Business Studies

Chapter 8

External In uences on Business Activity

Key de nitions

Monopoly : Theoretically a situation in which there is only one supplier,

but this is very rare : for government policy purposes this is usually
rede ned as a business controlling at least 25% of the market.

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 communication information.

Innovation : Creating more e ective 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 exible.

Environmental Audits : Assess the impact of a business’s activities on

the environment.

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.

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The impact of the government and law on business activity

Legal constraints on business activity

Categories of laws and constraints.
• Employment practices and conditions of work.

• Marketing behaviour and consumer rights.

• Business competition.

• Location of businesses.

The law and employment practices

Objectives :
• Prevent exploitation of workers by powerful employers by laying
down minimum levels of health and safety and minimum wage rates.

• Control excessive use of trade union collective action.

Legal constraints cover the following areas :

• 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.
Protecting the rights of workers usually takes the following forms. A
written contract of employment must be signed so that the employee is
fully aware of the pay, working conditions and disciplinary procedures
to be followed.

In the UK and other EU countries, an 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 if this takes the total working hours to over
48 hours in one week.

• Incorrect dismissal procedure having been followed

• Being a member of a trade union

In other countries :
• Maximum weekly working hours can be long

• There is no minimum wage law

• Health and safety at work requirements are less stringent.

 Health and safety laws

Health and safety laws usually require businesses to :
• Equip factories and o ces 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

These laws that add to costs that include :

• Supervisory costs regarding a rm’s recruitment, selection and
promotion procedures.

• Higher wage costs if less than the minimum wage was being paid
before this law was introduced.

• Higher costs from giving paid holidays

• Employment of more sta to avoid overlong hours for existing

workers

• Protective clothing and equipment to meet health and safety laws

Bene ts for businesses for meeting or exceeding minimum legal

requirements:
• Workers will feel more secure and more highly valued if they are
o ered a clear and fair employment contract.

• A safe working environment will reduce risks of accidents and time o

work for ill health or injury.

• Failing to meet minimum standards may lead to expensive court

cases and heavy nes.

• Businesses that make a policy of providing employment conditions

and a healthy environment beyond legal requirements can adopt a
high-pro le campaign to attract the best employees.

• The culture of the business will be looked upon as one that treats
workers as partners in the business.

The law, consumer rights and marketing behaviour

Reasons why government around the world take legal action to

protect consumers of goods and services from unfair business
activity :
• Individual consumers are relatively weak and powerless against a
large business with large marketing and promotion budgets.

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• Products are becoming more technological and it is di cult for
consumers to understand how they operate.

• Selling techniques are becoming more pressurised and are

increasingly di cult for consumers to resist.

• The increasingly globalised marketplace is leading to increases in

imported goods.

• The competitive nature of most markets leads to some rms trying to

take advantage of consumers by reducing quality, service, guarantee
periods so they could o er a lower price and better deal.

The following laws are the main UK consumer protection laws.

Sale of Good Acts, 1979 and 1982

• Goods and services should be t to sell-they should be safe and have
no defects that will make them unsafe.

• They should be suitable for the purpose for which they are bought

• They should perform in the way described.

Trade Descriptions Act, 1968

• There should be no misleading descriptions of goods being sold-a
jacket claimed to be made out of leather could not be made of cotton.

Consumer Protection Act,1987

• Firms that provide dangerous or defective products are liable for the
cost of any damage they cause.

• 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.

Evaluating the impact of consumer protection laws on business.

Business cost might have to rise to meet the requirements of consumer
protection legislation. Redesigning products to meet health and safety
laws or redesigning advertisements to give only clear and accurate
information can be expensive. However, improving the quality-control
standards and the accuracy of weights and measures in food
preparation will be essential to reduce the danger of legal action.
Treating consumers fairly and responding to complaints quickly may
also reduce the risk of court action.

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 The law and business competition
Bene ts to consumers for free and fair competition between
businesses :
• 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 qualities, design and

performance of the product.

Governments 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 rms.

Monopolies
Most monopolies are created by merger or takeover.

How do monopolies develop?

• Merging or taking over other rms in the industry

• Invention of new products or processes that are then legally patented

to give the originator a monopoly in production.

• Legal protection-a government may choose to protect its country’s

postal service by giving it a legal monopoly for the delivery of letters.

How are consumers a ected by monopolies?

Bene ts :
• 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 pro ts from the new idea.

Drawbacks :
• Higher prices if the monopolies has so little competition that
consumers have no option but to buy from this one rm

• Limited choice of products

• Less investment in new products as a result of complacency and little

risk of competition

• No incentive for the rm to lower costs and improve e ciency.

