Decision Making

Decisions are made at three basic levels in most organisations:

 Strategic level- long term decisions that entail high risks and are usually made by top management. Strategic decisions
influence the direction, overall policy and performance of the business.
 Tactical level- short to medium term decisions that are usually made at the middle management level. They carry
fewer risks and would involve decisions such as what price to charge, which supplier to purchase from and who to
employ or make redundant.
 Operational level- short term decisions that deals with the administration of the firm’s strategic and tactical decisions.
They involve few risks and can be made quickly. At this level, decisions such as which credit limit can be offered to a
customer or on the ordering of stationery are made.

CART:

1. Cost effectiveness- the cost of gathering the information should not outweigh its benefits. The information should be
gathered in the least costly way while maintaining its accuracy and relevance
2. Accuracy- Information collected must be accurate so that it can be relied upon by the manager. Misleading
information may impede the decision being made and results in undue costs to the firm
3. Relevant- the information collected must be appropriate for the situation or decision being made. It must be up to
date as outdated information is useless
4. Timeless- information must be available to managers and other decision makers on time. It should be obtained in a
timely manner, since failure to do so may lead to bad decisions.

A qualitative decision is one that is based on non-quantifiable information. These decisions often entail people’s value
judgements and opinions and their decisions are made based on SWOT analysis (Strength, weakness, Opportunities and
Threats) and PEST analysis (Political, Economic, Social and Technological factors).

A quantitative decision is one based on statistical data and unlike qualitative decisions, quantitative decisions rely on historical
data that can be quantified and analysed to make generalisations and draw conclusions. Quantitative decisions could be based
on information gathered from sources such as market research, historical sales figures and accounting information.

Stages of Decision Making

1. Problem analysis
2. Data collection
3. Analysis and Evaluation of data
4. Formulate and test alternative strategies
5. Implement the decision
6. Evaluate decision

The Process of decision making

Step 1: Identify the decision

You realize that you need to decide. Try to clearly define the nature of the decision you must make. This first step is very
important. The problem may be identified by thoroughly searching through the firm’s annual reports or financial statements
or from customers’ feedback among other sources.

Objectives – the aims of the firm should be the central start point for all decision making. This should be obvious – how can
any strategic decisions be taken about the future of a business unless directors and managers know what the business is trying
to achieve?

A dynamic firm is one that can turn its problems or the problems of others into an opportunity to provide goods or a service.
Therefore, this stage could also include the identification of opportunities that are available.

Step 2: Gather relevant information

Collect some pertinent information before you make your decision: what information is needed, the best sources of
information, and how to get it. This step involves both internal and external “work.” Some information is internal: you’ll seek it
through a process of self-assessment. Other information is external: you’ll find it online, in books, from other people, and from
other sources.

The data needed may be collected from primary and or secondary sources. ‘Primary data’ refers to original information
collected specifically in response to the problem. This may be collected through observation, interviews and questionnaires.
Primary data must be collated and analysed to have some value based on the problem defined in the first stage.

Secondary data represents information collected from other sources such as newspapers, textbooks, internet sources or other
work of a similar nature that was complied for previous research. This form of data will be reprocessed and reused to solve the
problem identified or to clarify the opportunities identified.

Step 3: Developing the alternatives

As you collect information, you will probably identify several possible paths of action, or alternatives. You can also use your
imagination and additional information to construct new alternatives. In this step, you will list all possible and desirable
alternatives.

These options may be developed individually, by teams or through analysis of similar situations in comparable organisations.
These alternatives should be geared toward solving the problem or achieving the objective outlined above. Having formulated
the possible alternatives, the manager can then move to the other stages.

Step 4: Analysing the alternatives

Draw on your information and emotions to imagine what it would be like if you carried out each of the alternatives to the end.
Evaluate whether the need identified in Step 1 would be met or resolved using each alternative. As you go through this
difficult internal process, you’ll begin to favour certain alternatives: those that seem to have a higher potential for reaching
your goal. Finally, place the alternatives in a priority order, based upon your own value system

An alternative may be deemed impractical because of:

 Lack of financial resources

 Lack of expertise to implement the alternative
 Legal restriction
 Ethical and social responsibility implications
 Technological constraints
 Insufficient information

The decision maker should consider its adequacy to address the problem as well as consider the costs or benefits of choosing
each alternative.

