Chapter 6 Business Activities PDF

CHAPTER 6 EXTERNAL INFLUENCES ON BUSINESS ACTIVITY 6.1 POLITICAL AND LEGAL INFLUENCES Privatization = the act of selling state owned and controlled business organizations to investors in the private sector Nationalization = the transfer of privately owned businesse...

CHAPTER 6 EXTERNAL INFLUENCES ON BUSINESS ACTIVITY 6.1 POLITICAL AND LEGAL INFLUENCES Privatization = the act of selling state owned and controlled business organizations to investors in the private sector Nationalization = the transfer of privately owned businesses to state (government) ownership and control Privatization Transfers ownership of state owned industries into private sector by creating public limited companies Shares in the new company are sold through the stock exchange Advantages and disadvantages of privatization + private sector businesses lead to greater efficiency than when business is supported and subsidized by the state + Decision making in state bodies can be slow and bureaucratic + Privatization givers responsibility for success to managers and employees (this is motivating) therefore there is greater sense of empowerment than in state owned businesses + Market forces operate: failing businesses will be forced to change or die: successful ones can expand (profits of most privatized businesses have increased following their sell off + Important business decisions are taken for financial reasons, not political (eg. Keeping electricity prices artificially low) + Sale of nationalized industries can raise finance for government which can be spent on other state projects + Private businesses will have access to the private capital markets and this will lead to increased investment in these industries - the state should take decisions about essential industries (decisions can be based on the needs of society and not just the interests of shareholders) this may involve keeping open business activities that private companies would consider unprofitable - Privately operated businesses that compete with each other are unlikely to achieve a coherent and coordinated policy for the benefit of the whole country (eg. On the railway system electricity grid and bus services) - Through state ownership an industry can be made accountable to the country (this is by means of responsible minister and direct accountability to parliament) - Many strategic industries could be operated as private monopolies if privatized and they could exploit consumers with high prices - Breaking up nationalised industries perhaps into several competing units reduces the opportunities for cost saving through economies of scale Advantages and disadvantages of nationalisation + the government will have control of major industries + Integrated industrial policy (eg. For water supply) should now be possible + It prevents private companies operating as monopolies and exploiting consumers + Economies of scale can be achieved by merging all private businesses in an industry into one nationalised corporation - there is less profit motive so less incentive to operate the industry effectively and the government may provide subsidies to loss making nationalised industries 1  - Government may intervene too much in business decision making for political reasons - The cost to the government of buying private companies could be very high - It removes the ability of the industry to raise finance from private sources (eg. Through the stock exchange) Legal constraints on business activity In most countries governments have introduced laws that control business decisions and activities (these are the categories) Employment practices, conditions of work and wage levels Marketing behaviour, consumer rights and controls over some products Competition Location of business The law and employment practices Laws control the relationship between employers and employees Two main objectives of these laws are Prevent exploitation of workers by powerful employers by insisting on appropriate levels of health and safety and minimum wage rates Control excessive use of trade union collective action Legal constraints usually cover the following area of employment practices Recruitment, employment contracts and termination of employment Health and safety at work Minimum wages Minimum wage = employers are not allowed to pay less than the set minimum wage per hour (or per week or per month) Recruitment, employment contracts and termination of employment Legally protecting the rights of workers takes the following forms Written contract of employment so that the employee is fully aware of the pay, working conditions and disciplinary procedures to be followed Minimum ages at which wound people can be employed Maximum length of the working week Holiday and pension entitlements No discrimination against people during recruitment and selection (or while at work) on the grounds of race, color, gender, religion Protection against unfair dismissal Health and safety at work Requirements aim to protect workers from discomfort and physical injury at work Providing healthy and safe environment in which to work is now a legal requirement in most countries Health and safety laws usually require businesses to 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 2 In EU there is comprehensive and legally enforceable inspection system which has power to inspect any work premises at any time and start legal proceedings against firms that fail to meet minimum standards Minimum wages Aims to prevent exploitation of poorly organized workers by powerful employers Aims to reduce income inequalities between the high paid and low paid in the economy Benefits are that minimum wages increased standards