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 Uncompetitive-or restrictive-practices
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

2. Full-line forcing : This is when a major producer forces a retailer to

stock the whole range of products from the manufacturer.

3. Market sharing agreements and price- xing agreements : This

form of collusion involves forming a cartel between the rms
concerned. They agree to x prices and divide the market between
them and not to compete for new business.

4. Predatory pricing : When a major rm in an industry tries to block

new competitors by charging very low prices for certain goods, then
this is called predatory pricing.

Bene ts and limitations of a social audit

Bene ts :
• Identi es what social responsibilities the business is meeting-and
what still needs to be achieved.

• Sets target for improvement in social performance by comparing

these audits with the best-performing rms in the industry

• Improves a company’s public image and this will help to act as a

useful marketing tool to increase sales

Drawbacks :

• If the social audit is not independently checked-as published

accounts must be-will it be taken seriously by stakeholders?

• Time and money must be devoted to producing a detailed social audit

- is this really necessary if these audits are not legally required ?

• Many consumers may just be interested in cheap goods - not whether

the businesses they buy them from are socially responsible or not.

The impact of technology on business activity

Technology
Technology means the use of tools, machines and science in an
industrial context.

Word processing
Common business applications :
• Used in all departments for administrative tasks - typing, printing,
storing, amending all forms of written letters and messages for
internal and external communication.

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 Advantages :
• Speed

• Accuracy

• Ease of amending documents

• Fewer administrative sta needed

• Links with use of email for quick internal/external communications.

Pagemaker and publishing programs

Common business applications :
• Specialist publishing programs can create magazine and newspaper
pages for high-quality printing direct from computer.

• Marketing department can produce own promotional material.

• Internal business newspaper can be produced to aid internal

communications

Advantages :
• May reduce the need for use of professional publishing rms -
reducing costs.

• Documents can be amended quickly

• Professional appearance given to company publications.

Databases
Common business applications :

• Used in all departments where the storing, ling and retrieving of large
quantities of data are necessary

• Human resources department for keeping of personnel records

• Marketing department for storing details of all customers, addresses,

numbers of products purchased and most frequently purchased
products.

Advantages :
• Replaces vast quantities of paper records

• Rapid retrieval of information saves time

• Linking two sets of data

Spreadsheet programs
Common business applications :
• Financial and management accounting records can be updated and
amended

• Cash- ow forecasts and budgets can be updated in the light of new

information

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 • Changes in expected performance can be input to the spreadsheet
and changes in total gures are made automatically

• Income statements and statements of nancial position can be drawn

up frequently.

Advantages :
• Flexibility and speed

• ‘What if’ scenarios in budgeting and sales forecasting can be

demonstrated.

Computer-aided design (CAD)

Common business applications :
• Nearly all design and architectural rms now use these programs for
making and displaying designs

• Designs can be shown in 3D and turned around to show e ect from

all angles.

Advantages :
• Saves on expensive designer salaries as work is now much quicker

• More exibility of design as each customer’s special requirements can

be easily added

• Can be linked to other programs to obtain product costings and to

prepare for ordering of required supplies

Computer-aided manufacturing (CAM)

Common business applications :
• These programs are used to operate robotic equipment that replaces
many labour-intensive production systems

• Used in operations management in manufacturing businesses

Advantages :
• Labour costs are reduced as machines replace many workers

• Productivity is increased and variable cost per unit is lower than in

non-computerised processes

• Accuracy is improved

Internet/intranet
Common business applications :
• The Internet is the World Wide Web of communication links between
computers

• Marketing department

• Operations management

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 • Human Resources uses these programs for communicating within the
organisation

• Intranets allow all sta to be internally connected via computers

Advantages :
• Cost savings from cheap internal and external communications

• Access to a much larger potential market than could be gained

through non-IT methods

• Webpages project a worldwide image of the business

• Online ordering is cheaper than paper-based systems

• B2B communications can obtain supplies at lower costs

Applying technology to business - potential limitations

1. Costs : Redundancy costs will be incurred if any existing sta 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 justi ed.

3. Reliability : : Breakdowns in an automated production or stock-

handling systems can lead to the whole process being halted

4. Data protection : The right to hold data on sta 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

IT and business decision-making

Bene ts :
• Managers can obtain data quickly and frequently from all departments
and regional divisions of the business.

• 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.

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• 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.

Introducing technology e ectively

Important stages a business should go through when introducing
or updating technology to reduce opposition to change :
• Analyse the potential use of IT and the ways in which it can make the
business more e ective.