Step 5: Choose among alternatives

Once you have weighed all the evidence, you are ready to select the alternative that seems to be best one for you. You may
even choose a combination of alternatives. Your choice in Step 5 may very likely be the same or like the alternative you placed
at the top of your list at the end of Step 4.

Here, the decision maker selects the best course of action to solve the problem. Situations do not themselves to mathematical
or quantitative analysis but instead are subjective.

The manager may also select and use a combination of options instead of one. Once selected the option should be
implemented in the least costly way feasible. It is also possible that management may encounter unforeseen problems and
face resistance to change from employees.

Step 6: Act

You’re now ready to take some positive action by beginning to implement the alternative you chose in Step 5.

Step 7: Review your decision & its consequences

In this final step, consider the results of your decision and evaluate whether it has resolved the need you identified in Step 1. If
the decision has not met the identified need, you may want to repeat certain steps of the process to make a new decision. For
example, you might want to gather more detailed or somewhat different information or explore additional alternatives.
Here the decision maker needs to evaluate the outcome of the decision taken. These results are then compared with the
original objectives or problem to ascertain whether they were achieved or solved. The results are often presented in a report.
Having assessed the report, it may be necessary to modify the course of action or to start the process of decision making over
again.

Stage Action needed

Problem analysis  Link the two issues- fall in sales will not lead to market share objective being achieved
 Identify the data the need to be collected and analysed
Data collection  Secondary data: recent sales trends for business- broken down into products and regions:
recent sales data for competitors, overall market size- broken down into products and
region
 Primary data: consumer research- reasons for changing tastes and new buying habits
Analysis and  Is the problem of falling sales limited to this company or to the whole market?
evaluation of data  Are sales falling for all products/ regions – or just certain ones?
 Are sales for some products/ region increasing?
 What evidence is there from primary research that consumes buying habits have changed?
What are they now ‘looking for’ in this market?
 Can existing products be adapted- or will new products have to be developed?
Formulate and test  Product development- this will take time but could meet the changing needs of consumers.
alternative strategies Much product testing will be essential.
 Market development- enter new markets or market segments with existing products.
 Market penetration- use promotional and other strategies to sell more in existing markets
 All these options will need to be tested
Implement the  The action to be taken to ‘solve’ the problem will need to be implemented after careful
decision planning. Resources of finance and personnel will have to be adequate to increase chances
of success. Specific targets need to be established for strategy.
Evaluation of  Managers cannot just take a decision and forget it. The success of the strategy must be
decision assessed and reviewed against the original objectives for it. If it is not meeting these targets
then further management action may be needed.

FACTORS AFFECTING DECISION MAKING

GOVERNMENT, POLITICAL AND LEGAL FACTORS

In a free market economy, the government had ver little if any influence over business activity- the market forces reigned
supreme and business managers had few political or legal checks on their decisions.

Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of
rules exist in various fields of biology and society, but the term has slightly different meanings according to context.

A government is the system or group of people governing an organized community, generally a state. In the case of its broad
associative definition, government normally consists of legislature, executive, and judiciary

Legal factors are those that emerge from changes to the regulatory environment, which may affect the broader economy,
certain industries, or even individual businesses within a specific sector. They include, but are not limited to: Industry
regulation. Licenses and permits required to operate.

In a planned economy, the government owned and controlled all important means of production, so the government did not
have to pass laws to control its own decisions.

Governments act to control the activities and decisions of firms in the private sector to protect consumers, workers, society
and the environment.

The government is responsible for passing various laws and requirements and establishing frameworks that will affect decision
making.

