QUALIFICATIONS CURRICULUM SUPPORT
Business Management
Managing Organisations:
The External Environment
[ADVANCED HIGHER]
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Acknowledgement
Learning and Teaching Scotland gratefully acknowledge this contribution to the
National Qualifications support programme for Business Management. Originally
published in 2006; revised version published in 2008.
© Learning and Teaching Scotland 2006, 2008
This resource may be reproduced in whole or in part for educational purposes by
educational establishments in Scotland provided that no profit accrues at any stage.
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INTRODUCTION
Contents
Introduction
Section 1:
Section 2:
Section 3:
4
Multinational/transnational companies
Reasons for growth
Transfer pricing
Foreign control of the economy
Effects on the host country
Effects on the home country
7
9
11
14
15
European Union
European institutions
The Single European Act
European Monetary Union
The Social Chapter
Enlargement
Future developments of EU activities
19
21
23
26
31
33
Business issues
Business ethics and social responsibility
Environmental and green issues
Technological changes
Government involvement
Emerging economies
34
38
41
47
52
Answers to SAQs
53
Exercises
59
Suggested answers to exercises
61
References
64
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 3
INTRODUCTION
Introduction
This pack contains student notes and exercises to support the teaching of Business
Management (AH): Managing Organisations: The External Environment.
Further details of the items included are given below. Overall, however, the material is
designed to reflect the fact that Advanced Higher places considerable demands on
students. It is intended to be challenging and to encourage students to engage fully
with the relevant concepts and ideas. Teachers and lecturers should, therefore, be
prepared to offer support to students to help them to deal with the material, especially
during the early stages of the course. This should result in substantial positive benefits
for students who should develop a firm foundation both for the Advanced Higher
course and for future study.
Student Notes – These provide the underpinning knowledge for Advanced Higher
Business Management. Students should be encouraged to make use of relevant
textbooks, other library resources such as business oriented magazines and periodicals
(such as The Economist), as well as the internet, to source additional information on
topics.
Self-Assessed Questions (SAQs) and Activities – SAQs are provided throughout the
text to develop students’ understanding further, while the activities offer them the
opportunity to undertake further research when time permits. Answers to all the SAQs
are provided at the end of the notes before the exercises.
Exercises – These include a variety of questions:
 Some ensure that the ‘theory’ of the topic is understood
 Some are summary case studies where students are asked to put theory into
practice
 Others are research questions where students must investigate a situation and
suggest how they would apply the theory of what they have learned into a ‘real’
business situation.
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INTRODUCTION
In a number of cases use of the internet as a research device is suggested; however,
alternative written material is normally available from a variety of sources.
Suggested answers to exercises – These are provided for guidance only. In a variety of
situations there are no clear right or wrong answers, but students should show a firm
grasp of what is being asked, and apply their acquired knowledge to the situation
described. In many cases students should be encouraged to research the area of the
question by looking at the business press (such as journals, daily newspapers, etc), the
internet and other sources to gain a better understanding of the subject area.
The Internal Environment, External Environment and Business Report units can be
taught in any order; however, the ‘Change’ section in Internal Environment is
particularly useful in linking the elements of the course together.
At Advanced Higher level every effort should be made to encourage independent
learning among students and to help them to prepare for future academic study. In
Business Management, this includes the development of an analytical, enquiring
approach and recognition that there is rarely a single unambiguous way forward in any
particular situation. Any approach may well have advantages and disadvantages that
need to be weighed against the pros and cons of other possibilities. Students should be
guided to consider why actions have been taken, or could be taken, and what the
justification for these might be.
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 5
MULTINATIONAL/TRANSNATIONAL COMPANIES
Section 1: Multinational/transnational companies
A multinational company is any company that has productive activities in two or
more countries. Examples include Ford, Sony, Unilever, BP, etc. They also normally
undertake their research and development, finance and marketing on an international
basis while having a definite home base ( Ford in the USA, Sony in Japan). Many of
these powerful companies have sales turnover higher than the GNP of nations such as
Belgium or Ireland.
A transnational company also operates internationally but does not have a clear home
base. Examples include companies such as The News Corporation, the organisation
that owns a number of TV companies (Sky), and newspapers (The Times) and
operates in many countries, such as the UK, Australia and the USA, yet has no clear
home headquarters.
A multinational company can thus be distinguished from a transnational
company. However, the term multinational is often used to cover both types
of company.
International business, however, is conducted not just by large companies, but also by
small- and medium-sized enterprises (mini-nationals) in international terms. For
example Harry Ramsden’s fish restaurants can be found in several countries.
SAQ 1
Can you think of more examples of multinational companies? Try to pick ones that
you experience on a day to day basis.
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MULTINATIONAL/TRANSNATIONAL COMPANIES
Reasons for growth of multinational/transnational companies
Multinational companies have been with us since the 1700s as a means of trading
with, and obtaining materials from, less developed countries. In the 20th century
there was a rapid growth in the number of multinationals that aimed to:
 gain global market dominance
 utilise cheap labour and materials
 enter markets that are protected by tariffs or quotas (for example, Nissan and
Toyota now have production facilities within the EU)
 avoid monopoly legislation in the home country that might prevent the company
from expanding its core activities at home.
Methods of growth
Organic growth
A business expands by introducing its product to new markets. This type of growth
takes a long time to develop as the business may have to create production facilities
and distribution channels in the new markets that it has chosen to enter.
External growth
Many multinational businesses use acquisition or merger as a method of growth and
entering new markets. Purchasing or joining forces with a successful company
provides quick access to new geographical markets and also allows businesses to
benefit from the skills and local knowledge that exist within the acquisition’s
workforce.
Importance of global operations
Many businesses seek to expand beyond their national boundaries. Many large firms
view the world as ‘one market’ as opposed to a number of distinct national markets.
Growth is an important objective for many multinational businesses. By entering new
and developing markets they can:
 increase sales and profits and thus boost the returns to shareholders
 continue to dominate the market with their particular brand/s
 reduce costs through economies of scale and by taking advantage of low wage
economies.
What has facilitated the growth of multinationals/transnationals?
Sometimes it just makes sense for a company to become a multinational. In the oil
industry for example, it is good sense for Shell or BP to control the operation from
extraction to petrol-tank filling, which may well start on an oil rig in the China Seas
and end up in a filling station in Glasgow Road, Edinburgh.
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MULTINATIONAL/TRANSNATIONAL COMPANIES
Low cost transportation has made it more economical to ship products around the
world, thereby helping to create global markets serviced by multinationals.
The decline in barriers to the free flow of goods, services and capital that has occurred
since World War II, i.e. the work done by the General Agreement on Tariffs and Trade
(GATT), and the World Trade Organisation (WTO), has made trading on a worldwide
basis much easier.
Low-cost global communication networks such as the internet are helping to create
electronic global markets that help multinationals to do business on a worldwide
basis.
Likewise, global media have created a demand for a range of goods and services
throughout the world. It is as easy to find a McDonald’s restaurant in Tokyo as it is in
Chicago or to buy a Sony Walkman in Rio as it is in Berlin.
Low cost jet travel has resulted in the mass movement of people between countries,
and it is quite feasible for senior directors of large multinationals to commute
between countries to facilitate business.
Since the 1960s there have been two notable trends:


the rise of non-US multinationals, particularly Japanese
the growth of mini-nationals.
The composition of the largest multinationals by country
Of the top 260 in 1973
Of the top 500 in 1997
United States
126 (48.5%)
162 (32.4%)
Japan
9 (3.5%)
126 (25.2%)
Britain
49 (18.8%)
34 (6.8%)
France
19 (7.3%)
42 (8.4%)
Germany
21 (8.1%)
41 (8.3%)
Sources: 1973 figures – Hood, N and Young, J (1979), The Economics of the
Multinational Enterprise, New York: Longman; 1997 figures – ‘The Global 500’ (4
August 1997), Fortune magazine.
SAQ 2
Can you think of any multinationals based in Scotland?
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MULTINATIONAL/TRANSNATIONAL COMPANIES
Transfer pricing
This is an important issue for multinational and transnational companies. These
companies operate in many different countries and, as a result, they often transfer
goods from a branch in one country to a branch in another country. Ford, for
example, makes engines for cars in South Wales and sends them to Ford car making
plants elsewhere in Europe. This is an illustration of a common situation where
components for a product are manufactured by subsidiaries in a number of countries
and sent to another country for final assembly. It is also quite common for different
stages of the production process to be carried out in different countries. In these
cases, goods will move between several different countries before being sold to the
final consumer, who may be in a yet another country.
A transfer price is the price at which goods and services are transferred between
branches of multinational companies in different countries. The goods and services
do not go outside the company and so no actual buying and selling of them takes
place. This means that the multinational company itself decides what the transfer
price will be. It is, therefore, possible to set the prices in a way that suits the
company. For example, if a company sets a high transfer price, then the earnings of
the branch producing the good will rise. The company in another country, which
receives the good, will have to pay a higher price for it. Its costs will be higher and
its revenue lower. In any international business, there are normally a large number
of transfers of goods and services between the parent company and its foreign
subsidiaries, as well as between foreign subsidiaries.
There are many advantages in manipulating transfer prices, including:



Tax liabilities can be reduced by using transfer pricing to shift earnings
from a high-tax country to a low-tax one.
Import duties can be reduced where the tariff to be paid is calculated as a
percentage of the value of the goods (which is shown by the price).
Where large currency devaluation – a reduction in the exchange rate of a
currency – is expected in a country, transfer pricing can be used to reduce
exposure to foreign exchange risk.
There are, however, also a number of problems with transfer pricing, most notably
that many governments, particularly that in the US, limit companies’ freedom to
manipulate transfer pricing because it effectively decreases that country’s legitimate
income. Another problem is that where such prices are manipulated, a subsidiary’s
performance on paper may not reflect its actual performance – this could negatively
or positively affect a management incentive scheme based on a subsidiary’s
profitability. For example, a manager in a selling subsidiary might be able to use
high transfer prices to mask inefficiencies, while a manager in a purchasing
subsidiary might become disheartened by the effect of high transfer prices on that
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MULTINATIONAL/TRANSNATIONAL COMPANIES
subsidiary’s profitability.
An example follows of the use of transfer pricing by Japanese companies in the
USA and multinational companies in Japan:
Transfer pricing in Japan
Foreign-based multinationals, through elaborate transfer pricing schemes, underpaid
the US government by as much as $35 billion during the 1980s. Examples included
Yamaha, the Japanese motorcycle manufacturer, which paid just $123 in US taxes in
one year, when the government claimed it should be more than $127 million!
Japan’s high corporation tax (50% vs 33% in the UK), makes it a tempting target for
firms trying to minimise their tax liability through transfer pricing. Firms accused of
manipulating transfer prices to reduce their tax liability in Japan often face a large tax
bill. In 1994 Coca-Cola’s Japanese unit announced it would contest a claim for back
taxes amounting to some $140 million; likewise Goodyear Tyres for 600 million yen
and Proctor & Gamble for 800 million yen.
Adapted from Steiner, R, 25 November 1996, ‘Japan’s Tax Man Leans on Foreign
Firms’, Wall Street Journal
SAQ 3
1
Explain how Yamaha could have used transfer pricing to reduce its tax liability
in the United States.
2
What could a multinational firm, which has a base in Japan, do to reduce its tax
liability in Japan?
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Foreign control of the economy
Companies, such as First Choice and high technology sector producers, have
announced that they have chosen to locate their business operations in Scotland.
SAQ 4
List some of the factors that would influence firms in deciding to locate in Scotland.
We will now consider, in more detail, the effects of such foreign investment on the
host country and on the home country.
Foreign direct investment (FDI) occurs when a firm either:

