influences on business decisions

Short termism

Where business and managers are focussed on quick financial rewards, such as quarterly profit or sales figures, often at the expense of investment in important areas

Reasons and how to achieve short termism

Reasons for short-termism:

• Shareholders in a Public Limited Company want to see a return on their investment in the form of a high dividend payment. Shareholders often receive dividends quarterly, therefore management might take decisions that result in high short-term profits that are motivated purely to maximise these dividend payments

• Managers might be in receipt of bonuses or financial incentives that are based on short-term performance. For example, a manager in a car dealership is likely to be paid on a commission basis and could be more concerned with generating high sales volumes in the short-term to earn a higher level of commission

• A business might be subject to frequent changes in leadership and strategy. This could be caused by a merger or takeover. The new management team will likely try to put their own stamp on the direction of the business - this often happens at football clubs when a new appointment is made

A short-term approach is likely to see management focusing on:

• Pursuing growth in sales revenue, possibly through adopting price cutting strategies to capture customers with price elastic demand

• Increasing gross profit and operating profit neglecting the quality of profit made. For example, a business might dispose of non-current assets which increases profits in one financial year, but this can't be sustained in the next year

• Focusing on driving down unit costs and increasing productivity which could be at the expense of staff motivation and quality and long term training and development

• Improving return on capital employed

Long termism

As the name suggests, long-termism involves taking a long-term view and is the opposite of short-termism.

Businesses that take a long-term view are therefore more likely to invest in research and development as well as recruitment, training and development, aiming to build a long-term competitive advantage.

Decision making

Decision making is at the heart of business activity. The nature of decisions will vary depending upon the life stage of a business. For example, when starting up, decisions are likely to be focused on survival. As markets mature, decision making may turn to extension strategies. Decision making takes place all the time at various levels within a business - from the top corporate (board) level through the actions of employees on the "shop-floor".

Examples of decisions include:

What price to charge?

Who to employ?

How many people to employ?

How to respond to the emergence of a competitor?

How much stock to hold?

Should the business expand?

Two main ways business decisions are made

Evidence-based

• Draws on, and utilises, data

• Systematic

• Scientific in approach

• Employs analytical tools

• Can be time consuming and expensive to implement

Subjective

• Based on hunches, intuition and management experience as opposed to data

• Can be quick to implement

• Hard to justify if there is significant risk

Culture

When exploring culture, we are often interested in finding out:

• The shared values of a business

• The beliefs and norms that affect every aspect of work life

• Day to day typical behaviours of employees and management

The strength of an organisation's culture often sets the tone for determining how easy it is to know how to behave.

When you visit a range of businesses you soon get a sense of the strength of the business culture. if a culture can be measured, how might this show itself? We can think of this in terms of 'strong' and 'weak' cultures.

Two types of culture

Strong cultures

A strong culture exists when norms and behaviours are deeply embedded into the way a business does things.

Signs of a strong culture might include:

• Staff understand and respond to culture

• Little need for policies and procedures

• Consistent behaviour

Cultural norms are entrenched throughout the organisation

Weak cultures

Signs of a weak organisational culture might include:

• Little alignment with business values

• Inconsistent behaviour

• A need for extensive bureaucracy & procedures

Handys four kinds of culture

Power culture

In an organisation with a power culture, power is held by just a few individuals whose influence spreads throughout the organisation. There are few rules and regulations in a power culture. What those with power decide is what happens and decision-making centres upon them and their beliefs. Employees are generally judged by what they achieve, most likely quantitative outcomes, rather than how they do things or how they act. A consequence of this can be quick decision-making, even if those decisions aren't in the best long-term interests of the organisation.

Role culture

Organisations with a role culture are based on rules. They are highly controlled, with everyone in the organisation knowing what their roles and responsibilities are. Power in a role culture is determined by a person's position or job role in the organisational structure.

Role cultures are built on detailed organisational structures which are typically tall (not flat) with a long chain of command. Public sector organisations that require stability and adherence to processes and procedures are likely to have a role culture.

A consequence is that decision-making in role cultures can often be painfully slow and the organisation is less likely to take risks. This might have an adverse effect on an organisation that operates in a dynamic market.

Task culture

Task culture forms when teams in an organisation are formed to address specific problems or progress projects. The task is the important thing, so power within the team will often shift depending on the mix of the team members and the status of the problem or project. Whether the task culture proves effective will largely be determined by the team dynamic. With the right mix of skills, personalities and leadership, working in teams can be incredibly productive and creative. This might be a feature of a firm's competitive advantage.

Person culture

In organisations with a person culture, individuals very much see themselves as unique and superior to the organisation. The organisation simply exists in order for people to work. An organisation with a person culture is really just a collection of individuals who happen to be working for the same organisation.