In the Caribbean there are currently several laws governing the behaviour and operation of businesses. These include:

 Employment laws which governs contracts, recruitment, termination of employment, redundancy, health and safety in
the workplace, unionisation, dispute resolution and minimum wage payments. Businesses must be aware of these
laws when making decisions since they have serious implications for them. A written contract of employment must be
 signed so that the employee is fully aware of the pay, working conditions and disciplinary procedures to be followed.
There are minimum ages at which young people can be employed. Holiday and pension entitlements are usually
guaranteed by legal regulations. Discrimination against people during recruitment and selection or whilst at work on
the grounds of race, colour or religion is illegal. Unfair dismissal can be claimed if the employment contract is ended
because of:
1. Pregnancy
2. Refusal to work on a holy day
3. Refusal to work overtime if this takes the total working hours over forty-eight hours in one week
4. Incorrect dismissal procedure being followed
5. Being a member of a trade union
 Laws to promote competition in business. Governments have enacted laws revoking previous monopoly licences and
liberating some of these markets to foster competition. These laws may also prevent mergers and limit uncompetitive
practices among firms.
 Consumer rights which protect consumers from exploitation and unfair practice in business. The Sale of Goods act is
also important, as it stipulates the conditions under which goods are sold.
 Environmental laws with the emphasis that is being placed on global warming in recent times, firms now must be
more careful about their impact on the environment. Governments are also becoming more vigilant in the
enforcement of environmental protection laws.
 Health and safety law- these aim to protect workers from discomfort and physical injury at work. In Trinidad and
Tobago, the health and safety laws require businesses to:
1. Equip factories and offices with safety equipment
2. Provide adequate washing and toilet facilities
3. Provide protection from dangerous machinery and materials
4. Give adequate breaks and maintain certain workplace temperatures.

THE IMPACT ON BUSINESSES OF LEGAL CONSTRAINT ON EMPLOYMENT AND HEALTH AND SAFETY

The costs of these include:

1. Supervisory costs regarding a firm’s recruitment, selection and promotion procedure

2. Higher wage costs if the minimum wage was not being paid before this law was introduced
3. Higher costs from giving paid holiday, pension contributions and paid leave for sickness, maternity and paternity leave
4. Employing more staff to avoid over-long hours for existing workers
5. Protective clothing and equipment to meet health and safety laws

Clearly, multinationals that operate in countries with very few legal constraints will enjoy lower production costs.

What are the benefits to businesses from meeting the legal requirements?

1. Workers will feel more secure and more highly valued if they are offered a clear and fair employment contract.
2. A safe working environment will reduce risks of accidents and time off work for ill health or injury.
3. Failing to meet minimum standards may lead to expensive court cases and heavy fines
4. Businesses that make a policy of providing employment conditions and a healthy environment beyond legal
requirements can adopt a high-profile campaign to attract the best employees.
5. The culture of the business might be to treat workers as partners in the business, equal in status and importance to
managers and shareholders

The Law and Consumer Rights

Here are some reasons why governments around the world take legal action to protect consumers of goods and services form
unfair or unscrupulous business activity:

1. An individual consumer is relatively weak and powerless against a large business with large marketing and promotion
budgets.
2. Products are becoming more scientific and technological and it is difficult for consumers to understand how they
operate an to assess the accuracy of the claims being made for them
3. Selling techniques are becoming more pressurised and are increasingly difficult for some consumers to resist.
4. The increasingly globalised market place is leading to increases in imported goods.
5. The increasingly competitive nature of most markets leads to some firms trying to take advantage of consumers by
reducing quality, service, guarantee periods and so on to offer an apparently lower price and ‘better deal’
In T&T the Consumer Protection Act is the single most important law affecting the relationship between consumers and
businesses. Amongst other consumers safeguard it:

 Protects consumers against misleading contracts

 Prevents unfair penalties being imposed on consumers
 Stops businesses from varying the terms of a contract after they have been agreeing on by the business and the
consumer

Impact of Consumer Protection Laws on Businesses

1. Raise in business cost

2. Redesigning products
3. Redesigning advertisements
4. Improving quality control standards
5. Treating consumers fairly and responding to complaints quickly may reduce the risk of court action
6. Change of strategy a culture in the organisation

The Law and Business Competition

It is usually argued that free and fair competition between businesses has benefits for consumers. They are presented with a
wider choice of goods and services firms will try to keep prices as low as possible and businesses will compete by improving
the quality, style and performance of the product.

