Chapter 6 Notes: External Influences on Business Activity

Chapter 6: External Influences on Business Activity

6.1 Political and Legal Influences

• Learning Intentions:

  • Understand state intervention in business ownership (privatisation & nationalisation).
  • Analyse government's legal controls over business.
  • Evaluate the impact of technology on business decisions.
  • Evaluate the impact of competitors and suppliers on business decisions.
  • Evaluate the impact of societal changes on business strategy.
  • Examine the growing importance of sustainability on business decisions.
  • Assess the nature, purpose, and uses of environmental audits.

• Privatisation vs. Nationalisation:

  • Mauritius: Plans to privatise the water supply industry (CWA) to increase efficiency with private sector participation.
  • Kenya: Voted to nationalise Kenya Airways to save it from debts, mirroring Ethiopia's model of government-controlled air transport assets.

• External Environment: Consists of laws, political & social factors, economic conditions, technology, competitors, suppliers, international trade, and environmental pressures.

• Privatisation: Transfers state-owned industries to the private sector via public limited companies and stock exchange listings (e.g., British Airways, Deutsche Telekom, Skoda).

  • Arguments for Privatisation:

    • Greater efficiency due to private-sector management.
    • Faster decision-making compared to state-owned entities.
    • Increased responsibility and motivation for managers and employees.
    • Market forces drive change or failure, enabling expansion for successful businesses.
    • Financial decisions replace political ones.
    • Raises finance for the government.
    • Private capital markets lead to increased investment.

  • Arguments against Privatisation:

    • Essential industries should be controlled by the state.
    • Private competition hinders coherent national policy (e.g., railways, electricity).
    • State ownership ensures accountability to the country via ministers and parliament.
    • Privatised industries may become monopolies exploiting consumers.
    • Breaking up nationalised industries reduces economies of scale.

• Nationalisation: State buying privately owned businesses.

  • Arguments for Nationalisation:

    • Government control of major industries.
    • Integrated industrial policy possible.
    • Prevents private monopolies and consumer exploitation.
    • Economies of scale via merging private businesses into one corporation.

  • Arguments against Nationalisation:

    • Less incentive for efficiency due to reduced profit motive; government subsidies may be needed.
    • Potential government intervention in business decisions for political reasons.
    • Could be costly for the government.
    • Inability to raise finance from private sources.

• Legal Constraints on Business Activity Categories:

  • Employment practices.
  • Marketing behaviour and consumer rights.
  • Competition.
  • Location of businesses.

• Law and Employment Practices Objectives:

  • Prevent exploitation of workers.
  • Control excessive trade union action.

• Legal Constraints on Employment Practices:

  • Recruitment, contracts, and termination.
  • Health and safety at work.
  • Minimum wages.

• Worker Rights Protections:

  • Written contracts.
  • Minimum employment ages.
  • Maximum working week length.
  • Holiday and pension entitlements.
  • Non-discrimination.
  • Protection against unfair dismissal.

• EU Legislation: Prohibits discrimination based on age and includes paid maternity/paternity leave.

• Variations in Employment Laws:

  • Maximum weekly hours: 52 in Central African Republic vs. 37 in Denmark.
  • No minimum wage: Sweden, Norway, Denmark.
  • Minimum working ages vary (e.g., 10 years old in Sri Lanka).
  • Varying health and safety standards (Bangladesh, Bahamas).

• Health and Safety at Work Requirements:

  • Safety equipment & staff training.
  • Adequate facilities.
  • Protection from hazards.
  • Adequate breaks and temperature control.

• EU Inspection System: Enforces health and safety standards with the power to inspect and start legal proceedings.

• Minimum Wages: Legally binding; vary worldwide (e.g., Luxembourg at $13.80 per hour in 2020, Egypt at$1.10 per hour based on a 160-hour month).

  • Aims:

    • Prevent worker exploitation.
    • Reduce income inequalities.

  • Effects:

    • Increased living standards.
    • Work incentive.

  • Criticisms:

    • Avoidance via casual employees.
    • Reduced business competitiveness and potential redundancies.
    • Pressure for wage increases above minimum, increasing inflation.

• Impact of Changes in Employment/Health and Safety Laws:

  • Constraints:

    • Supervisory costs.
    • Higher wage costs.
    • Increased costs for holidays, pensions, and leave.
    • More staff to manage working week controls.
    • Protective clothing and equipment costs.