How is culture formed

• Influence of the founder. This could be positive or negative. In the case of IKEA, founder Ingvar Kamprad's influence can be seen throughout the company today. Kamprad believed success would stem from simple and cost-effective solutions. These principles are evident throughout IKEA's product portfolio but also clear from the instore experience.

• Size and development stage of the business. For example, is it a new start up, an established multi-site business or a multi-national corporation?

• Leadership & management style

• Organisational structure, policies & practices

• Employee & management reward structures. For example, pay and conditions, bonuses, individual versus team rewards

• Markets and industries in which it operates

• Working environment and the nature of the tasks involved in job roles. For example, is the work physical? Is the office the focal point for the organisation? How common is remote and flexible working practices?

• Factors within the external environment - for example legal or economic pressures

• Attitude of organisation to risk-taking and innovation

Difficulties in changing culture

• Declining profits and sales

• Inadequate returns on investment

• Low quality or standards of customer service

• Loss of market share

• Failure to innovate

Stake holder

A stakeholder is any individual or organisation who has a vested interest in the activities and decision-making of a business.

Shareholder

Shareholders (the owners of a business) are one example of a stakeholder, but the two terms are easily confused.

The key stakeholders in a business

Internal

• Managers

• Employees

• Shareholders

External

• Customers

• Suppliers

• Government

• Local community

• Pressure groups

Stakeholder objectives

Shareholders and owners	• A shareholder and owner wants to see a return on their investment. Shareholders receive dividend payments as a reward for their risk taking • They want to see success and long-term growth which is driven by efficient and effective management teams
Managers and employees	• These stakeholders want to earn an income in the form of a wage or salary. They may also expect monetary and non-monetary rewards • Job security is most likely the top priority for many, coupled with good working conditions. This might include set weekly hours and most will no doubt want clarity in their job role • Career orientated employees will look for promotion opportunities. As a business sees success, there is usually the chance for expansion which facilitates career development opportunities and new roles
Customers	• Want value for money and quality products. If this isn't realised, they may take their business elsewhere • In the 21st century digital market place, good customer service and clear communication are key
Suppliers	• Here, the focus is on payment in accordance with agreed credit terms. Suppliers ultimately want the business to pay its bill as it falls due • Repeat purchase and a long-lasting relationship are also top of a supplier's wish list and main interests
Banks and other investors	• Want to be secure in the knowledge that the business can repay any amounts that have been loaned to it • Investors are interested in growth in profits, as there is always an opportunity cost to the risk they have undertaken
Government	• Need the business to pay the correct amount of tax as its falls due • They also seek to ensure that the business complies with relevant legislation such as Health and Safety • Government and political parties also want to see business growth for the most part, as this helps to build and secure jobs
Local community	• Success of the business in a wider sense, particularly creating and retaining • Communities also want businesses to act in a socially responsible way; minimising pollution and acting in a sustainable way

Stakeholder mapping

A useful model when looking at stakeholder influences is stakeholder mapping. Stakeholder mapping involves managers making a judgement about which stakeholders to focus their attention on and how they should respond to variations in preferences. This process can be very helpful to management when implementing change, such as entering a new market or changing working practices. The idea centres upon mapping stakeholders' level of power against their interest. Through completing the map, a business can make a judgement about which groups to focus their attention on.

Ethics

Ethics are moral guidelines which govern acceptable behaviour. Ethical behaviour is about doing what is morally right and, when making business decisions, considering what is morally wrong or right.

Trade off

a trade-off being a balance between two desirable outcomes, where perhaps having more of one thing, for example, profit, leads to less of another, for example, ethical behaviour.

Benefits and drawbacks of acting ethically

Benefits

• Higher revenues. This could come from demand from consumers who positively support ethical behaviour

• Improved brand and business awareness and recognition

• Better employee motivation and recruitment

• New sources of finance, for example from ethical investors

Drawbacks

• Higher costs, for example, sourcing from more ethical suppliers rather than the lowest price suppliers. Higher fixed costs, for example, from training and communication of ethical policy

• A danger of building up false expectations

  
  

Benefits

• It may improve the image and reputation of a business

• It is necessary in order to avoid excessive regulation

• Socially responsible actions can be profitable

• An improved social environment will be beneficial to a business

• It may be attractive to some investors

• It may increase employee motivation

• It could help to correct the social problems caused by business

Drawbacks

• The efficient use of resources may be reduced if businesses are restricted in how they act

• Businesses cannot decide what is in society's interest

• CSR may stifle innovation

• CSR may increase costs which hinders the ability to compete on price. These costs may also need to be passed on to customers

Corporate social responsibility

Corporate social responsibility (CS) is when companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis. It is about considering the needs and wants of all stakeholders, not just the business's shareholders. Central to CSR are two main ideas:

• The extent to which a business addresses the needs and obligations of wider stakeholders

• The actions that a business undertakes that go above and beyond the minimum that is required by the law when addressing the needs and wants that it attempts to fulfil

Examples of how business demonstrate cpr