Influences on Business Decisions
Unit 3: Business Decisions and Strategy
Influences on Business Decisions
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Corporate culture is the shared values and habits that decide how things are done in a business. A strong culture is widely shared and deeply held; a weak one is not.
Corporate culture is the set of values, beliefs and habits that people in a business share: "the way we do things here". It shows in how decisions are made and what gets praised or punished, whatever the mission statement says.
In a strong culture most staff hold the same values and act on them without being told. Decisions are quick because people already agree on what matters, and newcomers pick up the norms fast. In a weak culture values vary from one part of the business to another, so behaviour depends on the individual manager and head office has to lean on rules and checks.
Orvana, a Malaysian snack maker with 2,400 staff, has a strong culture of thrift. Managers question every expense, and waste on the production line is treated as a personal failing. That keeps costs low, but a proposal that costs money now and pays back later meets suspicion before anyone has read the figures.
So strength is not the same as quality. A strong culture magnifies whatever its values are: an advantage while they suit the market, and a brake when the market changes, because shared beliefs make the business slow to respond. When everyone thinks alike, fewer people challenge a poor decision, which is sometimes called groupthink.
Real Example: A long-established bank in the Gulf with a strong culture of caution avoided its rivals' riskiest loans, but was years behind them in offering mobile banking.
Exam Matters: Judge a culture by fit, not by strength. Say whether the values the case describes suit the decision the business now faces, and explain what the strength of the culture does to the speed and quality of that decision.
In a power culture, decisions flow from one person at the centre; in a role culture, they flow from job titles, procedures and rules.
Company cultures are classified into four types by where power sits and how work gets done: power, role, task and person. The four are usually credited to the management writer Charles Handy; the names of the types are what matter, not the writer.
In a power culture, decisions radiate from one person or a small group at the centre, usually the founder or owner. There are few rules; staff succeed by knowing what the centre wants. Decisions are fast, and the business can change direction in a day. The weaknesses grow with size: everything waits for one person, and staff who disagree tend to leave rather than argue.
In a role culture, power comes from the job, not the person. Written procedures, job descriptions and a clear hierarchy decide who does what. Work is predictable, consistent and easy to check, which suits large and stable operations. It is slow to change, because a new idea must pass every level that could say no.
Orvana shows both. Its founder still approves every new flavour personally: a power culture at the top. Its factories run on shift procedures, hygiene checklists and grade-based pay: a role culture on the production line.
Real Example: A family-owned pharmacy chain in Karachi grew from three shops to sixty. Its owner could no longer check every order, so written stock procedures and area managers took over the decisions she used to make herself.
Exam Matters: Name the type from the evidence in the case (who decides, and by what authority), then explain what that type does to the decision in question. A label with no evidence behind it shows knowledge only.
In a task culture, power follows expertise and teams form around projects; in a person culture, the organisation exists to serve the individuals in it.
In a task culture, teams are formed around a job to be done and broken up when it is finished. Authority comes from expertise, not rank: whoever knows most about the problem leads on it. Task cultures suit work that is new each time, such as product development, consultancy and research, because people with different skills combine quickly. They are expensive to run and harder to control, because no one follows a fixed routine.
In a person culture, the organisation is a framework that lets skilled individuals do their own work: a partnership of lawyers, architects or doctors sharing premises and support staff. Each professional decides how to work; the organisation serves them rather than the other way round. That keeps experts motivated, but a decision for the whole firm needs the agreement of people who each see themselves as their own boss.
Orvana's new chief executive has set up a task culture in one corner of the business: a food scientist, a marketer, a buyer and an engineer who take a new snack from idea to shelf, with no approval from the founder until the final tasting.
Most businesses mix types. What matters is whether the type in each part of a business fits the work that part does.
Real Example: A film production company in Lagos hires a crew for each film (director, camera, sound, editing) who work as one team for months and then go their separate ways. Each project is run by expertise, not job title.
Exam Matters: If a case describes a business that mixes types, say which part of it has which culture and why that fits, or does not fit, the work there. That is stronger than forcing one label on the whole firm.
Culture forms from the founder's values, the firm's history, who it hires and promotes, what it rewards, and the country and industry it works in.
No one writes a culture down and switches it on. It forms over years from a handful of sources, and each keeps reinforcing the others.
The founder and leaders. Early on, the founder's values are the business: what the founder praises, tolerates and punishes becomes normal. Later leaders shape culture most through what they do, not what they say.
