6 External influences on

business activity
A Activity 6.1 (page 85): Employment rights in your country
1 Why do you think the Chinese government introduced such a wide-ranging law such
as this, covering all aspects of employer−employee relationships? [4]

• The government may have decided that there was a need to protect worker rights
to ensure that firms do not abuse their power. The wide-ranging laws will set out
minimum standards that firms have to adhere to, thus ensuring that unscrupulous
employers do not gain a competitive advantage through treating workers unfairly.
• It may have coincided with the opening up of the Chinese economy to limited
elements of the free market. Thus, there would be an increased need to protect
worker rights.

2 Do these laws help or damage business interests? Explain your answer. [10]

Any reasonable answer.

Benefit business interests:

• As well as protecting the rights of workers, employment laws also set out the
duties of employees towards the employer. Thus, they also protect employer
rights. For example, the circumstances under which industrial action can be
taken may be controlled, thus preventing wildcat strikes.
• Forcing businesses to adopt standards with regard to health and safety may
benefit businesses in the long term by reducing accidents at work.
• Anti-discrimination legislation may ensure that businesses make decisions
about recruitment and promotion with greater objectivity. Thus, businesses will
employ the best person for the job.
• Worker rights regarding holidays and working hours may lead to more
contented and motivated staff.
• Employment legislation protects good employers from being placed at a
disadvantage when competing with bad employers.
• Minimum wage legislation increases employee incomes and can lead to an
increase in demand in the economy.
• Some foreign firms may prefer to do business in countries where worker rights
are protected.

Damage business interests:

• Employment laws interfere with the free market and prevent owners from
managing their business as they see fit. Legislation may make it difficult to
reduce the workforce in times of economic difficulty.

Chapter 6 © Cambridge University Press 2010 1

A • Health and safety legislation adds to the costs of business, as safety equipment
has to be provided.
• Increasing holiday entitlement increases costs, as output will be lost.
• Reducing working hours will mean that more employees need to be hired,
increasing the costs of recruitment.
• Any increase in costs will affect international competitiveness.

Evaluation may:
• contrast the increased costs imposed by legislation with the longer-term benefits in
terms of a more satisfied workforce
• recognise that legislation may not affect all businesses equally, as some employers will
believe in corporate social responsibility and, therefore, treat workers well anyway
• consider that the extent to which employment law modifies the market is significant
− not all aspects of legislation will be damaging.

Remember that the law acts not only as a constraint on business activity, but also as an
enabler.

3 Research task.

Activity 6.2 (page 87): Employment laws being observed?

1 Identify as many examples as possible of how the firm might have broken the
employment and other laws of your own country. [6]

Specific answer will depend on applicable legislation in your own country.

A typical answer may identify the following possible breaches:

• absence of a written contract of employment
• payment below the minimum wage
• failure to disclose payments to the tax authorities
• discrimination on the grounds of sex
• summary dismissal without grounds
• refusal to deal with trade union
• unfair dismissal.

2 What action could Gowri now take if the firm was based in your own country? [4]

Answer dependent on country-specific employment laws.

In some countries, Gowri would be able to appeal to an employment tribunal

on the grounds of unfair dismissal. The tribunal would hear from Gowri and the
employer and would have to decide whether the employer had acted unfairly. If
the tribunal found in favour of Gowri, she would receive compensation and/or be
offered reinstatement in her job.

In some countries, it might be possible for Gowri to seek compensation through

the civil courts, particularly as there is evidence of discrimination as well as unfair
dismissal.

Chapter 6 © Cambridge University Press 2010 2

A 3 Do you think that this business should observe employment laws? Give reasons for
your answer. [10]

Employment laws should be observed:

• The business operates as part of a wider society. The business will enjoy the
protection provided by the laws of that country and should, therefore, observe
the laws which set out worker rights. Employment laws also provide protection
for the employer.
• Observing employment laws will help the business recruit and retain staff. A
failure to pay minimum wage will lead to higher rates of labour turnover. This
could put the business at a competitive disadvantage.
• The business has a moral duty to consider the rights of workers and should,
therefore, at the very least, remain within the law.
• If laws are broken, then this may result in bad publicity and lost sales.
• If laws are broken, then legal action may be taken against the business. This
could lead to fines, suspension of production or even complete closure. The
penalties for breaking the law may be so great that it is not worth taking the risk
for the sake of reducing short-term costs.

Employers who do not recognise their social responsibilities might ignore

employment laws because:
• Employment laws add to the costs of a business, e.g. safety equipment.
• Employment laws may make recruitment processes more time consuming.
• Businesses exist to make profit, not to provide employment.
• A business may be able to gain a competitive edge by cutting corners on safety
or paying workers below minimum wage. Consumers are primarily interested
in value for money, so if costs can be cut and prices reduced, then the business
will benefit from higher sales.

