk in decision-making and help identify the likely outcome
-data can help compare alternative options
disadvantages of evidence based decision-making:
-can be hard or expensive to collect, especially for small businesses
-sometimes data is unavailable, out of date or unreliable
what is subjective decision-making?
decisions based on experience and intuition without having supporting data
advantages of subjective decision-making:
intuition might come from experienced managers → useful when making qualitative decisions, such as the character of a new employee or the potential success of a new marketing campaign
disadvantages of subjective decision-making:
without evidence in the form of data, decisions based on intuition will always be risky
situations where subjective decision making may be appropriate:
-where quick decisions need to be made
-where the nature of the industry means that subjective decisions are normal
-where there is a lack of data to support evidence-based decision-making or where data conflicts
-where a persuasive and single-minded leader runs the business
appropriate subjective decision-making: where quick decisions need to be made
-sometimes a swift decision needs to be made to adapt to rapidly-changing market conditions
(eg: the entry of a new competitor may require an immediate response to avoid losing sales)
appropriate subjective decision-making: where the nature of the industry means that subjective decisions are normal
-in some industries, subjective decision-making provides the key element of competitive advantage
-the fashion industry relies on the instincts and personal style choices of designers and buyers who are likely to have a ‘gut feeling’ that guides their decisions
appropriate subjective decision-making: where there is a lack of data to support evidence-based decision-making or where data conflicts
-in some instances, there may be a lack of up-to-date and accurate data to support an evidence-based decision so a well-placed ‘hunch’ may be the best option a business has
appropriate subjective decision-making: where a persuasive and single-minded leader runs the business
-some businesses are dominated by powerful leaders who make key strategic decisions without consultation and with limited data
-this is an appropriate decision-making approach where leaders are experienced and trusted and have a good track record
decision-making techniques of large vs small businesses:
-due to the level of financial risk involved in corporate decision-making, large corporations are more likely to use an evidence-based approach to decision-making to reinforce the opinions of senior managers
-they may also have specialist functions and business analysts to produce and analyse evidence, whereas smaller businesses will not
Examiner Tips and Tricks
A businesses approach to decision making can provide an excellent basis for analysis and evaluation.
Look out for clues in the case study that identify whether the business takes an evidence-based or subjective approach and weigh up how this may affect both the quality of the decision and likelihood of the business achieving its objective.
Explore the skills, experience and characteristics of the key decision makers and state your concerns.
Consider whether their approach is appropriate given the timescales available and the level of risk involved in the decision.
Evaluate the sources of information used to make decisions and make a judgement about whether it is sufficient.
what is the culture of a business?
valued, believe and assumptions that make up the way a business is run and the way employees interact with one another
what is a strong culture?
-the attitudes values and beliefs are easily embedded into the business
-the culture is obvious to the people working in that business and it will influence
where factors such as attitudes values and beliefs are easily-recognised and embedded into the way that a business operates
Businesses with strong cultures are likely to possess a range of visual features and norms
visual features in a business with a strong culture:
-uniforms
-a well know figurehead as a role model
-ceremonies
-training culture (e.g induction and on-going training)
norms visible in a business with a strong culture:
-core organisational values (e.g. staff wellbeing)
-workplace procedures (e.g. meeting etiquette)
-business specific language (e.g. calling workers ‘team members’ or ‘partners’)
benefits of a strong culture:
-employees have a ‘can do’ attitude and are motivated by their work
-a sense of belonging
-a sense of togetherness/camraderie
-improved commitment from employees
-people understand their purpose within the organisation
drawbacks of a weak culture:
-a ‘them and us’ attitude may exist between workers and management
-employees may doubt the sincerity of the corporate mission
-high levels of staff turnover and low commitment amongst staff
classification of company cultures:
there are four types of organisational culture:
-power
-role
-task
-person
what is power culture?
decision-making is carried out by one or a small number of powerful individuals, usually at the top of the business hierarchy
features of job culture:
-few rules exist to determine decision-making procedure
-a competitive atmosphere between workers vying for power
-most communication is by personal contact
what is role culture?
roles and responsibilities are clearly defined, individuals are expected to follow established procedures
features of role culture:
-usually a very clear hierarchical structure
-employees are expected to adhere to rules and understand their place in the hierarchy
-very large organisations in the public sector, such as the NHS, are usually considered to have a highly structured role culture
disadvantages of role culture:
businesses with role cultures may find it difficult to adapt to rapidly changing market conditions
what is task culture?
teams are formed around specific tasks or projects and are motivated by shared goals
features of task culture:
-power lies with those with task-related skills (e.g. a finance specialist may make decisions related to funding within the group)
-teams are created and dissolved as projects are started and completed
-there is an emphasis on adaptability and teamwork
what is person culture?
