External Influences on Business Activity

Chapter 6: External Influences on Business Activity

Learning Intentions

• Understand privatization and nationalization.
• Analyze government legal controls over business and their impact.
• Evaluate the impact of technology, competitors, and suppliers on business decisions.
• Evaluate how societal changes impact business strategy.
• Examine the growing importance of sustainability.
• Assess the nature and purpose of environmental audits.

6.1 Political and Legal Influences

Privatization

• Definition: Selling state-owned businesses to the private sector.
• Process: Creating public limited companies and selling shares on the stock exchange.
• Examples: British Airways, Deutsche Telekom, Skoda.
• Arguments for:
  • Greater efficiency due to private sector management.
  • Faster decision-making compared to bureaucratic state bodies.
  • Increased responsibility for managers and employees.
  • Market forces drive change and expansion.
  • Financial reasons guide decisions, not political ones.
  • Sale raises finance for the government.
  • Access to private capital markets for investment.
• Arguments against:
  • Essential industries should be based on societal needs, not shareholder interests.
  • Lack of coherent and coordinated policy in key sectors (e.g., railways).
  • Reduced accountability to the country.
  • Potential for private monopolies to exploit consumers.
  • Loss of economies of scale when breaking up nationalized industries.

Nationalization

• Definition: Transfer of privately owned businesses to state ownership.
• Arguments for:
  • Government control of major industries.
  • Integrated industrial policy.
  • Less profit motive, potentially benefiting consumers.
• Arguments against:
  • Inefficient operation due to lack of profit incentive.
  • Government intervention in business decisions for political reasons.
  • High cost to the government of buying private companies.
  • Removes the ability to raise finance from private sources.

Legal Constraints on Business Activity

• Categories:
  • Employment practices, working conditions, and wages.
  • Marketing behavior, consumer rights, and product controls.
  • Competition.
  • Location of businesses.

The Law and Employment Practices

• Objectives:
  • Prevent worker exploitation through health and safety standards and minimum wages.
  • Control excessive trade union action.
• Areas covered:
  • Recruitment, contracts, and termination.
  • Health and safety at work.
  • Minimum wages.
• Recruitment, Employment Contracts, and Termination of Employment
  • Written contract of employment.
  • Minimum employment ages.
  • Maximum working week length.
  • Holiday and pension entitlements.
  • No discrimination during recruitment or at work.
  • Protection against unfair dismissal.
• EU Legislation: Prohibits age discrimination and provides maternity and paternity leave.
• Country Comparisons:
  • Maximum weekly working hours: Vary widely (e.g., 52 in Central African Republic, 37 in Denmark).
  • Minimum wage: Not present in some countries (e.g., Sweden, Norway, Denmark).
  • Minimum working ages: Vary significantly (e.g., 10 years old in Sri Lanka).
  • Health and Safety: Stringency varies; some countries haven't adopted ILO standards.
    *Health and safety at work:
    *Equip factories and offices with safety equipment and train staff to use it.
    *Provide adequate washing and toilet facilities.
    *Provide protection from dangerous machinery and materials.
    *Give adequate breaks and maintain certain workplace temperatures.
• Minimum Wages

*The rates vary considerably around the world. In 2020, the highest rate paid was in Luxembourg ($13.80$ per hour).
*The lowest rate, based on a 160-hour working month, was Egypt ($1.10$ per hour).

Aim:

*Prevent exploitation of poorly organized workers by powerful employers.
*Reduce income inequalities between the high paid and low paid in the economy.

Effects:

*Increased standard of living and purchasing power of low paid workers.
*A work incentive, as working is more worthwhile than being unemployed.

Criticisms:

*They can be avoided by employers insisting on casual employees with no employment contracts and no job security. These actions are illegal, but difficult to prevent.
*Raising labour costs can make businesses uncompetitive and they might make workers redundant.
*Other workers being paid just above the minimum wage will ask for a wage raise, and inflation might increase as business costs increase further.

• Impact of Changes in Employment and Health and Safety Laws
  • Constraints that add to business costs.
  • Supervisory costs for checking procedures.
  • Higher wage costs.
  • Increased costs from paid holidays, pension contributions, and leave.
  • Employment of more employees to respond to controls over working week length.
  • Protective clothing and equipment for health and safety.
  • Benefits of Meeting Minimum Standards
  • More secure and motivated workers.
  • Reduced risk of accidents and time off work.
  • Avoidance of court cases and fines.
  • Attraction of the best employees.
  • Good publicity for treating workers well.

The Law, Marketing Behavior, and Consumer Rights

• Reasons for government consumer protection:
  • Consumers are weak against large marketing budgets.
  • Products are becoming more complex.
  • Pressurized selling techniques.
  • Globalized marketplace increases import of varied quality goods.
  • Increasingly competitive markets lead to reduced quality and service.