invests directly in facilities to produce and/or market a product in a foreign/host
country
Many examples exist in the UK as a whole and Scotland in particular, especially in the
high technology sector, where companies such as IBM have built manufacturing
facilities to produce goods for the European marketplace. This form of investment
takes considerable time, effort and finance – having to build a new physical facility
(normally deploying the most up-to-date processes to produce goods cost-effectively),
hire employees and train them cannot be done overnight. However, a company
operating this policy can be sure that it can effectively replicate facilities across the
world, manage them on a common footing and more easily instil new company culture
in a foreign land.
or

buys an existing enterprise in a foreign/host country – this is not uncommon, and
has the added advantage of making knowledge and experience of local market
conditions available from the initial stages.
An example of this is Volkswagen, which acquired a large number of US dealers when
it decided to enter the ‘unknown’ US market – it had the product but no knowledge of
the local market to sell the product. Another reason why companies use this method of
FDI is that it allows them to enter new markets easily, where they have little or no
experience. An example is Scottish-based Kwik-Fit Holdings which was bought by
Ford to allow them immediate entry to a different market1. Often, companies buy up
1
Note that this did not work out for Ford in the longer term, and they later decided to concentrate on their
core business of car making. So they sold Kwik-Fit but retained 19% of the shares.
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MULTINATIONAL/TRANSNATIONAL COMPANIES
loss-making businesses abroad very cheaply, invest in management (either from HQ
or by training local managers) and technology and turn the company round much more
quickly than it would take to set up a business from scratch.
ABB Asea Brown Boveri Ltd
ABB is a transnational giant in the supply of electrical engineering services and
equipment. It is divided into one thousand companies, managed via a corporate matrix
system, in 140 different nations. Its CEO, Percy Barnevik, has been successful with
hundreds of acquisitions worldwide. ‘We have learned the technique of integrating
them quickly into ABB. We go for local people, rather than expatriates in management
positions everywhere.’ They use Poles and Czechs to build the presence in Russia and
the Ukraine. They speak Russian and understand Slavic culture. ‘Once they are
converted to the Western management style and the ABB culture, they are much more
effective in building new business than Americans, Germans or other Westerners,’ he
says.
Adapted from Barnevik, P (1998), Creating a Federation of National Cultures,
Straight from the CEO, Nicholas Brealey Publishing, London
NB: Since this was written, Percy Barnevik has left ABB and the company has
encountered substantial difficulties. Some of these are due to the problems of coordinating all the various parts of the company.
Both FDI options present different managerial problems, and have a number of
advantages and disadvantages that mean that some organisations use both methods to
expand internationally. An example is Electrolux, a Swedish company with a small
home market, yet one that is the world’s largest manufacturer of household appliances,
such as washing machines and fridges. It chose in 1991 to buy a company in Hungary
called Lehel and one in Brazil called Refripar, yet developed green-field (new)
manufacturing operations in Russia, Poland and the Czech Republic in parallel.
The volume of FDI has grown more rapidly than the volume of world trade in recent
years, despite the fact that exporting and licensing are viable alternatives to FDI.
While in the past the United States has been the biggest player in the FDI market,
Japan is fast increasing its share. An increasing share of FDI is currently being
directed at the developing nations of Asia and Eastern Europe.
Governments can both encourage and restrict FDI. Host governments can encourage it
by providing incentives for foreign companies to invest in their economies, and they
can restrict it through a range of laws and policies. Many high-tech companies from
the USA and Japan have been encouraged by various grants to set up plants in
Scotland. However, governments can also restrict FDI; for example, companies in the
USA are prohibited from investing in or exporting to Iran and Cuba. The downfall of
communism has opened up many new and potentially large markets to FDI. Countries
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such as Poland, the Czech Republic and Russia are now sought after markets that
have, until recent years, been largely untapped by the producers of Western goods
such as electronics, fashion wear and advanced pharmaceuticals.
Westward Ho!
The Polish Ministry of Economy attaches great importance to economic cooperation
with Britain, the sixth largest market for Polish products. It says it also sees Britain as
a country from which Poland can buy new technologies and attract capital.
Poland expected to attract more FDI in 2000 (US$10–12 billion) than in any year
since becoming a market economy in 1990.
A British investor in Poland is GlaxoSmithKline which entered the market fifteen
years ago and has since invested $280 million in the country. Glass company
Pilkington International Holdings has been involved in Poland since 1993 and now
operates four companies with more than 2,000 workers. ‘The market is still growing,’
says their director Jacek Lasota in Warsaw, ‘the disadvantage is the red tape.’ Tesco
opened a hypermarket in Warsaw in February 2000, the biggest in its worldwide
network of 300 stores. Tesco has already invested $300 million in Poland.
While bureaucracy is a major disadvantage, the Polish people are a major asset. The
country enjoys one of the highest GDP rates in Europe. It acts as a gateway to eastern
markets and as a link to the west.
Britain invested $2.6 billion in 1999 and now most of the investment is coming from
small and medium-sized companies. According to Wavell Magor, of the British
Embassy, two of the most interesting sectors for the UK are agriculture and
automotive industries which need to modernise to be competitive. With Poland only a
few hours away from Britain by plane, the opportunities are immense.
Adapted from Turek, B, April 2000, ‘Westward Ho!’, Director Magazine
Activity
Investigate the experiences of a UK-based organisation following investment in the
Polish market.
Consider the effects on employees based within the UK and those at the new sites in
Poland.
Having studied some of the financial implications of operating on an international
basis, there are more general implications for a multinational company’s home country
and host/ foreign country, not all of which are financial.
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MULTINATIONAL/TRANSNATIONAL COMPANIES
Effects on host country
There are a number of advantages and disadvantages for a foreign/host country
when multinational companies operate subsidiaries in a foreign country.
Advantages
 The gross national product (GNP) of the host country will increase as will the
standard of living where there has been investment in new manufacturing
capability.
 The balance of payments of the host country may benefit for three reasons. Firstly,
there is the one-off initial capital inflow to the economy when either a local
company is purchased or investment is made in a new, green-field operation.
Secondly, if the FDI is a substitute for imports, it can improve the current account
of the host country’s balance of payments. Much of the FDI by Japanese car
manufacturers in the USA and UK, for example, can be seen as substituting for
imports from Japan. Thus, the current account of the UK’s balance of payments has
improved because many Japanese companies are now supplying the UK market
from production facilities in the UK, as opposed to facilities in Japan. Thirdly, the
multinational can use a foreign subsidiary to export goods and services to other
countries – examples in the UK include car manufacturers such as Toyota based in
Derby which exports cars to other EU countries.
 Local companies can benefit from seeing better production and management
techniques used by such companies, for example the introduction of JIT and
Quality Circles from Japan within the UK – this is known as technology transfer.
Cross-fertilisation of ideas from outside the host country is often a healthy
outcome.
 Tax raised as a result of the companies’ profits is an important source of revenue.
 The result is often a greater choice of goods and services within the host country.
 Workers can benefit from greater employment opportunities with the multinational
or as a result of demand for goods from local suppliers.
 Competition within the host country is stimulated, often lowering consumer prices
and improving efficiency.
 Competition tends to stimulate capital investments in plant and equipment in order
to compete with rivals. This can have long-term implications of increasing
productivity growth, product and process innovations and greater economic
growth.
Disadvantages
 Multinationals can be socially irresponsible, and have been shown to be so
especially in developing countries where accusations of bribery and corruption,
exploitation of cheap labour and resources, repatriation of profits and government
manipulation are not unknown.
 Multinationals are sometimes thought to be outwith the control of the host
country’s government, purely because of their size and financial power.
 Multinationals have the power to switch production easily from one country to
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



another, resulting in unemployment, adverse effects on the balance of payments
and stunting of economic growth. Compaq and Motorola, for example, have both
closed plants in Scotland in recent years. Previous investors such as Singer in
Clydebank and British Leyland at Bathgate have also disappeared.
Multinationals have been criticised for adjusting transfer costs between their
subsidiaries so that profits are declared in those countries with lower tax regimes.
Multinationals often move vast sums of money between countries in order to
protect the value of their reserves and protect their own interests.
Multinationals can create competition with domestic companies with the result that
those companies cut their labour force or indeed close down.
Multinationals often import their own staff in management roles and only use local
labour for low-skilled jobs.
Effects on home country
There are advantages and disadvantages for the home country (the country where the
company is based) when multinational companies operate a subsidiary in a foreign
country.
Advantages
 Due to less demand for unskilled labour, people are encouraged to seek education
to ensure they can be employed, and as a result have a higher income.
 The capital account of the home country’s balance of payments benefits from the
inward flow of foreign earnings and also from the demands created for homecountry exports of, for example, capital equipment.
 Positive employment effects result when the foreign subsidiary creates demand for
home-country exports.
 As a result of exposure to foreign markets, home companies can benefit from
valuable skills learnt abroad, superior management techniques and processes that
can be transferred back to the home country contributing to economic growth.
Disadvantages
 The home country’s balance of payments can be negatively affected in three ways.
Firstly, the capital account can suffer from the initial capital outflow to finance the
FDI (normally offset by future profits). Secondly, the current account suffers if the
objective of FDI is to serve the home market from a low-cost production location.
Thirdly, the current account suffers if the FDI is a substitute for direct exports.
Thus, insofar as Nissan’s assembly operations in the UK are intended to substitute
for direct exports from Japan, the current account position of Japan will deteriorate.
 The low cost of unskilled labour in other countries can lead to unemployment in
the home country.
 The wage rate for unskilled workers in many developed countries has fallen
significantly over the years because of competition from other countries.
 The skill mix of employees changes. Because there is less demand for low-skilled
work in developed countries, this places a burden on society to invest in education
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 15
MULTINATIONAL/TRANSNATIONAL COMPANIES
to increase the supply of skilled workers.
 The home government often loses control of multinationals.
Activity
List multinational companies that have set up plants in Scotland. Try to find out what
has happened to them. What long-term benefits do you think your examples have
brought to Scotland?
Overall, do you think the benefits of FDI have outweighed the costs as far as the
Scottish economy is concerned?
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SAQ 5
Enter the following words or phrases in the correct blank spaces in the sentences. Each
word or phrase is used once.
Gross National Product
production
invests directly
lose control
technology transfer
new management techniques
local people
little experience
capital inflow
foreign direct investment
1. Foreign direct investment (FDI) occurs when a firm __________________
__________________ in facilities to produce and/or market a product in a
foreign/host country.
2. Volkswagen was an example of __________________________________
_______________________ when it acquired a large number US dealers.
3. FDI can allow companies easily to enter new markets where they have
__________________.
4. Worldwide management can be successful when multinationals use
______________________________________________________ in management
positions.
5. As a result of FDI the ____________________________________ of the host
country will increase.
6. FDI benefits the balance of payments of the host country by initial
__________________.
7. The introduction of JIT and Quality Circles from Japan to the UK is known as
______________________________________________________.
8. Multinationals can easily switch __________________ between host countries.
9. Exposure to foreign markets through FDI can benefit home companies by learning
____________________________________.
10. Home governments can __________________ of multinationals.
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 17
EUROPEAN UNION
Section 2: The European Union
The European Union was formed to create a single market within which the member
states can trade freely.
SAQ 6
What do you think are the business issues and concerns that such a market raises?
We will now look, in greater depth, at the main topics of current concern and those
that might have an impact in the future.
The European Community (EC) was established by the Treaty of Rome on 25 March
1957 and currently has 27 members (including the United Kingdom). After the Single
European Act in 1987, it changed its name to the European Union. With a population
of nearly 500 million and a GDP greater than that of the USA, the EU is a potential
global superpower – hence its importance to businesses. Its purpose is to form a
common market among member states that is not affected by tariff barriers.
The EU is a major economic and political institution and has a significant effect on
business in all member states, including the UK. Its size and wealth mean that its
influence extends beyond member states. The exact nature of its influence and the
extent to which it impacts on business varies considerably over time. This section
considers some aspects of the EU that could affect business. Some have been
influential in the past but may play a smaller part in the future. Others may become
much more significant as time passes. The topics are:





European institutions
The Single European Act
European Monetary Union
The Social Chapter
Enlargement of the EU.
They have been chosen because they illustrate the range of influences that the EU can
have.
Activity
As you read through them, try to think about:
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 how important each is at the present time
 whether each is likely to become more or less important in the future.
European institutions
The economic policies of the European Union (EU) are currently formulated and
implemented by five main institutions:





The European Council
The Council of Ministers
The European Commission
The European Parliament
The Court of Justice.
The European Council
The European Council meets at least twice a year to resolve major policy issues and
set policy directions. It is composed of heads of state of the EU’s member nations and
the President of the European Commission.
The Council of Ministers
The interests of member states are represented by the Council of Ministers, with one
representative from the government of each member state. The membership varies
depending on the topic under discussion, e.g. transportation ministers attend when
transportation policy is being discussed. Draft legislation can only become EU law if
the Council agrees.
The European Commission
The European Commission in Brussels is responsible for proposing EU legislation,
implementing it and monitoring compliance with EU laws by member states.
Comprising around twenty commissioners, each is appointed by a member country,
not to represent the best interests of each individual country, but to have responsibility
for a particular policy area, such as agriculture and fisheries.
The Commission makes legislative proposals that go to the Council of Ministers and
then to the European Parliament.
The European Parliament
The European Parliament, which meets in Strasbourg, has over 600 members, directly
elected by the citizens of the member states. It is primarily a consultative, rather than a
legislative body, debating legislation proposed by the European Commission and
forwarded to it by the Council of Ministers. It proposes amendments to legislation
which are often taken up by the Commission and the Ministers.
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The Court of Justice
One judge from each member country sits in the Court of Justice to hear appeals under
EU law. Like Commissioners, they do not represent their individual country’s
interests, but act as independent officials. Member states can be brought to court for
not meeting treaty obligations.
European institutions – implications for business
European institutions set policy and, in this sense, they have a significant effect on
business. In practice however, it is the policies they set which affect how businesses
behave, rather than the institutions themselves. Nevertheless, the policy-making
process can have an effect on what business and others do. In particular, businesses
can attempt to influence the decision-making process.
Vigil held for fishing industry
About 250 people gathered at Fraserburgh fish market on 21 December 2002 to hold a
vigil for the fishing industry. Earlier in the day, a meeting of the EU Council of
Ministers had agreed that cod quotas would fall by 45% and that fishing boats would
only be allowed to go to sea for15 days a month. Carol MacDonald, the leader of Cod
Crusaders, said at the vigil, ‘We have got one month before these measures are
implemented to get the Prime Minister’s assistance because he is the only one who can
bail us out now. We are being stripped of 75% of our income.’
Elsewhere, Barry Deas, Chairman of the UK National Federation of Fishermen,
described the deal as a ‘dark day for the fishing industry’.
Adapted from news stories on http://news.bbc.co.uk
Activity
Choose a current issue where an EU institution such as the Council of Ministers has
decided on a new EU policy. Use the BBC website to find out how the policy-making
process is having an effect on businesses in the UK.
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The Single European Act
The Single European Act was adopted by the European Community (EC) in 1987.
The objective was to establish a single market by 31 December 1992. The Act
proposed the following changes:
 Remove all frontier controls between EC countries in order to abolish delays and
reduce the resources required to comply with trade bureaucracy.
 Apply the principle of ‘mutual recognition’ to product standards. A standard
developed in one EC country should be accepted in another, provided it meets
basic requirements in such matters as health and safety.
 Open public procurement to non-national suppliers, reducing costs directly by
allowing lower-cost suppliers into national economies and indirectly by forcing
national suppliers to compete.
 Lift barriers to competition in the retail banking and insurance industries, to drive
down the cost of borrowing.
 Remove all restrictions on foreign exchange transactions between member
countries by the end of 1992.
 Abolish restriction on cabotage (the right of foreign truckers to pick up and deliver
goods within another member state’s borders) to reduce the cost of haulage.
The objective of all these changes was to lower the cost of doing business in the EC.
In addition, however, other opportunities came to the fore – companies could exploit
economies of scale (supplying outside a company’s borders) and competition was
increased (no internal barriers to trade) forcing companies to become more efficient.
Because of the significance of the Act, the EC decided to change its name to the
European Union (EU) once the Act took effect.
The Single European Act – implications for business
The Single European Act has many implications for companies both within and
outwith the EU, including:
 Lower costs of doing business in Europe, e.g. simplified tax regimes, harmonised
product standards and free movement of goods across borders.
 Potential to gain economies of scale (500 million consumers in Europe).
 Competition (no longer any barriers to trade; for example, the French and Italian
markets prior to 1992 were very protected).
 Delays in applying the Act to several industries (the insurance industry until 1994,
investment services until 1996 and telecommunications until 1998) have slowed
down the shift to a European market.
 National markets are still often separated by deep and enduring cultural and
language barriers between countries.
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 Businesses must rationalise their production and reduce costs in order to compete;
for example, prior to 1992 a VW Golf car cost 55% more in the UK than in
Denmark. Such price differentials must vanish in a single market. Again, progress
towards this has been slow and differentials still remain.
 Companies outside the EU will be faced with more competition from EU
companies who have reduced their cost structures and can now compete more
globally.
What businesses think
In late 2002, ten years after the introduction of the Single European Market, the EU
conducted a survey to find out what businesses thought of the Single European
Market.
Some of the findings were:
 Four times more EU companies (46%) felt that the Internal Market had had a
positive effect on their business compared those who thought it had a negative
effect (11%).
 42% of businesses felt that it had had no impact.
 There were some significant variations between Member States. British businesses
were least enthusiastic about the Internal Market – only 26% of companies in the
UK rated its impact on their business as positive compared with 35% in France,
42% in Germany, 68% in Italy and 69% in Ireland.
 44% of smaller companies rated the impact of the Internal Market on their business
as positive. For medium-sized companies, this figure rose to 55% and for large
companies to 67%.
 Exporting companies felt that they had benefited the most. 76% of companies
exporting to more than five EU countries rated the impact of the Internal Market on
their business as positive.
 42% of businesses said that they felt very well or well informed about their
company’s rights in the Internal Market. Those in Germany (34%) and the UK
(40%) were least confident.
 83% of smaller companies, 90% of medium-sized companies and more than 92%
of larger companies believed that improving the functioning of the Internal Market
should be a key priority for the EU in future.
Adapted from http://europa.eu.int
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European Monetary Union (EMU)
European Monetary Union, ratified by EU member states signing the Maastricht
Treaty, established an agreement that includes the fixing of exchange rates,
leading to a single currency, the euro.
A European Central Bank (ECB) was created in 1998, and together with the national
central banks, forms the European System of Central Banks that controls and runs a
common European monetary policy. Several nations (including the UK) were
concerned about the effectiveness of this arrangement and the implied loss of national
sovereignty and they have chosen, so far, to stay out of monetary union.
On 1 January 1999 the euro was introduced in the eleven participating countries
(excluding the UK, Denmark, Greece and Sweden). Conversion rates were locked and
a single interest rate and foreign exchange policy was enforced.
On 1 January 2002 notes and coins were introduced to the eurozone (including
Greece). All national currencies in the eurozone were withdrawn in February 2002.
Slovenia joined the eurozone on 1 January 2007, with Cyprus and Malta joining a year
later.
There are benefits for both consumers and businesses. For consumers, there will be
the reduction in the cost of changing money when travelling from one EMU country
to another. There should also be increased price stability and consistency of prices
across Europe.
The euro – implications for business
The impact of the euro on businesses in the UK depends on whether or not the UK
joins the euro. If it does, the following benefits could follow:
 Reduced exchange/transaction costs – the EU currently converts approximately $8
trillion from one EU currency to another every year, and the move to the euro
represents a saving of $12 billion in exchange costs. This would result in cheaper
transaction costs for UK companies. (Vauxhall estimates that this costs it £10
million per year in the UK alone.) Some UK-based companies such as Toyota now
insist that all UK suppliers present their invoices in euros.
 Fewer resources required for accounting, treasury management, etc. which is
particularly relevant in the UK financial market – London and Edinburgh.
 Being within the eurozone would help to attract inward investment to the UK,
which is vital for jobs. (If the UK decides to stay outside the single currency, a
number of companies such as General Motors are threatening to give higher
priority to investing in plants within countries that have adopted the euro.)
 Using the same currency will let businesses gain economies of scale by selling
throughout Europe.
 Mergers between UK companies and European companies would be easier and
more firms may adopt a European wide strategy.
 Less risk of currency fluctuations causing loss of earnings from international trade.
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 With transparent prices, UK companies could improve competitiveness by seeking
low-cost supplies and possibly pass this on to their consumers through price
reductions.
If the UK does not adopt the euro, the above benefits may not materialise. There may
be other consequences for business if this happens.
 European companies may not consider using UK companies as suppliers because
of transaction costs, exchange rate risks and lack of transparent pricing. This could
diminish the potential size of the market available to UK companies.
 Business challenges will also present themselves – increased competition and
pressures due to transparency of prices and costs across Europe.
 Some companies such as Nissan and General Motors have said that they are more
likely to invest in other European countries if the UK does not adopt the euro.
 The same price for a product or service will be expected by the consumer in
different countries, e.g. the price of a Fiat car in one country would be the same as
in another (certainly not the case today in the UK).
 Critics argue that the euro will initially involve high investment costs (training
staff, new software systems, etc.), that it has performed poorly to date on world
currency markets and that it will lead to lower economic growth and higher
inflation within Europe.
In spite of the potential benefits, there is some evidence that UK businesses are
backing away from joining the single currency. In September 1998 research showed
65% of UK businesses in favour of the euro, but by August 1999 this figure had fallen
to 52%. In August 2001 a survey of 1,002 chief executives found that 65% of
respondents wished to keep the pound and only 20% were in favour of the euro. In
addition 80% of replies felt that interest rates would be more appropriate to UK
circumstances if the UK did not adopt the euro. Adopting the euro was also ranked
lowest among a list of things that the government could do to help businesses. Many
of the surveys have shown that the strongest opposition to the euro comes from the
small and medium-sized firms that make up the majority of the UK’s businesses.
There are also pressure groups such as Business for Sterling.
The following article summarises some of the benefits felt by Irish manufacturing
companies who are committed to the European Monetary System.
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International Competitiveness and the Single Currency
This article summarises the results of a study of UK and Irish manufacturing firms
over a 5-year period 1989–93. During this period the Irish Republic was committed to
the European Monetary System and the Exchange Rate Mechanism. In contrast, the
UK joined the ERM in 1990, and left abruptly 18 months later.
A perception of exchange rate stability has directed Irish firm-level competitive
activity towards distinct or focused strategies based on aspects of ‘process’
(behavioural) activity. This is characterised by innovation and the development of
products and processes in which participants in the market are proactive.
A stable currency leads to a leaner, fitter manufacturing sector, and a focus on highvalue-added niches or differentiated products. It provides a positive incentive to
inwardly investing companies and makes exporting easier for firms.
Overall, the results indicate a positive linkage between exchange rate stability and
individual firms’ competitiveness. Irish exporters have benefited from their
government’s approach to European Monetary Union (EMU) and will continue to do
so. The research identifies changes in firm-level competitive activity that occur where
the exchange rate is fixed, and argues that exchange rate stability leads to sustained
long-run competitive advantage for firms located within the currency area (over those
that are not).
Adapted from Taggart, J and J (1999), ‘International Competitiveness and the Single
Currency’, Business Strategy Review, 199, Vol. 10, Issue 2, pp 25–36
SAQ 7
1. What benefits will the single currency, the euro, offer to the individual citizen?
2. Why would being within the eurozone assist in attracting inward investment into the
UK?
3. Small and medium-sized businesses are uncertain about the benefits of joining the
euro – what are their concerns?
4. What can the UK learn from the Irish approach to European Monetary Union?
Activity
Do you think the UK should join the euro? Maybe you could conduct a survey to see
what others think. What reasons would you give to support your view?
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The Social Chapter
The Social Chapter is the term used to describe a legal mechanism through which the
member states can formulate common social and employment policies. It is not a
ready-made set of policies that member states automatically have to adopt. It is also
referred to as the Social Charter. It was adopted in 1989 but was not signed by the UK
until 1998. The real significance of the Social Chapter is not that it introduced radical
new legislative powers or competencies, but that it represented a restatement of the
EU’s commitment to social questions. The Social Chapter is updated regularly, and
new directives and European legislation are introduced regularly. The Treaty of
Amsterdam, for example, which came into force in 1999, promotes a series of policy
initiatives, especially in the field of employment.
The fundamental principles of the Social Chapter are:
 free movement of workers based on the principles of equal treatment in access of
employment and social protection
 employment and remuneration based on the principle of fair remuneration
 improvement of living and working conditions
 social protection based on the rules and practices proper to each country
 freedom of association and collective bargaining
 vocational training
 equal treatment of men and women
 information, consultation and participation of workers
 protection of health and safety in the workplace
 protection of children and adolescents
 protection of the elderly
 protection of the disabled.
Activity
Research the current Social Chapter in terms of the principles outlined above.
Every member state has the right to veto proposals on:
 social security
 the representation and collective defence of workers
 conditions for employment of third country nationals legally resident in EU
territory
 the protection of workers when their employment contract is terminated.
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In other areas decisions are made by majority voting. These include:





improvements in the working environment (including health and safety)
working conditions
informing and consulting workers
equal opportunities
integration of people excluded from the labour market.
The following are some examples of major directives under the Social Chapter. Not all
apply in the UK.
 The European Works Council Directive requires large and medium-sized
multinational companies operating in Europe to set up works councils at a
European level. A works council can be expected to be consulted on: the structure
of the business; investments; mergers; transfer of production; cutbacks; closures;
collective redundancies.
 The Parental Leave Directive means that all British workers are entitled to three
months’ unpaid leave following the birth/adoption of a child, with the right of
return to work. This compares with Germany, which currently allows 160 weeks’
parental leave, and Spain, which allows 50 weeks.
 The Part-time Workers Directive aims to remove discrimination against part-time
employees with respect to employment conditions, pay, training, pension rights and
representation rights. The agreement also calls on employers to implement
measures to facilitate part-time work at all levels of the enterprise, and to
encourage more flexible working arrangements.
 The Directive on the Onus of Proof in sex discrimination cases was agreed in June
1997. This directive means that in a sex discrimination case against an employer
the burden of proof is shared between the employer and the employee, and that,
where doubt remains, the employee will be given the benefit of the doubt. This
came into force in 2001.
 The Working Time Directive placed a 48 hours per week limit on the amount of
time each person should spend working. It became law in the UK in 1998, but the
UK is the only EU country to take advantage of a rule that allows workers to opt
out of the agreement. According to a TUC survey in 2002, more than 16% of the
UK workforce work more than 48 hours a week, although the figure for Scotland
was 14%. Most of those who work long hours were men and 1 in 4 men worked
more than the 48 hour limit.
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Case study
France’s economy doing well on a shorter working week
As the French economy continues to outshine the rest of the eurozone, there is
growing evidence that the shorter working week can claim some of the credit. Last
year, the working week was cut from 39 hours to 35 in the face of opposition from
French business. But now the companies that warned of disaster are reaping the
benefit of a surge in consumer confidence, while next door in Germany – and in much
of Europe – confidence and growth are on the decline.
A labour ministry survey found that, with extra time on their hands, people are dining
out more often, taking short breaks and brightening up their homes. Implementation of
the reform was left to negotiations in the workplace, and most employers and
employees ended up with extra days off rather than working shorter days. With an
average of 16 more days off a year – mostly taken on Fridays – there are more
opportunities to go away for a long weekend, replant the garden or wallpaper the
lounge.
The study found that 59% of workers said their daily life had improved as a result of
the shorter hours. Leroy Merlin, the country’s second-largest DIY retailer, has
reported a boom in interest in its television spots showcasing ideal homes, with
customers asking for specific instructions and in-store demonstrations. Travel agents
say there has been a demand from workers anxious to escape the poor spring weather
in France for a short break in the sun.
Nicolas Claquin, an economist at CCF Bank in Paris, said that, while the shorter
working week had no clear impact on household spending figures since its
implementation in February 2000, it was indirectly boosting consumer confidence.
This month, three public holidays have fallen during the week, and people have used
their extra days to faire le pont – ‘make the bridge’ to the weekend to take a short
holiday.
On a wider level, the shorter working week has achieved its goal of reducing
unemployment. Levels were at 12.6% in 1997 and are now 8.7%, the lowest for
eighteen years.
However, there was also some downside in the survey. Low-skilled workers felt they
had not done well out of the change, while a quarter of all workers said they were
suffering from increased stress levels, as they had to do the same amount of work in a
shorter time, or learn to do new things to cover for colleagues who were off digging
their gardens.
Adapted from Business A.M., 18/05/01, Frazer Thomson
The above case study shows how some EU members are attempting to follow the
Spirit of the Social Chapter in their domestic employment legislation.
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Implications of the Social Chapter for business
The UK has not wholeheartedly supported the Social Chapter. However, the measures
taken to date have not imposed the exceptionally high costs on business that were
predicted. Evidence for this lies in the fact that many British companies who were
under no obligation to abide by Social Chapter directives did in fact decide to include
British representatives on their European Works Councils. These companies include:
United Biscuits, Marks & Spencer, Coats Viyella, Pilkington, ICI, NatWest and BT.
Major corporations welcome Social Chapter reforms but criticise red tape
HR directors of UK corporations broadly welcome the European Social Chapter
reforms, according to a recent survey into the impact of new employment legislation
on larger companies, commissioned by law firm Lovell White Durrant.
Nearly 90% said that the Social Chapter was important in safeguarding employees’
rights, and more than half were in favour of harmonising employment laws across the
EU. Only 17% thought that the UK should opt out of the Social Chapter.
However, 80% expressed concern that the Social Chapter would increase bureaucracy
and business costs. Particular criticism was levelled at the inflexibility, complexity
and rushed implementation of the reforms.
More than half of those surveyed said that the implementation of new legislation,
especially the Working Time Regulations 1998, was one of the biggest challenges
they had faced over the past two years. The survey also examined attitudes to future
EU legislation. While most welcomed the European Works Councils directive,
opinion was divided on parental leave (due for implementation by December 2000).
The highest approval rating was reserved for the part-time workers directive with 95%
supporting such workers’ fundamental rights to be treated as favourably as full-time
staff.
Adapted from Lovel White Durrant, CCH Employment Law Manual
Other impacts upon organisations include the fact that because of the minimum wage,
maximum hours, minimum paid holiday levels, and other new standards, labour costs
increase, making it more difficult for companies to compete against low wage
countries such as China and South Korea. The impact of the Social Chapter should
also be seen in the context of other labour market legislation. For example, the
Employment Relations Act 1999 in the UK decreased the unfair dismissal period from
two years to one and increased compensation costs which will be passed on to the
employer.
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However, a number of more positive benefits for businesses include: workers being
more motivated and therefore productive because they have enhanced rights at work;
workers being more involved in company decisions through consultation processes
are less likely to raise industrial relations issues; shorter hours may enable workers to
be more productive.
Conclusion
Through time, new social legislation (European and UK) is likely to affect
businesses in the UK both positively and negatively. This is a very fluid
environment as new directives and laws come into effect almost on a monthly basis.
These are all areas that companies (both large and small) need to be aware of.
The Social Chapter is merely a new legal framework allowing the member states to
decide matters of social policy. In itself it does not entail any new regulation. The
Social Chapter is not legally binding.
As noted above, employers are very wary about the costs imposed upon them by the
various labour market initiatives. However, labour market flexibility is another key
issue with respect to the Social Chapter. There is a danger that regulations to protect
workers will make labour less mobile, both geographically and occupationally. It
may thus make it harder for firms to adapt quickly to changing market conditions
and make workers more vulnerable to unemployment. The EU has long recognised
the need for balance between social legislation and competitiveness. It published a
white paper on this in 1994.
The Labour government in the UK is committed to labour market flexibility. The
Prime Minister, Tony Blair, has, for example, opposed the extension of works councils
to small and medium businesses as he believes it would overburden the business
sector.
Activity
Choose an organisation with which you are familar. Select ONE measure from the
Social Chapter, preferably one which is of current significance.
Identify the advantages and disadvantages of the measure to a) the organisation as an
employer; and b) employees of the organisation.
You may get some general ideas by looking at http://www.cbi.org.uk (for the views of
employers) and http://www.tuc.org.uk (for the views of employees).
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Enlargement of the EU
Since its beginning in the 1950s, the EU has grown from its original six members.
Potential members have to apply to join and this was the route followed by the UK in
1973. The phrase ‘enlargement of the EU’ refers to the large number of countries,
many from Eastern Europe, making applications at the same time to join the EU.
Existing member states have been concerned that their individual influence on EU
decisions will be watered down and that the Union will become difficult to manage. In
addition, many of the applicants have much lower levels of GDP per head than
existing members and may represent a financial burden to the EU. This, in turn, may
leave fewer EU funds available for activities based in current member states.
To try to resolve these difficulties, applicants must demonstrate that they meet
specific membership criteria. These are:
 Stability of institutions guaranteeing democracy, the rule of law, human rights and
the respect and protection of minorities – the political criteria.
 Existence of a functioning market economy as well as a capacity to cope with the
competitive pressure and market forces within the Union – the economic criteria.
 Ability to take on the obligations of membership, including adherence to the aims
of political, economic and monetary union – administrative and judicial
structures.
Ten new members joined the EU in 2004: Cyprus, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia.
Bulgaria and Romania became members in 2007. No date has been set for the
accession of Turkey; Serbia and Montenegro have also both expressed an interest in
joining the Union.
Implications for business of enlargement of the EU
An enlarged EU offers several opportunities to businesses in the UK. These include:
 The EU has become an even bigger market as its population has increased from
about 370 million to about 500 million. This increase in the number of potential
customers could lead to greater scope for economies of scale in distribution, etc.
 Enlargement could result in greater political and economic stability among new
members, which may make it easier for overseas firms to invest in them.
 Labour costs in many new member states are low, which may enable UK firms to
reduce costs by sourcing supplies there.
 The removal of labour market restrictions may enable firms to recruit skilled
employees from a much wider area – the UK has agreed that British firms must
consider applicants from the new member countries immediately – other countries
have decided not to do this.
 Many new members are relatively poor and economically unsophisticated, so
competition from local firms is likely to be slight, which may benefit firms from
countries like the UK.
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 Customers in the former communist countries in Eastern Europe are keen to
experiment with new products. Also they have not had the chance to develop
strong allegiances to well known international products. This may enable UK firms
to gain new markets.
However, there may be some factors which limit possible opportunities. Among them
are:
 Most new members have a relatively low GDP per head and thus may have limited
purchasing power.
 UK firms may face competition from firms in existing EU member countries such
as France and Germany who wish to expand operations to the new members.
 The increased size of the EU could attract more investment from non-EU
multinationals.
 If the UK remains outside the eurozone, UK firms may be at a disadvantage
compared to those in countries which do use the euro, as these firms could benefit
from reduced transaction costs, etc.
The enlargement of the EU may also have a wider impact on the work of the Union
and, thus, on business activity. In particular, money may be diverted from other EU
programmes to finance schemes associated with enlargement. For example, the
arrangements for structural funding have been simplified and the Fund Objectives
reduced from seven to three. This means that some areas, such as the Scottish
Highlands, which previously qualified for funding, are no longer eligible.
Activity
Choose one of the ten countries that were part of the first phase of enlargement. Try to
find out something about that country’s economy, spending patterns, etc. Assess the
extent to which UK firms could benefit from this country’s membership of the EU.
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Future development of EU activities
Like any organisation, the EU is both subject to change and making changes itself in
what it does. Different issues are thus important at different points in time.
Consequently, the extent and the nature of the impact of the EU on business vary
from time to time. This is why it is important to check the current situation as some
of the points above may have been overtaken by events. The following highlights
some of the issues that may be important in the future. It is not, however, an
exhaustive list.
Trade negotiations: the Millennium Round
The Millennium Round is a series of international negotiations on trade being
conducted among the members of the World Trade Organisation (WTO). Almost all
major trading nations are members of the WTO. The negotiations aim to liberalise
trade further, especially in services, and increase market access. The EU negotiates
on behalf of member countries that do not act individually.
There is scope for disagreement, for example between the EU and the USA, and this
may have consequences for firms in the EU. For example, a dispute over the trade in
bananas between the EU and the USA led on one occasion to the USA imposing
restrictions on the sale of Scottish cashmere knitwear in the United States. The ban
was eventually lifted but it did cause some problems for knitwear manufacturers in
Scotland. There have also been fears in the past that the EU will adopt a protectionist
stance (known as Fortress Europe) towards trade outside the EU.
The euro
This is of particular significance to the UK because it has not adopted the euro. The
debate on whether or not to join the eurozone is an important feature of the UK’s
relationship with the EU. Whatever decision is finally made, it is certain to have major
implications for the UK economy.
Activity
Look at newspapers, magazines and websites for information on the EU. You could
also watch TV news programmes.
Which three issues relating to the EU do you think are currently the most important
for the UK? For each issue, try to work out the effects it might have on businesses.
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 33
BUSINESS ISSUES
Section 3: Business Issues
Good businesses plan for the future – but this should be a future that comes with
few surprises, as businesses should be striving to anticipate the effect on their
activities that a change in their wider environment will cause.
While companies are affected by the environment in which they operate, i.e. the
specific market or industry, they are also affected by the general business
environment, the broad political–economic–social–technological (PEST)
framework within which all companies operate. The following four sub-sections:




business ethics and social responsibility
environmental and green issues
new technology
government involvement
attempt to look at these broader issues and the impact they have upon organisations
today. While they are studied individually, one often interacts with the other. For
example, a new environmental practice might involve the use of new technology,
which in turn might improve competitiveness and therefore lead to higher employment
(economic factor).
Business ethics and social responsibility
This section looks at how some of these issues impact businesses in the area of
ethical and socially responsible behaviour and how this can affect the way firms
operate. Examples include changing social attitudes from green consumers which can
provide both an opportunity for a company (e.g. to market a more environmentally
friendly product) and pose a threat (e.g. consumers might ‘vote with their feet’ and
not purchase products deemed environmentally unfriendly).
Business ethics can be described as a set of values and principles that influence how
organisations behave. Company ethics help with decisions such as, should a product
harmful to consumers be withdrawn from the market? Or should a bribe be used to
help win a contract?
Social responsibility is where companies act in a way that takes into account the
obligations they have to society as a whole. Examples include the employment of
older people in the DIY chain B&Q and the removal of CFCs in the frozen food
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company Iceland’s refrigerators. The revival of interest in social responsibilities has
occurred for a number of reasons, including growing environmental awareness,
corruption and fraud in the business sector, stakeholder empowerment and the
development of equal opportunities.
Social responsibility involves actions which address the needs of external
stakeholders of a company such as the local community in which it operates. Social
responsibility does not include actions related to internal stakeholders such as a
company’s workforce. For this reason, the concept of corporate responsibility is
sometimes used. This is the idea that a company has obligations to all those
connected to it and should attempt to address the needs of all its different
stakeholders, both internal and external. This would include employees of the
company. Corporate responsibility is therefore wider than social responsibility.
For example, the fast food company, McDonald’s, sponsors a charity which provides
accommodation for families with children who are in hospital for a long time. There
is one of these Ronald McDonald Houses at Yorkhill Hospital in Glasgow. By doing
this, McDonald’s could be said to be acting in a socially responsible way. Scottish
Power provides learning centres for employees and thus could be said to be
demonstrating corporate responsibility.
Ethics, social responsibility and corporate responsibility are closely related. The ethics
of a company are likely to influence the extent to which it behaves in a socially
responsible way and how far it demonstrates corporate responsibility.
Legislation, consumer demand and pressure groups are often instrumental in having
company policies changed to be more responsible. EU legislation, for example,
ensures that companies have to operate equal opportunities policies for their
employees. If a product is not selling because consumers don’t want to buy it as a
result of publicity that it is tested on animals, then organisations will sit up and take
notice. Similarly, if a pressure group such as a trade union or Greenpeace puts
pressure on politicians, or invests in an advertising campaign to publicise ‘bad
practice’, this too can affect a company’s ethical policy and the extent to which it acts
in a socially responsible way.
Social responsibility applies to all sectors – both profit and non-profit organisations:
 Individuals and managers are exposed to ethical dilemmas in all organisations.
 All organisations have to obey statutory requirements on issues such as the
environment, health and safety, and equal opportunities.
 All organisations have a range of stakeholders for whom there are reciprocal rights
and responsibilities.
 All organisations are exposed to competition and are accountable in some shape or
form.
 Increasingly more organisations are exposed to market pressures and are forced to
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adopt principles of quality and excellence.
 All organisations have a responsibility to the environment to adopt sustainable
development principles that require taking moral responsibility for this and future
generations and for the environment.
Some examples of company policies on social responsibility
BP (a UK-based oil company)
‘Society expects us to be environmentally and socially responsible, as well as
financially successful; we see positive environmental and social performance as
essential conditions for sustainable business.
Social performance is about the combination of three things:
 Our behaviour (whether we live up to the standards we set for ourselves in our
business practice)
 Our impact (how well we manage the impact of our operations on people), and
 Our overall contribution to society (including our support for community
programmes and charities).’
Levi Strauss (a US clothing producer)
‘Our corporate values – empathy, originality, integrity and courage – are the
foundation of our company and define who we are. They underlie how we compete in
the market place and reflect the legacy of our founder Levi Strauss, who devoted
substantial time and resources to charitable and philanthropic activities.’ [The
company sponsors a charity, the Levi Strauss Foundation, which provides grants to
community based organisations to help them make social changes in their area.]
Activity
Look up these companies on their websites at http://www.bp.com and
http://www.levistrauss.com and find out what things they actually do.
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SAQ 8
What are the benefits to businesses of being socially responsible?
Companies which do adopt socially responsible policies often make use of them in
their advertising and promotion. The Body Shop is a well-known example. The
company, and its founder, Anita Roddick, have gathered a lot of favourable publicity
for its ethical stance on the production and testing of cosmetics. Another example is
Premier Teas, one of whose brands is Typhoo Tea. Workers on tea plantations have
traditionally worked long hours in poor conditions for low pay – about 50p per day.
Premier Teas put a lot of effort into building good working relationships with tea
estates, including purchasing on long-term contracts. This encouraged estate
managements to develop programmes of health, education and housing benefits for
workers. As a result, the company could market itself as being socially responsible.
Disadvantages to businesses of socially responsible behaviour
Social responsibility may, however, have a negative effect on businesses:
 Decrease in profit may occur if a company has to turn down a business opportunity
which could be financially lucrative. However, this could be offset if consumer
demand acted negatively against it. It could lead to conflict with shareholders who
might be looking for short-term financial return.
 Costs to the business could increase, for example buying raw materials from a
country with a bad human rights record might be cheaper than buying from
elsewhere.
 Business practices, such as policies on recruitment and career advancement, would
have to be reviewed to ensure they complied with equal opportunities,
environmental policies and consumer protection. There is a danger that businesses
could be thought to be trying to take over the role of government.
 Different people see social responsibility in different ways and there is a danger
that being socially responsible could backfire on firms. For example, in 2002,
Walkers Crisps ran a scheme in which primary schools could get free books in
return for the wrappers from Walkers Crisp packets. Schools collected wrappers
from students. Some people criticised the scheme because they believed that it
encouraged schools to promote unhealthy eating habits among children. Critics
also argued that the number of wrappers required for each book was very large.
Walkers vigorously refuted these criticisms.
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Environmental and green issues
Socially responsible and ethical business behaviour is partly demonstrated by the
environmental policies pursued by companies. We are bombarded by information
about why companies should pay attention to the environment and green issues. The
accident at the Chernobyl nuclear power plant is an often cited example, but
companies from the very small to the global can make a real difference to the
environment.
In many cases environmental initiatives save money and help to improve profitability
and competitiveness. Many companies have seen benefits to the bottom line, new
product opportunities or increased market share.
Reasons for change include:
 Public awareness and consumer pressure are two drivers of change.
 UK and European legislation is forcing companies to be more environmentally
aware.
 Large companies are putting pressure on their suppliers to comply with new
standards (such as ISO 14001 and the new European directive on Integrated
Pollution Prevention and Control (IPPC) – see example of Zeus Aluminium
Products on the next page).
 The government also forces change, through:
– taxation such as carbon tax on fuels
– offering subsidies for environmentally desirable projects
– forcing companies to compensate those negatively affected by bad practice.
 Finally, many companies have seen the cost savings that can be made by
implementing environmentally friendly policies and this has driven them to adopt
greener practices.
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Environmental demands turn up heat on foundry
Zeus Aluminium Products
Britain’s motor industry has been hit by so much bad news that concern about the
environment may not be expected to be high on the agenda as suppliers ponder their
own chances of survival.
But for companies such as Zeus Aluminium Products, a foundry which makes engine
castings, survival will depend in large part on being able to meet tough new
environmental legislation. Gary Roper, Zeus’ general manager, says: ‘Our customers
have left us in little doubt that our failure to comply could see us being kicked out of
the supply chain.’ Ford and General Motors have said their suppliers must meet ISO
14001 and 14002. Roper is on his guard. In the past three years 17 people in Britain,
some of them company directors, have been jailed for causing pollution.
Five years ago the company invested £500,000 in a fluidised bed furnace which has
allowed it to recycle much of the sand it uses. The investment has made sound
business sense. Without the new equipment, the company’s bill for landfill tax would
have more than doubled from the £12,000 per week it already pays.
The energy tax of 20% from April 2001 will also impact companies like Zeus despite
the fact that it has managed to cut its fuel bill by £30,000 per year through energy
efficiency schemes. However, even the anti-pollution systems, the dust collectors, the
scrubbers and sand reclamation equipment it uses to clean up its site, are big users of
energy. It is still far from clear whether the Treasury will agree to industry demands to
exempt such equipment under the act.
The motor industry is taking a lead in reducing the depletion of natural resources. It is
creating lighter vehicles that are more fuel efficient and are produced with less waste.
The key for Zeus is to be at the forefront of this movement.
Adapted from Renton, J, Sunday Times (23 April 2000)
Activity
Look up the quantity surveying company Gardiner & Theobald on
http://www.thetimes100.co.uk. How important do you think ‘sustainable
development’ is?
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Environmental policies in organisations
Environmental initiatives within industry include the following:
 Using less energy because most sources of energy have polluting effects on the
environment. For example, fossil fuels give rise to sulphur dioxide and nitrogen
oxides, the main components of acid rain.
 Using less water and reducing water pollution. Not only do water shortages affect
the organisation, rivers dry up, or flow becomes so low that wildlife cannot be
supported, and of course discharge of waste to our rivers and seas affects the
environment.
 Waste reduction, i.e. elimination at source, should be a primary goal, with re-use
and recycling as back-up strategies.
 Packaging – a European Directive is considering placing responsibility for the
disposal of packaging waste with the producer. Similarly landfill tax in the UK has
been increased dramatically to make it a more expensive option than incineration
and recycling.
 Noise pollution, e.g. noise from a production facility, impacts both people and
animals negatively, and laws exist to stipulate acceptable levels of noise.
 Reducing the impact of transport where companies consolidate loads, compact
products or waste, eliminating packaging or at least making it more space efficient,
are all ways of effectively helping to reduce carbon dioxide emissions and
improving air quality.
Conclusion
For many reasons, including consumer pressure, legislation, government policies or
potential cost savings, more and more organisations are becoming more
environmentally aware. The impacts upon businesses include:
 Production techniques or materials may have to be changed, e.g. use of more
energy efficient manufacturing equipment or use of recycled materials.
 Increased costs are likely, such as costs to treat waste products rather than dumping
untreated waste into the sea.
 Decreased costs might apply as a result of new environmentally friendly policies
(see Zeus Aluminium Products example – sand recycling).
 Increased investment in research and development might have to be made to
achieve more environmentally friendly production techniques or materials.
 Possible increased demand for products from consumers who are attracted to
companies that have environmentally sound practices.
So far we have examined how social responsibility and environmental issues have
made a considerable change to the way in which businesses operate. Next we will look
at how new technology has similarly influenced recent business practices and some
trends that are likely to impact businesses in the future.
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Technological changes
Information technology makes a significant impact on how organisations do business.
The speed of technology change is becoming greater – in a single day in 1999 there
were as many phone calls made in the UK as in the whole of 1983, and in a single day
we sent as many emails as in the whole of 1990. The internet is possibly the biggest
business change in our lifetime.
SAQ 9
Before reading on, think about what opportunities, changes in information technology,
such as the internet, present to business.
E-commerce
The research group Forrester believes that by 2004 more than half of all Western
Europeans will have access to the internet and 65% of them will be online buyers.
These are staggering statistics that provide huge business opportunities for
organisations of every size.
Integrating the use of the internet in an organisation means not just using the
technology itself but taking a step back and evaluating how the technology can be
used to best advantage – looking at business strategy, business processes,
distribution, marketing, etc., and probably making changes to the way the company
operates, what markets it sells to and even the structure of the organisation to
support it.
This provides the ability to exchange information electronically at any point in a
company’s supply chain – customers, suppliers and business partners. It is not
unknown for customers to send design drawings for a product to an engineering
company electronically, transferring the data directly to a machine that will
manufacture the product.
Forms of E-commerce
 B2C (Business to Consumer) internet use, as typified by amazon.com for buying
books or easyjet.co.uk for booking cheap flights, is a huge growth market. Any
individual with access to a PC can order their shopping from Tesco and have it
delivered or order a birthday gift, have it gift-wrapped and sent to a friend across
the Atlantic without leaving their armchair. B2C affects large, medium and small
businesses – a one-man entrepreneur can set up a web-based company, operating
from home; likewise, large companies are providing customers with the ability to
buy their products online, often at a lower price to reflect a lower cost of sales.
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Surfing USA
America has all too often been a graveyard for foreign retailers. But this week the
tables were turned. Safeway, California’s biggest food retailer, is to adopt the
successful internet shopping service used by Tesco. Safeway is the majority
shareholder in GroceryWorks, a loss-making, on-line retailer.
GroceryWorks is to close its warehouse-based distribution network and replace it with
Tesco’s so-called ‘store-picking’ system, under which orders placed on-line are taken
from the shelves of existing stores. This is further proof of the advantages of bricks
and mortar retailers over their pure on-line rivals. While almost all pure online grocery
stores have gone out of business, Tesco has profitable on-line business which turns
over £300 million a year.
Tesco’s system involves specially employed pickers who select items from the aisles
of a supermarket close to the home of the customer who has placed the on-line order.
Orders are packed and delivered by van. There is no need for expensive, specially
built warehouses and, in addition, picking is easier because stores are laid out to make
it easier for customers to select goods.
Adapted from Economist, 30 June 2001
Activity
Can you find any other examples of successful B2C operations? The next section
covers B2B; try to also find example of successful B2B operations.
 B2B (Business to Business) use of the internet is where companies do business
electronically with their suppliers. By the year 2004 B2B was more than $7 trillion
worldwide – some 7% of all trade between organisations. B2B provides the
opportunity for improving relationships with business partners and suppliers with
the efficiencies and cost savings that can be made as a consequence. BT currently
spends $5 billion per year on goods and services, costing the company around £70
to raise a purchase order in the UK. BT’s solution is a website where in-house
purchasers can scour the catalogues of suppliers and select the best offers for their
needs. Employees can also find out which suppliers have items in stock and which
have the best delivery times, and even chart the progress of an order from approval
to delivery. The cost of raising a purchase order has now dropped to £5, but the
savings go beyond this. New prices and service levels are negotiated with suppliers
providing further cost savings. This method of e-procurement benefits suppliers
too, as they receive orders direct into their own systems, with no need for human
intervention.
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 C2B (Consumer to Business) internet use is where the individual reaches out to
the entire market. An example might be where you want to buy a used car of a
specific make, model, mileage, etc. and dealers will bid for your business, or if
you want a mortgage you supply your terms and wait for building societies and
banks to bid.
Weir Pumps in Glasgow (see below) has started to use the World Wide Web to
increase its global market share and to cut its costs for suppliers’ products.
E-commerce drive helps Weir Group to pump up global sales
Weir Group, Scotland’s most illustrious engineering firm, has set ambitious targets to
use E-commerce to more than double sales of its pumps.
The launch of its new website attracted multi-million pound orders from 17 countries,
demonstrating that traditional manufacturers can keep pace with technology.
The Glasgow company, which earns more than 70% of its revenue overseas, plans to
use the internet to establish a new customer base, cut costs via more efficient
purchasing and set up a 24-hour global design operation.
A Weir spokesman said that successful marketing of its website had secured £9
million of orders to date. The company has set up a team to double sales of its pumps,
using the internet as a key tool. It also intends to buy more components from nonEuropean suppliers, increasingly from companies selling via the web.
Adapted from Darroch, D, ‘E-commerce drive helps Weir Group to pump up global