Most of the above points can be made with reference to the issues raised by the
treatment of Gowri by the business.

Evaluation may consider:

Evaluative comment should consider the costs when discussing the benefits of
observing employment laws, and should also contrast the short-term gains from
ignoring them against longer-term problems.

You may argue that not only should the law be observed, for the reasons outlined above, but
that it is potentially in the interests of a business to go beyond the requirements of the law.

Activity 6.3 (page 89): Consumer rights in your country

1 Why do you think countries’ governments, such as Malaysia and India, pass laws to
protect consumer rights? [4]

Issues outlined may include:

• There is disparity in power between a large business and an individual consumer.
Businesses have more resources and knowledge than the consumer; this gives a
significant advantage to the business in its relationship with the consumer.

Chapter 6 © Cambridge University Press 2010 3

A • The complexity of modern products means that it is difficult for consumers to
fully understand individual products and the claims made about them.
• It is important to protect the consumer from unsafe products.
• It is important to protect the consumer from unfair selling techniques.
• Businesses should be prevented from making false claims about products,
e.g. ensuring that food sold by weight really is that weight.
• Consumers should be protected from unfair competitive practices. Such
practices may lead to higher prices and less choice.

2 Do you think that such laws help or damage business interests? [10]

Any reasonable answer.

Consumer laws help business interests:

• Through regulating business activity, consumer laws prevent dishonest and
unscrupulous businesses from gaining a competitive advantage. Consumer
laws ensure that there is fair competition and, thus, actually protect business
interests. For example, the 1986 Consumer Protection Act in India gives a
detailed list of unfair and uncompetitive trade practices. The 1999 Consumer
Protection Act in Malaysia outlaws all misleading and deceptive conduct by
firms and false advertising.
• Consumer laws may prevent claims being made through civil courts regarding
unsafe products, as businesses have to improve their standards.

Consumer laws damage business interests:

• There are costs of conformance with the law, e.g. the need to meet minimum
safety standards.
• When the law in Malaysia was changed in 1999, this may have required
Malaysian firms to substantially change their culture as well as their practices.
Changing culture may have proved expensive.
• The more rights that consumers have, the more likely it is that firms will
be taken to court to defend their actions. The strict liability for defective
and potentially dangerous products enshrined in Malaysian law will lead to
companies being sued.

Evaluation may consider:

Evaluative comment may recognise that, although there are compliance costs to
businesses from consumer legislation, it ensures that competition is fair, which
ultimately is beneficial to most businesses.

3 Research task.

Activity 6.4 (page 89): Ryanair – Adverts are ‘misleading’

1 In what ways might Ryanair gain from ‘misleading’ customers in the ways
described? [6]

• Ryanair may benefit from misleading customers because once customers have
been attracted to the website by low advertised prices, they may well continue

Chapter 6 © Cambridge University Press 2010 4

A with the booking even when the price starts to rise due to the addition of taxes
and charges.
• Ryanair may gain a competitive advantage over other low-cost airlines that take
a more honest approach to advertising.
• The publicity generated highlights the fact that Ryanair is offering flights at
these low prices, even if there are restrictions applicable. This free publicity
may encourage consumers to check Ryanair’s website when searching for cheap
flights.

2 Do you think that advertisers should be controlled over the claims they make and the
way they promote their products? Give reasons for your answer. [10]

In favour of control:
• Advertising should respect society’s customs and standards. If adverts are
likely to cause offence, as in the case of Ryanair’s use of a woman dressed as a
schoolgirl, they should be withdrawn.
• False and misleading claims cause consumers confusion and cloud their
judgement when making purchases. This is an unfair practice, both to the
consumer and to other competing businesses. With no controls, businesses
would be free to make any claim they wished, however untrue.

Against control:
• The claims being made and promotional techniques used do not force consumers
to actually purchase. Consumers still enter into contracts voluntarily; consumers
can vote with their spending power if they are unhappy about misleading claims.
• If adverts that caused offence to an individual or group were banned, then firms
would be unreasonably restricted in what and how they advertise.
Evaluation should include an overall conclusion based on the argument above.

3 If you were the chief executive officer of Ryanair, how would you respond to this bad
publicity and the threat of legal action? Justify your answer. [10]

There are several courses of action the chief executive could pursue:
• He could withdraw the offending advert of the woman dressed as a schoolgirl
and comply with the warnings over misleading advertising. This will avoid legal
action being taken and thus, potentially, save Ryanair being fined and suffering
further bad publicity. Legal action could be extremely damaging to Ryanair in
terms of its reputation. Ryanair may gain a reputation for mistreating customers
and this would make it more difficult attract to new customers.
• He could ignore the threat of legal action as compliance with the law could be
costly. Having to change advertised prices to include taxes and charges could
lead to a loss of sales as well as disruption to the website whilst the changes
are made. Thus, Ryanair risks losing passengers to other low-cost airlines. The
problem with this strategy is that if the Office for Fair Trading does take legal
action, the costs could be even greater. Ryanair would need to take legal advice
as to the likelihood of any prosecution being successful.
• The airline may launch a counter offensive to try and win public support.
The chief executive may undertake public relations exercises and make press
releases. Ryanair may claim that it is being unfairly treated by the ASA; much
would depend on the number of complaints that the ASA has actually received.