A pure monopoly is technically a situation in which there is only one supplier but this is very rear.

HOW DO MOMOPOLIES DEVELOP?

1. By invention of new products or processes that are then legally patented to give the originator the monopoly of
production
2. By merging or taking over other firms in the industry
3. By legal Protection
4. The existing of barriers to entry into an industry
5. The privatisation of state monopolies

HOW ARE CONSUMERS AFFECTED BY MONOPOLIES?

There can be both positive and negative effects. Possible benefits include:

1. Lower prices if large- scale production by a monopoly reduces average costs of production through economies of scale
(economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically
measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables an
increase in scale)
2. Increased expenditure on new products and technical advances as the monopolies will be able to protect their
position and make monopoly profits from the new idea.

However, the drawbacks include

1. Higher prices if the monopolist has so little competition that consumers have no option but to buy form this one firm
2. Limited choices of products
3. Less investment in new products because of complacency and little risk of competition
4. No incentive for the firm to lower costs and improve efficiency
Society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or
social territory, typically subject to the same political authority and dominant cultural expectations.

Culture is defined as the social behaviour, institutions and norms found in human societies as well as the knowledge, beliefs,
arts, laws, customs, capabilities and habits of the individuals in these groups which is originated from or attributed to a specific
region or location

The following are factors that affect decision making:

 An ageing population
 Changing role of women
 Changing the family structure
 Increasing provision of education facilities
 Improving of education
 Population age and working habits
 Early retirement in many western countries
 Rising divorce rates
 Job insecurity is forcing more employees to accept temporary and part-time employment

AN AGEING POPULATION

Changing patterns of demand as greater numbers of ‘grey’ consumers demand different types of goods than teenagers.

Age structure of the workforce may change. There may be reduced numbers of youthful employees available and it may be
necessary for workforce planning to include provision for employing older workers- or for keeping existing workers up to and
perhaps, beyond retirement age.

PATTERNS OF EMPLOYMENT

In many industries capital is replacing labour. This is particularly true of the secondary sector of the economy. Output can rise
due to increasing productivity yet total employment often falls

Transfer of labour form old established industries such as steel to the new hi-tech industries

An increase in the number of women in employment and in the range of occupations in which they can be found

An increase in part-time employment. Part of this is due to single part-time jobs and some of it to job sharing. Much of it is
second jobs as people supplement their income.

An increase in student employment on a part-time basis, among both those who are at or waiting to go into higher education
and those who are still in secondary education. Students and part-timers substantially staff some industries.

Flexible hours are more common due to working in large conurbations where the problems of being at work for 9:00 a.m. or
getting home at the normal end of the day have produced a more flexible approach. Such an approach is also helpful to
working parents

An ageing population changes the balance between those in work and those supported and this put increasing burdens on the
health service, pensions, private pension funds and the care industries.

Women are tending to stay in full time employment for longer. Families are smaller, more women do not have children and
there is an increasing tendency to have children later in life. More women take maternity leave then return to work

Many countries are increasingly multi-cultural and this influences the pattern of women at work

CHANGING THE FAMILY STRUCTURE

There are many things to take into consideration when making products for families such as the type of family e.g. single
parent, family members’ ages, income, and products they demand.

IMPROVEMENT IN EDUCATION

Because there are more tertiary education level institutions the persons will have more inquiries about the company’s
decisions before purchasing a product.
POPULATION AGE AND WORKING HABITS

Due to healthier life choices and better medical treatment the life expectancy rate went up meaning an increase in population
age. Most people are retiring earlier due to better investment opportunities. Decision makers must take all these factors into
consideration.

The influence of culture on decision making is carried out mainly through shared beliefs and values that form a stable set of
underlying assumptions among members of society.

