EXTERNAL INFLUENCES ON
BUSINESS ACTIVITY
6.1 Political and legal influences
Advantages and disadvantages of privatization
Privatisation transfers ownership of state-owned industries into the private sector by creating
public limited companies
Advantages and disadvantages of nationalisation
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Legal constraints on business activity
These fall into the following main categories:
Employment Marketing
practices, conditions behaviour, consumer
of work and wage rights and controls
levels over some products
Location of
Competition
businesses
The law and employment practices
The two main objectives of these laws are to:
1. prevent exploitation of workers by powerful employers by insisting on
appropriate levels of health and safety and minimum wage rates
2. control excessive use of trade union collective action.
Legal constraints usually cover the following areas of employment practices:
• recruitment, employment contracts and termination of employment
• health and safety at work
• minimum wages.
Recruitment, employment contracts and termination of employment
Legally protecting the rights of workers takes the following forms:
• a 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 young 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, colour, gender or religion
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• protection against unfair dismissal.
Health and safety at work
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.
Minimum wages
The two main aims of the minimum wage are to:
• prevent exploitation of poorly organised workers by powerful employers
• reduce income inequalities between the high paid and low paid in the
economy.
Apart from these two benefits, other effects of the minimum wage are:
• increased standard of living and purchasing power of low-paid workers
• a work incentive, as working is more worthwhile than being unemployed.
Criticisms of most minimum wage systems include:
• 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 on business of changes in employment and health and safety laws
There are both positive and negative effects to changes to these laws. On the one
hand, they are constraints that add to business costs, including:
• supervisory costs for checking on recruitment, selection and promotion procedures
• higher wage costs if a minimum wage is introduced or increased
• higher costs from an 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
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• protective clothing and equipment to meet stricter health and safety laws.
The benefits include:
• Workers will feel more secure, more highly valued and more motivated with a clear
and fair employment contract.
• A 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 a policy of providing employment conditions and a 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.
Employment Marketing
practices, conditions behaviour, consumer
of work and wage rights and controls
levels over some products
Location of
Competition
businesses
The law, marketing behaviour and consumer rights
There are various reasons why governments around the world take legal action to
protect consumers of goods and services from unfair or unscrupulous business
activity and marketing behaviour:
• Individual consumers are relatively weak and powerless against businesses with
large marketing and promotion budgets. Advertising can also be very influential but
misleading.
• Products are becoming more scientific and technological. It is difficult for
consumers to understand how they operate and to assess the accuracy of the claims
being made for them.
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• Selling techniques are very pressurised and are increasingly difficult for some
consumers to resist. These include the offer of apparently cheap loans, some of
which can commit consumers to paying off debts for many years at high interest
rates.
• The globalised marketplace has increased the import of goods. Consumers need
protection from products that have different quality and safety standards to those in
the 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 a
lower price.
Consumer protection laws
• Sale of Goods Acts. There are three main conditions of these acts:
• Goods and services must be fit to sell; they should be safe and have 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 Descriptions Act. The most important condition is that there should
be no misleading descriptions of, or claims made for, the goods being sold
(e.g. a plastic chair cover cannot be claimed to be leather).
• Consumer Protection Act.
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.
Possible 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
• a reputation for dealing with complaints fairly and quickly and for advertising with
fairness and
honesty.
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Employment Marketing
practices, conditions behaviour, consumer
of work and wage rights and controls
levels over some products
Location of
Competition
businesses
The law and business competition
It is usually argued that free and fair competition between businesses has the
following benefits for consumers:
• There is a wider choice of goods and services than when just one business
dominates a 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. 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 monopolies
• limit or outlaw uncompetitive practices between businesses, such as collusion.
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6.2 Social and demographic influences
Corporate social responsibility
Definition :
this concept applies to those businesses that consider the interests of the society by
taking responsibility for their impact of their decisions of customers, employees,
communities and the environment.
Why businesses need to consider community needs
Benefits
Improving the public
Increasing the chance that
image of the business,
the community will accept
making it more attractive
business decisions such as
to investors and socially
expansion or relocation
aware consumers
Increasing the chance that Reducing the risk of
the business will receive negative action being
government grants and taken against the business
subsidies by pressure groups.
Pressure groups
3 main areas:
1. Business to change policies
2. Consumer to change purchasing habits
3. Government to change policies
How?
1. Publicity through media coverage
2. Influencing consumer behaviour
3. Lobbying of government
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Impact on business of social and demographic change
An ageing population
• a larger proportion of the population over the age of retirement
• a smaller proportion of the population below 25 years of age
• a larger number of dependents on social benefits, putting a higher tax burden
on the working population.
The impact on business of these changes is most apparent in two ways:
• Changing patterns of demand.
• Age structure of the workforce.
Patterns of employment
• Labour is being replaced by capital equipment
• The number of women in employment and in a wider range of occupations is increasing.
