EXTERNAL INFLUENCES ON
BUSINESS ACTIVITY
Chapter 6- new edition
EXTERNAL FACTORS ?
 They are factors that are beyond the biz’s control
 Limit nature of decisions
 External influences may have a negative or positive impact
 External influences are outside the business
POLITICAL AND LEGAL
ISSUES:
PRIVATIZATION/NATIONALIZATION
 Selling state owned and controlled biz org (nationalized) to investors
in the pvt sector
 Creation of Plc
 Started in Britain in 80s – british airways and skoda
 Aim of pvt sector: pvt sector will use resources more efficiently in
the pvt sector as they have profit motive as their main aim
 Flipside: state can pursue other obj. –more employment– welfare of
people—provide merit and public goods
ARGUMENTS FOR AND
AGAINST
PVT
For
Against
More efficient than state
owned
State should take decision
regarding essential industries.
Needs of society vs
shareholders
Slow and bureaucratic
decision making in state
owned
Difficult to achieve a coherent
and coordinated policy for the
benefit of the country e.g.
railways n utilities
Pvt- resp for success,
motivation and empowerment
as directly involved
Industry becomes accountable
to minster to the parliament
Market forces(D/S in play)
unsuccessful will change or
run out of biz vs successful
who will grow
Strategic industries in pvt
sector can become
monopolies and exploit
consumers by increasing
prices
No political interference and
motive
Breaking national industry
into components will lead to
higher costs and no e.o.s
PVT OR STATE OWNED?
 Some industries should stay state owned as matters of defense (security)
and utilities( for the nation’s welfare).
 Provision of public goods (street lighting) and merit goods( edu) should
remain nationalized
 However, inefficient industries should be private as they are better
managed and efficient
 PIA case evaluated
 The new idea of public-pvt partnerships is becoming increasingly popular
all over the world. ( both do what they are best at doing and work together
towards a goal)
*DO NOT confuse national industries with nationalized indutries
LEGAL CONSTRAINTS
 May be intro due to political and social reasons
 Intro laws that constraint biz decisions:
Employment practices and conditions of work
Marketing behaviour and consumer rights
Biz competition
Location of biz
LAW AND EMPLOYMENT
PRACTICES
 Between employer and employee
 Prevent exploitation of workers
 Control TU(trade union) collective action
 Legal constraints:
Recruitment, contracts and termination
Health/safety at work
Min wage
TU rights/responsibilities
LAW AND EMPLOYMENT
PRACTICES
 Recruitment, employment and termination of employees:
-protect worker rights
-must be signed
-contract : pay, work conditions, discipline –min age of employee
-holiday, pension
-discrimination ( race, colour, gender, religion)
-maternity leave
-Unfair dismissal
LAW AND EMPLOYMENT
PRACTICES
 Health and safety laws:
-protection from discomfort and physical injury
-provide safe environment
-equipment is safe
-adequate washing and toilet facilities
-dangerous material and machinery
-breaks and temperatures controlled
LAW AND EMPLOYMENT
PRACTICES
negative impact
positive impact
Supervision cost, recruitment,
selection and promotion
More secure, fair employment,
satisfied and motivated workers
More wages than min wage
Safe work env less risk of
accidents and hence
holidays/time off
More costs due to paid
holidays, sickness, maternity
Fail to meet min health
standards expensive court
cases
Clothes/equipment to meet
certain health and safety
standards. Cost increases
Culture will be positively looked
at and attract the right kind of
employees
CONSUMER RIGHTS AND
MARKETING BEHAVIOUR
 Individual consumers are weak and powerless against big
companies. Consumers cant make good decisions
 Products are becoming more and more scientific and
technology based
 Diff quality/ safety standard
 Take advantage of consumers, low price and better
quality/service/guarantee period
 Laws like CPA- consumer protection act, TDA-trade
description act, Sale of Goods Act
CONSUMER RIGHTS AND
MARKETING BEHAVIOUR
 Impact of consumer protection laws on businesses
-biz costs increase
-redesign products
-redesign advertising
-improve quality control
-treat consumers fairly
-complaints are responded
-clarity of advertising, accuracy and promotion, quality of product and good
after sales service
-profit gains in the LR
LAWS AND BIZ
COMPETITION
 Free and fair competition between biz has benefits for consumers
-increase in choice
-low price
-improved quality, design and performance
-Efficient and effective
 Govts encourage competition by passing laws:
Control monopolies and prevent mergers
Limit uncompetitive practices between firms
LAWS AND BIZ
COMPETITION
 Monopolies ? Single supplier, controls at least 25% market share
 How do they develop:
1.
Invention of new products and processes (patents)
2.
Merger/takeover
3.
Legal protection by govt e.g. postal service *legal monopoly
4.
