BUSINESSS ADMINISTRATION

NOTES OF LECTURE 5
 EXTERNAL FACTORS AFFECTING BUSINESS

Businesses operate in an ever changing world. External factors are things outside a business that
will have an impact on its success. Their impact can be positive or negative. A business cannot
control external factors. All it can do is react to them and make decisions to help it remain
successful. the different types of external factors are:
 political - For example, new legislation
 economic - For example, inflation and unemployment
 technological - For example, being able to sell goods online or using automation in factories
Political factors
Political factors involve the decisions and laws that governments make. These include:
 tax
 laws
 political stability
Governments can raise or lower corporation tax, which will impact on profits. They can also affect
businesses by increasing value-added tax on products or business rates.
They can bring in new laws like the National Minimum Wage, which impacts on profits and
employment rights. Governments can also introduce new health and safety legislation meaning
that a business has to change the way it works, for example by training its staff.
Economic factors
Economic factors are all concerned with the so called ‘levers’ of the economy. These include:
 economic growth
 interest rates
 unemployment
 inflation
  exchange rates
Economic growth
If there is economic growth then more jobs will be created and more tax will be paid.
Interest rates
When interest rates are high, businesses borrow less and invest less. However they receive more
interest on money saved in the bank.
When interest rates are low, businesses may borrow and invest more, but will receive less interest
on money in the bank.
Unemployment
If unemployment is high, then firms have more potential workers to choose from. More
competition for jobs means that it is easier for a business to keep wages down. If the rate of
unemployment is low then businesses will have to offer higher competitive wages to secure new
employees.
Inflation
When inflation is high, prices rise and customers may stop buying luxury goods and focus on
essentials.
Exchange rates
Exchange rates can rise or fall. When there is a fall in the pound it has both positive and negative
impacts on businesses. When the exchange rate for the pound falls it becomes weak. A weak
pound makes our goods cheaper to sell abroad. However if UK firms need to buy in raw materials
from abroad then the weak pound buys less, making the cost of production higher. This extra cost
may be passed on to the customers, resulting in higher prices.
Technological factors
Automated car production is an example of a technological factor
Technological factors refers to the ways new practices and equipment can affect businesses. These
include:
 ICT
 research and development
 automation
 e-commerce
ICT
ICT can make processes and communication within a business quicker and more efficient. Firms
also need to keep their software and hardware up to date. If they don’t, they risk being seen as
old fashioned by customers and in danger of becoming obsolete.
Research and development
Research and development (R & D) refers to the steps businesses take in the innovation of new
products, systems and services. In recent years research and development has led to the
introduction of 3D printers, smart phones, tablets and a multitude of apps.
Innovations can have a major impact on firms and sometimes can destroy a traditional business.
For example Kodak used to produce and sell 80% of the world’s film for cameras. But the invention
of digital cameras has caused the market for camera film to shrink dramatically. .
Automation
 E-commerce
More and more firms are online. This widens the number of customers and lowers the costs of
production but it is highly competitive.
Demographic factors
Companies with successful products and services evaluate the demographics of their target
market to ensure they meet the needs of those who benefit from their offerings. They also
perform tests to measure how well they serve their customers. This helps them understand if their
target market has changed and how they can develop better ways to serve their loyal customers
and earn new ones. Demographics that affect business decisions and processes include:
 Age
 Gender
 Race
 Nationality
 Belief system
 Marital status
 Occupation
 Income
 Level of education
For example, when mobile phone companies emerged in the 1990s, their marketing efforts
focused on young, successful professionals. Now, people of all ages use mobile devices daily.
Telecommunications companies have adapted to this change by modifying the features of their
products and taking different approaches to advertising methods.

The global dimension of the environment refers to factors in other countries that affect U.S.
organizations. Although the basic management functions of planning, organizing, staffing, leading,
and controlling are the same whether a company operates domestically or internationally,
managers encounter difficulties and risks on an international scale. Whether it be unfamiliarity
with language or customs or a problem within the country itself (think mad cow disease),
managers encounter global risks that they probably wouldn't have encountered if they had stayed
on their own shores.
 SIX ELEMENTS OF ORGANIZATIONAL STRUCTURE

