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LO1 - Factors when making business decisions, Key words - Coggle Diagram
LO1 - Factors when making business decisions
1.1 - Different types of business decision
Strategic
Questions
Who are we?
Where are we heading?
Should we open sportswear shops?
Should the range include ski wear?
Business-wide complex and multi-dimensional choices of identity and direction.
May involve large sums of money
Taken by senior managers
Long term impact
Examples; expand product range, relocate headquarters, diversify
Tactical
How to manage performance to achieve the strategy.
These decisions may involve significant resources bit within clearer boundaries, and may not affect the whole business.
Questions
What resources are needed?
What is the timescale
Which skiwear should it stock?
How will the new range be promoted?
Taken by senior or middle managers
Medium term impact
Examples; Carry out research on suitable product for development, Look for suitable locations for headquarters.
Operational
Routine decisions that follow know rule, involve more limited resources, can be carried out quickly and can have a shorter-term application.
Questions
How many?
To what specification?
Where in the will the skiwear be displayed?
How much space should be given o the skiwear at the London flagship store?
Are extra weekend staff needed?
Taken by staff at all levels
Short term impact
Examples; How much stock to order, Which suppliers to use.
1.2 - Different criteria when making business decisions
Internal
Attitude to risk
If a business is said to be risk adverse they are avoiding risks. As level of risk increases potential for reward (profit or loss) increases. Risk adverse business less likely to gain rewards or suffer losses than a risk taking business.
Risks can affect a businesses reputation and the success of a project. Ansoff's Matric is a tool used to measure risk.
E.g. - Jane spent £500 million per year on trying to develop digital photography products that would change the way people create store and view pictures. The company took a huge risk but it didn't pay off as janes forecast of customer behavior was inaccurate and failed to keep up with technological advancement in its sector.
Organisational objectives
Targets that have a direct impact on the decisions taken by a business.
E.g. - If a business objective is reducing running costs by 10%, its unlikely more staff will be employed.
Decisions on marketing mix depends on marking objectives set.
Core competencies of a business
Things that a business is good at, making it stand out from the competitors and making it do better.
E.g. - Facebook's core competencies is social networking, while Apple's is product design, you wouldn't expect Facebook to make tablets. HOWEVER Tesco's tablet (Hudl) was well received, and although it is outside Tesco's core competencies but they took a risk and succeeded.
Prahalad and Hamel
They stated that 'managers will be judged on their ability to identify, cultivate and exploit the core competencies that make growth possible - indeed, they'll have to rethink the concept of the corporation itself'
According to them in order for a business to grow, it needs to develop areas of expertise unique to them. Business need to constantly adapt to their core competencies to changes in the external environment, and to be able to evolve and develop as opportunities arise.
Impact on internal stakeholders
E.g. a business deciding on whether automate a production line will need to consider subsequent job losses and its impact on employees.
Before deciding whether to extend it opening hours, a business will need to think about the effects on its employees, especially those with young families.
Business ethics
Consumer trends dictate that businesses take a strong ethical stance in their activities. Doing the right thing is not always a natural choice as ethical business practices cost money.
A restaurant choosing to locate in the UK to benefit the local community puts ethics before profits. A business also needs to consider its CSR when making decisions.
E.G. Ben & Jerry's only uses fair trade ingredients and has developed a dairy farm sustainability programme in its home state of Vermont. Actions such as this can also provide a business with a unique selling point that appeals to customers and improves its reputation.
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 (e.g. retained profit, owners' funds) or external (e.g. bank loan, mortgage, selling shares, debentures.)
It is cheaper to use outside contractors for a task instead of doing the task in-house, so many businesses will choose to do this.
E.g. using a distribution company to deliver products, by outsourcing deliveries, huge capital investments and the running costs of maintaining the vehicles are avoided.
Time
Complex decisions take more time to consider than simple, straightforward ones. In addition, a choice could depend on the amount of time it takes for a business to reap its rewards. For a business that priorities cash flow over long-term profit, a project with a shorter payback period if preferred.
Opportunity cost
Refers to consequences of decisions and alternatives.
E.g. due to limited resources, a business has to choose between two project, A & B. By choosing A the business will lose out on the benefits of project B and vice versa.
External
Level and nature of risk
Examples of risk that are beyond a business's control are natural disaster, terrorist attacks, war, changes in consumer trends and changes in economic factors.
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
Important considerations as external stakeholders such as customers, local community and pressure groups can have a serious impact on a business's reputation.
If you were an energy provider, would you consider fracking?
Degree of uncertainty
Next step is to assess the level of risk - the likelihood of the risks actually happening.
Before making a major strategic decision that requires lots of borrowed funds, businesses need to consider the risk of a rise in interest rates and how likely it is that this will take place.