Chapter 6 © Cambridge University Press 2010 5

A If there have been few complaints about the advertising, then it may be assumed
that the majority of consumers do not object to the advertising imagery used.
There might be substantial media interest in the story and the publicity would
not necessarily harm Ryanair.

Activity 6.5 − answer provided on Student’s CD-ROM.

Activity 6.6 (page 98): Changing employment patterns

1 Why might employees prefer part-time to full-time employment? [6]

Possible reasons include:

• Employees may be trying to balance their work life with leisure time, i.e. the
work−life balance. By reducing working hours, this releases time for leisure
activities, and, although income will fall, quality of life may be improved. The
employee values leisure time more highly than work.
• Working part time may fit in with childcare needs, enabling parents to collect
children from school. Childcare may also be expensive, so it may be preferable to
work part time to reduce the cost of childcare.
• Part-time employment may complement other priorities that employees have,
e.g. students at university will not be able to take full-time work but may need
to earn money to pay for their studies.
• Part-time employment gives some workers the opportunity to take a second job
to supplement their income.
• Older workers who have retired may wish to supplement their pensions
through part-time work.

2 What benefits could a business gain from employing:

• more staff on part-time contracts? [6]

• more staff on temporary contracts? [6]

Benefits of more part-time staff:

• There is greater flexibility. It may be easier to alter hours of employment
according to trading conditions.
• Part-time staff in many countries have fewer rights than their permanent
colleagues. Rights to sick pay, maternity leave, holidays may differ
significantly.
• Some jobs may not be attractive to full-time employees. Businesses such as
McDonald’s employ a high proportion of part-time workers. McDonald’s may
find it difficult to recruit and retain sufficient full-time staff due to the nature of
the work / low rates of pay.
• Some businesses have actively recruited older employees as they are often
considered more reliable. Part-time work may be particularly attractive to older
workers who have retired or are approaching retirement age.

Benefits of more temporary staff:

• There is greater flexibility to alter staffing costs to match the economic cycle.
Thus, in an economic recession, businesses will be able to reduce costs by not

Chapter 6 © Cambridge University Press 2010 6

A renewing temporary contracts. If a business employs all staff on permanent
contracts, then, reducing the size of the labour force during an economic
downturn, may be more expensive due to the need for redundancy payments.
• Temporary workers are essential in seasonal industries, e.g. tourism and
hospitality in the Caribbean. These are short-term, seasonal jobs such as
waitress, spa position, dive instructor, tour coordinator.
• There could be cost savings as temporary staff in many countries have fewer
rights than their permanent colleagues − rights to sick pay, maternity leave,
pensions and holidays may differ significantly between permanent and
temporary staff.

3 What disadvantages might these trends in employment patterns have for workers? [7]

• The trends will not suit all workers. Many workers will prefer full-time
employment for financial reasons; the increasing number of part-time contracts
may make it more difficult to find full-time work.
• Many workers may prefer permanent contracts rather than temporary
contracts. A permanent contract provides greater job security and this is
highly valued by employees as they may have significant ongoing financial
commitments and cannot afford to be out of work.
• Having to move from one temporary contract to another may increase stress.
• Some employees may enjoy their work and may, therefore, prefer to be working
full time.
• Where employment is either temporary or part time, it will affect an employee’s
ability to contribute to a pension fund. This may mean that workers have to
continue working for longer in order to be able to afford to retire. In particular,
temporary workers may miss out on membership of company pension schemes.

Activity 6.7 (page 99): Changing labour force data and

impact on business

1 Calculate the forecast percentage increase in the labour force between 2000 and
2020. [2]

Increase in labour force = (12,939.6 − 7,042) ÷ 7,042 × 100

= 83.75%

2 Identify two changes to the structure of the labour workforce forecast over this period.
Explain how each of these changes might have an impact on the employment policy of
a business in this country. [10]

Change Impact on employment policy

Age distribution − a
reduction in the relative
proportion of the
15–24 age group and an
increase in the 35–54 age
group
• It will become increasingly difficult to recruit new
employees from the younger age group as young
people remain in education. Thus, the business will
need to retain older staff or actively attract older staff
to fill vacancies. Greater attention may need to be
paid to offering a defined career structure to attract
long-term employees.