Consumer Protection Laws (UK examples):

*   **Sale of Goods Acts**:
    1.  Goods must be fit to sell and safe.
    2.  Goods must be suitable for their intended purpose.
    3.  Goods must perform as described.
*   **Trade Descriptions Act**:
    *   No misleading descriptions or claims.
*   **Consumer Protection Act**:
    *   Firms liable for damage caused by dangerous products.
    *   No misleading prices.

• Impact on Business of Consumer Protection Laws
  • Increased costs for: redesigning products, improving quality control, and accurate advertising.
  • Change of strategy and culture, putting consumer interests first.
  • Possible Benefits of Consumer Protection
  • Reduced risk of consumer injury.
  • Reduced risk of court action.
  • Improved customer loyalty.
  • Reputation for fair complaint handling.
  • Sales and marketing benefits from honest practices.

*The law and business competition:
*Wider choice of goods and services.
*Businesses have to keep prices as low as possible to be competitive.
*Businesses compete by improving the quality, design and performance of the product.
Competitive markets within one country also have external benefits. Rival businesses become more
competitive against foreign firms and this helps to strengthen the domestic economy.

*Governments attempt to encourage and promote competition between businesses by passing laws that:
*investigate and control monopoly activities and make it possible to prevent mergers and takeovers that create monopoly.
*limit or outlaw uncompetitive practices between businesses, such as collusion.
*Collusion: Businesses agree to work together and restrict competition by fixing prices and sharing contracts between themselves.

6.2 Social and Demographic Influences

• Corporate Social Responsibility (CSR)
  • Acceptance of legal and moral obligations to all stakeholders.
  • CSR and Accounting Practices
  • Avoid 'accounting window dressing'.
  • CSR and Payment of Illegal Incentives
  • Avoid 'incentive payments' (bribes).
  • CSR and Social Auditing
  • Annual social report indicating the social impact of a business.
    *Social audit: a report on the impact a business has
    on society.

Social audits usually include:

*A health and safety record (e.g. the number of accidents and fatalities)
*Pollution levels.
*Contributions to local community events and charities.
*The proportion of supplies from ethical sources (e.g. Fairtrade suppliers)
*Employee benefit schemes.
*Feedback from customers and suppliers on the ethical nature of the business's activities.
Annual targets for social responsibility measures.
Benefits of social audits identifies what social responsibilities the
business is meeting - and what still needs to
be achieved
sets targets for improvement in
social performance
by comparing these audits with the best-
performing firms in
the industry
improves a company's public image, which acts as a useful marketing tool to increase sales
Limitations of social audits if the social audit is
not independently checked, it may not
be taken seriously by
stakeholders
detailed social audits require time and money some consumers are just interested in cheap goods, not whether the businesses they buy
from are socially responsible or not

Why businesses need to consider community needs:

*Improving the public image of the business, making it more attractive to investors and socially aware consumers.
*Increasing the chance that the community will accept business decisions such as expansion or relocation.
*Increasing the chance that the business will receive government grants and subsidies.
*Reducing the risk of negative action being taken against the business by pressure groups.

Pressure Groups

*Greenpeace campaigns for greater environmental
protection by businesses adopting green strategies
and governments passing tighter anti-pollution
laws.
Fairtrade Foundation - aims to achieve a better deal for agricultural producers in low-income countries.
Amnesty International – rigorously supports human
rights especially in countries where these are at risk as
a result of government action.
Extinction Rebellion - encourages demonstrations to force governments to take action against
climate change.

Pressure groups want changes to be made in three important areas:

*Businesses to change policies so that, for example, less damage is caused to the environment.
*Consumers to change their purchasing habits, so that businesses which adopt appropriate policies see an increase in sales, but those that continue to pollute or use unsuitable work practices see sales fall.
*Governments to change their policies and to pass laws supporting the aims of the group.

Pressure groups try to achieve these goals in a number of ways:

*Publicity through media coverage: Effective public relations are vital to successful pressure-group campaigns. Frequent press releases giving details of undesirable company activity and coverage of direct-action events, such as meetings, demonstrations and consumer boycotts, help to keep the campaign in the public eye. The more bad publicity the group can create for the company concerned, then the greater the chance of changing company policy.
*Influencing consumer behaviour: If the pressure group is so successful that consumers stop buying a company's products for long enough, then the commercial case for changing policy becomes much stronger. The successful consumer boycott of Shell petrol stations following a decision to dump an old oil platform in the sea led to a change of strategy. Shell is now aiming to become Public sympathy for a pressure group campaign can increase its effectiveness significantly.
*Lobbying of government: This means putting the arguments of the pressure group to government members and ministers because they have the power to change the law. If the popularity of the government is damaged by a pressure-group campaign that demands government action, then the legal changes asked for stand a greater chance of being introduced.

• Demographic Changes

  • Changes in population structure at:
    • Local level: increases due to refugees or new housing.
    • National level: changes in birth rate and aging population.
    • Global level: projected growth to 11 billion by 2100.
  • Recent global social and demographic changes
    • An ageing population in many high-income countries
    • Changing role of women
    • Better provision of education facilities and increasing literacy.
    • Early retirement.
    • Rising divorce rates.
    • Job insecurity.
      *globalisation: the increasing freedom of movement of goods, capital and people around the world.