• Part-time employment is increasing.
• Learner employment on a part-time basis is increasing
• Temporary and flexible employment contracts are increasing.
• Flexible work patterns are more common
Evaluating the impact on business of social and demographic changes
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6.3 Technological influences on business activities
Innovation through new technology is one of the most important ways for businesses to add
value. Technological change is having a big impact on how businesses produce goods and
services.
Impact on business of technological change
New products New processes Reduced costs
Better More
communication information
Potential threats to business
Workforce
Costs Reliability
relations
Data
Management Competition
protection
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6.4 International influences
Importance of international trade and its impact
Risk from international trade:
Decline, due to imports, in
Loss of output and jobs
domestic industries that
from domestic firms
produce essential goods
Risk
Newly established
Imports exceeds Export =
businesses may find it
loss of Foreign Exchange
impossible to survive
Impact of International Trade Agreements
Led to significant reductions in protectionism. The most common forms of trade barriers
are tariffs, quotas and voluntary export limits.
The benefits of increased international trade are
1. Wider choice
2. Importing products creates competition for domestic industries. This should
encourage them to keep costs and prices down and make well-designed, high-
quality goods.
3. Specialisation can lead to economies of scale
4. Increase in living standard
Multinational businesses and relationships with government
When defining a multinational business, it is not enough to state that such businesses ‘sell
products in more than one country’.
Why become a multinational?
• It brings them closer to their main markets, with the benefits of lower transport costs and
better market information about consumer tastes.
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• The benefits include lower costs of production as a 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.
Communication with Language, legal and cultural
headquarters difference
Problems for
Multinationals
Skill levels of the local
Coordination with other will be employees may be low,
difficult requiring substantial investment
in training programmes.
Evaluation of the impact of multinationals on host countries
Benefits Drawbacks
The investment brings in foreign The local workforce might be
currency and, if output from the plant exploited. There are no strict labour
is exported, further foreign exchange is and health and safety laws in some
earned. countries. Multinationals can employ
cheap labour for long hours with few of
the benefits that workers elsewhere
would demand.
Employment opportunities are created Manufacturing plants might produce
and training programmes improve the more pollution than allowed in other
quality and efficiency of local people’s countries. This could result from
skills. inadequate laws or fear in the host
country that the multinational might
cease operations if environmentally
acceptable practices are insisted on.
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Local firms benefit from supplying Local competing firms may be
services and components, generating squeezed out of business due to inferior
additional jobs and incomes. equipment and much smaller resources
than the multinational.
Local firms are forced to improve Western-based businesses, such as
quality and productivity to McDonald’s and Coca-Cola, have been
international standards, either to accused of imposing
compete with the multinational, or to
supply to it.
Tax revenues are boosted from profits Western culture on other societies by
made by the multinational. the power of advertising and
promotion. This could lead to a
reduction in cultural identity.
Management expertise in the Profits may be sent back to the country
community will improve when, and if, where the head office is based, rather
foreign supervisors and managers are than kept for reinvestment in the host
replaced by locals, once they are nation.
suitably qualified.
The total output of the economy is
increased, increasing gross domestic
product.
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6.6 Environmental influences on business activity
How environmental issues influence business behaviour
Businesses can benefit from making decisions that reduce negative environmental
effects, including:
Reducing pollution by using low- Using recycled materials instead of
energy equipment scarce natural products; disposing of
waste responsibly
These decisions give businesses They reduce the chances of breaking
marketing and promotional advantages. laws designed to protect the
environment, avoiding bad publicity
and heavy fines. They also attract more
applications from better-qualified
potential employees who are keen to
work for an environmentally
responsible business.
There could be long-term financial For example, generating electricity
benefits. from solar panels requires heavy
capital expenditure but is low cost once
the equipment has been paid for,
especially compared with rising prices
for oil and gas.
The potential costs of cleaning up the These might include the cost of
environment or compensating locals clearing polluted waste from rivers or
will be avoided. land, or compensation for lost
livelihoods and the cost of healthcare
for those affected by pollution.
The arguments for businesses not taking environmentally friendly decisions
include:
Environmentally friendly decisions can Replacing oil boilers with solar panels
be very costly. can
cost millions of dollars, as can low-
polluting equipment. These costs might
push product prices up.
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Keeping prices low may increase sales.
Consumers will benefit from low-
priced goods and may
overlook the environmental
consequences.
Higher costs may reduce profits. This limits how much can be invested
in the future.
Protection of the environment is weak If there is little risk of legal action or
and inspection systems are heavy fines, some businesses will
inadequate. choose cheaper,
less environmentally friendly options.
Economic growth may be more It might seem that increasing output
important than protecting the using low-cost methods is better than
environment. using the greenest
production methods.
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South Africa accelerates its car production
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