  • Benefits:

    • More secure & motivated workforce.
    • Reduced accidents & absenteeism.
    • Avoidance of court cases and fines.
    • Attraction of best employees.
    • Good publicity for ethical treatment of workers.

• Chinese Employment Rights: Governed by PRC Employment Law of 1995, covering working hours, health & safety, social welfare, and non-discrimination.

• Reasons for Consumer Protection Laws:

  • Individual consumer weakness relative to businesses.
  • Product complexity.
  • Pressurised selling techniques.
  • Globalised marketplace & varying standards.
  • Competitive markets leading to reduced quality and guarantees.

• UK Consumer Protection Laws (Examples):

  • Sale of Goods Acts:

    • Goods must be fit to sell.
    • Suitable for intended purpose.
    • Perform as described.

  • Trade Descriptions Act: No misleading descriptions or claims.

  • Consumer Protection Act:

    • Firms liable for damage caused by dangerous/defective products.
    • No misleading prices.

• Impact of Consumer Protection Laws on Business:

  • Increased Costs:

    • Product redesign for safety.
    • Advertisement redesign for accuracy.
    • Improved quality control.

  • Potential Benefits:

    • Reduced consumer injury & bad publicity.
    • Reduced risk of court action.
    • Improved customer loyalty.
    • Reputation for fair complaint handling and honest advertising.

• Law and Business Competition:

  • Benefits of Competition:

    • Wider choice for consumers.
    • Lower prices.
    • Improved product quality and design.
    • Strengthened domestic economy.

  • Government Actions to Encourage Competition:

    • Investigating and controlling monopolies.
    • Limiting uncompetitive practices (e.g., collusion).

6.2 Social and Demographic Influences

• Corporate Social Responsibility (CSR): Business accepting legal and moral obligations to all stakeholders.

• CSR and Accounting Practices: Misleading financial reporting considered socially irresponsible.

• CSR and Illegal Incentives: Bribes distort markets and are socially irresponsible.

• CSR and Social Auditing:

  • Annual social report indicating social impact.

  • Voluntary (not legally required).

  • Contents include health & safety, pollution levels, community contributions, ethical sourcing, employee benefits, stakeholder feedback.

  • Benefits:

    • Identifies social responsibilities met/unmet.
    • Enables target setting.
    • Improves public image.

  • Limitations:

    • May lack credibility without independent verification.
    • Time and money intensive.
    • Some consumers prioritize low prices over social responsibility.

• Community Needs Consideration: Benefits include improved public image, community acceptance, government grants, and reduced risk of pressure group action.

• Pressure Groups: Aim to influence business policies, consumer behaviour, and government policies.

  • Examples: Greenpeace, Fairtrade Foundation, Amnesty International, Extinction Rebellion.

  • Methods:

    • Media publicity.
    • Influencing consumer behaviour through boycotts, etc.
    • Lobbying government.

• Demographic Changes: Changes in population size and structure at local, national, and global levels.

  • Examples: Ageing populations, changing roles of women, improved education, early retirement, rising divorce rates, job insecurity.

• Impact of Ageing Population on Business:

  • Changing Demand: Shift to products for older consumers.

  • Workforce Age Structure: Reduced young employees and need to retain older workers.

• Changing Patterns of Employment:

  • Labour replaced by capital equipment.

  • Labour migration to hi-tech industries.

  • Increased women in employment.

  • Increased part-time employment.

  • Increased temporary & flexible employment contracts.

  • Increased flexible work patterns.

  • Increased multiculturalism.

  • Increase in zero-hour contracts.

• Impact of Social and Demographic Change:

  • Opportunities:

    • Increased demand for products aimed at specific demographic groups.
    • Rising population increases demand for housing and household products.
    • Increase in high-income people increase consumer spending on luxury products.
    • Part-time employment patterns allow for greater flexibility of operations.

  • Threats:

    • Reduced demand for products aimed at age groups or social groups that are becoming relatively less important.
    • Shortage of labor supply with ageing population.
    • Increased taxation.
    • Need to restructure work patterns to suit more part-time workers.
    • Part-time workforce may be more difficult to build into a loyal team.

6.3 Technological Influences on Business Activities

• Technology Definition: Use of tools, machines, and science in industry.

• Impact of Recent Technological Developments:

  • Changes in products consumers demand.
  • Changes in product manufacturing methods.
  • Changes in business communication.
  • Changes in how businesses collect, store and use information.