(Continued)

Chapter 6 © Cambridge University Press 2010 7

A Change
An increase in the female
participation rate from
44% to 49%
Increasing level of
educational attainment
− the proportion of
university-educated
participants in the labour
force estimated to rise to
over 35%.
Impact on employment policy
• Increasing rates of female participation in the labour
force may require that the business offers more flexible
working contracts to employees. If females take
responsibility for the primary care role for children
in this society, it is necessary for the business to offer
more child-friendly hours to female employees. Part-
time employment contracts may also be desirable.
• The business will miss out on the skills and contribution
of female employees if policies are not changed.
• It will be increasingly difficult to recruit employees
to fill less-skilled roles in the organisation due to the
increasing expectations of the labour force. Wages
for low-skilled jobs may have to increase due to
shortages of suitable applicants.

3 Evaluate whether a business should provide more than the basic legal minimum in
terms of conditions of employment and health and safety at work. [10]

Benefits of providing more than the basic legal minimum:

• It is easier to recruit high-quality staff who will be attracted by the positive
employment practices of the business.
• There will be a reduction in labour turnover due to a more satisfied workforce.
• There will be a reduction in recruitment costs due to lower labour turnover.
• A more motivated and committed workforce will lead to improvements in
customer service and potentially higher productivity.
• An improved reputation will lead to an increased number of customers due to
ethical treatment of workers and acceptance of corporate social responsibility.
• Absences due to accidents at work will be reduced.

The costs of providing more than basic legal minimum:

• There will be the increased costs of providing health and safety equipment and
training.
• There will be the increased costs associated with paying more than the
minimum wage, offering longer holidays and other positive terms of conditions
of employment.
• Increased costs may put the firm at a competitive disadvantage in terms of
pricing.

Evaluation may consider:

Evaluation is likely to focus on the question of the long-term impact of high
employment standards in increasing employee loyalty and consequent effect on the
consumer. However, the effect will also depend on:
• Attitude towards employment issues in society − in many countries, it is an
increasingly important consideration for employees. This may also depend on other
external factors, such as the rate of unemployment and the extent to which the
business is in competition with other firms to recruit employees.
• Competitor behaviour − if competitors have low employment standards, then a firm
will be put at a cost disadvantage if it adopts high standards itself.

Chapter 6 © Cambridge University Press 2010 8

A Activity 6.8 (page 101): Virgin’s environmental policies –
genuinely green or just ‘greenwash’?

1 Analyse why Virgin Atlantic is making efforts to reduce the amount of jet fuel
(kerosene) used by its aircraft. [8]

Reasons may include:

• To reduce costs − the bio-fuel may be cheaper than usual jet kerosene. Cost
savings will give a competitive edge to Virgin as this will allow it to reduce
prices. Reducing costs will make Virgin more profitable.
• To generate publicity − environmental issues are increasingly newsworthy as
concern grows about global warming. The publicity generated provides free
advertising for Virgin.
• To increase sales − as Virgin is claiming that the use of bio-fuel is less polluting
than normal jet kerosene, this may attract customers who are concerned about
their carbon footprint. It would be a unique selling point (USP) for Virgin and
could enable it to charge higher prices as demand is less price elastic.
• Corporate social responsibility − Virgin may be genuinely committed
to measures to reduce its impact on the environment as it recognises its
responsibility to wider society. Reducing the use of normal jet kerosene will
reduce pollution and the external costs associated with it.

2 To what extent will the company lose or benefit from these well-publicised attempts to
reduce air pollution? [10]

Issues that might be raised include:

• If the accusation of greenwashing is widely accepted by consumers, then
Virgin will gain little from the widespread publicity and may even lose out.
If the public does not believe that Virgin is genuinely interested in reducing
air pollution, then they may take their custom elsewhere. Consumers will be
unhappy at Virgin’s attempts to mislead them.
• If costs are higher because of the use of bio-fuel and prices rise, the benefit of
the publicity may depend on other economic factors. For example, if there is a
recession, consumers may be more interested in prices than the impact on the
environment.
• Will business passengers be influenced by the environmental credentials
of Virgin? They are, perhaps, more likely to make decisions based on price,
convenience and comfort of travel. Therefore, the impact of the publicity will be
negligible on business travellers.
• The publicity is potentially beneficial to the image and reputation of Virgin.
• The environment is a significant issue. Any effort by a business to reduce pollution
is likely to be commended by consumers. Thus, passenger numbers will be boosted.

Activity 6.9 (page 103): Corporate social responsibility

1 Explain what you understand by the terms:

• ‘socially responsible business’

• ‘ethics’. [4]

Chapter 6 © Cambridge University Press 2010 9

A Socially responsible business involves a consideration of the wider impact of
business activity on society. For example, a business might take into account its
impact on the environment before investing in new equipment and choose a more
environmentally friendly technology even if it is more expensive.