of living and purchasing power of low paid workers Criticism is that 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 labor costs can make business uncompetitive and they might make workers redundant Other workers being paid just above the minimum wage will ask for wage raise, inflation might increase as business costs increase further Impact on business of changes in employment and health and safety laws They are both positive and negative effects to changes to these laws These are constraints that add to business costs Supervisory costs for checking on recruitment, selection and promotion procedures Higher wage costs if minimum wage is introduced or increased Higher costs from increase in paid holidays, pension contributions and paid leave for sickness, maternity and paternity Employment of more employees to respond to controls over length of the working week Protective clothing and equipment to meet stricter health and safety laws Multinationals that operate in countries with very few legal constraints will enjoy lower production costs but there are also benefits to be gained by businesses that meet or exceed minimum standard Workers will feel more secure more highly valued and more motivated with clear and fair employment contract Safe working environment reduces the risk of accidents and time off work for ill health or injury Meeting minimum standards avoids expensive court cases and heavy fines Businesses that make policy of providing employment conditions and healthy environment beyond legal requirements are likely to attract the best employees Good publicity will be gained if the business culture is considered to treat workers as partners in the business equal in status and importance to managers and shareholders The law marketing behavior and consumer rights Reasons why governments around the world take legal action to protect consumers of goods and services from unfair business activity and marketing behavior Individual consumers are relatively weak and powerless against business with large marketing and promotion budgets (advertising can also be very influential but misleading) Products are becoming more scientific and technological (difficult for consumers to assess the accuracy of the claims) Selling techniques are very pressurized and are increasingly difficult for some consumers to resist (these include the offer of apparently cheap loans) The globalized marketplace has increased the import of goods (consumers need protection from products with different quality and safety standards that those in their domestic country) Increasingly competitive markets lead to some businesses trying to take advantage of consumers by reducing quality, service and guarantee periods in order to offer lower price 3 Consumer protection laws Sale of Goods Act (these main conditions of these acts) ○ Goods and services must be fit to sell (safe with no defects that will make them unsafe if they are used in the ways intended) ○ All goods and services must be suitable for the purpose for which they are intended ○ Goods and services must perform in the way described Trade description Act: there should be no misleading descriptions of the goods beings sold Consumer Protection Act (these main condition of the act) ○ Firms that provide dangerous or defective products are liable for the cost of any damage they cause ○ It is illegal to quote misleading prices Impact on business of consumer protection laws Complying with these laws increases business costs for: Redesigning products to meet consumer health and safety laws Redesigning advertisements to give only clear and accurate information Improving quality control standards and the accuracy of weights and measures Benefits of consumer protection include: Reduced risk of consumer injury from using a product and resulting bad publicity Reduced risk of court action Improved customer loyalty for products that meet minimum performance standards Reputation for dealing with complaints fairly and quickly and for advertising with fairness and honesty Business could gain good reputation for offering consumers even higher standards of consumer protection ○ If consumers are offered an improved deal in terms of honest ads, accurate promotional offers and quality products they are more likely to stay loyal and buy multiple times from the business (producing higher sales) The law and business competition Free and fair competition between businesses has these consumers benefits There is wider choice of goods and services than when just one business dominates the market 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 (of becoming more competitive together against foreign firms which strengthens 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 monopolies Limit or outlaw uncompetitive practices between businesses (like collusion) Monopoly = market in which there is only one supplier with no close competitors Collusion = businesses agree to work together and restrict competition by fixing prices and sharing contracts between themselves 6.2 SOCIAL AND DEMOGRAPHIC INFLUENCES 4 Corporate social responsibility Business shows corporate social responsibility when it accepts its legal and moral obligations to all stakeholders CSR and accounting practices Accounting window dressing means changing financial records to make a company look better than it is ○ Reporting false profit numbers to attract investors is unethical ○ Increasing the values of business on paper to get loans is also unethical CSR and the payment of illegal incentives Incentive payments refer to bribes or illegal payments made to influence decisions ○ Paying bribes to directors/managers to secure contracts is unethical ○ Giving bribes to government official to get subsidies or avoid penalties is also unethical CSR and social auditing Social audit = report on the impact a business has on society businesses are increasingly expected to report annually on their social responsibility Social audits highlight: ○ If profits were prioritized over stakeholder interests ○ Efforts made to meet social responsibilities Common elements of social audit include: ○ Health and safety records (no. of accidents or fatalities) ○ Pollution levels ○ Contributions to community events and charities ○ Percentages of supplies from ethical sources (fair trade) ○ Employee benefit schemes ○ Customer and supplier feedback on ethical practices ○ Annual social responsibility targets Advantages and disadvantages of social audits + identify what social responsibilities the business is meeting and what still needs to be achieved + Managers can set targets for improvement in social performance by comparing these audits with the best performing firms in the industry + They improve a company’s public image which acts as a useful marketing tool to increase sales - 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 cheaps goods, not whether the businesses they buy from are socially responsible or not Why businesses need to consider community needs Business that aims to be socially responsible will take decisions that consider the needs of the community as well as its stakeholders Benefits of business meeting these needs Improving the public image of the business making it more attractive to investors and socially aware consumers 5  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 (want changes in these key areas) Business to change policies so that 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 International examples are: Fair trade foundation: aims to achieve a better deal for agricultural producers in low income countries Greenpeace: campaigns for greater environmental protection by business adopting green strategies and governments passing tighter anti pollution laws Pressure groups try to achieve these goals in number of ways: Publicity through media coverage ○ Frequent press release giving details of undesirable company activity and coverage of direct action events (like meetings, demonstrations, 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 behavior ○ Pressure groups aims to be successful in stopping consumers buying a company’s products ○ As they reveal negative factors of the company the purchasing patterns might have effect Lobbying the government ○ Putting the arguments of the pressure group to government members and ministers because they have the power to change the law Demographic changes Changes in the size and structure of population can occur at: Local level: increase in local population due to large settlement of foreign refugees or the building of large new housing estates National level: increase or decline in the national birth rate and aging population Global level: projected growth in the world’s population from almost 8 billion in 2020 to 11 billion in 2100 (world population doubled since 1970) Recent global social and demographic changes: Aging population in many high income countries Changing role of women as they seek more employment opportunities Better provision of education facilities and increasing literacy leading to more skilled and adaptable workforces Early retirement in many high income countries leading to more leisure time for growing number of relatively wealthy pensioners Rising divorce rates creating increasing number of single person households Job insecurity (caused by globalization) forcing more employees to accept temporary and part time employment 6  Demographic = relating to the structure of population Globalization = the increasing freedom of movement of goods, capital and people around the world Impact on business of social and demographic change Aging population Average age of population is rising Larger proportion of population over the age of retirement Smaller proportion of the population below the 25 years of age Large number of dependents on social benefits, putting higher tax burden on the working population Changes often result from lower birth rates, more women in work and longer life expectancy The impact on business of these changes is most apparent in two ways: Changing patterns of demand ○ Older consumers demand different types of products from those bought by younger consumers ○ Construction company might switch from building large apartments for families to smaller units special facilities for the elderly ○ Market research will be important to forecast changes in demand for products as a consequence of an aging population Age structure of the workforce ○ There may be reduced number of young employees available ○ It may be necessary for workforce planning to include provision for employing older workers or for keeping existing workers longer than usual ○ Younger employees may be more adaptable and easier to train in new technologies ○ Older workers are often said to show more loyalty to business and will have years of experience that could improve customer service Patterns of employment Main feature of changing employment patterns in many countries are Labor is being replaced by capital equipment such as automated machines, particularly in the secondary sector of the economy Labor is transferring from old established industries (steel) to new high tech industries (computer designs) The number of women in employment and in wider range of occupation is increasing Part time employment is increasing Learner employment on part time basis is increasing (McDonald) Temporary and flexible employment