employees have a great deal of independence and may not be strongly affiliated with a specific group
features of person culture:
-these individuals have significant levels of power to determine their own decision-making procedures and often work autonomously
-organisations with person cultures are very common in professional services such as accounting and law
how does corporate culture generally form?
corporate culture generally forms over time especially as a business grows
factors that contribute to the formation of a corporate culture:
-leadership styles
-human resources policies
-type of ownership
-rewards (what the business recognises as success and the way it rewards this)
-experiences
-type of product
-environment factors
factors that contribute to the formation of a corporate culture: type of ownership
-large public limited companies are likely to adopt a shareholder approach, focusing on meeting the short-term profit maximisation needs of shareholders
-family-owned businesses are more likely to take a longer-term approach, focused on the longevity of the business and perhaps a wider range of stakeholder needs
reasons for changing an established culture:
-to increase productivity
-to improve innovation and creativity
-to face a particular challenge
-to follow the direction of a new leader
-due to poor performance
-due to a change in customer needs
factors that cause difficulties in changing established cultures:
-identifying contributing factors
-the existence of sub cultures
-overcoming resistance to change
-changing culture is a long process. It may require significant education and training of the workforce
-large organisations may have more than one culture across different functions or regions
factors that cause difficulties in changing established cultures: identifying contributing factors
identifying the various elements of an organisation’s culture can take time and significant insight to fully understand
factors that cause difficulties in changing established cultures:
the existence of sub cultures
-changes to visual elements such as uniforms logos and mission statements is a relatively straightforward task
-the impact of unofficial subcultures (such as always undermining management decisions) can be harder to change
factors that cause difficulties in changing established cultures:
overcoming resistance to change
-any change process is uncomfortable and requires employee buy in
-this requires careful communication in order for commitment to that change to be achieved
Examiner Tips and Tricks
Case studies contain lots of clues about a firm’s culture
Look for signs of a strong or weak culture, e.g.
Does the business have a clear figurehead?
Is there a particular way that the business carries out its activities?
Are there obvious guiding principles?
Are there visible signs of a culture, e.g. branding, uniforms?
The more clues you can identify, the more likely the business has a strong culture, but:
Do negative subcultures exist?
Is communication effective?
Is everyone ‘on board’?
what can a strong culture lead to?
a strong culture that exhibits desirable characteristics can lead to a competitive advantage for a business
↳ it can lead to a creative, innovative, cohesive or highly motivated organisation
point of evaluation for changing a strong culture:
-changing an organisational culture is very difficult and can take a long time as certain aspects of human behaviour are driven by attitudes and beliefs
-a strong culture might be desirable, but it will be difficult to change if it is not working
what are stakeholders?
individuals or groups that affect or are affected by the actions of a business
stakeholders & success:
a business needs to take into account the needs and interests of its stakeholders to operate successfully, not all stakeholders have the same needs and wants, it’s important to be able to manage often-conflicting interests
what are internal stakeholders?
individuals or groups inside the business
examples of internal stakeholders:
-employees
-managers
-business owners
-shareholders
what are external stakeholders?
individuals or groups outside of a business
examples of external stakeholders:
-customers
-suppliers
-the local community
-government
-pressure groups
owner objectives:
-rely on the business to provide an income
-they will want all, or a share of the profit
-they will want the business to be succeed
employee objectives:
-earn a living
-have job security
-be compensated fairly for their work
-have a safe working environment
-opportunity for development
what are employees?
individuals who work for a company
what are managers?
individuals who are responsible for the day-to-day operations of a company
manager objectives:
earn a living
-have job security
-be compensated fairly for their work
-have a safe working environment
-opportunity for development
-to meet the company’s goals and objectives
-to maximise profits and minimise costs while ensuring that the company operates efficiently
what are shareholders?
individuals or entities who own a portion of a company’s stock
shareholder objectives:
-to maximise their returns on investment
-for the company to be profitable
-to increase share values
define customers:
individuals or businesses who purchase goods/services from a business
customer objectives:
-to receive high-quality products or services at a fair price
-good customer service
-a positive experience with the company
supplier objectives:
-for the business to pay what it owes promptly and in full
-to be able to establish long-term arrangements with customers to improve business stability
definitions of the local community:
includes individuals and organisations that live or operate in the area where a business operates
objectives of the local community:
for the business to have a positive impact on the community:
-being environmentally responsible, providing jobs
-contributing to local causes/charities
-not polluting the area
define government:
responsible for creating and enforcing laws and regulations that affect businesses
government objective:
-to promote the public good and protect the interests of citizens
-the government wants companies to operate within the law and contribute to the economy
-employment opportunities
-tax
what are pressure groups?
organisations that seek to influence the policies and actions of businesses
pressure group objectives:
-to promote a specific cause or agenda
-want the company to support their cause or take action on an issue
which two approaches can a business take in its strategy?
a shareholder approach or a stakeholder approach
what does a stakeholder approach take?
