Influences on Business Decisions Revision Notes for Edexcel A-Level Business

Influences on Business Decisions

Understanding strategic decisions

Senior management teams in large corporations must regularly make strategic decisions. These are important, wide-ranging decisions that have lasting impacts on a business and cannot be easily reversed. For example, deciding to build a new factory in an overseas location will affect the company's finances, workforce, and operations for many years to come.

When making these critical decisions, large corporations are influenced by several key factors that shape their approach and choices.

Note

Strategic decisions have three defining characteristics:

They are far-reaching - affecting multiple areas of the business
They have long-term impacts - consequences last for years
They are difficult to reverse - changing course is costly and complex

Corporate timescales: short-termism versus long-termism

Short-termism refers to making decisions focused on immediate results and quick profits, while long-termism involves decisions that prioritize sustainable growth and future success.

Most businesses develop strategies containing both long-term objectives and short-term goals. However, tensions can arise when businesses make short-term decisions that conflict with their long-term strategy.

Impact on business performance

When companies pursue short-term profits at the expense of their long-term strategy, they risk damaging their future performance.

Example

Practical Example: Wage Decisions

A business might limit wage increases to just 1% for three years to boost immediate profits.

Short-term result: Reduced labor costs and higher immediate profits

Long-term consequence: Worker motivation and productivity decline, leading to reduced performance and potentially higher staff turnover costs

Important

The Short-term vs Long-term Trade-off

Businesses face a critical dilemma: decisions that maximize short-term profits often come at the expense of long-term sustainability. Strong strategic decision making requires balancing immediate financial pressures with long-term business health.

Exam tip: When evaluating business decisions, always consider both short-term benefits and long-term consequences. Strong answers analyze the trade-offs between immediate gains and sustainable success.

Evidence-based versus subjective decision making

Businesses can approach decision making in two fundamentally different ways:

Subjective decision making

Subjective decision making relies on the personal judgment, intuition, and opinions of key decision makers rather than hard data and analysis. This approach carries more risk because it depends on individual perspectives that may not reflect objective reality.

Example

Case study: LiftWithPower

LiftWithPower, a forklift truck manufacturer, received a takeover offer that appeared generous to shareholders. The company's leader, Vincenzo Cicotti, rejected it immediately based on personal reasons—he wanted to preserve the family company name.

The criticism: Some shareholders argued he should have:

Gathered all relevant facts
Analyzed them systematically
Consulted with stakeholders
Made an informed decision based on evidence rather than emotion

This demonstrates the risks of purely subjective decision making in strategic situations.

Evidence-based decision making

Evidence-based decision making involves systematically collecting data, analyzing information, and making choices based on factual evidence rather than personal opinion. This approach typically involves:

Gathering relevant data and market research
Analyzing financial information and projections
Consulting experts and stakeholders
Evaluating multiple options objectively
Making decisions supported by evidence

Note

Evidence-based decisions generally reduce risk because they rest on solid information rather than individual judgment. However, this thorough approach can be more time-consuming than subjective decisions, which may be necessary when quick responses are needed.

Important

Risk Comparison

Subjective approach: Higher risk but faster decision making

Evidence-based approach: Lower risk but more time-consuming process

Exam tip: When analyzing decision-making approaches, explain that evidence-based decisions typically reduce risk but may slow down the decision-making process, while subjective decisions allow for faster responses but carry higher risk of error.

Corporate culture influence

The corporate culture—the shared values, beliefs, and behaviors within an organization—significantly influences how businesses make decisions.

Open and innovative cultures

Organizations with open, creative, flexible, and innovative cultures tend to make decisions that embrace change. These businesses are more willing to:

Take calculated risks
Pursue new opportunities
Experiment with different approaches
Challenge existing practices
Invest in innovation

Resistant cultures

In contrast, cultures that resist change lead to more cautious, conservative decision making. These organizations typically:

Avoid significant risks
Maintain established practices
Make incremental rather than transformative changes
Prioritize stability over innovation

Important

The Innovation Dilemma

While cautious approaches provide stability and consistency, excessive resistance to change can result in:

Reduced innovation
Loss of competitive edge
Inability to respond to market changes

More agile competitors may move ahead while resistant cultures struggle to adapt.

Exam tip: In evaluation questions about culture, consider both perspectives: stability can provide consistency and reliability, but excessive resistance to change can cause a business to fall behind competitors.

Stakeholder perspective

Different businesses take varying approaches to considering stakeholder interests when making strategic decisions.