History. Ways of working that once brought success become "how we do things", and are defended long after the reason for them has gone.
Recruitment, promotion and rewards. Firms hire people who seem to fit and promote those who display the existing values. Pay rules show what really counts: a firm that pays bonuses only on volume will have a culture of volume, whatever its posters say about quality.
The country and the industry. National attitudes to hierarchy and to questioning a boss, and the demands of the sector (safety in a chemical plant, speed in fashion), push a culture in a direction too.
Orvana's thrift began with its founder, who started out frying snacks in one rented shop and counted every sen. It spread because careful spenders rose to run departments.
Real Example: An airline in the Gulf founded by former military pilots still runs on precise checklists, strict seniority and punctuality: values its founders brought with them, which its training rules have passed on to every later intake.
Exam Matters: When a case asks why a business behaves as it does, trace the behaviour back to a source of culture the case gives evidence for, such as the founder, a past success or the reward system, rather than asserting that "the culture" causes it.
An established culture resists change because people are invested in it: their status, their skills and their sense of what works all depend on the old ways.
Changing an established culture is hard because it is held in thousands of daily habits rather than in any one decision. The difficulties fall into four groups.
Loss. Managers who rose under the old culture owe their position to it. A change that rewards different behaviour threatens that position, so they have most reason to resist, and most power to slow things down.
Proof. If the old ways brought success, staff see no reason to drop them. The longer the record of success, the harder the argument for change.
Systems. Recruitment, promotion, pay and procedures were built around the old culture. Unless they change too, they keep rewarding the old behaviour, and a new values statement is quietly ignored.
Time and scale. A culture changes only as people change their habits, which takes years, not months. In a large business each site may keep its own version long after head office has moved on.
At Orvana, the new chief executive wants product decisions made in teams. Factory managers who built careers on carrying out the founder's instructions see the teams as a loss of control, and the founder, still on the board, points to thirty years of profit as proof that the old way works.
Real Example: When two private hospital groups in Kenya merged, doctors at one were used to being consulted on every purchase, while managers at the other bought centrally. Years later, the two sets of hospitals still bought equipment in different ways.
Exam Matters: Name the specific difficulty the case gives evidence for (who stands to lose, what past success is being defended, which system still rewards the old behaviour) and say what it means for how fast the change can happen.
Whether a culture can be changed depends on how deep the old one runs, how urgent the need is, and whether leaders change the systems as well as the words.
A question on culture often asks for a judgement: can this business change its culture, and should it? A strong answer weighs the difficulties against the conditions that make change possible, and says what the outcome depends on.
For success at Orvana. The new chief executive has the board's backing and can change what earns a promotion: product managers could advance for launches that sell, not for following instructions. Rivals are launching healthier snacks faster, so staff can see why the old way is no longer enough.
Against. The founder is still on the board and still admired; factory managers have most to lose; and the thrift that made the firm successful makes spending on experiments feel wrong. A culture built over thirty years will not shift in one.
The judgement. Change is likely to succeed in the product team, where the chief executive controls who is hired and how they are paid, and to be slow in the factories, where the role culture suits the work anyway. Whether it succeeds overall depends most on whether the founder visibly backs it, because staff copy what the most powerful person does.
Real Example: A telecoms firm in Pakistan, formerly state-owned, set out to become customer-focused after it was sold. Its sales teams changed within two years once their bonuses depended on customer ratings; back-office departments, whose rewards stayed the same, took far longer.
Exam Matters: End an evaluation of culture change with the condition it depends on, for example whether leaders change how people are paid and promoted, rather than a flat yes or no. The condition is what makes the judgement a supported one.
A stakeholder is anyone affected by, or able to affect, a business. Internal stakeholders work within it; external stakeholders are outside it.
A stakeholder is any individual or group with an interest in what a business does, because they are affected by its decisions or can affect them.
Internal stakeholders are inside the organisation: employees and managers, and the owners of a small business who run it themselves. External stakeholders are outside it: customers, suppliers, lenders such as banks, the local community, government, and pressure groups that campaign on an issue.
Shareholders are the group textbooks disagree on. They own the company, so many class them as internal; in a large listed company most shareholders never set foot inside it and play no part in running it, so others class them as external. Either is accepted with a reason. What matters more is what they want and how much influence they have.