Ethics are the moral guidelines that determine decision making. For example, it
might be considered unethical to test a product on animals because of the suffering
caused.

2 Examine two factors given in the article which could encourage a business to adopt
an ethical and environmentally aware strategy. [8]

Recruitment and retention of employees − ethical employers will find it easier

to recruit good-quality staff and retain them. Thus, costs of recruitment will be
reduced and the negative consequences of high labour turnover avoided, such as
training costs and costs of integrating new staff into the organisation. Recruitment
of employees is particularly important as in some industries there is a limited
number of the right type of graduates, so businesses face stiff competition to attract
them; many graduates can afford to pick and choose the jobs they want and ethical
factors will influence their choice.

Commercial benefits of making operations more socially responsible − a reputation

for social responsibility will lead to an increase in sales and profits. Shell believes
that it must listen to its various stakeholders if it is to be successful. In the case of
Shell, it has for a number of years faced negative publicity as a consequence of its
operations being considered unethical. The tarnished reputation that has developed
will reduce its sales in the marketplace.

Improve stock market valuation − an improved reputation will enhance the value
of a business on the stock market. This may be because social responsibility places
a business in a better position to meet the challenges of the 21st century.

3 Why did the chairman of Ford express ‘an equally strong desire to ensure Ford’s
continued profitability’? [3]

Although businesses are increasingly adopting the language of social and

environmental responsibility, their primary reason for existing remains that
of profit. The profit motive is still central to most private-sector activity. The
chairman of Ford is answerable to shareholders and cannot, therefore, abandon a
commitment to profitability.

Chapter 6 © Cambridge University Press 2010 10

A 4 Discuss the likely costs and benefits for Shell of being seen as ‘the leading
multinational in economic, environmental and social responsibility’. [10]

Costs
• Shell will have to alter its behaviour
substantially to become the
leading multinational in economic,
environmental and social
responsibility. This may be costly.
Shell is competing in industries
that naturally have a significant
environmental impact (petroleum and
chemicals are core activities). To be
responsible, Shell will have to invest
substantially in new technologies and
tighten practices to prevent accidents
occurring.
• Shell will have to ensure fair treatment
of all workers and this means
implementing high standards of health
and safety and providing good wages.
• Shell may have to reconsider contracts
with governments that are considered
to be corrupt and may have to end
operations in some countries. For
example, Shell has been criticised in
the past for its operations in Nigeria.
• Shell will have to pay for independent
social audits to convince the public
that it really is socially responsible.
Further, it will have to act on the
findings of those audits.
• A failure to apply high standards will
lead to negative publicity. Shell will
find itself subject to much scrutiny if it
is seen as being socially irresponsible.
Benefits
• Shell will potentially enjoy increased
sales if consumers are convinced
that it is ‘the leading multinational
in economic, environmental
and social responsibility’. Green
consumerism is increasing and
higher sales may lead to higher
profits.
• Improved reputation will reduce
the negative publicity that Shell has
traditionally suffered from.
• It will provide a competitive
advantage to Shell in competing
with other organisations, such as BP.
Through differentiating itself from
the competition, Shell can justify
charging higher prices without a
resultant drop in demand.
• It will be easier to recruit and retain
high-quality staff. This will reduce
costs in the long term.
• There may be long-term cost savings
from adopting environmentally
friendly strategies. For example,
energy use may be reduced and
increased levels of recycling may
save on the costs of waste disposal.
• The risk of infringing the law
will be reduced. In 2007, BP was
fined over $370m in the USA
for environmental crimes and
committing fraud.

Evaluation may consider:

A simple way to achieve evaluation may be to contrast the potentially high short-term
costs of improving social responsibility with the long-term benefits.

Activity 6.10 (page 105): Tibet protesters target BP over

PetroChina stake

1 What change in the strategy of BP and PetroChina is the Tibetan pressure group
attempting to bring about? [3]

The pressure group is seeking the following changes in strategy:

• They want BP to sell its 2.2% stake in PetroChina. They want BP to honour its
ethical policy on human rights and the environment.
• They want PetroChina to abandon the proposed pipeline that passes through Tibet.

Chapter 6 © Cambridge University Press 2010 11

A 2 What do you understand by the term ‘ethical policy’? [3]

A statement that sets out a business’s beliefs with regard to the moral guidelines
that influence its decisions. For example, it may cover issues such as:
• environmental policies
• employment policies
• social responsibilities.