Culture influences this process by providing members with interpretations of their experiences

Cultural diversity may lead to better decisions because of different views, perspectives, ideas, proposals of citizens.

THE IMPACT OF TECHNOLOGY ON DECISION MAKING

Businesses must both use and adapt to technology because firms compete and the market is both global and highly sensitive
for most of the major products and services.

TECHNOLOGY AND BUSINESS

Businesses utilize technology for the following reasons:

1. Communication
2. Product technology
3. Costs of production
4. Human resources
5. The market

TECHNOLOGY AND COMMUNICATION

In some businesses so much is done by computers that there are increasing problems of isolation and computer stress.

PRODUCT TECHNOLOGY

It frequently determines the nature and speed of production flow on the line, the quality of the product, the part that workers
play in the process and the creation or disposal of waste.

COSTS OF PRODUCTION

Technology is not cheap at any level, although many prices are falling. At the highest level of use it is complex and expensive.
This raises fixed costs and thus creates the need for a very large market to spread those fixed costs and reduce unit costs.

Production is now global in many instances, serving a global market, and in these instances, it is easier to be small and
effective than it is to be medium sized and effective.

TECHNOLOGY AND HUMAN RESOURCES

Technology has led to:

1. Redundancies, as technology has changed methods and replaced people throughout industry and at all level in
organisations
2. Increased employment
3. Some deskilling (the process by which skilled labour within an industry or economy is eliminated by the introduction of
technologies operated by semi- or unskilled workers)
4. Multi-skilling
5. In many instances, to changed attitudes to career choice and to jobs themselves
6. An increase in the number of small businesses
7. A flattening of organisation charts
8. A shortage of skilled computer engineers and programmers
9. An increasing acceptance of change

Technology and Marketing

 1. The increase in the range and the changing nature of products we can buy
2. The way in which we can be in the market
3. Pricing
4. Ability to compete.
5. The pattern of demand
6. Distribution has been revolutionised by technology as the world increasingly becomes one market
7. For some people, technology has led to higher disposable incomes
8. It has changed the way we are paid
9. Technology has created more leisure time and an increasing demand for fitness and leisure-based products and
services
10. Technology has radically changed health and medicine

Economic factors affecting decision making

Economic objectives of governments

 A target rate of economic growth- the annual percentage increase in a country’s total level of output (GDP)
 A target of price inflation- the rate at which consumer prices, on average, increases each year
 Low levels of unemployment
 A balance, in the long term between the value of goods bought from other countries (imports) and the value of goods
the country sells to others (export)- the values of imports and exports are measured on the annual Balance of
Payments account
 Exchange rate stability- the government will try to prevent wild swings in the external value of currency in terms of its
price with other currencies

Economic growth- a definition and why it is considered desirable

The total value of goods a service produced in a country in one year is called Gross Domestic Product. This is measured in
monetary terms and inflation will raise the value of GDP. Economic growth in the economy occurs when the real level of GDP
rises because of increases in the physical output of good and services in an economy.

Reasons Economic growth is desirable:

 Higher real GDP increases the quantity of goods and services available for consumers and this increase living standards
 Higher levels of output often lead to increased employment, which will increase consumer incomes
 More resources can be devoted to desirable public sector projects, such as health and education without reducing
resources in other sectors
 Absolute poverty can be reduced or even eliminated if growth is substantial enough and the benefits are sufficiently
dispersed.
 Businesses should experience rising demand for their products, although this will depend on income elasticity of
demand for their products
 Higher GDP makes more resources available for government through greater income from taxes and a decreased
burden of social expenditure. This can be used to pursue government objectives more effectively and it can be used to
reduce the burden of taxation

Factors that lead to economic growth

 Increases in output resulting form productivity increases caused by technological changes and improved training of
staff. Growth that results from these factors does not lead to inflation as there are no demand – pull pressures.
Governments wish to encourage this form of economic growth by encouraging business investments, innovation and
training schemes
 Increases in demand for the products made by industry. This demand comes from not just consumers but also from
government, from foreign demand for investment goods such as machinery. Increases in total or ‘aggregate’ demand
will encourage businesses to increase output.