For Orvana, a plan to close its older factory in Ipoh touches internal stakeholders (the 300 people who work there and their managers) and external ones (the site's suppliers, the town's shops, the state government). Influence differs too: a major shareholder can vote against the board, while a local shop can only complain. Planners sometimes map this on Mendelow's grid of power and interest; the influence itself is what counts.
Real Example: When a mining company in Kenya applied to expand a site, the miners, engineers and managers inside it, and the villagers, county officials and financing bank outside it, each wanted something different from the same decision.
Exam Matters: Identify the stakeholders this particular decision affects, using the case, rather than listing every group a business could have. Two well-chosen stakeholders developed in context say more than seven names.
Each stakeholder group wants something different from a business, and those objectives often pull the same decision in opposite directions.
Every stakeholder has objectives: what it wants the business to deliver for it. Knowing them is how you predict who will support a decision and who will fight it.
Shareholders want a return, through a rising share price and dividends. Employees want fair pay, job security, safe conditions and a chance to progress. Managers want the business to grow, and their own pay and status with it. Customers want value, quality and reliable supply. Suppliers want regular orders, fair prices and to be paid on time. Lenders want interest paid and loans repaid, so they watch cash flow and risk.
The local community wants jobs, and wants noise, traffic and pollution kept down. Government wants employment, tax revenue and businesses that obey the law.
Objectives overlap as well as clash. Everyone at Orvana gains if the business survives and grows. The clashes come over how the gains are shared: a higher dividend, a pay rise and a price cut all come out of the same profit.
Real Example: A supermarket chain in Singapore that decides to open around the clock pleases shoppers who work late and owners hoping for more sales, but its night-shift staff want extra pay and the neighbours of its stores want quiet at night.
Exam Matters: State each stakeholder's objective as it applies to the decision in the case ("workers at the site want to keep their jobs") rather than a general list of what that group usually wants.
The shareholder model says decisions should aim purely at returns to shareholders; the stakeholder model says they should weigh every group the business affects.
There are two views of whose interests a business should serve when it makes decisions and sets objectives.
The shareholder model: the business should focus purely on shareholder returns, increasing the share price and dividends. Directors act for the owners; other groups are protected by contracts and the law, and anything more spends the owners' money without their consent. The economist Milton Friedman made the best-known case for this view.
The stakeholder model: the business should consider all of its stakeholders in its decisions and objectives, because it depends on all of them: workers' effort, customers' loyalty, suppliers' reliability, the community's tolerance. Ignoring them eventually costs the owners too. The writer most linked with it is R. Edward Freeman.
In practice the two are ends of a spectrum rather than a switch. Even a firm run for its shareholders must keep customers and staff; even a firm run for all its stakeholders must make a profit to survive. The real difference shows when their interests clash and the business has to choose whom to put first.
Real Example: Two coffee chains in Hong Kong face the same rise in rents. One raises prices and cuts staff hours to protect its payout to owners; the other holds prices and hours and accepts a smaller profit to keep its regular customers and experienced baristas.
Exam Matters: When you apply either model, show what it would lead the business in the case to decide, and why. A definition of the two models is only the starting point.
Profit-based objectives serve shareholders; wider objectives serve other stakeholders. One decision can raise profit while costing jobs, suppliers or a community.
The two models matter most where profit-based (shareholder) objectives and wider (stakeholder) objectives point in different directions. Many decisions do.
Orvana can close its older factory in Ipoh and move the work to an automated plant in Johor. The move saves RM9m a year for a one-off cost of RM12m, so yearly profit rises from RM60m to RM69m, and the cost is recovered in about sixteen months.
On the shareholder model the decision is straightforward. On the stakeholder model it is not: 300 people lose their jobs, local suppliers lose a customer, the town loses spending, and the staff who remain may fear they are next.
The conflict is not always as sharp as it looks. Retraining, transfers to the new plant or a phased closure cost some of the saving but reduce the damage, and a firm that treats departing staff fairly finds it easier to recruit later. Whether that is worth the cost is the judgement.
Real Example: A textile firm in Pakistan that moved spinning to a new plant offered every worker at the old mill a transfer and free transport. Its saving was smaller in the first year, but absence at the new plant stayed low.
Exam Matters: Name the stakeholders the decision affects, explain how their objectives clash with the profit objective, and judge whose interest should carry most weight in this case and why. The judgement needs a reason drawn from the case.