3 Explain what impact a ‘public relations disaster’ could have on BP. [6]

A ‘public relations disaster’ could have damaging consequences for BP:

• Loss of sales or even a boycott of products would reduce sales and profits.
• A public boycott could lead to a fall in the share value of BP over fears of the
long-term consequences for the business.
• BP will have to counteract the negative publicity with its own public relations
action. This will increase BP’s expenditure on promotional activity.
• Concerted action against BP could even force the business to sell its stake in
PetroChina. The negative publicity might cause the value of its investment to be
reduced and it may have to accept less than the $578 m that it originally paid
for the 2.2% stake.

4 Evaluate the factors that will determine whether this pressure group’s campaign is
successful. [8]

Factors influencing the success of the campaign:

• Media interest − the extent of media coverage in newspapers and on TV will
affect the impact of the campaign. Will the media report extensively on the
planned disruption of BP’s AGM in April? Media interest will depend on many
factors, including what other newsworthy events are occurring.
• The level of public support for the campaign − consumer boycotts have been
successful in influencing corporate strategy, e.g. a boycott of Barclays Bank in
the 1980s by university students may have contributed to Barclays’ decision to
leave South Africa in 1986. However, the long-running boycott of Nestlé over
baby milk has had little effect on the Swiss giant.
• Concern about its public image − BP has an ethical policy and may be more
open to pressure than a business that has not adopted such a policy.
• Whether Tibetan pressure groups have any access to government ministers
in other countries − if foreign governments can be influenced to speak out
against the pipeline, then this will increase the pressure on BP. It is questionable
whether there would be any criticism from foreign governments, considering
the importance of oil supplies and the influence of the Chinese government
worldwide.

Evaluation may consider:

BP is primarily influenced by judgements on what is in its commercial interest, that is
what the impact on profitability is of any particular course of action. The success of the
Free Tibet Campaign is likely to hinge on whether sufficient numbers of consumers can
be mobilised to support its aims so that BP concludes that it is commercially risky for
the company to retain its stake in PetroChina.

Chapter 6 © Cambridge University Press 2010 12

A Revision case study 1 (page 106): Co-op Bank finds ethics can
be made to pay
1 Outline three ways in which the Co-operative Bank seems to be acting ethically. [6]

• by paying employees above the industry average and treating employees fairly −
beyond what is required by the law
• by reducing carbon dioxide emissions by 60% since 1997, the Co-op is reducing
the external costs that it imposes on society
• by refusing to lend money to businesses involved in ‘unethical activities’,
including the weapons industry, oil production and cigarette manufacture

2 Explain the likely benefits to this company of publishing a social audit. [8]

The social audit will reinforce the claims made by the Co-op Bank that it is acting
ethically. The benefits include:
• Positive publicity will result from the social audit. It will enable the Co-op to
undertake effective public relations. There will be an improvement in the
Co-op’s image.
• The banking system may be viewed with suspicion by many consumers and its
reputation has been tarnished by recent events surrounding the credit crunch –
there has been much criticism of the business practices used, including the
remuneration of senior executives. The Co-op will be able to promote itself as
an ethical alternative to mainstream banks.
• The Co-op has succeeded in attracting ‘large numbers of liberal-minded
middle-class customers’.
• More consumers will be encouraged to buy the products offered by the Co-op,
e.g. its investment and savings vehicles.
• An increased level of custom will increase revenues and profits of the bank.
• The audit will help identify potentially anti-social behaviour and thus enable
the Co-op to implement appropriate measures to prevent such behaviour. It will
give the Co-op a clear direction for future improvements.

There is no need to provide a balanced argument as the question only asks for an
explanation of the benefits.

3 Discuss the view that ‘ethics can be made to pay’ for all businesses. [10]

The benefits of ethical behaviour are that:

• An increasing number of consumers make spending decisions that take into
account ethical considerations. Ethical behaviour can, therefore, lead to a long-
term increase in sales. The Co-op has increased its retail lending by 7% and
savings by 13% despite competition and refusing to lend to unethical businesses.
• Ethical behaviour will differentiate a business from competition. Consumers
may be willing to pay a premium for ethical products. Demand will be more
price inelastic and higher prices will increase profit margins.
• As more and more businesses adopt ethical codes of conduct, it may be risky
for any one business not to do the same. A business that retains a reputation for
unethical behaviour may be at a competitive disadvantage in the marketplace.

Chapter 6 © Cambridge University Press 2010 13

A • It attracts good-quality candidates to fill job vacancies.
• It helps retain staff and thus reduces labour turnover and the costs of recruitment.
The chairman of the Co-op Bank attributed much of its success to staff.
• Employees will be more committed to the business and, therefore, be more
motivated to help the business succeed.
• Some forms of ethical conduct may actually contribute to a reduction in costs.
For example, reducing the carbon footprint of a business may save money as it
encourages a focus on reducing energy usage.