• Opportunities from New Technology:

  • New products.
  • New processes (automation).
  • Reduced costs.
  • Better communications (social media).
  • More information for decision-making.

• Threats from New Technology:

  • High capital costs.
  • Labor and training costs.
  • Redundancy costs.
  • Damaged workforce relations from poorly managed change.
  • Reliability issues.
  • Data protection legalities.
  • Management resistance.
  • Increased competition.

• Management Information Systems Benefits:

  • Quick data access from all departments.
  • Rapid data analysis and decision-making.
  • Accelerated communication of decisions.

• Drawbacks Management Information Systems:

  • Information overload.
  • Reduced authority and empowerment for lower-level managers.

• Effective Introduction of Technology Stages:

  • Analyse usage in ways that can increase effectiveness.
  • Involve managers and employees in assessing potential benefits and pitfalls of introducing the new technology.
  • Evaluate different systems.
  • Plan for introduction (training/demonstrations).
  • Monitor effectiveness.

6.4 Influence of Competitors and Suppliers

• Market power decreases with more competitors and increases with fewer suppliers.

6.5 International Influences

• Importance of International Trade: Leads to economic development and improved relationships but also potential risks like job losses and import competition.

• Potential Risks from International Trade:

  • Loss of output and domestic jobs.
  • Decline of essential domestic industries.
  • Switch causing factory closures and job losses.
  • Newly established unable to compete with importers.
  • Dumping of goods to eliminate competition.
  • Import values exceeding exports.

• Drivers of Free International Trade: WTO and free-trade blocs (ASEAN, EU).

• Benefits of Increased International Trade:

  • Wider consumer choice.
  • Access to raw materials and products.
  • Increased industrialisation for developing economies.
  • Competition for domestic industries.
  • Specialisation and comparative advantage.
  • Economies of scale.
  • Cheaper imports.
  • Increased living standards.

• Role of Technology in International Trade:

  • Improved communications via the internet.
  • Blockchain technology.
  • Artificial Intelligence & Machine learning.
  • New digital platforms.
  • Mobile payments.

• Multinational Businesses: Headquarters in one country with operations in multiple countries.

• Reasons for Becoming a Multinational:

  • Proximity to markets.
  • Lower production costs.
  • Avoid import restrictions.
  • Access to natural resources.

• Operating-Plant Risks in Foreign Countries:

  • Poor communication with headquarters.
  • Language, legal, and cultural barriers.
  • Coordination difficulties.
  • Low skill levels of local employees.

• Impact of Multinationals on Host Countries:

  • Potential Benefits:

    • Foreign currency investment and earnings.
    • Job creation and training.
    • Local supplier benefits.
    • Quality and productivity improvements in local firms.
    • Increased tax revenues.
    • Improved management expertise and expertise.
    • Increased output of the economy.

  • Drawbacks:

    • Exploitation of workforce.
    • Increased pollution beyond allowed practices in domestic countries.
    • Local firms squeezed out of business due to inferior equipment/resources.
    • Imposition of Western culture.
    • Profit repatriation.
    • Depletion of natural resources.

6.6 Environmental Influences on Business Activity

• Environmental Issues: Pollution, congestion, emissions, use of scarce resources.

• Influence Business Behaviour: Consumers support businesses with green policies; avoid companies that damage.

• Benefits of Reducing Negative Environmental Effects:
  * Marketing and promotional advantages.
  * Reduce pollution.
  * Using recycled materials.
  * Dispose of waste responsibly
  * Reduce the chances of breaking laws designed to protect the environment avoiding bad publicity and heavy fines.
  * Potential long-term financial benefits compare with rising prices for oil and gas.

• Arguments for Not Taking Environmentally Friendly Decisions:

  • High costs and lower short term profits.
  • Weak legal protection in some countries.
  • Economic growth prioritised over environmental protection in developing countries.
  • Lack of inspection systems.

• Greenwashing: Making misleading environmental claims.

• Environmental Audits: Independent checks on environmental performance.

  • How Stakeholders May Use them:
    • Businesses report on pollution, waste, energy use, recycling.
    • Managers set sustainability targets.
    • Consumer groups influence purchasing.
    • Investors make investment decisions.
    • Employees develop pride.

• Limitations of Environmental Audits:

  • Voluntary and not always taken seriously.
  • Potential for publicity stunts.
  • Time-consuming and expensive.

• Sustainability and Business Decisions: Environmentally friendly decisions contribute to sustainability.