-focuses on interdependencies between stakeholder groups
-takes steps to ensure that the benefits and drawbacks of its operations are shared equally amongst them
-
positive effects of a stakeholder approach:
encourages ethical practices by reducing the negative impact of a business’s decisions on a third party
negative effects of a stakeholder approach:
-likely to decrease profits, competing stakeholder needs may require solutions that involve increased costs (e.g. meeting employees’ needs by paying higher wages will increase salary costs)
what is the shareholder approach?
focused on meeting the needs of shareholders → maximising profits in order to increase dividends and improve the share price
effects with the stakeholder approach:
-fits with the idea that it has become good business practise to be socially responsible due to increased media scrutiny of business operations
examples of business influences on stakeholders:
-if a business experiences financial difficulties, shareholders may lose value in their investments, and employees may face job losses or pay cuts
-if a business is profitable, shareholders may benefit from increased dividends, and employees may receive bonuses or promotions
-customers can be affected by business activity in terms of product availability, quality, and pricing
-the local community can be impacted by the environmental and social impact of business operations, such as pollution or job creation
-the government can be affected by business activity in terms of tax revenue and regulatory compliance (following the laws)
examples of stakeholder influences on business:
-customers can influence product development and pricing through feedback
-e mployees can impact business activity through their productivity, skills, and job satisfaction
Shareholders can impact business activity through their investment decisions and demands for return
the local community can
impact business activity through regulations and permits (from the local council) and social pressure
pressure groups can impact business activity by lobbying for changes in policy or boycotting products
The government can impact business activity through taxes, regulations (laws), and subsidieso
what can there be between stakeholders?
conflict between different stakeholders within a business and the shareholders
what are examples of stakeholder groups that conflict?
-shareholders & employees
-shareholders & customers
-shareholders & management
-shareholders & government
stakeholder groups that conflict: shareholders & employees
-shareholders aim to maximise the return on their investment, which usually requires the business to make as much profit as possible
-employees aim for higher wages and better conditions, which is likely to increase costs and reduce profits
stakeholder groups that conflict: shareholders & customers
-customers aim for fair prices as well as good customer service
-as shareholders demand high profits to achieve maximum dividends, there is pressure on businesses to raise prices
stakeholder groups that conflict: shareholders & management
-management aims to run the business effectively and ensure it pleases its shareholders
-management may recommend the decision to retain profits to invest and grow the business rather than issue it to shareholders as dividends
stakeholder groups that conflict: shareholders & government
-governments want businesses to create good quality jobs whilst complying with laws and tax contributions
-shareholders are less interested in job creation and more interested in profit maximisation (this could lead to tax avoidance)
the shareholder concept:
-the belief that the prime function of a business is to satisfy its shareholders → maximising profitability and shareholder return
-business objectives from a shareholder perspective are profit-based and can be detrimental to the interests of the wider stakeholder group
the stakeholder concept:
-where businesses cater for the needs of all stakeholders, not just shareholders
-businesses create long-term prosperity and avoid unsustainable business practices
-this can hinder short-term profit objectives as the most profitable short-term decisions will not be made
aligned objectives:
-many businesses now adopt an approach that focuses on shareholder value with a long-term perspective, not just for short-term profitability gains
-as businesses adopt a long-term perspective, consideration of other stakeholders becomes more agreeable - such as the investment in training to improve the skills of the workforce
what are ethics?