Problems that may be encountered when adopting ethical behaviour:

• If a business lacks real commitment to implementing an ethical policy, then
there is the risk of increased negative publicity when unethical behaviour occurs.
• There may be an increase in costs:

– higher wages paid to staff

– increased costs of waste disposal
– increased costs of using ethical suppliers
– greater investment in cleaner technologies
– the need to produce and publish social audits is both time consuming and
expensive.

• A business will have to take decisions which may directly lead to a loss of sales,
e.g. the Co-op will have to refuse potentially lucrative lending to businesses
involved in arms manufacture. A business selling sweets might have to limit its
direct advertising to children.
• Although consumers increasingly want businesses to be ethical, they are still
heavily influenced by price. This is often a critical factor in making purchasing
decisions.

Evaluation may consider:

Evaluation may contrast the potentially high short-term costs of ethical behaviour with
the long-term benefits. It may be argued that not all businesses can benefit in the way
that the Co-op has because if all businesses behave ethically, then no business will gain a
competitive advantage through ethical operations.

Revision case study 2 (page 107): Petrobras bids to clean up

dismal safety and environment record

1 What evidence is there for the claim that Petrobras is putting the interests of investors
before those of other stakeholder groups? [6]

Investors will be most interested in profits and an increasing share price.

Evidence of putting the interests of investors first includes:

• Petrobras has achieved record profits.
• A poor safety record indicates that Petrobras has failed to consider the welfare
of employees. The recent explosion on its offshore platform may indicate that
reducing costs was put ahead of employee safety, e.g. the oil platform did not
undergo the normal eight-month test phase.

Chapter 6 © Cambridge University Press 2010 14

A • Equipment is outdated and, therefore, more dangerous. The lack of investment
in new equipment will help enhance short-term profitability.
• A number of oil spills reflects insufficient protection of the environment and
imposes costs on society.
• Industrial waste goes untreated. This will impose costs on society.
• Employees have a poor attitude toward the environment and safety. This may
indicate poor training.

2 Analyse the likely factors contributing to the recent accidents at Petrobras sites. [6]

Many reasons are suggested in the case material. These centre on failings within
human resource management and operational control.
• There is a weak culture of care among employees towards safety; employees
simply do not care. This is likely to reflect the failings of the business to promote
safety as an important issue. This is also a result of employing a large number
(54%) of contract workers – these workers have no long-term commitment
to the business. Petrobras admitted that it was difficult to ensure contractors
comply with safety requirements.
• The oil platform was brought into production too soon without proper testing.
• Poor working conditions are provided that resulted in employee fatigue. This
will increase the likelihood of accidents occurring.
• Staff were used with inappropriate training – underqualified staff are used
and safety training is recognised as being inadequate. This will increase the
probability of mistakes being made by workers.

3 The company is now taking steps to improve its safety and environmental records.
Explain the likely reasons for this policy. [8]

• Bad publicity surrounding the accidents and pressure group activity

highlighting the environmental impact of Petrobras could lead to a loss of
custom.
• There could be increased difficulty in recruiting and retaining employees as a
result of both the environmental and safety record of the business. The death of
ten workers will give Petrobras a bad reputation within the industry and deter
skilled workers from working for them.
• Loss of life and non-fatal accidents may lead to legal action over health and
safety and could result in substantial fines and compensation.
• The long-term costs of accidents occurring may be too great. For example,
financial damages were as much as $450 m during a one-year period. Although
the oil platform was insured, Petrobras will face increasing insurance premiums
as a result of the number of accidents that are occurring.

4 To what extent will the future profitability of companies, such as Petrobras, depend on
meeting high ethical and environmental standards? [10]

Definition of ethical/environmental standards − The case clearly indicates some

of the drawbacks of Petrobras’s negligent approach to ethics and the environment.
Examples of ethical businesses, such as the Co-op Bank, may be used to illustrate
the benefits of setting high standards.

Chapter 6 © Cambridge University Press 2010 15

A Problems that may be encountered
when adopting high ethical/
environmental standards
• High ethical standards will, in the
short term, increase business costs,
e.g.:
– paying fair wages to workers
– increasing expenditure on health
and safety, e.g. Petrobras having to
train workers properly and investing
in necessary safety standards
– increased costs of investing in
cleaner technology
– cost of sourcing fair trade
products and auditing that
suppliers are ethical.
• Missed opportunities to collude with
other firms to fix markets, e.g. GDF
Suez and E.ON, two of the world’s
biggest gas producers, colluded to
avoid competition in French and
German energy markets and to drive
up prices. Increasing the prices they
are able to charge increases profits.
• Sales will be lower due to refusal
to bribe corrupt governments/
organisations.
• Opportunities to boost sales through
unethical marketing techniques will
be lost, e.g. persuasive advertising of
toys to children.
Benefits of high ethical/environmental
standards
• There is the potential for some forms
of unethical behaviour to lead to
prosecution and fines. For example,
poor health and safety policies could
lead to injury of employees and claims
for compensation. Failure to ensure
the safety of consumer products may
also lead to legal action and negative
publicity.
• Unethical behaviour, even when it does
not break the law, can lead to negative
publicity and loss of sales. Consider the
impact of publicity on companies such
as Gap. Ethical behaviour can attract
customers, e.g. The Body Shop.
• High ethical standards are likely to
make recruitment and retention of
skilled staff easier. This will reduce the
long-term costs of the business.
• An ethical code can be used as a
marketing tool for the business to
attract customers and differentiate the
firm from competitors.
• High environmental standards can
reduce costs in the long term, e.g.
greater efficiency in energy use.
• The environment is increasingly a
significant factor in spending decisions.