• Impact on Business of Social and Demographic Change

  • An Aging Population
    • Larger proportion over retirement age.
    • Smaller proportion below 25 years of age.
    • Higher tax burden on the working population.
    • Changing patterns of employment are one of the social constraints on the activities of business.

*An increase in the number of women in employment
and in a wider range of occupations.
An increase in part-time employment.
An increase in learner employment on a part-time basis. Some industries are substantially staffed by learner and part-timers. McDonald's, most of the other fast-food chains and many supermarkets employ many such workers.
An increase in temporary and flexible employment
contracts. These can be imposed by employers on
workers to reduce the fixed costs of full-time jobs
and to allow for flexibility when faced with seasonal demand or uncertainties caused by
increasing globalisation.
Flexible work patterns are more common. Working
from home or flexi-hours arrangements can benefit both employer and employee.

• Evaluating the Impact on Business of Social and Demographic Changes

6.3 Technological Influences on Business Activities

• Definition of Technology: The use of tools, machines, and science in an industrial context.

• Impact of Recent Developments

  • Changes in consumer demands.
  • Transformations in product manufacturing.
  • Evolution of business communication methods.
  • Advances in data collection, storage, and usage.
    *information technology (IT): the use of electronic
    technology to gather, store, process and communicate
    information.

• Impact on Business of Technological Change

  • Opportunities:
  • New products and processes.
  • Reduced costs due to higher productivity.
  • Better communications.
    More information for decision-making.

• Potential Threats:

  • Costs.
  • Workforce relations.
  • Reliability.
  • Data protection.
  • Management.
    Competition.

• Providing Data for Business Decision-Making

  • Benefits of Management Information Systems:
    • Managers can obtain data quickly
    • Computers can be used to analyze and process the data rapidly.
    • accelerate the communication of decisions

*Introducing technology effectively
*Analyze the potential use of the new technology and the ways it can make the business more effective.
*Involve managers and other employees in assessing the potential benefits and pitfalls of introducing the new technology. Better ideas may come from workers who will use the system than from managers responsible for purchasing it.
Evaluate the different systems available, comparing cost, and expected efficiency and productivity gains.
Consider the budget available.
Plan for the introduction of the new system, including extensive training for all users and demonstrations to all staff.

6.4 Influence of Competitors and Suppliers

• The greater the number of competitors and their total market share, the less market power individual businesses have.
• The smaller the number of suppliers, the less likely a business customer is able to influence prices and credit terms

6.5 International Influences(Importance of international trade and its impact)

*Growth of world trade in recent years has been very rapid
*Potential risks from international trade include: there may be loss of output and jobs from domestic firms that cannot compete effectively with imported goods.

*Impact of international trade agreements has led to significant reductions
in protectionism. The most common forms of trade barriers are tariffs, quotas and voluntary export limits.
Voluntary export limits: agreed limits to the quantity
of certain goods sold by one country to another
(possibly to discourage the setting of tariffs/quotas).
*The important benefits of international trade agreements , consumers have a much wider choice of goods and services
*The role of technology in international trade. Improved communications via the internet - between business, suppliers and customers - have been a major factor driving the growth in international trade.

multinational business:
*It brings them closer to their main markets, with the benefits of lower transport costs and better market information about consumer tastes.
*The benefits include lower costs of production as a result of lower wages, lower rental costs and relatively weak government restrictions.

Potential problems:

 *Communication links with headquarters may be poor.
 *The skill levels of the local employees may be

low, requiring substantial investment in training
programmes.

Benefits of Multinational Expansion

*Foreign currency inflow and export earnings.
*Employment creation and skills improvement through training.
*Local firms benefit from supplying services and components.
*Improved quality and productivity in local firms.
*Increased tax revenues.
*Management expertise improvement.
*Increased gross domestic product.
*Drawbacks:
Local workforce exploitation due to lax labor laws.
Pollution due to inadequate environmental regulations.
Competition squeezing out local firms.
Imposition of Western culture.
Profit repatriation to the home country instead of reinvestment.
Depletion of limited natural resources.

6.6 Environmental Influences on Business Activity

• Impact of Business Activity: Air and noise pollution, road congestion, expansion into country areas, global warming, and use of scarce resources.

• Influence of Environmental Issues on Business Behavior
  *Businesses can benefit from making decisions that reduce negative environmental effects, including reducing pollution by using low-energy equipment; using recycled materials instead of scarce natural products; disposing of waste responsibly.
  Potential costs of cleaning up the environment or compensating locals will be avoided. These might include the cost of clearing polluted waste from rivers
  or land, or compensation for lost livelihoods and the cost of healthcare for those effected by pollution.

• Arguments Against Environmentally Friendly Decisions

  • Environmentally friendly decisions can be very costly.
  • Environmentally friendly decisions can be very costly
    *Environmental audit: assesses the impact of the activities and decisions of a business on the environment.