• Involve managers and other sta in assessing the potential bene ts

and pitfalls of introducing IT.

• Evaluate the di erent systems and programs available - compare the

cost and e ciency and consider the budget available for this system.

• Plan for the introduction of the new system, including training for sta
and demonstrations to all users.

• Monitor the introduction the e ectiveness of the system.

Social and demographic in uences on business activity

The changes occurring in many countries include :
• An ageing population with reduced brith 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 workforces.

• Early retirement in many high-income countries, which is leading to

more leisure time for a growing number of relatively 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
It is associated with :
• A larger proportion of the population over the age of retirement.

• A smaller proportion of the population lower age ranges, for example

0-16 years old.

• A smaller number of workers in the economy but a larger number of

dependants, that is those below working age or retired.

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 These changes often result from lower birth rates. The impact on
business of these changes is most apparent in two ways :
1. Changing patterns of demand as greater numbers of ‘grey’
consumers demand di erent types of goods from those sought by
teenagers.

2. Age structure of the workforce may change. There may be reduced

numbers of youthful employees available and it may be necessary
for workforce planning to include provision for employing older
workers.

Patterns of employment
The main features of changing patterns in most countries are as
follows :
• In many industries, labour is being replaced by capital. This is
particularly true of the secondary sector of the economy.

• Transfer of labour from the old, established industries to new hi-tech

industries.

• 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.

• Flexible hours are more common. This is most in large towns and
cities.

• An ageing population changes the balance between those in work

and those supported and this puts burden on the health service.

• More women take maternity leave and then return to work.

• Many countries are increasingly multicultural and this has an e ect on

the pattern of women at work.

Evaluating e ects on business of the changes in the pattern of

employment
Firms can make these changes work to their own bene t, while
accepting some of the cost implications of them. Higher-quality and
better-quali ed workers should be more e cient.

Environmental constraints on business activity

The environment and corporate social responsibility

When a rm does accept its legal and moral obligations to stakeholders
other than investors, it is said to be accepting ‘corporate social
responsibility’.

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 Arguments for and against adopting environmentally friendly
business strategies
Arguments for :
1. Businesses that reduce pollution by using the latest ‘green’
equipment or use recycled material rather than scarce natural
products can have a real marketing and promotional advantage.

2. Low-polluting production methods and responsible waste disposal

will reduce the chances of businesses breaking laws designed to
protect the environment.

3. Businesses that switch to a more environmentally friendly strategy

often report an improvement in the number and quality of
applications they receive from potential employees.

4. There could be long-term nancial bene ts too. Generating

electricity by using solar panels may involve very heavy capital
expenditure.

Arguments against :
1. There might be a marketing advantage from keeping costs as low
as possible, even though the environment is damaged as a result.

2. Pro ts may be reduced if expensive but low-polluting equipment is

used or if waste is disposed of in responsible ways rather than just
dumping it into rivers.

3. In many countries, legal protection of the environment is weak and

inspection systems are inadequate.

4. In developing countries, it is argued that economic development is

more important than protecting the environment.

Environmental audits
An audit simply means an independent check. It is most commonly
known in connection with the accounts of a company, which have to be
veri ed by an external auditor as a true and fair account. In recent
years, some businesses have been using the auditing approach to
evaluate their performance in ways other than just pro t and loss.

Social audits
Social audits can include an environmental audit but they give
details of other impacts on society too. These include:
• Health and safety record

• Contributions to local community events and charities

• Proportion of supplies that come from ethical sources

• Employee bene t schemes

• Feedback from customers and suppliers

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 The social audit will also contain annual targets to be reached to
improve a rm’s degree of social responsibility and details of the
policies to be followed to achieve these aims will also be given.

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
veri ed.

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 nance.

Environmental and ethical issues - the role of pressure groups

Perhaps the best-known international examples are :
• 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

• WWF - aims to improve animal welfare, especially protecting and

conserving the habitat of wild animals.

• Amnesty International - rigorously opposes anti-human rights

policies of governments

• Jubilee 2000 - campaigns for Western governments to reduce or

eliminate the debt burden on developing countries.

Pressure groups want changes to be made in three important

areas :
• Governments to change their policies and to pass laws supported 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.

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

1. Publicity through media coverage : E ective public relations are
crucial to most successful pressure-group campaigns. Frequent
press releases giving details of undesirable company activity and
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 coverage of ‘direct action’ events, such as meetings,
demonstrations and consumer boycotts will help to constantly keep
the campaign in the public eye.

2. In uencing 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.

3. 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.
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