contracts are increasing (seasonal demand) Flexible work patterns are more common Aging population increases the dependency ratio Women are tending to stay in full time employment for longer (families are smaller and many women have children later in their life) More women take maternity leave and then return back to work Many countries are increasingly multicultural and this has effect on the pattern of women at work In the UK the proportion of women seeking full time employment has risen to 75% Evaluating the impact on business of social and demographic changes Possible opportunities of social and demographic change Demand is increasing for products aimed at ethnic groups or age groups Rising population increases the demand for housing and household products 7  Increasing numbers of high income, middle class people increase consumer spending on luxury products Part time employment patterns allow for greater flexibility of operations Possible threats of social and demographic changes Reduced demand for products aimed at age groups or social grouús that are becoming relatively less important Shortage of labor supply if there is an aging population Increased taxation to pay for more people dependent on social benefits Need to restructure work patterns to suit more part time workers Part time workforce may be more difficult to build into loyal team 6.3 TECHNOLOGICAL INFLUENCES ON BUSINESS ACTIVITIES Information technology (IT) = the use of electronic technology to gather, store, process, and communicate information Recent technological developments have transformed the way most business operate including The products consumers demand The ways products are made The ways businesses communicate The ways businesses collect, store, use information Impact on business of technological change (opportunities from new technology) New products: as in developing new consumer electronics products New processes: automation and robotics are being widely adopted Reduced costs: resulting from much higher levels of productivity Better communications: from increasing use of social media More information: IT systems are providing much more data for business decision making Potential threats of new technology: Costs: capital and trading costs are necessary and can be really expensive Workforce relations: damaged if technological change is not explained and presented to workers in positive way ○ Redundancy damaging motivation levels of other workers ○ Trade unions may oppose technological change Reliability: breakdowns in automated production or inventory handling systems can lead to the whole process being halted (delays) Data protection: right to hold data on staff and customers is controlled by national laws and the business must keep up to date with these legal constraints on its use of IT Management: some managers do not welcome new technology Competition: rival companies might be even more innovative and adopt technology more rapidly, leaving business less competitive than before it invested in technology Providing data for business decision making (benefits) Managers can obtain data quickly and frequently from all departments and regional divisions of the business which aids overall control 8  Computers can be used to analyse and process the data rapidly allowing managers to interpret data and take decisions based on it quickly Management information system accelerate the communication of decisions to those in the organization who need to know Information gives managers opportunity to review and control operations of business Drawbacks The ease of transferring data electronically can lead to information overload making it difficult in identifying most important information which need immediate action The power that n information brings to central managers could reduce the authority and empowerment given to work teams n and middle managers (reducing job enrichment) Job enrichment = aims to use the full capabilities of workers by giving them the opportunity to do more challenging and fulfilling work 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 new technology Evaluate the different systems comparing costs and expected efficiency Plan for the introduction of the new systems like training Monitor the introduction and effectiveness of the system 6.4 INFLUENCE OF COMPETITORS AND SUPPLIERS Competitors The greater the number of competitors and their total market share, the less market power individual businesses have Decisions on pricing have to be taken in line with competitor’s prices, unless effective product differentiation is achieved Even in case of few competitors, if it is easy for new businesses to join an industry the market power of any one business will be low Suppliers Smaller the number of suppliers, the less likely the business customer is able to influence prices and credit terms If there are many suppliers competitive with each other, customer business has an excellent chance of forcing prices of supplies down and demanding longer credit terms 6.5 INTERNATIONAL INFLUENCES Importance of international trade and its impact Growth of world trade has been very rapid Huge expansion in trade between countries like China and USA has had great impact on their economic development By trading together counties can also build improved business, political and social links Potential risks from international trade: Loss of output and jobs from domestic firms that cannot compete effectively with imported goods 9  Decline, due to imports, in domestic industries that produce essential goods (steel) ○ This puts the country at risk if there was to be conflict between countries or another factors leading to loss of imports Switch from making