The decision will of course depend on the business's attitude to risk and how important change is to the ling-term survival of the business.
Businesses looking to expand their operations into China will need to predict the economic conditions there.
Some risks many be likely and difficult to control (e.g. when a particular competitor is known to be developing a similar product), while others are less likely or can be controlled (e.g. online shop could be hacked)
Changes in market
Refers to changes in the demand and supply of certain goods or services in the market, mainly as a result of social factor such as changing consumer preferences.
Businesses need to respond quickly to any changes in the market they operate in, in order to maintain or gain market share.
Changes in external environment
Changes in external factors including economic, legal, political and technological. The McCain case study also shows how the company responded to the external environment.
1.3 - Different types of information when making business decisions
Internal information
Information found in different functional areas - finance, sales, marketing, production, human resources etc.
E.g. trends in sales revenue inform production and development decisions, and the purchase of raw materials; production costs and running costs of different products can be used to measure the profitability of each product.
Productivity, absenteeism and staff turnover are measures of how motivated employees are and these figures can be compared across departments or over time.
Absenteeism - the practice of regularly staying away from work or school without good reason.
External information
Information outside of a business includes all the external factors.
Businesses need to compare their current activities and performance with those of its competitors as well as carrying out market research on consumer preferences.
Qualitative information
Data based on people opinions, attitudes and feelings, collected to gain a deeper understanding of consumer behavior.
Usually collected using unconstructed or semi-structured questions, giving people the chance to give their opinions.
Quantitative information
Numerical data that can be qualified and analysed mathematically.
Usually translated into statistics e.g. the proportion of people who spend 30% on their income on entertainment, the percentage of population who prefer to eat out rather than have takeaways.
Historic information
Refers to using past data to make decisions e.g. on competitors, the market, past consumer trends.
Can be found across all functional departments & can also be gathered outside the business.
Internet provides a rich source of historical information, which can be assessed relatively easily and quickly.
Forecasted information
Based on internal or external prediction and forecasts.
E.g. sales forecasts can be used to inform human resource needs, while consumer trends are useful for makin strategic decisions regarding product development.
Businesses need to consistently look ahead when planning for the medium and long term.
Primary research information
Data collected through primary research - collections of new data and information specific to a business's need when the information does not already exist.
E.g. a business wanting to find out how many people living in the local area smoke or the number of similar businesses operating within a five-mile radius.
Secondary research information
Already exists & is readily available to businesses from many sources e.g. data agencies, government statistics, journals & magazines, data bases etc.
E.g. population make up, consumer buying habits and lifestyle changes.
Types of information
External
Advantages
A large amount of information is available.
Easy to get online.
Disadvantages
Quality of available data can be confusing.
Can be costly to get information from external research companies especially small businesses.
Primary
Advantages
Disadvantages
If its large scale it is costly & time-consuming.
Time & money needs to be spent on designing the research methods, which need to be carried out.
Skills and knowledge are required when designing the questionnaire and in subsequent interpretation of the results.
Questionnaires can be tailored to a business's specific needs; the results can than be used to solve particular problems that a business faces.
Forecasted
Advantages
If reliable, allows business to be prepared e.g. contingency plan can be put in place if interest rate is forecast to go up or down then appropriate plans can be made for reducing human resources.
Cash flow-forecasts can be used to predict shortages of cash that a loan can be arranged before it is a problem.
Disadvantages
Simply a prediction, educated guess that might not be useful in face of challenges.
Inaccurate forecasts may lead to disastrous decision and huge losses.
Predicting the future is not easy, especially for new businesses with little historic data.
Requires a high degree of skill, knowledge & experience - even professionals get it wrong.
Secondary
Advantages
Easier, quicker, & cheaper to collect than primary.
Existing information collected by professional organisations can be very accurate and reliable, as data is usually collated from a large sample.
Disadvantages
Costly to get, beyond reach of small businesses.
Free secondary info can be confusing & time consuming to sift through to reach conclusion.
Different sources are conflicting information.
Difficult to find secondary data the fits specific needs of a business.
Can be hard to tell how reliable a secondary source is.
Quantitative
Advantages
Easy to analyse using statistical methods.
Consumer trends and preferences can be can deduced from a large amount of data.
Results collected are more objective than qualitative data.
Results can be applied to whole population.
Research methods are easier, cheaper and less time consuming than qualitative data; methods repeated easily in other locations/samples of population and results compared.
Disadvantages
Doesn't answer question 'why?' e.g. wile it's useful to know that more women than men work part-time, its more useful to find the reason for this.
Use of structured question leads to bias and false answers, making results unreadable.
Opinions presented to interviewees might not be options they prefer, only closest match.
Data can appear to be more scientific and factual that is actually is.