sales’, Scotland on Sunday, 16 April 2000
Access methods
Until recently, the personal computer was the only access method for communication
with the internet. Changes to technology, such as Personal Digital Assistant (PDA),
Wireless Application Protocol (WAP) mobile phones and interactive digital TVs,
provide new ways of accessing the internet.
Regulation and safety of the internet
Despite the opportunities provided to businesses that use the internet, there are a
number of areas that companies should be aware of when planning their use of Ecommerce.
Hackers are not uncommon and a company’s website should be made secure to ensure
that confidential information cannot be intercepted by unauthorised third parties. The
Electronic Communications Bill (April 2000) seeks to boost user confidence in the
security of the internet. The Computer Misuse Act (1990) was introduced to combat
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the increase in hack attacks. Despite this, hackers have continued to disrupt IT systems
and it is not easy to see how their activities can be curtailed. The Data Protection Act
sets out strict principles and criteria for obtaining and handling personal data held by
organisations, to help prevent data being misused.
The following illustrates the criminal possibilities of the internet.
UK E-commerce crime second only to India
The internet is supposed to make life easier. With a click of a mouse, tedious errands
such as paying your bills or buying the week’s groceries are taken care of in a few
minutes. Unfortunately, the net has also become a matter of convenience for a far
more sinister purpose. Credit card and mobile phone fraud in the UK is increasing
faster than any other criminal activity. There was a 14% increase in fraud in Scotland
last year to 21,200 incidents from 18,600 in 1999.
Using illegally obtained numbers to order products on the telephone and the internet
has become so common that MasterCard reports fraudulent online purchases account
for half of its disputed transactions. The British government is taking the problem
seriously, forming a national high-tech crime unit to target organised and sophisticated
criminals operating in cyberspace. The Scottish Executive has provided funding for
seven National Criminal Intelligence Service officers to be based in Scotland and they
will liaise with the unit when it becomes operational in a year.
In the US there was the case of the New York busboy, Abraham Abdullah, who tried
to defraud more than $10 million by impersonating wealthy celebrities, including
Warren Buffett, George Soros and Ted Turner, using information gathered via the
internet. The highly publicised case quickly made it clear to web users around the
world that nobody is immune from criminals.
Abdullah found his victims in a copy of Forbes magazine’s annual list of the 400
wealthiest Americans. At his Brooklyn home, police say they found 800 fraudulent
credit cards, 20,000 blank credit cards and a machine to emboss them. In the Volvo he
used, they found documents containing the photographs, social security numbers, birth
dates, home addresses and the mothers’ maiden names of 200 chief executives of US
corporations.
Police were reportedly alerted to the case when Merrill Lynch received an Email
requesting the unauthorised transfer of $10 million from an account belonging to
Thomas Siebel, the founder of Siebel Systems, the software company.
Adapted from Business A.M., 18/05/01, Julia Fields
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Videoconferencing
Videoconferencing provides the facility for people to hold meetings across multiple
sites (and often countries) in real time. Video cameras, TVs and microphones in each
of the sites are needed along with the communications technology to transmit the
visual and audio data. Holding video conferences using ISDN communications links is
a routine part of life for many large organisations. Holding a company meeting
between a marketing department in Boston and a manufacturing plant in Scotland no
longer needs people to fly across the Atlantic. They simply sit in their own offices,
each with their video equipment and communicate with each other as if they were in
the same office, only they see each other on a TV screen talking in real time.
Changes to technology mean that companies will no longer have to buy expensive
special purpose equipment. High-end PCs are now being bundled with
videoconferencing software and the company LAN is being used as the
communications backbone. While, at the moment, this method of videoconferencing is
not ideal (low sound and picture quality), advances in compression/decompression
technology and improvements in communications bandwidth are enabling home users
to start videoconferencing (through applications such as Skype and MSN Messenger).
Internet banking
For business, internet banking provides a great opportunity to improve company
efficiency while reducing costs. Statements can be viewed online, giving companies
a precise indication of their financial position at any moment in time. Funds can be
transferred and bills paid. Most of the big British banks now offer some form of
online business banking to compete with internet banks, such as egg and Smile.
Conclusion
Advances in new technology, many of which have positive implications for business,
happen by the day. Discussed above are some recent changes in technology, but since
this is such a fast-moving area, you should keep up-to-date with new developments.
Business implications implied by the technology discussed above include:
 The World Wide Web effectively means that companies can sell their products or
services globally 24 hours a day, 365 days a year (no time difference between
countries).
 The use of data, such as consumer buying patterns, provides companies with the
ability to target customers with additional products or services.
 Pressure on companies to invest in new technology to remain competitive.
 E-commerce, especially B2B, provides companies with the opportunity to revise
business practices for competitive advantage, attacking the supply chain, for lower
costs.
 The use of B2C changes the behaviour of consumers, making shopping less of a
social affair.
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 A variety of access methods to the World Wide Web make product purchasing
more accessible, e.g. use of a mobile phone to order from the supermarket while on
the train to work.
 As SMART technology is adopted cost-effectively and widely, this opens the door
to additional value-added services. A utility company such as Scottish Power could
programme your dishwasher to come on during cheaper cost off-peak times, the
manufacturer of the dishwasher could be remotely informed of a problem and
arrange for an engineer to come to fix it when he’s next in the area.
 Videoconferencing can allow businesses to operate more easily on a global basis,
in addition to becoming a low cost alternative to the time and cost involved in
travelling to meetings.
 Internet banking can improve company efficiency and reduce costs.
The above list of new technology and its benefits is not exhaustive, but gives some
examples of how businesses in the UK can take advantage of changes in technology.
SAQ 10
Now you have completed the section on new technology, can you summarise the
advantages and disadvantage of B2C for a business?
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Government involvement
Government involvement in UK organisations is an example of the political and
economic environment and how it affects the day-to-day operations of companies.
Like the other three areas of PEST, they interact with each other. For example,
changes in social attitudes to the long-term unemployed have encouraged political
parties to campaign on the need to get the unemployed back to work.
The government influences many areas of business activity, from the SME to
the large multinational. In addition, its role includes:
 providing free education for under 16-year-olds
 providing a ‘free’ national health service (NHS) paid for by (employers’ and
employees’) National Insurance contributions
 providing social services to assist those in need of financial support, paid for the
national taxation and insurance
 providing a police force to ensure safety
 providing a well maintained transport infrastructure
 providing an infrastructure to protect the defence of the country through the
Ministry of Defence (MoD).
How a company is affected by government
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Why does government become involved with business?
There are many reasons why the government intervenes:
 To control the level of economic activity. Only by creating wealth on a continuous,
rolling basis can the country:
– extend the transport infrastructure, e.g. new road building to further strengthen
the economy;
– facilitate financial investment by companies to replace worn-out plant and
premises;
– improve education, health and security provision;
– achieve its social, political and economic objectives.
 To decrease unemployment. While unemployed, people are not contributing to the
country, indeed they are likely to be receivers of the government’s money in
unemployment benefit or income support. They may be more likely to become
involved in crime which will in turn cost the country money, and finally, they are
less likely to vote for a party that many perceive has made them unemployed in the
first place.
 To ensure that ‘weak’ groups are not exploited by organisations (for example,
Equal Opportunities Act).
 To regulate private monopolies. Without organisations such as OFTEL to represent
telecommunications users or OFFER to represent electricity users, we may all be
paying more than we should, and have less choice of supplier than we should.
 Business is unable to provide certain services such as law and order, defence of the
country, etc. It can be argued that these types of services cannot be provided on a
‘privately funded’ basis and the government must remain responsible for them.
 To provide education, health services and training to ensure a healthy and educated
workforce is available for companies to employ.
Examples of government intervention include:
 Consumer protection – In order that suppliers of goods or services are responsible
for what they provide, legislation has been introduced to protect the consumer.
Protection covers initial advertising of the product, its description, the quality of
the item and its purchase on credit. The Trades Descriptions Act protects the
consumer by covering advertising and product/service description, the Sale of
Goods Act covers quality, the Consumer Safety Act covers safety, the Weights and
Measures Act covers quantity, the Prices Act covers display of prices, while the
Consumer Credit Act covers credit provision. Companies need to ensure that they
are aware of all this legislation. If for example a customer buys a toy for a child
that turns out to be dangerous the company would be liable under the Consumer
Safety Act which could have significant repercussions for the company concerned.
In addition, pressure groups and independent bodies such as the Consumers
Association and Citizens Advice Bureaux work to protect the interests of the
consumer.
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 Competition policy – To prevent price-fixing or anti-competitive practices, the
government has passed various pieces of legislation to ensure that trading is carried
out ‘in the public interest’. The Monopolies Commission, and more recently the
1998 Competition Act attempt to ensure that trading activity is not unfair to the
consumer. For example, price or quota fixing, or creation of a monopoly which
would be to the long-term detriment of the consumer. Recent examples in the UK
include the wide range of suppliers of telecommunications, energy and water
services now available to consumers following the liberalisation of the markets.
Many other laws, such as the Fair Trading Act and the Restrictive Practices Act,
are examples of legislation to attack anti-competitive practices.
SAQ 11
What other forms of government intervention can you think of?
The following example illustrates how government legislation can affect businesses.
As you read it, you might like to think about why expanding into England is a good
idea for SRH. You might also like to consider why it has chosen to do this by buying
existing companies rather then setting up a company itself from scratch.
Vibes good for SRH in radio race
In 2002 the government passed the Communications Bill although it did not become
law until 2003. Under this legislation, the government has relaxed rules about the
cross-ownership of media groups. Previously, radio and TV companies were
prohibited from becoming too large in case they exerted a dominant influence over
what was broadcast.
In anticipation of the changes, Glasgow-based Scottish Radio Holdings (SRH) began
to look at the possibility of acquiring more radio stations in England, which it was not
able to do under the old legislation. It has set up a company called Vibe Radio
Services Ltd as a joint venture with GWR, an English radio station company. As a
result it now has an interest in Galaxy 101, based in Bristol, and Vibe FM based in the
west of England. SRH already owns some radio stations in England – Wave 105 in the
Solent area and CFM in north-west England.
‘England is the obvious place for us to move on to,’ says Chief Executive Richard
Findlay. ‘We are there in a significant way now and we’ll continue to grow the
company in a sensible manner.’
Adapted from an article by Doug Morrison, Scotland on Sunday, 6 October 2002
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 49
BUSINESS ISSUES
Conclusion
Many of the effects that government policy has on businesses are linked to other
issues we have discussed. Government legislation has affected the development of
information technology, for example. Much government legislation, also, originates in
policies determined through the EU. There are often strong links between government
policy and how firms behave with respect to social responsibility and environmental
issues.
The final example illustrates some of these links.
Greenpeace moves to thwart EU bailout
The government has decided to provide £650 million of aid to British Energy (BE).
This is to allow it to carry out a restructuring plan, which will enable it to stay in
business as the company is heavily in debt.
BE supplies electricity generated by nuclear power. The environmental pressure
group, Greenpeace, is opposed to nuclear power because of the dangers that it poses to
the environment. It believes that the government payment to BE is contrary to EU
competition regulations and that the only way approval could be granted would be if
BE were to close some of its nuclear power plants. This is what Greenpeace wants and
it is challenging the government’s decision at the European Court of Justice.
The government believes that the proposed assistance is in line with EU rules and does
not wish to see the closure of nuclear power plants in the UK.
Substantially adapted from an article by David Gow, The Guardian, 15 January 2003
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BUSINESS ISSUES
SAQ 12
Case study
Investment in Scotland by foreign businesses rose by 30% in 2000. One such investor
is the Danish turbine maker, Vestas Wind Systems, who are to create 150 jobs in one
of the largest inward investment projects ever brought to the Highlands and Islands.
This decision to set up near Campbeltown comes as Ernst & Young’s European
Investment Monitor reported the number of overseas projects is up from 42 in 1999 to
55 last year.
The Vestas announcement is a big boost to the Kintyre economy, which was recently
hit by a decision by the clothing firm Jaeger to close its plant in the town with the loss
of 160 jobs. Vestas – a world leader in its field – was attracted by £9 million of public
funding and will establish a factory producing wind turbine systems at a former RAF
base.
The plant is its first in Europe outside Denmark and will use many of the skills
formerly employed in Campbeltown’s shipyard, which closed in 1997. The area has
lost some 500 jobs in recent years and has also suffered from depopulation. This new
investment will require some highly skilled workers and so, it is hoped, will attract
new people to the area.
Scottish Power also played an important role in persuading Vestas to come to Scotland
by recently placing orders worth £20 million with the company. The news comes after
a succession of inward investment announcements last year, which have been reflected
in the Ernst & Young report. The firm said Scotland’s number of projects was bettered
only by London, the South-East and the West Midlands and the country continued to
exceed expectations. The UK as a whole retained the largest share within Europe last
year, increasing by 13% on 1999. But the Ernst & Young report sounded a warning
note for Scotland, stressing that its dependence on US technology investment was a
‘mixed blessing’ in the light of the Motorola closure at Bathgate.
Questions
1.
Explain the effects of investment such as Vestas’s on:
(a)
(b)
2.
host countries like the UK
Denmark, which is Vestas’s home country.
The case study refers to the global nature of business. Analyse the likely effects
of this trend on business in the UK.
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 51
BUSINESS ISSUES
Emerging economies
One in three people in the world lives in China or India – a total of 2.4 billion people –
these are nations that have experienced rapid economic growth since the 1990s. Fast
growing, emerging economies such as those of China, India (and others such as
Brazil) have had a significant impact on the world economy in recent years – at
present China leads the way, and if its economy continues to grow at current rates it
will soon overtake the USA in its consumption of the world’s resources. Directly or
indirectly these economies have influenced wage rates, employment, inflation rates,
interest rates and prices of raw materials in the established Western economies.
The availability of cheap labour has encouraged many Western companies to shift
production and service centres to these countries – so far, it could be argued that the
resultant job losses in the ‘old’ economies have generally been absorbed. However, for
obvious reasons this transfer of jobs is a trend that many Governments in the Western
world would prefer to stop.
The ability of China and India to produce cheaply has pushed down the price of many
goods worldwide. The low prices of consumer goods manufactured in these countries
and exported to Europe and the USA has led directly to lower inflation rates in
western economies.
In the longer term economic growth in the emerging economies may result in
increased prices for commodities/raw materials as these countries make even greater
efforts to obtain a share of the world’s finite resources e.g. China has accounted for
one-third of the increase in global oil demand over the past five years.
Despite poverty and the obvious wealth imbalance that exists within their populations,
both China and India are no longer considered developing nations – they are emerging
economic superpowers that will continue to have an ever increasing impact on the UK
economy.
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ANSWERS TO SAQS
Answers to SAQs
SAQ 1
Possible examples could include:
McDonald’s; Gap; Nike; IBM; Volkswagen; Coca Cola; Pepsi Cola; Nokia;
Amazon; Samsung; LG; Disney; MTV.
In addition, many familiar products may be produced by multinationals, e.g.
Bertelsmann AG, a German based company, owns, among other companies,
Random House, a major book publisher and BMG, a music recording company.
SAQ 2
Possible examples are:
Stagecoach; Kwik-Fit; Weir Group
[There are not that many examples so you may have found it hard to think of any.
Most of the Scottish based multinationals are like the ones above and have overseas
operation in only a small number of countries.]
SAQ 3
Your answer might include:
1.
Yamaha could have used transfer pricing to reduce its tax liability in the USA
by:
– setting high transfer prices for the goods and services its US subsidiaries buy
from parts of the organisation outside the US
– setting low transfer prices for the goods and services sold by US subsidiaries
to parts of the organisation outside the US.
2.
Companies that operate in Japan will use similar tactics to reduce the earnings
of subsidiary organisations based in Japan and so reduce their tax liability.
This would involve setting high transfer prices for goods sent from Japan.
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ANSWERS TO SAQS
SAQ 4
Your list might have included some of the following:








skilled labour
inexpensive labour
government financial incentives
industrial relations record
employment legislation
infrastructure
concentration of population
Scottish culture.
SAQ 5
1
2
3
4
5
6
7
8
9
10
54
invests directly
foreign direct investment
little experience
local people
Gross National Product
capital inflow
technology transfer
production
new management techniques
lose control
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT)
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ANSWERS TO SAQS
SAQ 6
You might have listed some of the following:












competition
pricing of goods and services
branding of products for different cultures
currency exchange rates
single currency
European central bank
cultural differences
communications
national identity
legislation
infrastructure
distribution channels.
All of the above have been and will perhaps still be concerns and issues for
businesses throughout Europe.
SAQ 7
Your responses should consider the following:
1.
Individuals should benefit from:
– a reduction in the cost of changing money when travelling between member
countries;
– consistency and transparency of prices.
2.
Being in the eurozone will encourage investment in the UK:
– inward investors will benefit from reduced exchange/transaction costs;
– reduced resources required when operating within eurozone countries;
– consumer confidence in pricing will be high among eurozone countries and
this will offer members an attractive investment.
3.
Small and medium-sized enterprises are concerned about:
– training and technology costs;
– poor current performance of the euro.
4.
The stability of the exchange rate has allowed Irish companies to focus on
strategic planning and so encouraged innovation and product development.
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ANSWERS TO SAQS
SAQ 8
Your answer might have included some or all of the following:
Companies that operate in an ethical or socially responsible way can reap
benefits in a number of ways:
 Consumers have been shown to be influenced to buy from companies that behave
ethically. For example, many people refused to buy products from South Africa at
the time of apartheid; investors in the Co-operative Bank know that their money
will not be used to finance countries with poor human rights records.
 Employee motivation is said to increase. Employees who are aware that their
company operates in an ethical manner are more likely to be committed to the
success of the company and therefore be more motivated. Attracting and retaining
good staff in the long term may be easier for a company with a good track record
of behaving in an ethical manner.
 Can provide benefits in terms of good publicity and getting a good reputation as
well as avoiding adverse publicity, e.g. if things do not work out as expected. Some
companies make use of their social responsibility programmes in advertising.
 Can enable companies to cope with changing legislation, e.g. on environmental
standards and safety requirements.
SAQ 9
You may have noted some of the following:
 Any company or individual in the world can get in touch with, exchange
information and trade with anybody else in the world, any time of the day or night,
cheaply and conveniently – the GLOBAL business.
 Information technology allows the data it holds to be used by companies to
advantage. What we buy at our supermarket using loyalty cards gives us a buyer’s
profile so we can be targeted by marketing departments for other products and
services in the future. The way we pay for our goods and other financial
information is used by companies to attract us to spend money in other ways. High
street stores such as Marks & Spencer are good examples – in the past they were
purely retail outlets, now they provide financial services of almost every kind.
 For organisations, this means their products and markets, how they reach their
markets and their systems must always be under review; they should never be static
again. They must change to embrace new technology as it becomes available in
order to be competitive.
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ANSWERS TO SAQS
 Technological changes should present an opportunity to reduce costs and become
more efficient.
 New technology can also introduce new methods of working that can lead to staff
development opportunities and increased staff motivation.
SAQ 10
Your answer may have included:
Advantages
 Companies are no longer constrained by their geographical situation – opens up
new markets.
 Customers can check availability of products.
 Companies may gain economies of scale and be able to offer a wider availability of
products.
 Consumers are able to buy goods when they wish to do so – this may be especially
important to people who cannot get to stores at normal opening times.
Disadvantages
 May lead to increased competition, e.g. consumers can more easily compare prices
between companies.
 Setting up distribution systems may be expensive – training staff etc. may also lead
to higher costs.
 Company may be vulnerable to hackers – if security is breached customers may
lose confidence in the company.
SAQ 11
Your answer may have included:
 Monetary policy – e.g. rise in interest rates can make firms delay expansion plans;
it may also discourage consumers from spending.
 Fiscal policy – e.g. changes in taxes can affect disposable income and purchasing
power and this may affect sales and profits.
 Legislation – e.g. on employment (unfair dismissal, working hours, maternity
leave), discrimination (e.g. race, gender, disability), health and safety.
 Regional policy – tax breaks and grants may induce firms to set up in areas for
expansion.
 Government funded organisations such as Scottish Enterprise can offer financial
and other help to firms. This includes giving advice, especially to small and
medium-sized firms, e.g. on exporting; raising funds.
 Government funding may also be available for research projects – often these
involve collaboration between firms and/or between firms and universities.
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ANSWERS TO SAQS
SAQ 12
Suggested answers may include:
1(a)