High barriers to entry (tech, huge costs of building and advertising)
hence difficult for startups
LAWS AND BIZ
COMPETITION
+ve imapct
-ve impact
Low price as scale of production High prices (little competition)
is high and hence low average
costs (AC)
Expenditure on new products,
technical advances
Ltd choice of products
Customer quality satisfaction
Less investment in new
products
Customers variety
No incentive for lowering AC
and becoming efficient
LAWS AND BIZ
COMPETITION
 Uncompetitive and restrictive practices:
-act together/collusion interference with Demand and
Supply ltd choice and high prices
-refusal to supply a retailer if they don’t agree to charge
prices given by the manufacturer
-full line forcing- major producer forces a retailer to stock
whole range of products . If retailer refuses, not even
popular products will be supplied
-market sharing agreements and price fixing agreements
(cartel) and divide market share between them. E.g. of
cartel is OPEC
-predatory pricing- block new competitors by lower prices
and difficult for competition to survive
*illegal in countries
SOCIAL AND DEMOGRAPHIC
INFLUENCES ON A BIZ
 Social- how society changes overtime
1.
Ageing pop- developed countries problem. Small
workforce and more dependent population ( low birth
rates and death rates)
2.
Changed role of women
3.
Increase in literacy rate. More skilled /adaptable
workforce
4.
Early retirement- more leisure time
5.
Increased divorce rates
6.
Temporary/part time workers
How does it affect society?
-demand for different portfolio of goods could change as a
consequence of ageing pop
-age structure of whole workforce may change
SOCIAL AND DEMOGRAPHIC
INFLUENCES ON A BIZ
 Pattern of employment
1.
Labour replaced with capital
2.
Transfer of labour from old industrieshigh tech industries
3.
Increase in women employment
4.
Increase in part-time employment
5.
Increase in student employment on part time basis
6.
Temporary and flexible employment contracts
7.
Ageing pop changes the balance ( workforce vs dependents)
burden on health, pension and tax payers money
8.
Women at work don’t have children early and marry late
Effects?
9.
Better qualified and efficient workers
10. Part timers can be used
11. Wider choice of staff
ENVIRONMENTAL
CONSTRAINTS+CSR
Accept legal and moral obligations to stakeholders

 Accept CSR- firms attitude to being socially responsible –
how it deals with environment ex
 Safe and “green policies”
For environmental
policies
Against environmental
policies
Reduce pollution->
marketing and promo
advertise
Keep costs low even at
the expense of env
Waste disposal-> avoid
bad publicity + court
fines
Profits low. How will they
invest in future
Attract employees ->
pride in policies
Legal protection of env
is weak+inspection sys
inaccurate
LT financial benefits
Produce cheaply in
developing countries
SOCIAL AUDIT
 Annual report on how socially responsible they are
 Impact of a biz on society (pollution, health/safety, customer satisfaction
and contribution to the society)
 Not legal but done voluntarily
benefits
limitations
• Identifies social
responsibility and
what needs to be
achieved
Needs to be checked
independently
• Set targets for
improvement
Timely and costly
• Improve public image
and marketing tools
for increasing sales
Consumers are
interested in cheap
goods
ENVIRONMENTAL AUDIT
 Assess impact of biz on the environment
 Check pollution, wastage levels, energy use, recycling
 Favourable consumer reaction  more sales positive
coverage , good rep, more people want to apply
 Gives a clear direction, new aims, objectives and new
target
Evaluation
of
env+social
audit
Unless made compulsory, people don’t take it
seriously
Accused of publicly stunt or “smoke screen” to hide
intentions
PRESSURE GROUPS
 Organizations created by people with a common interest or aim. They put
pressure on biz and govt to change policies so that an objective is reached
 International organizations such as WWF (save wildlife) and Amnesty
International ( advocates of human rights) are examples of pressure groups
How to implement
How to achieve
Govt to change policies
and pass laws
Lobbying govt via
ministers and people in
power
Biz to change policies
Publicity through media,
press coverage and
releases
Consumers to change
purchasing habits
Influence consumer
behaviour e.g shell
boycott
TECHNOLOGY IMPACT ON
BIZ
 Use of tools, machines and science in industrial processes based on IT (use of
electronic tech to gather, store, process and communicate info)
 Innovation- create effective processes, products and ways of doing things in biz
 Examples:
1.
Wordprocessor
2.
Page maker
3.
Databases
4.
Spreadsheets
5.
CAD- use computer and IT when designing products
6.
CAM-use computer and machinery to speed up production and make it more flexible
7.
Internet (world wide access) and intranet ( local connection within an org)
TECHNOLOGY IMPACT ON
BIZ
 Application of tech to biz:
1.
Costs- capital costs, training and redundancy
2.
Labour relations- labour replaced with capital. TU can oppose change
3.
Reliability- whole process is halted if something breaks down
4.
Data protection (controlled by national laws)
5.