Historic
Advantages
If things remain more or less the same then historic information can be used to forecast future relatively accurately.
Future sales of a product can be forecast using past sales figures.
It does not require lots of skill to collect historic data & can be collected quite quickly.
Ensures consistency, reinforces attitude, value and culture of a business.
Leads to continuity and stakeholders know what to expect.
Disadvantages
If there are changes to internal and external business environment, use of historic information could impede growth; could lead to loss of market share and failure.
Internal
Advantages
Readily available.
Less costly to collect than external information.
Generally contains fewer errors than information collected externally through market research.
Disadvantages
Requires a culture of keeping accurate information within a business.
Only using internal information to make decisions fails to consider with external environment.
Does not help consumer tends.
Does not provide opportunities for benchmarking across the sector.
Cannot prepare a business from impending or future threats.
Qualitative
Advantages
Allows deeper understanding of consumer behavior by looking in detail at their opinions, attitude and feelings.
Allows people to elaborate on their answers so more detail & meaningful analysis can be made.
Disadvantages
Difficult to analyse as the answers vary due to opinions
Time-consuming to organise focus groups & face-to-face interviews.
Takes longer to analyse results; quality of data collected depends heavily on skills of interviewer/observer.
Fewer people can be researched so results cants be accurately generalised to apply to whole population.
1.4 - Judging the validity of information used to make decisions
Reliability
If a piece of research is to be repeated, will the researcher get the same result?
Its impossible to get the same result but there should be a strong correlation.
Said to be reliable if get same response when question is given to same sample different times or when same question is given to different samples.
Bias
Has the researcher, in the process of collecting the information, somehow influenced the outcome?
The way the questions are asked e.g. their tone of voice or body language, the way the sample is chosen or the wat the research is carried out.
E.g. not giving people enough time to fill out a questionnaire tends to give biased results.
Complexity
Result should be in a clear language.
Diagrams & flowcharts can be used effectively to describe system or process, shouldn't be complicated as to confuse people.
Is the information too difficult to understand?
Relevance
Can the information selected be used to answer the question or solve the problem?
E.g. Survey on spending habits - would be irrelevant to ask people what time they get up in the morning.
Care must be taken when deciding what questions to use and make sure those questions will help collect the information.
Degree of detail
Does the level of detail match the type of decision being made?
Some decisions require detailed personal information on consumers e.g. to build an accurate profile.
A decision on whether to discontinue a product line doesn't require detailed information on consumer spending; a study of sales trends of the product should be sufficient for the decision to be made.
Currency
Is the information up to date?
Outdated information shouldn't be used to inform future e.g. consumers are becoming more aware of food miles & sustainability.
Information in this area has to be up to date otherwise the decision made may be the wrong one.
Intended use
Is the information appropriate to what it will be used for?
Information gathered for psychologists to explain a certain behavioral pattern is usually not intended for marketing purposes.
In this case the information contains more detail than needed & level of complexity is to high.
Important to choose information gathered for purpose intended so not to waste time & effort.
Quality
In this case the information contains more detail than needed & level of complexity is to high?
Internet has become main source of information and is hard to tell in info is reliable & authoritative.
First check quality is the source; does information come from a well-known/reliable organisation?
Other criteria; complete, up to date, comprehensive enough for task to be performed.
1.5 - Purposes, benefits and importance of communication
With internal and external stakeholders
Customer's & local community need to be informed of decision that has impact on them.
E.g. informing customers, local community & employees of proposal to extend the working hours of a noisy industrial dry-cleaning business would convey an image pf a caring business.
Effective communication eases decision-making process.
Communication is before, during & after decisions have been made.
Allows stakeholders to know why change is necessary, options available to them & rational behind a particular course of action.
If decision involves huge financial commitment or business has cash flow problems leader should be informed in the first instance to avoid confusion & distrust.
With the media
Needs to be dealt with sensitively, especially if crisis is involved.
By being open and sincere, carrying out swift remedial actions, a business can avoid damage to its reputation.
In a crisis a business but be seen to be open and willing to take remedial action, cut for the space, stakeholders need to be reassured and informed of steps that business has taken and that situ is under control.
1.6 - Factors affecting the quality of decision making
Access to relevant information
Sometime difficult to obtain info that could be useful e.g. competitors' sales figures & strategies.
Too much info can be overwhelming or introduce inaccurate information.
Key personnel
Access to decision-making tools
Training of managers in decision-making skills
Availability of finance
Power differential & potential for bias
Consultation
Key words
Strategic decisions
Decisions made by top management that affect the long-term direction of a business
Tactical decisions
Decisions made by middle management that aim to meet strategic objectives.
Operational decisions
Day - to - day decisions made by staff at all levels that help the business to run smoothly.