Shareholder approach

The shareholder approach means that shareholder views influence decision making, while other stakeholder interests are overlooked or given less priority. Under this model:

Decisions focus primarily on maximizing shareholder value and returns
Large institutional investors (such as pension funds and investment firms) may significantly influence company decisions
The needs of employees, customers, suppliers, and communities receive less consideration
Risk levels may be shaped by major shareholders' preferences

Stakeholder approach

The stakeholder approach means that the views and needs of a wide range of stakeholders are considered when making strategic decisions. This broader perspective includes:

Customers: their needs, satisfaction, and loyalty
Employees: their wellbeing, development, and working conditions
Suppliers: fair treatment and sustainable relationships
Local communities: impact on the area and community relations
Environment: environmental sustainability and responsibility
Shareholders: financial returns and company value

Note

Understanding the Difference

Shareholder approach = Narrow focus on maximizing returns for shareholders

Stakeholder approach = Wide focus recognizing that long-term success depends on maintaining positive relationships with multiple stakeholder groups

Important

Evaluating Stakeholder Conflicts

Shareholder approach advantages:

Clear decision-making priority
May maximize short-term profits
Simpler to measure success (share price, dividends)

Shareholder approach risks:

May damage relationships with other stakeholders
Can harm long-term sustainability
Risk of negative publicity and customer backlash

Stakeholder approach advantages:

Builds more sustainable long-term success
Maintains positive relationships across groups
Reduces risk of stakeholder conflicts

Stakeholder approach challenges:

May reduce immediate profits
More complex decision making
Competing stakeholder interests

Exam tip: When evaluating stakeholder conflicts, explain that the shareholder approach may maximize short-term profits but risk damaging relationships with other stakeholders, while the stakeholder approach may reduce immediate profits but build more sustainable long-term success.

Business ethics influence

Business ethics refers to moral principles that guide business behavior and decision making. Companies' ethical stances significantly influence their strategic choices.

Strong ethical stance

Corporations with strong ethical principles and corporate social responsibility (CSR) commitments make different decisions from those with little regard for ethics. Ethical businesses are unlikely to:

Choose actions that threaten the environment
Damage relationships with local communities
Make decisions that upset or harm their workforce
Invest in controversial industries or unethical suppliers

Instead, they consider the broader social and environmental impact of their decisions alongside financial considerations.

Weak ethical stance

Businesses that are not concerned with ethical issues may make decisions purely based on financial returns, such as investing in controversial industries. However, even companies without strong ethical principles are still influenced by ethics through:

Fear of bad publicity: negative media coverage can damage reputation and sales
Customer pressure: consumers increasingly expect ethical behavior
Regulatory requirements: laws enforce minimum ethical standards
Employee expectations: workers may resist unethical practices

Example

Real-world Example: Supply Chain Ethics

Many UK retailers have faced public pressure over supply chain ethics, particularly regarding factory working conditions.

What happened: Media investigations revealed poor working conditions in overseas factories

Business response: Even businesses without strong ethical commitments changed practices

Why they changed: To avoid reputational damage and prevent customer boycotts

This demonstrates that ethical considerations influence decisions even when businesses lack intrinsic ethical motivation.

Important

Two Types of Ethical Influence

Intrinsic motivation: Making ethical decisions because it's the right thing to do

Reflects genuine commitment to CSR
Guides all strategic decisions
Builds authentic reputation

Extrinsic pressure: Making ethical decisions to avoid negative consequences

Responding to potential bad publicity
Meeting customer expectations
Avoiding legal penalties

Exam tip: In questions about business ethics, consider both intrinsic ethical motivation (doing the right thing) and extrinsic pressure (avoiding bad publicity). Strong evaluation answers recognize that even businesses without ethical principles are still influenced by potential consequences of unethical behavior.

Summary

Key Points to Remember:

Strategic decisions are far-reaching and long-lasting - they cannot be easily reversed and impact finances, operations, and employees for years
Short-term decisions may conflict with long-term strategy - pursuing immediate profits can damage future performance, such as low wage increases harming worker motivation
Evidence-based decision making reduces risk compared to subjective approaches - decisions based on data and analysis are typically more reliable than those based on personal judgment alone
Corporate culture shapes decision making - innovative cultures embrace change and risk, while resistant cultures favor caution but may lose competitive edge
Stakeholder approaches differ significantly - shareholder approach prioritizes shareholder returns, while stakeholder approach considers broader interests of customers, employees, suppliers, communities, and environment
Ethics influence all businesses - companies with strong ethical principles make socially responsible decisions, but even non-ethical businesses respond to potential bad publicity and customer pressure

Influences on Business Decisions (Edexcel A-Level Business): Revision Notes