goods that cannot compete with imports to those in which the country has comparative advantage may take long time This will cause job losses and factory closures before other production increases Newly established businesses may find it impossible to survive against competition from existing importers (preventing infant industries from growing domestically) Some importers may dump goods at below cost price in order to eliminate competition from domestic firms If the value of imports exceeds the value of exports (products sold abroad) for several years then this could lead to loss of foreign exchange Impact of international trade agreements There has been series of international trade agreements which have led to significant reductions in protectionism Most common forms of trade barriers are tariffs, quotes, voluntary export limits Recent moves towards free international trade with less protectionism have been driven by: World Trade Organization (freeing up trade from restrictions) Benefits of increased international trade are: By being able to purchase products from other nations, consumers have much wider choice of goods and services ○ Many of products would not be available at all without international trade because the production facilities don’t exist in their own country (bananas in EU) The same principle applies to raw materials ○ UK steel industry depends entirely on imports of iron ore Imports of raw materials can allow developing economy to increase its rate of industrialization Importing products creates competition for domestic industries encouraging them to keep costs and prices down and make high quality goods Countries can specialize in products they make best and import products they make less effectively compared to other countries (this is comparative advantage) Specialization can lead to economies of scale and further cost and price benefits Some imported products are cheaper than similar products made within a country The living standards of all consumers in all countries trading together should increase Protectionism = the use of barriers to free trade to protect a country’s domestic industries Tariff = tax imposed on imported product Quota = physical limit placed on the quantity of imports of certain products Voluntary export limit = agreed limits to the quantity of certain goods sold by one country to another (possibly to discourage the setting of tariffs or quotas) Free international trade = trade with no restrictions or barriers that might prevent or limit trade between countries The role of technology in international trade The future expansion of trade will be stimulated further by the following technologies: Blockchain: technologies speeding up finance agreements needed for international trade and reducing the cost of trade finance 10  AI and machine learning: used to establish the most effective trade shipping routes, manage ship and truck traffic at ports efficiently, translate e commerce search queries from one language into other languages New digital platforms: bringing together service providers with potential global customers Mobile payments: Apple Pay, M-Pesa and other technologies for making mobile payments are enabling more people to buy products online ○ Mobile payments are allowing even low income groups to be global consumers However not all technological developments lead to increased international trade 3D printing developing to its full potential could result in reduced international trade ○ It requires very little labor, it may become cheaper to produce goods within countries rather than to import them from suppliers paying low wages Multinational businesses and relationships with government Multinational business is more than just one importer and exporter It has headquarters in one country but owns operations in more than one country which produce goods and services The biggest multinationals have annual revenues exceeding the size of many countries entire economies The size of multinationals and the influence they have can lead to many problems for governments Many multinationals have their head offices in Western Europe or in US yet many of their operating bases in less developed countries with much smaller economies If companies need to save costs by reducing size of workforce, often the last countries to lose jobs are the ones where the head offices are based Why become multinational 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 result of lower wages, lower rental costs and relatively weak government restrictions They avoid import restrictions by producing in the local country They gain access to natural resources which might not be available in their base country Potential problems for multinationals Communication links with headquarters may be poor Language, legal and cultural differences could make communication difficult Coordination with other plants in the multinational group will become more difficult The skill levels of the local employees maybe low, requiring substantial investment in training programmes Evaluation of the impact of multinationals on host countries (benefits and drawbacks) + investment brings in foreign currency and if output from the plant is exported further foreign exchange is earned + Employment opportunities are created and training programmes improve the quality and efficiency of local people’s skills + Local firms benefit from supplying services and components, generating additional jobs and incomes + Local firms are forced to improve the quality and productivity to international standards either to compete with the multinational or to supply to it + Tax revenues are boosted from profits made by the multinational 11  + Management