3-6-1-causes-and-effects-of-change

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Causes of change

Businesses operate in a continuously changing business environment:
- Changing internal factors such as business growth, new business ownership or internal restructuring
- Changing external factors, such as changes to the market or technological advancements
Whilst consistency or a lack of change might be easy options, most businesses will find it difficult to maintain a competitive edge without planning for and responding to change

Internal causes of change

Cause	Explanation
A change in business size	Businesses are likely to grow organically as they sell more products They may create or expand functional areas, open new premises or introduce new levels of supervision An increase in size may also come about when a firm merges or takes over another business Workforces, resources and capital will need to be integrated, and systems will likely need to be streamlined A business may also become smaller as a result of divestment or as a result of market pressures Redundancies and the sale of assets may be required, or workers may need to transfer to other parts of the business
Poor performance	A period of poor performance may mean that a business makes changes to its leadership team in order to pursue a new direction E.g. after a run of 11 defeats in 14 games, Frank Lampard was sacked as the manager of Everton Football Club in early 2023. The team went on to win its next game against league leaders Arsenal Change following poor performance needs to be swift to avoid problems setting in, such as the potential loss of customers and reputational damage
New ownership	A change in ownership can bring significant change to the overall aim and objectives of the business A new owner is likely to bring about new policies, attempt to make changes to a business’s culture and bring key personnel to implement these changes
Transformational leadership	In some cases, change can only be brought about by a transformational leader with a new strategic direction and vision for the business Extensive changes are likely to be made to the business’s aims, objectives, structure and culture
Business restructuring	Changes to the structure of a business may be required as a result of an expansion or contraction of the business A restructure may also be needed when a business enters a new market, changes its scope of operations or integrates with another business E.g. as Frasers Group plc has taken over a string of struggling high street brands such as Debenhams and Missguided, significant changes have been made to the managerial and operational structures of the business to reduce functional duplications and costs

External change happens all the time, and in many cases, businesses can make plans to respond if they keep a close eye on PESTLE factors (see subtopic 3.1.4)

External causes of change

Cause	Explanation
Changes in the market	A new competitor may enter the market, or existing competitors may change their strategy E.g. in the UK, established supermarkets such as Tesco and Sainsbury have responded to new discount entrants Aldi and Lidl by focusing on lowering prices and opening smaller stores
Social change	Long-term changes to consumption habits as a result of social change can require a business to refocus its business strategy E.g. as the UK has an increasingly diverse population, food retailers now sell a wide range of foods from around the world and related products
Political change	Periodic change in political leadership can require both short-term and longer-term business responses E.g. the Conservative Party’s 2015 election pledge to hold a referendum on the UK’s membership of the EU has had a significant impact on business, especially for those involved in the import and export of goods to and from the EU
Economic change	Economic growth or contraction can impact the demand for goods and services and can be difficult to predict E.g. poor UK growth in recent years, combined with more recent high inflation, has squeezed households’ disposable income and led to significant changes in consumers’ purchasing priorities
Technological change	Technological change has been particularly rapid over the last few decades, creating significant opportunities but also a need for businesses to adapt E.g. the growth in online retailing has allowed even the smallest of businesses to reach a larger number of customers, though traditional high street retailers have needed to adapt their supply chains and invest significantly in logistics to be able to meet demand
Legal change	Changes to the laws affecting businesses often accompany political change and require adaptation and compliance E.g. the 2007 law banning smoking in indoor public spaces meant that many hospitality businesses, such as pubs and restaurants, were required to make adaptations to their premises, such as constructing all-weather outdoor facilities
Environmental change	Environmental change is increasingly associated with political change and subsequent changes to the law In recent years, numerous environmental issues have emerged, and increasingly, consumers expect businesses to respond to their concerns, even if they are short-lived E.g. in response to environmental concerns about the impact of single-use plastics, the UK government introduced the “bag tax” in 2015, leading to a 97% reduction in their use and the development of a wide range of innovative alternatives, such as the corn starch bags provided by The Cooperative Group to shoppers

Possible effects of change

Change can have significant effects on the business in the following areas:
- Competitiveness
- Productivity
- Financial performance
- Stakeholders

Competitiveness

Change as a result of some internal factors (e.g. following poor performance or the arrival of a new leader) can be rapid and can lead to swift improvements in competitiveness
Change as a result of external factors is more likely to be gradual and involve a business carefully selecting and pursuing an appropriate long-term competitive strategy (see Porter, subtopic 3.1.2)
Research suggests that change has an overall positive effect on business competitiveness when it brings management and engaged employees together and their efforts are coordinated

Productivity

In the short term, as change is being implemented and employees get used to new processes, surroundings, leadership or a new product, productivity is likely to be reduced
Once changes are embedded, productivity is likely to return to earlier levels and possibly improve, especially if new technology is part of the change
During periods of external change, businesses may endure a period of unstable levels of productivity and must take steps to manage capacity utilisation and unit costs

Financial performance

In the short term, the implementation of change can be very expensive for several reasons:
- An organisational restructure may involve significant redundancy payments as well as recruitment and training costs
- Market research and product development require investment
- Attracting transformational leadership to key roles will require attractive salaries to be offered
- Public relations and promotional activity may be needed, especially where change is implemented as a result of poor performance
- New strategies are likely to involve capital expenditure
In the longer term, financial performance is likely to improve as change becomes the new way of working and as teething problems are overcome

Stakeholders

Change can have predictable as well as less obvious impacts on the range of stakeholders

Some changes, such as seasonal fluctuations or cyclical economic factors, can often be planned for and their impacts on stakeholders considered in advance
- E.g. increased orders for barbecue products are very likely to be placed during the warmer summer months, so a supermarket will be able to liaise with suppliers ahead of time
- A sudden “cold snap”, on the other hand, is likely to be difficult for many fashion retailers, as they operate on a seasonal basis — customers may well be disappointed if they are unable to source warm clothing

Significant long-term change is likely to involve a wide range of stakeholders at some level
- E.g. following its takeover by Frasers Group plc, Debenhams stores were closed, and the brand moved online
- This had far-reaching impacts on Debenhams’ product range, organisational structure and supply chain
- Thousands of employees were made redundant, rapid changes were made to the management structure, existing supply agreements were cancelled and new suppliers were appointed
- Local councils were faced with large empty premises in prominent high street locations, impacting the retail environment in their towns, as well as reducing income from business rates

Examiner Tips and Tricks

The concept of change is rarely examined as a topic in its own right, yet understanding its implications and how businesses and their stakeholders plan and respond to change is vital.

Some of the following questions may be useful when considering changing external factors or strategic change coming from within the business:

Does the change pose a threat or present an opportunity to the business?
What can the business do to manage the threat or exploit the opportunity?
How can competitive advantage be retained or created as a result of change?
How are stakeholders likely to respond to the change?
How may the problems change causes stakeholders be mitigated?

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