THE BUSINESS CYCLE

There can be a problem when economic growth results from demand increases. Inflation can result from demand- pull forces,
especially when the economy is nearing full capacity.
Problems likely arises:

 Demand- pull inflation will accelerate, reducing industrial competitiveness and leading to higher wage demands. If this
reduces the competitiveness of local industry than that of other countries, export markets could be lost.
 Labour shortages will become a problem, especially for skilled workers in high demand. This, too, will cause wages and
business costs to rise.
 Consumers will experience a feel-good factor because unemployment will be low and incomes will be rising. This will
encourage consumers to borrow more to spend on house purchases and other durable goods. Prices of many of these
goods will rise and the high price of housing will be of concern to government.
 As consumers incomes continue to increase, so the demand for imports will rise, especially luxury goods and services,
such as foreign holidays. At the same time home-based firms will find it easier to sell goods on the domestic market
than overseas and may switch production away from exports towards the home market. The result of these two
trends is for a current-account deficit to become a serious problem. The country will be spending much more foreign
currency than it is earning.

Type of producer Period of economic growth Period of recession

Producers of  Increase the range of goods and services  May not reduce prices for fear of damaging
luxury goods and  Raise prices to increase profit margins long-term image
services  Promote exclusivity and style  Credit terms to improve affordability
 Increase output  Offer promotions
 Widen product range with lower priced
models
Producers of  Add extra value to product- better  Lower prices
normal goods and ingredients/ improved packaging  Promotions
services  Brand image may attract exclusive tag  Do nothing- sales not much affected
 Do nothing- sales not much affected anyway
anyway
Producers of  Attempt to move product ‘upmarket’  Promote good values and low prices
inferior goods  Add extra value to the product  Free consumer trials
and services  Extend the product range to include  Increase range of distribution outlets
more exclusive or better designed
products

An economic recession, defined as six months of declining GDP as output is falling, fewer workers will be needed.
Unemployment will increase and as incomes fall, so demand for goods and services further. Government tax revenue will also
fall as less income tax and sales revenue will be received. Firms producing ‘normal’ and income elastic goods will experience
reduced demand, which will leave them with spare capacity.

Capital assets such as land and property and even other businesses, may be relatively cheap and firms could invest in
expectation of an economic recovery

Demand for ‘inferior’ goods could increases

The risk of retrenchment and job losses may encourage improved relations between employees and employers to increase
efficiency

Hard decisions may need to be taken regarding closures of factories and offices- this could make the business ‘leaner and
fitter’ and better able to take advantage of economic growth when this eventually starts again

Inflation can be defined as an increase in the average price level of goods and services.

Deflation can be defined as a fall in the average price level of goods and services.

THE IMPACT OF INFLATION ON BUSINESS STRATEGY

 Cost increases can be passed on to consumers more easily if there is a general increase in prices
 The real value of debts owed by companies will fall. This means that, because the value of money is falling, when a
debt is repaid it is repaid with money of less value than the original loan. Thus, highly geared companies see a fall in
the real value of their liabilities.
  Rising prices are also likely to affect assets held by firms, so the value of fixed assets, such as land and building, could
rise. This will increase the value of a business and, when reflected on the balance sheet, make the company more
financially secure.
 Since stocks are bought in advance and then sold later, there is an increased margin from the effect of inflation
 Staff will become much more concerned about the real value of their incomes. Higher wage demands are likely and
there could be an increase in industrial disputes
 Consumers are likely to become much more price sensitive and look for bargains rather than brand names
 Rapid inflation will often lead to higher rates of interest. These higher rates could make it very difficult for highly
geared companies to find the cash to make interest payments, even though the real value of the debts is declining
 Cash- flow problems may occur for all businesses as they struggle to find more money to pay the higher costs of
materials and other costs
 Inflation adds to uncertainty about the future
 If inflation is higher in one country than in other countries, then businesses will lose competitiveness in overseas
markets
 Businesses that sell goods on credit will be reluctant to offer extended credit periods- the repayments by creditors will
be with money that is losing value rapidly
 Consumers may stockpile some items or transfer their disposable income to commodities that are more likely to hold
or increase their value

