Chapter 8 – External influences on business activity

Impact of the government and law on business activity:

Legal constraints on business activity

In most countries – for political and social reasons – governments decide to introduce laws that
constrain business decisions and activities. These fall into the following main categories:

 Employment practices and conditions of work.

 Marketing behaviour and consumer rights.
 Business competition.
 Location of businesses.

The law and employment practices

These laws control the relationship between employers and employees. The objectives are to:

 prevent exploitation of workers by powerful employers

 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.
 Trade union rights and responsibilities.

Recruitment, employment contracts and termination of employment

Unfair dismissal can be claimed if the employment contract is ended because of:

 Pregnancy
 Refusal to work on a holy day
 Refusal to work overtime
 Incorrect dismissal procedure having been followed
 Being a member of a trade union

Health and safety laws

Health and safety laws usually require businesses to:

 Equip factories and of ices with safety equipment

 Provide adequate washing and toilet facilities
 Provide protection from dangerous machinery and materials
 Give adequate breaks and maintain certain workplace temperatures.
Evaluating the impact on business on employment and health and safety
laws
Costs:

 supervisory costs regarding a firm’s recruitment, selection and promotion procedures

 higher wage costs
 higher costs from giving paid holidays, pension contributions and paid leave for sickness,
maternity and paternity leave
 employment of more staff to avoid overlong hours for existing workers
 protective clothing and equipment to meet health and safety laws.

benefits to businesses from meeting – or even exceeding – the minimum

legal requirements:

 Workers will feel more secure and more highly valued, leading to more satisfied and
motivated workers.
 A safe working environment will reduce risks of accidents and time of work for ill health or
injury.
 Failing to meet minimum standards may lead to expensive court cases and heavy fines.
 Good publicity/reputation that might have marketing benefits for the business.

The law, consumer rights and marketing behaviour

reasons governments take legal action to protect consumers of goods and services:

 Individual consumers are weak and powerless against a large business with large marketing
and promotion budgets.
 Products are becoming more scientific and technological, difficult for consumers to
understand how they operate and to assess the accuracy of the claims being made for them.
 The increasingly globalised marketplace is leading to increases in imported goods.
Consumers may need protection from producers of goods that adopt different quality and
safety standards from those existing in the domestic country.
 The increasingly competitive nature of most markets leads to some firms trying to take
advantage of consumers by reducing quality and service

Sale of Goods Acts, 1979 and 1982

 There are three main conditions of these acts:
 That goods and services are fit to sell – they should be safe and have no defects in them
that will make them unsafe if they are used in the ways intended
 That they are suitable for the purpose for which they are bought
 That they perform in the way described.

Trade Descriptions Act, 1968

  There should be no misleading descriptions of, or claims made for, goods being sold, so a
chair that was claimed to be covered in leather could not, in fact, be covered in plastic.

Consumer Protection Act, 1987

 That firms that provide dangerous or defective products are liable for the cost of any
damage they cause
 That it is illegal to quote misleading prices – if it is claimed that ‘the price is £50 less than
the manufacturer’s recommended price’ when it is not, then the business has broken the
law.

The law and business competition

Fair and free competition consumer benefits:

 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.
 Competition between businesses, these firms will be more able to compete effectively with
foreign firms and this will help to strengthen the domestic economy.

Governments attempt to encourage and promote competition between businesses by passing laws
that:

 Investigate and control monopolies and make it possible to prevent mergers

 Limit or outlaw uncompetitive practices between firms.

Monopolies
Monopoly: theoretically a situation in which there is only one supplier, but this is very rare: for
government policy purposes this is usually redefined as a business controlling at least 25% of the
market.

Monopolies are developed by:

 Invention of new products or processes

 Merging or taking over other firms in the industry
 Legal protection
 The existence of ‘barriers to entry’ into an industry, such as advanced technical knowledge,
huge costs of building facilities or buying equipment, or the need to advertise extensively to
get established – these barriers will prevent, or make very difficult, the start-up of new
competitors.

How are consumers affected by monopolies?

Benefits:

 Lower prices if large-scale production by a monopolist reduces average costs of production

  Increased expenditure on new products and technical advances as the monopolist will be
able to protect their position and make monopoly profits from the new idea.

Drawbacks:

 Higher prices if the monopolist has so little competition that consumers have no option but
to buy from this one firm
 Limited choice of products
 Less investment in new products as a result of complacency and little risk of competition
 No incentive for the firm to lower costs and improve efficiency.

Uncompetitive – or restrictive – practices

Examples of restrictive practices include:

1. Refusal to supply a retailer if they do not agree to charge the prices determined by the
manufacturer: Keeping prices high is clearly a disadvantage for the consumer, yet
manufacturers can argue that it is an essential part of their branding of the product and
helps to pay for extensive advertising and product development.
2. Full-line forcing: This is when a major producer forces a retailer to stock the whole range of
products from the manufacturer – not just the really popular ones. If the retailer refuses,
then even the popular items will not be supplied any longer.
3. Market sharing agreements and price-fixing agreements: This form of collusion involves
forming a cartel between the firms concerned. They agree to fix prices and divide the market
between them and not to compete for new business – they will agree to share new business
or new contracts out around the group so that they do not compete with each other to drive
prices down.
4. Predatory pricing: When a major firm in an industry tries to block new competitors by
charging very low prices for certain goods, then this is called predatory pricing. As the new
business is unlikely to have the low costs enjoyed by a large, established business, the firm
may find it very difficult to survive this extreme form of competition.

Social audit: a report on the impact a business has on society – this can cover pollution levels,
health and safety record, sources of supplies, customer satisfaction and contribution to the
community.

Information technology: the use of electronic technology to gather, store, process and
communicate information.
Innovation: creating more effective processes, products or ways of doing things in a business.