expertise in the community will improve when and if foreign supervisors and managers are replaced by locals, once they are suitably qualified + Total output of the economy is increased, increasing gross domestic product - local workforce might be exploited as there are no straits labor, health and safety laws in some countries - Multinationals can employ cheap labor for long hours with few of the benefits that workers elsewhere would end a d - Manufacturing plants might produce more pollution than allowed in other countries - Resulting from inadequate laws or fear in the host country that the multinational might cease operations if environmentally acceptable practices are insisted on - Local competing firms may be squeezed out of business due to inferior equipment and much smaller resources than the multinational - Western based businesses (McDonald) have been accused on imposing Western culture on other societies by the power of advertising and promotion (leading to reduction in cultural identity) - Profits may be sent back to the country where the head office is based rather than kept for re investment in the host nation - Depletion of limited natural resources has been blamed on multinationals - They may have no incentive to conserve these resources because they can relocate quickly if the resources run out 6.6 ENVIRONMENTAL INFLUENCES ON BUSINESS ACTIVITY How environmental issues influence business behaviour Business can benefits from making decisions that reduce negative environmental effects, including reducing pollution by using low energy equipment, using recycled materials instead of scarce natural products These decisions give businesses marketing and promotional advantages ○ They reduce the chances of breaking laws designed to protect the environment, avoiding bad publicity and heavy fines ○ They attract more applications from better qualified potential employees who are keen to work for an environmentally responsible business There could be long term financial benefits (like generating electricity from solar panels requires heavy capital expenditure but is low cost one the equipment has been paid for, especially compared with rising prices for oil and gas) 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 affected by pollution The arguments for business not taking environmentally friendly decisions: Can be very costly ○ Replacing oil boilers with solar panels can cost millions of dollars as can low polluting equipment ○ This higher costs push product prices up which may result in decreased sales ○ Consumers may benefit from low priced goods and may overlook the environmental consequences Higher costs may reduce profits limiting how much can be invested in the future In many countries legal protection of the environment is weak and inspection systems are inadequate 12  ○ If there is risk of legal action or heavy fines, some businesses will choose cheaper, less environmentally friendly options In developing countries economic growth may be more important than protecting the environment ○ It might seem that increasing output using low cost methods is better than using the greenest production methods Greenwashing = giving false impression or providing misleading information about how company’s products are environmentally sound and sustainable Businesses must ensure ha any environmental claims they make are genuine Making misleading or untrue claims is called greenwashing which often results in bad publicity A business might invest in CSR projects to distract attention away from the environmental damage caused by its their activities Environmental audits Audit refers to independent check It has been used to evaluate business’s environmental performance Environmental audits = assess the impact of the activities and decisions of business on the environment How stakeholders may use environmental audits Businesses use environmental units to report on their pollution and waste levels, energy and transport use, and recycling rates Managers may set sustainability targets for coming year, then report their performance against these targets in next annual audit Consumer groups may use these audits to influence consumer’s purchasing behavior (positive media coverage leads to increased sales) Investors will use these audits to help them decide whether to invest or lend to the company Employees often have pride in business that has excellent environmental record and publicizes this through an audit ○ Working towards common aim of reducing harm to the environment could help to bring employees and managers together ○ Better qualified applicants will want to join company with good reputation and fine team spirit Evaluation of environmental audits Until they are compulsory some observers will not take them seriously Companies have been accused of using them as publicity stunt or smokescreen to hide their true intentions and damaging practices Can be very time consuming and expensive limiting their usage (not including small businesses with limited finance) Sustainability and business decisions Taking environmentally friendly business decisions is one way in which companies can demonstrate their commitment to sustainability Helping to protect the environment means that business activity becomes more sustainable Pressure group activity, government environmental laws and green consumerism are forcing most businesses to take more sustainable business decisions 13 Sustainability = activities that meet the needs of the present without compromising the ability of future generations to meet their needs Green consumerism = the trend for consumers to only buy products that are produced sustainably without environmental damage 14