Cause of Government and Central Bank Policy to control Impact on business strategy of government policy
inflation inflation aiming to control inflation
Cost-push High exchange rate policy- this could be assisted by High exchange rate will make imports cheaper and
higher interest rates set by the central bank exports less competitive. Business could switch to
concentrating on the domestic market
Discourage high wage settlements- may use public
sector workers as an example High interest rates will discourage businesses
borrowing and investment. Businesses may cancel
investment projects

Consumer credit will also be discouraged, reducing

demand, especially for expensive goods

Businesses are unlikely to be influenced by

Demand-pull Policies designed to reduce aggregate demand such
as higher tax rates and lower government spending
Central Bank is likely to raise interest rates
government views on wage settlements- they will pay
what is needed to attract and keep staff, if the
business remains profitable
Higher taxes will reduce consumer demand. If
progressive taxes are increased, there could be a
swing away from luxury goods. Businesses may
change their ‘product mix’ to offer less-expensive
goods

Lower government spending could hit certain

industries very hard and these firms may attempt to
enter foreign markets.

Interest rate increases

During periods of rapid inflation, businesses may:

 Cut back on investment spending

 Cut profit margins to limit their own price rises
 Reduce borrowing ti levels at which the interest payments are manageable
 Reconsider their creditor policy
 Reduce labour costs
DOES THIS MEAN THAT DEFLATION IS BENEFICIAL?

 Consumers would delay making important purchases hoping that the prices would fall further. This would cause a
reduction in demand which could lead to a recession
 Businesses with long term liabilities would find that they were making interest payments and repayments of the debts
with money that had gained in value since the original loan was taken out. This will discourage borrowing to invest.
 Holdings of stocks of material and finished goods will be falling in value. Although this will reduce their working capital
needs, it will also reduce orders for supplies from other businesses. This is another factor that may push the economy
into a recession because output will decline.

Unemployment is said to exist when members of the working population are willing and able to work but are unable to find
employment.

Cyclical unemployment occurs when an economy is in recession which is a stage of the business cycle in which a fall in demand
for firm’s output, resulting in fewer workers required for producing goods and services.

Structural unemployment results in certain types of workers being unable to find work even though other labour markets are
short of labour resulting from structural changes in the economy such as changes in consumer tastes and expenditure patterns
resulting from higher incomes, changes in the structure of the industry and improvements in technology.

Frictional unemployment occurs when features of the changing labour demands in different businesses and industries which
are all occurring all the time. If labour turnover rates in the economy as a whole then the level of frictional unemployment will
increase.

BALANCE OF PAYMENTS

Results of this are:

 A fall or depreciation in the value of its currency exchange rate

 A decline in the country’s reserves of foreign currency
 An unwillingness of foreign investors to put money into the economy

It would be serious if:

 The exchange rate problems make importing and exporting too risky
 The government takes actions by placing control imports such as tariffs which benefit by reducing the imports of
competitors. However serious consequences could also result such as the policy could lead to retaliation by other
countries that will then reduce export demand and also import controls are serious for firms that depend on imported
supplies.

Exchange rate is a price of one currency in terms of another and is determined by the forces of supply and demand.

Exchange rate fluctuation is an appreciation: one unit of the currency will buy more units of other currencies

A depreciation of currency is when one unit of it buys fewer units of other currencies.

Macro- economic policies

Fiscal policy is concerned with decisions about government expenditure, tax rates and government borrowing. The major
expenditure programmes include social security, health service, education, defence and law and order. The government raises
finance to pay for these schemes through taxation, and the main tax revenues come from income tax, value added tax,
corporation tax and excise duties. Only when the government announces an overall change in total tax revenues or total
government expenditure plans will there be a macro-economic effect that will be noticed by virtually all businesses.