moral principles that guide the behaviours of individuals and businesses → when making decisions, businesses must consider the impact they have on all stakeholders
examples of the aspects of ethical-decision making:
-environment
-corruption
-workers
-technology
ethical decision making: environment
-ethical corporations will ensure they are sustainable and not damage the environment
-large corporations may operate in countries with less stringent environmental regulations
-avoid negative impacts on animals
ethical decision making: corruption
-ethical corporations will do business in a fair, honest and open ways
-corruption exists in all industries including practices such as tax avoidance, bribery, fraud or profiteering from illegal practices like trading weapons in politically unstable regions of the world
ethical decision making: workers
-ethical businesses will ensure employees have good working conditions, fair pay and care for their overall well-being and health. -many corporations manufacture products in countries where the living wage is low and there are fewer regulations around workers’ rights
-ethical businesses implement equitable supply chains (e.g. using sustainably-sourced raw materials in production)
ethical decision making: technology
there are ethical debates around the development of some new technologies, for example GM crops, fracking, nuclear power and electronic cigarettes
some ethical businesses adopt an…
ethical code of practice which informs decision-making and may set out how they
examples of ethical business practices might include:
-treating workers and suppliers fairly
-being honest with customers
-ethical sourcing of materials
-meeting government requirements (legislation)
-caring for the environment (sustainability)
-paying suppliers a fair price for their goods
-only trading with other ethical corporations
trade-offs between profit and ethics:
-businesses will embed their ethical code of practice into every aspect of their operations
-taking an ethical approach costs more and may reduce the overall level of profits if the business can’t raise their prices to compensate (unless a business has a long-term perspective on success)
-acting ethically can be expensive and is not the fastest way (but often the most sustainable) to make a profit
benefits of ethical decision-making:
-businesses that adopt ethical principles usually attract long-term loyalty from employees and customers
-they may find that their approach provides a useful competitive advantage
pay & rewards (and business ethics)
salaries, wages and other forms of financial reward play an important role in rewarding and motivating staff, attracting new employees & maximising productivity levels
examples of current ethical concerns regarding pay:
-the gender pay gap
-minimum wages
-executive bonuses
current ethical concerns regarding pay: the gender pay gap
in the UK the gender pay gap stands at around 10% which means on average women earn 10% less than men per hour, despite 50-year old Equal Pay legislation
current ethical concerns regarding pay: minimum wages
-many businesses pay workers the legally required minimum wage
-to supplement their earnings many low-paid workers are entitled to benefits such as Tax Credits which are a significant cost to the economy
current ethical concerns regarding pay: executive bonuses
-in some businesses, senior leaders are paid extremely high bonuses, whereas some workers are paid the minimum wage
-on 2022 the pay of CEOs of companies jumped by an average of 25% largely as a result of record bonus payments
-simultaneously, many businesses were restricting pay increases for employees to help them cope with increasing levels of inflation
pressure groups & ethical decision making:
-pressure groups are organisations that try to make businesses change their behaviour or operations. -pressure groups focus on issues such as animal rights, workers’ rights, the environment and world poverty
-a pressure group can cause negative publicity for a business that acts unethically, which can damage the business’s reputation
what is corporate social responsibility?
-the belief that a business should act responsibly and protect the interests of all its stakeholders
-a business should operate in a way that actually benefits society and the environment
CSR in practice: customers
-fair prices
-transparency
-honesty
-responsible after sales service
-safe products
CSR in practice: employees
-fair pay
-good working conditions
-job security
CSR in practice: suppliers
-sustainable sourcing of raw materials and components
CSR in practice: local community
-employment opportunities -investment in intrastructure
-minimal negative externalities (protecting the environment)
what structure relates to CSR?
carroll’s CSR pyramid
carroll’s CSR pyramid:
-sets out four responsibilities that all businesses should meet in order to be socially responsible
-the responsibilities are hierarchical, with economic responsibility at the base
-without first meeting this responsibility a business will fail and will therefore be unable to meet its other responsibilities
levels of carroll’s CSR pyramid:
philanthropic responsibility
(contribute resources to the community; improve quality of life)
ethical responsibility
(being ethical - obligation to do what is right, just and fair)
legal responsibility
(obeying the law - law is society’s codification of right and wrong)
economic responsibility
(being profitable - the foundation upon which all others rest)
the problem with carrol’s CSR pyramid:
-there is sometimes a short-term contradiction between the first step of the pyramid and the following three
-the pressures for a business to be legally, ethically and philanthropically responsible can require significant financial investment, therefore having an impact on short-term profitability
what is now a common practice for businesses regarding CSR?
it is now common practice for large companies to publish annual corporate responsibility reports (provide an audit of the steps being taken to meet their commitments to a range of stakeholders)
drawbacks of CSR:
-extra costs are involved in operating in a socially responsible way, these costs are likely to be passed on to consumers
-bad publicity for not acting in a socially responsible way can be shared easily through social media, damaging a businesses reputation
benefits of CSR:
-can enhance the business image and reputation
-customers may choose a business based on social responsibility
-can be very profitable as it adds value for many stakeholders
-may improve employee motivation and productivity
-can help recruit strong candidates
-may help to solve social problems, (e.g. resource depletion)
-supporting developing countries through effective CSR policies supports long-term sustainability and growth in these markets.
Examiner Tips and Tricks (CSR)
When assessing the value of an ethical approach to CSR, make sure you include an assessment of the disadvantages too
-increases business costs
-ethical businesses face high levels of media scrutiny and are likely to receive particularly damaging criticism if they fall short
-as much as leaders express a commitment to ‘doing the right thing’, their ethical principles are very likely to be watered-down or dismissed in favour of making as much profit as possible