An organizational structure is a diagram displaying the hierarchical arrangement of lines of

authority, roles and duties within an organisation and how they relate to one another. A structure
is dependent upon the objectives and strategy of which the organization is focussed on.
There are six basic elements of an organizational structure:
1. Specialisation
2. Departmentalisation
3. Chain of Command
4. Span of control
5. Centralisation and Decentralisation
6. Formalisation
Work specialization gives employees specific duties and roles they are expected to perform within
the company, factoring in their qualifications and skills. Having descriptions of duties for staff
members helps the organisation to fully meet the workforce needs and to ensure there are no
unnecessary duplications within roles.
 Departmentalization refers to how the organisation breaks down the functions and teams
needed to run the company and carry out the essential tasks. Departments are usually made up
of staff members who perform similar tasks in the same work area, but could also be grouped by
project, location, or however the organisation sees fit to ensure increased productivity.
CHAIN OF COMMAND Most organizations, from businesses to nonprofits to the military, utilize a chain
of command. This helps eliminate inefficiencies by having each employee report to a single
manager, instead of to several bosses. In the corporate context, this type of chain of command is
reflected in the organizational structure and affects job descriptions as well as office hierarchies.
Managers assign tasks, communicate expectations and deadlines to employees, and provide
motivation on a one-to-many basis. When employees encounter obstacles or problems, they
report back to the appropriate manager. When necessary, the manager is then responsible for
taking the concern or issue up the chain of command to the next level, and so forth. This chain of
authority or command streamlines corporate operations and communications for a more efficient
and productive business.

The span of control is how many employees each manager is given to oversee, and limits to their
capacity is set by the organisation. It ensures the efficiency of a company isn’t compromised, as a
manager will become less effective at their job if they have too many staff members to supervise
and the amount of time they spend focussing on each person will significantly reduce. Managers
who are positioned higher up in the chain of command will typically oversee less staff members,
as they will be directly responsible for middle managers and supervisors.
Centralization within a business means that middle management does not have a significant input
to company decisions, and these are left to top level management only. This is typical of a larger
organisation. Decentralization allows all level of management to share their input on the goals and
visions of the wider company, which will then help to improve their individual teams.

Organizational structures implement a degree of formalization, and determines the procedures and
rules of a company, as determined by management. A smaller organisation might have less formal
standards because staff undertake multiples roles and duties, but a larger organization would need
to set more defined elements to enable clarity for staff. The type of organization structure,
whether formal or informal, is based on the needs and usually the size of the company. A formal
organisation has clearly defined roles and responsibilities for staff, and accountability is fixed
within the structure. An informal structure has less set guidelines and restrictions, and is reliant
upon the interactions that staff members have with each other. A formal structure has been
deliberately created by top line management, but an informal structure would be spontaneous
created by staff. This could lead to chaos and confusion if the team grows in numbers, as there
may not be a clearly defined hierarchy or procedures to follow to ensure the company keeps
working effectively. An informal structure does however allow for flexibility within the
organisation, as there aren’t rules in place which could slow down operations.
AUTOCRATIC LEADERSHIP
Autocratic leadership, also known as authoritarian leadership, is a leadership style characterized
by individual control over all decisions and little input from group members. Autocratic leaders
typically make choices based on their ideas and judgments and rarely accept advice from
followers. Autocratic leadership involves absolute, authoritarian control over a group.
Characteristics
Some of the primary characteristics of autocratic leadership include:1
 Allows little or no input from group members
 Requires leaders to make almost all of the decisions
 Provides leaders with the ability to dictate work methods and processes
 Leaves group feeling like they aren't trusted with decisions or important tasks
 Tends to create highly structured and very rigid environments
 Discourages creativity and out-of-the box thinking
 Establishes rules and tends to be clearly outlined and communicated
Benefits
 Allows for quick decision-making especially in stress-filled situations
 Offers a clear chain of command or oversight
 Works well where strong, directive leadership is needed
Drawbacks
 Discourages group input
 Hurts morale and leads to resentment
 Ignores or impairs creative solutions and expertise from subordinates
 How to Be Successful
The autocratic style can be beneficial in some settings, but also has its pitfalls and is not
appropriate for every setting and with every group. If this tends to be your dominant leadership
style, there are things that you should consider whenever you are in a leadership role.2
Listen to Team Members
You might not change your mind or implement their advice, but subordinates need to feel that
they can express their concerns. Autocratic leaders can sometimes make team members feel
ignored or even rejected.
Listening to people with an open mind can help them feel like they are making an important
contribution to the group's mission.
Establish Clear Rules
In order to expect team members to follow your rules, you need to first ensure that guidelines are
clearly established and that each person on your team is fully aware of them.
Provide Tools
Once your subordinates understand the rules, you need to be sure that they actually have the
education and abilities to perform the tasks you set before them. If they need additional
assistance, offer oversight and training to fill in this knowledge gap.
Be Reliable
Inconsistent leaders can quickly lose the respect of their teams. Follow through and enforce the
rules you have established. Establish that you are a reliable leader and your team is more likely to
follow your guidance because you have built trust with them.
Recognize Success
Your team may quickly lose motivation if they are only criticized when they make mistakes but
never rewarded for their successes. Try to recognize success more than you point out mistakes.
By doing so, your team will respond much more favorably to your correction.