Management may be resistant to change
TECHNOLOGY IMPACT ON
BIZ
 IT and biz
 Tech can help analyze, involve, evaluate, plan and monitor
MIS- management info systems
benefits
Limitations
Obtain data quickly &
freq- more control
Info overload/halted
system
Computer can analyze
and process- quick
decision making
Abuse power
Accelerate
communication process
hijacking
FREE TRADE AND
GLOBALIZATION
 Free trade? No restrictions / trade barriers exist that might prevent/hinder
trade between countries
 Trade is an imp link between economies, political and social links
 Globalization? Increasing freedom of movement of goods, f.o.p (capital,
people) around the world
 Globalization Is not just limited to economy but also encompasses political,
social and cultural change
 Globalization is the interconnectedness of the world
 Hence business activity is influenced especially from MNCs
 Reduce the differences that once existed between national borders and
open yourself for trade
TRADE BARRIERS PROTECTIONISM
 Protectionism- use of barriers for trade to protect a country’s own domestic
industry
 Types:
1.tariffs- taxes on imports which makes them more expensive
2.Quotas- qty restriction/ limits on the qty of imports/ value of goods
imported
3.Voluntary export restraints- an exporting country agrees to limit the qty of
certain goods sold to one country
Other types: embargoes (complete ban on a certain good), subsidies (to
home industries) and administrative barriers (rules, regulations, lengthy
custom procedures etc)
BENEFITS OF TRADE
 Consumer variety- wider choice of goods and services
 Availability of raw material that wasn’t available before
 Imports of raw material can allow a developing economy to industrialize
 Additional competition for domestic industries decreasing cost, prices
and improving design and quality
 Leads to specialization  comparative advantage make what you can
make efficiently and import what you are inefficient at
 Specialization e.o.s hence cost and price benefits
 Greater world output
 Living standards of all consumers increases
RISKS OF FREE TRADE
 Loss of output / jobs for domestic firms especially of they cant compete with
imported goods
 Import of strategic goods such as food supplies could put a country at risk
esp during conflict and war
 Newly est firms (infant industries) find it impossible to survive from existing
competition from imports
 Some importers dump goods at below cost price in order to eliminate
competition from domestic firms
 M>X loss of foreign exchange (f.e) and negative balance of trade
 Spillover effects from other countries. For e.g. recession in UK can limit their
production and hence imports to country X which will have to meet that
short fall
INTERNATIONAL BODIESFREE TRADE ADVOCATES
 WTO- world trade org countries committed to the principle of freeing world
trade from restrictions. Hold meetings to reduce trade barriers. Since China
joined WTO ( cheap labor supply country) people got concerned
 Free trade blocs geographically grouped countries trade with each other
without restrictions
NAFTA- North American free trade association (U.S.A, Canada, Mexico)
ASEAN –Association of south East Asian Nations (including Pakistan)
SAARC- South Asian Association of Regional Cooperation ( including Pakistan)
EU –European Union
FREE TRADE OR NOT
 Depends on the circumstances
 Firstly, a country should be self sufficient in provision of basic necessities to
its people. If unforeseen circumstances arise, they shouldn’t be dependent
on anyone for basic provision of survival
 However, once they have become self sufficient they need to open
themselves to the rest of the world
 Cant survive in isolation without healthy competition and variety of goods
and services to choose from
 Overall, free trade leads to higher output, better quality, more choice and
better standard of living
 However, every case needs to be studied with its background to decide
whether to go for free trade
MNC
 MNC ? Biz org that has its headquarters (hq) in one country but with
operating branches , factories and assembly plants in other countries
 Hq in west Europe or U.S.A
 Operations in less developed countries  save costs
WHY BECOME A MNC
 Closer to main market
-Lower transport cost
-Better market info about taste and fashion
-Gain loyalty as a local company
 Lower cost of production
-low labour costs
-cheap rent and site costs
-govt grants and tax incentives
 Avoid import restrictions
-no import duties and no other restrictions
 Access to local natural resources
-might not be available in the headquarters, hence go to some other country
PROBLEMS FOR MNCS
 Communication with hq might be poor
 Language, legal and cultural difference with local workers 
misunderstandings
 Coordination with other parts has to be monitored to ensure quality
standards/maintenance
 Skill level of employees is not up to the mark and hence training is required
IMPACT ON HOST COUNTRIES
OF MNC
Benefits
Problems
1. Investment f.e increases
Output exported from host
country  f.e increases
1. Exploitation of local
workforce no strict labour,
health and safety laws
2. Employment opportunities
increase, quality and
efficiency goes up due to
training
2. Pollution from plants
3. Local firms benefit by
acting suppliers create
income and jobs
3.Local businesses may shut
down
4. Quality of local products
increases to compete with
MNCs
4. Impose western culture
5. Tax revenue increases due
to profits from MNCs
5. Profits sent back to the hq
6. output, GDP and growth
rises
6. Natural resources depleted,
relocate once they run out
ARE MNC’S BENEFICIAL ?
 Yes and no. depends on the situation and circumstances under which you
invite them
 Has your domestic economy grown? Or still infant?
 Do you want competition from imported firms at this point in time
 If your industry has developed, competition should be welcome
 More output, employment generation by MNC
 More f.e by MNC
 Positive signal for foreign investors to come to your country