1(b) 


2.





58
creation of employment, e.g. Campbeltown which may include highly
skilled jobs, although this is not always the case – screwdriver plants
regeneration of local industry – e.g. shipyard industry, clothing
manufacturing industry – may produce export opportunities
introduction of new production and management techniques that may spin
off into growth of other firms
repatriation of profits to Denmark, and impact on balance of payments
domestic problems may affect the UK, e.g. foreign plants may be closed in
preference to Danish ones
multinationals often pull out of host countries at short notice and are not
easily subject to local political control (e.g. state aid may be hard to
recover).
home countries may benefit from additional income through repatriated
profits, although does not benefit all countries/organisations
companies may concentrate energies abroad and neglect their home market
the mix of jobs in the home country may change, e.g. production go
overseas while higher level research, technical and managerial jobs are
concentrated at home which offers better quality jobs locally.
UK-based firms will be able to take advantage of trends elsewhere in the
world
Competitive advantage will be harder to sustain as information, etc. spreads
quickly around the world
Working practices will increasingly demand cooperation with people in
other countries
Companies are likely to organise their activities on a worldwide basis and
specialise in particular parts of their operation in different places. This may
limit the opportunities for locally based firms if they are squeezed out, but
might provide openings that can be exploited.
During a recession, countries such as Scotland may be particularly
vulnerable to the closure of plants owned by multinationals based abroad,
e.g. electronic companies in 2002/03.
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT)
© Learning and Teaching Scotland 2008
EXERCISES
Exercises
1.
The Perils of Complacency
The introduction of the European single currency is among a raft of global
issues that threaten some of Scotland’s most promising businesses, according to
a leading professional advisor.
Ralph Adams, Scottish partner in charge at Deloitte & Touche, believes
companies remain too complacent about the implications of the euro. And he
says the massive rise in ‘wired’ competition, such as internet-based services, is
changing markets as never before.
For global products, from cars to electronic components, the opportunity for
price transparency is there with the euro, the advantage being with competitors
who can price and process sales on a one currency basis with no added exchange
costs. ‘You can see this happening with online services and increasingly with
interactive buying,’ points out Adams. ‘One typical example will be digital TV,
when people will be able to easily buy products from anywhere.’
But the real question is whether the euro is ‘just another currency’, or does its
creation herald much more significant market change? There is consensus on the
latter among leading Scottish banks and professional advisors. In the end, a
single currency will affect all but the very few.
Adapted from Smith, M, ‘The Perils of Complacency’, Scottish Business Insider
(January 1999)
Questions
Imagine you are a UK business that trades in Europe. You need to make plans
for the move to the euro. What sort of issues might you have to consider relating
to customers and suppliers? What issues might there be for your own
organisation?
Useful websites include: http://www.euro.gov.uk
http://www.euro.fee.be
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 59
EXERCISES
2.
Microsoft was founded in the USA in 1975. It is known globally as the world’s
largest software company and operates on a worldwide basis. While it has set up
subsidiaries in almost all countries throughout the world, it has chosen not to
sell its products directly to consumers, instead it uses third parties (or resellers
as they are known). Microsoft works closely with local software companies
which exploit known local markets on behalf of Microsoft. In China, for
example, Microsoft employs only seventy people, but it works with more than
15,000 reseller companies to sell its products.
Why has a multinational like Microsoft decided to operate in this way, and what
effect might it have had on host countries?
3.
Read ‘Scotland in Europe – The impact of EU’
http://www.cec.org.uk/pubs/regions/ sc/contents.htm and summarise the main
impacts of EU policies and programmes in Scotland.
4.
Read about The Body Shop on its website http://www.bodyshop.co.uk and
discuss the ways in which the company has shown itself to be socially
responsible.
5.
Celtic Football Club won a Scottish E-commerce Award in 2000. Look at its
website on http://www.celticfc.co.uk and http://www.ebusinessforum.com and
list ways in which the club has embraced technology. Suggest areas where more
use could be made of technology. Alternative clubs could be used, e.g.
http://www.rangers.co.uk, which is the Glasgow Rangers Football Club.
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SUGGESTED ANSWERS TO EXERCISES
Suggested answers to exercises
1.
Customer related issues could include:
 Will our immediate customers want to use the euro?
 Are we in a supply chain with customers who will be using the euro?
 Can we handle the exchange rate risk?
 When will we have to reprint advertising and marketing material?
 Should we change our product design for a larger market?
 Should we rethink our distribution strategy?
 Do we know how our competitors’ behaviour will change?
 Do we have the production capacity needed for market expansion?
 Pricing:
– Will we need to standardise prices within the eurozone?
– What about price labels on products?
– What about price rounding? (£99.99 will not translate so well into the
euro)
– Will we be able to invoice in euros? (Can our accountancy package
handle it?)
Supplier related issues could include:
 Will our suppliers be invoicing us in euros?
 Are we in a supply chain that has a knock-on effect on us?
 Can we handle the exchange rate risk?
 Will we be able to pay in euros? (Can our accountancy package handle it?)
 Will we be able to purchase more favourably when pricing is more
transparent?
Organisational issues could include:
 Do we have offices or sites in the eurozone countries where we need to be
represented?
 Should we rationalise our operation?
 Will we need to cut costs to be price competitive with other European
companies?
 How will we price products and services in different countries?
 It opens up a much larger market for the company’s products, but could we
cope with a potentially larger demand for products? Should we set up a
working group to come up with a timetable to:
– review costs and prices
– look at our distribution channels
– review cash handling
MANAGING ORGANISATIONS: THE EXTERNAL ENVIRONMENT (AH BUSINESS MANAGEMENT) 61
SUGGESTED ANSWERS TO EXERCISES
– look at product sourcing
– investigate investment strategy?
2.
Answers could include:
 Nationals of the individual countries understand the culture of the consumer
and can therefore sell to them more effectively
 Such indigenous companies have vast experience of successfully selling in
their own marketplace, so there is little learning curve
 Buying and managing many companies around the globe is very complex,
and does not reflect their ‘core competency’ of designing and marketing
computer software
 Large profits can be made without a huge investment
 If the company want to withdraw from a market it is much easier than if they
employed many thousands of their own staff there
 Employing 70 staff in China for example, allows them to manage their
network of resellers, keep in contact with future consumer demands for their
products, and still have a cultural corporate presence within the country.
What might be the effect on host countries?
 Many more indigenous companies are formed, or existing companies
expanded to support a growing marketplace
 Local employment would increase as demand for Microsoft products
increased
 Large numbers of reseller companies are dependent upon the success of
Microsoft which could decide to withdraw from the country, with a big
impact upon employment
 These reseller companies will be trained professionally by Microsoft and so
their standard of competency is likely to be high
 Greater choice of goods and services in the country
 Competition with domestic companies’ products could result in layoffs or
shutdowns in some areas
 Tax revenue would be welcomed by the host country.
3.
Answers should cover:
 strengthening businesses in the region
 promoting innovation
 effects on both rural and urban areas
 environmental impacts
 impacts upon people and culture.
4.
Answers could include:
 no testing of products on animals
 helping companies in the poorest countries through sustainable trading
relationships
 encouraging consumers to use refillable containers
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SUGGESTED ANSWERS TO EXERCISES






5.
use of recycled packaging
campaigns against human rights abuses
involvement in environmental protection
funding of AIDS awareness projects in India and Nepal
campaigns for animal protection
Body Shop Foundation Charity funds many worthwhile causes.
Answers could include:
Current use of technology
 website to market club, season tickets, shareholding, etc.
 website to sell merchandise including secure payment facility
 email for feedback to the team and management
 users of website are used for target marketing.
Future possible uses of technology
 use of E-commerce to link with suppliers of merchandise
 match ticket sales through the web
 marketing of corporate entertainment packages to businesses via the web
 re-design of web screens suitable for access by WAP mobile phones – ability
to order merchandise or tickets via mobile phone
 internet business banking
 videoconferencing, e.g. business meetings with European shareholders,
communication between team and international coaches, etc.
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REFERENCES
References
Adams, R (1993), ‘Typhoo puts the ‘T’ in TQM’, Good Business, School for
Advanced Urban Studies (SAUS) Publications
Barnevik, P (1998), ‘Creating a Federation of National Cultures’, Straight from the
CEO, London: Nicholas Brealey Publishing
Darroch, D (16 April 2000), ‘E-commerce drive helps Weir Group to pump up global
sales’, Scotland on Sunday
European Commission Press Release, Brussels, 18 March 1998
Gow, D (15 January 2003), ‘Greenpeace move to thwart EU bailout’, Guardian
Hood, N and Young, J (1979), The Economics of the Multinational Enterprise, New
York: Longman
Lovel White Durrant, CCH Employment Law Manual
Morrison, D (6 October 2002), ‘Vibes Good for SRH in Radio Race’, Scotland on
Sunday
Renton, J (23 April 2000), The Sunday Times
Smith, M (January 1999), ‘The Perils of Complacency’, Scottish Business Insider
Smith, M (January 1999), ‘Winning Ways’, Scottish Business Insider
Steiner, R (25 November 1996), ‘Japan’s Tax Man Leans on Foreign Firms’, The Wall
Street Journal
Taggart, J and J (1999), ‘International Competitiveness and the Single Currency’,
Business Strategy Review, 199, Vol. 10, Issue 2, pp 25–36
‘The Global 500’ (4 August 1997), Fortune magazine
Turek, B (April 2000) ‘Westward Ho!’, Director magazine
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