DEMOCRATIC LEADERSHIP
Democratic leadership, also known as participative leadership or shared leadership, is a leadership
style in which members of the group participate in the decision-making process. This type of
leadership can apply to any organization, from private businesses to schools to the government.
With a democratic leadership style, everyone is given the opportunity to participate, ideas are
exchanged freely, and discussion is encouraged. While this process tends to focus on group
equality and the free flow of ideas, the democratic leader is still there to offer guidance and
control.
Pros
 More ideas and creative solutions
 Group member commitment
 High productivity
 Improved group morale
Cons
 Communication failures
 Poor decision-making by unskilled groups
 Minority or individual opinions overridden
 Potential security issues
How to Use Democratic Leadership
Democratic leadership works best in situations where group members are skilled and eager to
share their knowledge. It is also important to have plenty of time to allow people to contribute,
develop a plan, then vote on the best course of action. Because so many people are involved,
setting deadlines can ensure that you get everyone's input in enough time to act on it. Providing
 expectations upfront can be helpful as well, making it clear when the group's input will be
sought and which decisions management will make on its own.

LAISSEZ-FAIRE LEADERSHIP

Laissez-faire leadership, also known as delegative leadership, is a type of leadership style in which
leaders are hands-off and allow group members to make the decisions. Researchers have found
that this is generally the leadership style that leads to the lowest productivity among group
members.
Characteristics
Laissez-faire leadership is characterized by the following:
  Hands-off approach
 Leaders provide all training and support
 Decisions are left to employees
 Comfort with mistakes
 Accountability falls to the leader
Benefits
Like other types of leadership, the laissez-faire style has its advantages.
 It encourages personal growth. Because leaders are so hands-off in their approach,
employees have a chance to be hands-on. This leadership style creates an environment
that facilitates growth and development.
 It encourages innovation. The freedom given to employees can encourage creativity and
innovation.
 It allows for faster decision-making. Since there is no micromanagement, employees under
laissez-faire leadership have the autonomy to make their own decisions. They are able to
make quick decisions without waiting weeks for an approval process.
Disadvantages
Some possible disadvantages of the laissez-faire style include:6
 Lack of role clarity: In some situations, the laissez-faire style leads to poorly defined roles
within the group.7 Since team members receive little to no guidance, they might not really
be sure about their role within the group and what they are supposed to be doing with
their time.
 Poor involvement with the group: Laissez-faire leaders are often seen as uninvolved and
withdrawn, which can lead to a lack of cohesiveness within the group. Since the leader
seems unconcerned with what is happening, followers sometimes pick up on this and
express less care and concern for the project.
 Low accountability: Some leaders take advantage of this style as a way to avoid
responsibility for the group's failures. When goals are not met, the leader can blame
members of the team for not completing tasks or living up to expectations.
 Passivity: At its worst, laissez-faire leadership represents passivity or even an outright
avoidance of true leadership. In such cases, these leaders do nothing to try to motivate
followers, don't recognize the efforts of team members, and make no attempts at
involvement with the group.
When to Avoid
Even in situations where a laissez-faire leadership style may be helpful, such as in a creative field
or with self-managed teams, it may pay to utilize a variety of leadership approaches at different
phases of the work process. Generally, this leadership style is not suitable for:
 Situations where efficiency and high productivity are the main concerns. Some people are
not good at setting their own deadlines, managing their own projects, and solving
problems on their own. Under this leadership style, projects can go off-track and deadlines
can be missed when team members do not get enough guidance or feedback from leaders.
 Situations that require great oversight, precision, and attention to detail. In high stakes and
high-pressure work settings where every detail needs to be perfect and completed in a
timely manner, a more authoritarian or managerial style may be more appropriate.8
 People who aren't good at setting deadlines or managing projects. Using a laissez-faire
approach in this type of scenario can lead to missed deadlines and poor performance,
particularly if group members are unsure of what they need to be doing or do not have the
skills they need to perform tasks with little to no direction.