Business ethics is doing what is morally right, not only what is legal. Strategic decisions often trade profit against ethics, and the trade-off has to be weighed.
Business ethics are the moral principles that guide how a business behaves: deciding what is right, not only what is legal. A strategy can be lawful and still unethical, such as selling a product known to harm children where no law yet forbids it, or paying suppliers so little that their workers cannot live on it.
Strategic decisions often involve a trade-off between profit and ethics: the ethical choice costs money, at least at first, and the cheaper choice harms someone.
Orvana buys 20,000 tonnes of palm oil a year. Oil certified as grown without clearing rainforest costs RM300 a tonne more: RM6m a year. On its own that cuts profit from RM60m to RM54m, a fall of 10%.
The trade-off may be smaller than it looks. A price rise of 1.2% on RM500m of sales would cover the cost if customers accept it; retailers abroad may refuse uncertified oil anyway; and a scandal over forest clearing could cost far more than RM6m. It may also be larger, if rivals using cheaper oil undercut Orvana on price.
So the question is rarely "ethics or profit?" It is "how much profit, over what period, for how much ethical gain, and who bears the cost?"
Real Example: A cocoa processor in Ghana pays farmers a premium for cocoa grown without child labour and inspects farms each season. The inspections raise its costs, but they let it sell to chocolate makers that buy only from inspected farms.
Exam Matters: Put a size on the trade-off where the case gives figures (the cost as a share of profit, or the price rise needed to cover it), then weigh it against the ethical and commercial gains.
How a business pays and rewards people is an ethical choice: the gap between top and bottom pay, and what bonuses reward, both shape behaviour and trust.
Pay and rewards raise ethical questions at both ends of a business: how much directors should be paid, and for what; and whether pay at the bottom is enough to live on and fair between people doing similar work.
Orvana's chief executive is paid RM4.8m a year; its median employee earns RM48,000. That is a pay ratio of 100 to 1. The board proposes a RM1.2m bonus if this year's profit target is met, which would take the ratio to 125 to 1.
For high executive pay: the job is demanding and leaders are hard to recruit. Against: a very wide gap can damage trust and effort lower down, especially when workers' pay is frozen.
What a reward is tied to matters as much as its size. A bonus paid only for this year's profit rewards cutting the spending that protects the future (maintenance, training, safety) as well as genuine improvement. Adding targets for safety and customer satisfaction, or paying part of a bonus in shares held for several years, rewards what the business actually wants.
Real Example: A listed bank in Nigeria pays half of each director's bonus in shares that cannot be sold for three years, so directors gain only if results hold up.
Exam Matters: If the case gives pay figures, calculate the ratio or the percentage rise and use it in the argument. A widening gap measured from the case is application; "executives are paid too much" is assertion.
Corporate social responsibility is a business choosing to take account of its effects on society and the environment, beyond what the law requires.
Corporate social responsibility (CSR) is a business voluntarily taking responsibility for its effects on society and the environment, beyond what the law requires. Obeying the law is the minimum; CSR is what a business chooses to do on top of it.
CSR covers how a business treats its workforce and supply chain, its environmental conduct (emissions, waste, where its raw materials come from) and its part in the community. Where ethics asks whether a particular decision is right, CSR is the business's continuing policy across the whole range of its effects.
For Orvana, a CSR policy might commit it to certified palm oil, to less plastic in its packaging and to taking on apprentices in Ipoh even as the old factory closes.
Why firms adopt it. CSR can protect reputation, win customers and retailers who choose responsible suppliers, attract staff who want to work for such a firm, and reduce the risk of tighter regulation. The limits. It costs money that could go to shareholders; its benefits are hard to measure; and a policy that promises more than the business does is soon exposed. That gap, which critics call greenwashing, can do more damage than having no policy at all.
Real Example: A dairy company in Kenya pays for vets to visit the smallholder farms that supply it, and publishes an audited account each year of the milk it buys and what it pays. Buyers can check the claims rather than take them on trust.
Exam Matters: Judge a CSR policy on whether it changes what the business actually does, and what that costs, not on what it says. Evidence such as audited results or changed sourcing is what makes a CSR claim credible.
Corporate culture is the shared values and habits that decide how things are done in a business. A strong culture is widely shared and deeply held; a weak one is not.
In a power culture, decisions flow from one person at the centre; in a role culture, they flow from job titles, procedures and rules.