1.2 Different criteria used when making business decisions

Internal factors

Attitude to risk

Organisational objectives

Core competencies of a business

Impact on internal stakeholders

Business ethics

Financial considerations

Time

Opportunity cost

External factors

Level and nature of risk

Impacts on external stakeholders

Degree of uncertainty

Changes in market

Changes in external environment

Risk averse

Reluctant to take risks

Attitude to risk

As the level of risk increases, the potential for reward, which can either be profit or loss, also increases. Risks can be the effect on a businesses reputation and the likelihood of success of a project

What is a tool businesses use to measure risk?

Ansoff’s matrix

What is Ansoff’s matrix?

Ansoff’s matrix is a marketing tool that is used to determine a businesses longer term growth strategy by deciding whether to sell current or new products in existing or new markets.

Organisational objectives

These are targets that have a direct impact on the decisions taken by a business

Example of organisational objectives

If the business objective is to reduce running costs by 10 per cent, it is unlikely that more staff will be employed.

Core competencies of a business

These are the things that business is good at, making it stand out from its competitors and enabling it to do better. Businesses need to constantly adapt their core competencies to changes in the external environment, and to be able to evolve and develop as opportunities arise.

Impact on internal stakeholders

Before deciding whether to extend its opening hours, a business will need to think about the effect on its employees.

Business ethics

Customer trends dictate that businesses take a strong ethical stance in their activities. Doing the right thing is not always the most natural choice, as ethical business practices cost money. A business also needs to consider its corporate social responsibility when making decisions

Financial considerations

The decisions that a business makes often depend on the funds available. Whether to buy or rent premises depends on what the business can afford. Available funds could be internal or external.

Internal funds

Retained profit, owner funds

External funds

Bank loan, mortgage, selling shares

Example of financial considerations

Using a distribution company to deliver products

Time

Complex decisions require more time to consider than simple, straightforward ones.

Example of time

For a business that prioritises cash flow over long term profit, a project with a shorter payback period is preferred.

Opportunity cost

This refers to the consequences of decisions and alternatives.

Example of opportunity cost

Due to limited resources, a business has to choose between two projects, A and B. By choosing project A, the business will lose out on the benefits of project B and visa versa

Example of risks that are beyond a businesses control.

Natural disasters, terrorists attack, war, changes in consumer trends and changing in economic factors.

Level and nature of risk

Before a major strategic decision is made, businesses need to identify the likelihood of these risks and consider their options; this is the first step of the risk management process.

Impacts on external stakeholders

These are important considerations as external stakeholders such as customers, local community and pressure groups can have a serious impact on a business’s reputation.

Example of risks that are likely and difficult to control

When a particular competitor is known to be developing a similar product

Example of risks that are less likely and can be controlled

An online shop could be hacked

Degree of uncertainty

The next step is to assess the level of risk and the likelihood of the risks actually happening. The decision will of course depend on the businesses attitude to risk and how important change is to the long term survival of the business.

example of degree of uncertainty

Before making a major strategic decision that requires lots of borrowed funds, businesses need to consider their risk of a rise in interest rates and how likely it is that this will take place

Changes in market

These refer to changes in the demand and supply of certain goods and services in the market. Businesses need to respond to any changes in the market they operate in, in order to maintain or gain market share.