Monetary policy is concerned with decisions about the rate of interest and the supply of money in the economy. This is mainly
concerned with changes in interest rates, which are determined each month by central bank. When the forecast for inflation is
that it will rise above the targets set by government, then the bank will raise its base rate and all other banks and lending
institutions will follow. If inflation is low and is forecast to remain below government targets, then the bank may decide to
reduce interest rates- especially if economic growth is slowing down or there is a danger that unemployment might rise.

In addition to financial and monetary policies, the government also has to have a view about the exchange rate of the
currency.

Government policy and industrial competitiveness

The ability of industry to compete effectively with overseas rivals is a key factor in the long-term growth of an economy. Three
examples of policies that could have this effect are:

1. High rates of income tax

2. High rates of corporation tax
3. High rates of interest

Monetary policy and exchange rate

There is often a very important link between the level of interest rates and the exchange rate. If domestic interest rates
increase – especially if they increase above those in other countries- then the currency’s exchange rate is likely to appreciate
against other currencies.

One source of demand for a currency on the foreign exchange market is from international investors who decide to leave their
capital on deposit in domestic banks.

Their funds are more likely to be invested in a country’s bank if rates of interest are higher than those in other countries. If
domestic interest rates rise then the speculators will want to convert their own currency deposits into this currency thus
increasing the demand for it. The increase in demand will cause an appreciation in its exchange rate.

REASONS FOR NOT JOINING A COMMON CURRENCY

 By not joining the common currency, the central bank could keep its status as the interest-setting authority.
 Replacing the currency with a common currency will probably lead to common tax policies throughout the currency
zone.
 Allowing exchange rates to float means that except in extreme cases the government and the central bank can allow
the exchange rate of the pound to find its own level and will not use economic policies to keep it at one level or
another.
 Conversion costs from one currency to the common currency could be substantial in terms of dual pricing and the
changeover of notes and tills.
Factors affecting Positive impact on businesses
decision making
Government, Governments can provide the legal framework
legal and political within which businesses operate, which could work
in the business’s favour
Businesses can be protected form unfair competition
Government policies can create business
opportunities in some areas
Infant industries can receive protection from
external competition
Social and Social networking can be used as a good marketing
cultural tool to reach a larger group and wider cross-section
of people
The age differences in the population can be used as
an opportunity for segmentation i.e. creating
different products to meet the needs of each age
group
Once the firm learns the culture of the country, it
can produce products that are in tune with people’s
beliefs systems
Technological This has paved the way for doing business online
Each firm can market and sell its product globally,
thus having access to the global market
New and improved technology can increase
productivity and hence the output of the firm
Technological advancement in and of itself creates
business opportunities
Decisions made in the firm can easily be transmitted
using e-mail or video conferencing etc.
Economic Low interest rates can be good for firms wanting to
borrow for investment
The business needs to know information on inflation
and exchange rate to forecast or plan for the future
better
The firm can decide to locate in a country whose
economy is growing to maximise profits
A firm may decide to market its products where it
can gain high returns on investment
Ecological Decisions that are made with the environment in
mind show the firm’s corporate social responsibility
Negative impact on businesses
Laws such as those on minimum wage could have
an adverse effect on firms’ revenues
Political instability may result in the loss of
productive time
Government taxing policies could also deter firms
form operating in the region and could lead to
reduce revenue
Government monetary policy framework could
make it difficult to do business in the region
If an age gap exists then firms could experience a
slowdown in production as more experienced
employees retire
A shift in the family structure could result in more
absenteeism, especially when children become sick
If the product being sold by the firm is viewed as
offensive because of some belief in the market
country’s culture then it may not be supported
there
Technology comes with a cost to the firm and this
may be very expensive
The use of internet technology has brought new
competition to regional firms
Technology may cause information to become
available to unscrupulous users
Employees can feel alienated by technology. This
could lead to low levels of motivation and
productivity
Economic instability can reduce business
confidence, thus affecting investment decisions
High inflation rate can result in increased input
cost for the firm
If the economy moves into a recession, the firm
could see significant falls in sales and profits. This
may lead to it closing down
The firm must be aware of the legal implications of
polluting the environment