Computer-aided design: using computers and IT when designing products.

Computer-aided manufacturing: the use of computers and computer-controlled machinery

to speed up the production process and make it more flexible.

Applying technology to business – potential limitations

1. Costs: Capital costs can be substantial, labour training costs will be necessary and will recur
regularly with further technological development. Redundancy costs will be incurred if any
existing staff are being replaced by the technology.
2. Labour relations: These can be damaged if the technological change is not explained and
presented to workers in a positive way with the reasons for it fully justified. If many jobs are
being lost during the process of change, then remaining workers may suffer from reduced job
security and this could damage their motivation levels. Trade unions can oppose
technological change if it risks too many of their members’ jobs.
3. Reliability: Breakdowns in an automated production or stock-handling systems can lead to
the whole process being halted. There may be teething problems with new systems and the
expected gains in efficiency may take longer to be realised than forecast.
4. Data protection: The 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.
5. Management: Some managers fear change as much as employees do – especially if they are
not very computer literate themselves. In addition, recognising the need for change and
managing the technological change process require a great deal of management skill.

IT and business decision-making

Benefits:

 Managers can obtain data quickly and frequently from all departments and regional divisions
of the business – aiding overall control.
 Computers can be used to analyse and process the data rapidly so that managers can
interpret them and take decisions quickly on the basis of them.
 Management information systems accelerate the process of communicating decisions to
those in the organisation who need to know.

Drawbacks:

 The ease of transferring data electronically can lead to so many messages and
communications that ‘information overload’ occurs. This is when the sheer volume of
information prevents decision-makers from identifying the most important information and
the areas of the business most in need of action.
 The power that information brings to central managers could be abused and could lead to a
reduction in the authority and empowerment extended to work teams and middle
managers. Information used for central control in an oppressive way could reduce job
enrichment and hence motivation levels.
Introducing technology effectively
 Analyse the potential use of IT and the ways in which it can make the business more
effective.
 Involve managers and other staff in assessing the potential benefits and pitfalls of
introducing IT – better ideas of en come from those who will use the system than from those
responsible for purchasing it.
 Evaluate the different systems and programs available – compare the cost and the expected
efficiency and productivity gains. Consider the budget available for this system.
 Plan for the introduction of the new system, including extensive training for staff and
demonstrations to all users.
 Monitor the introduction and effectiveness of the system – is it giving the expected benefits
and, if not, what can be done to improve performance?

Social and demographic influences on business activity

changes occurring in many countries include:

 An ageing population with reduced birth rates and longer life expectancy
 The changing role of women – not just to bear and look after children but to seek
employment and to take posts of responsibility in industry
 Better provision of education facilities, which is increasing literacy and leading to more
skilled and adaptable workforce
 Early retirement in many high-income countries, leading to more leisure time for growing
number of wealthy pensioners
 In some countries, rising divorce rates are creating increasing numbers of single-person
households
 Job insecurity, often created by the forces of globalisation, which is forcing more employees
to accept temporary and part-time employment.

An ageing population
This means that the average age of the population is rising. Often associated with:

 A larger proportion of the population over the age of retirement

 A smaller proportion of the population in lower age ranges
 A smaller number of workers in the economy but a larger number of dependants, that is
those below working age or retired. This puts a higher tax burden on the working population

Patterns of employment

 Labour is being replaced by capital. Output and efficiency can rise due to increasing
productivity.
 An increase in the number of women in employment and in the range of occupations in
which they are employed.
 An increase in part-time employment
  An increase in student employment on a part-time basis.
 An increase in temporary and flexible employment contracts
 Flexible hours are more common.
 An ageing population changes the balance between those in work and those supported, and
this puts increasing burdens on the health service, pensions, private pension funds and the
care industries.
 Women are tending to stay in full-time employment for longer; families are smaller, more
women do not have children and there is an increasing tendency to have children later in
life.
 More women take maternity leave and then return to work.

Environmental constraints on business activity

Environmental audits: assess the impact of a business’s activities on the environment.

Social audits: a report on the impact a business has on society. This can cover pollution levels,
health and safety record, sources of supplies, customer satisfaction and contribution to the
community.

 health and safety record, for example number of accidents and fatalities
 contributions to local community events and charities
 proportion of supplies that come from ethical sources, for example Fairtrade Foundation
suppliers
 employee benefit schemes
 feedback from customers and suppliers on how they perceive the ethical nature of the
business’s activities.

Evaluation of environmental and social audits

1. Until they are made compulsory and there is general agreement about what they should
include and how the contents will be verified, some observers will not take them seriously.
2. Companies have been accused of using them as a publicity stunt or a ‘smokescreen’ to hide
their true intentions and potentially damaging practices.
3. They can be very time-consuming and expensive to produce and publish and this may make
them of limited value to small businesses or those with very limited finance.

Environmental and ethical issues – the role of pressure groups

Pressure groups: organisations created by people with a common interest or aim who put
pressure on businesses and governments to change policies so that an objective is reached.

Examples:

 Greenpeace – campaigns for greater environmental protection by both 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.

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

 governments to change their policies and to pass laws supporting the aims of the group
 businesses to change policies so that, for example, less damage is caused to the
environment
 consumers to change their purchasing habits so that businesses that adopt ‘appropriate’
policies see an increase in sales, but those that continue to pollute or use unsuitable work
practices see sales fall

Ways of achieving goals:

 Publicity through media coverage: Effective public relations are crucial to most 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 will help to constantly 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 it succeeding in changing corporate policy. The pressure group may spend money on its
own advertising campaign
 Influencing consumer behaviour: If the pressure group is so successful that consumers stop
buying a certain company’s products for long enough, then the commercial case for
changing policy becomes much stronger
 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. I