Evaluation may consider:

Evaluation is likely to focus on the question of the long-term impact of high ethical/
environmental standards in increasing consumer and employee loyalty. However, the
effect will also depend on:
• Society’ attitude towards ethics/environment − how important an issue is it? In
many countries, it is an increasingly important consideration for consumers.
• How ethical are competitors? If competitors have low environmental standards, then
a firm will be put at a cost disadvantage if it adopts high standards itself.
• The nature of the unethical behaviour. Does it actually contravene the legal
constraints within a country? Consequently, will it lead to legal action?
• May question whether there are sufficient ethical consumers within societies for it to
really matter.
• Profitability will also depend on other factors such as control over costs.

Revision case study 3 (page 108): More chips please?

1 What do you understand by the term ‘information technology’? [3]

This is the use of electronic technology to gather, store, process and communicate
technology. It includes:
• databases
• spreadsheet programs

Chapter 6 © Cambridge University Press 2010 16

A • internet/intranet
• management information system (MIS).

2 Outline how any two of the IT systems mentioned in the passage are likely to benefit
customers. [6]

IT system Benefit to customers

Radio- • Queuing at checkouts is reduced, even relative to the use of bar
frequency codes and checkout scanners, because the technology tracks
ID tagging exactly what the customer has as s/he passes a receiver.
• Cost of processing customer purchases is reduced as fewer checkout
staff are required. This cost saving may be passed on to customers.
• Better control of stock, e.g. increased awareness of products and
their sell-by dates.
Bar codes • Stock control is more accurate, ensuring that customers can find
what they want on the shelves.
• Speed at the checkout is increased as bar codes can be scanned.
Checkout • The speed of calculating customer bills is increased relative to
scanners the checkout assistant having to input all prices into a till. This
will reduce queuing time at checkouts.
• Checkout operator errors will be reduced. Therefore, the
customer should not be overcharged for any items.
Automatic • Stock-holding costs to the supermarkets will be reduced,
product enabling prices to be lowered for customers.
re-ordering • There will be less instances of stock-outs, that is improved
systems availability of products.
• Lower stock levels will ensure that stock is held for a shorter
time, increasing its freshness.
Loyalty cards • The supermarket will be able to build up a detailed picture of a
customer’s purchasing habits. Therefore, the supermarket can
target the customer with promotions that are likely to appeal to
the customer.
Chip-and-pin • The incidence of fraud will be reduced. There is better
machines protection for the cardholder, reducing the risk of anybody else
being able to make purchases with a stolen card.
Robot- • More efficient warehousing reduces costs and, therefore, prices
controlled paid by consumers. There will be less likelihood of damage to
transport products.
systems
Internet • Shopping availability will be 24/7; customers can shop when
it suits them. Reduced pressure on the shopper to make a
purchase as there are no shop assistants. The customer can take
more time over purchases.
• Ability to compare prices more easily will increase competitive
forces to push prices down.
• The time spent travelling to and from shops to make purchases
will be reduced.

3 Analyse the likely benefits of supermarkets using RFID to trace and collect data from
every product they sell. [6]

Reduced queuing at checkouts because the technology tracks exactly what the
customer has as s/he passes a receiver. Supermarkets will, therefore, be able to
make cost savings in staffing as there is a reduced need for checkout operators.
Reducing costs will contribute to higher profits, and prices can also be lowered to
increase the level of custom.

Chapter 6 © Cambridge University Press 2010 17

A There will be better control of stock as it is known exactly what has been sold.
Sell-by dates are automatically transmitted; thus, out-of-date products will be
recognised and customer dissatisfaction avoided.

Theft may be reduced as products leaving the store that have not been paid for will
be automatically identified.

There will be greater awareness of the original supplier of a product. This may help
with quality control.

4 Discuss how a supermarket business should effectively introduce the new RFID
technology. [10]

This question could be answered by considering the role of different functional areas.

This is a potentially difficult technology to introduce as it will have a significant

impact on human resources. Therefore, it is important to discuss its introduction
with affected workers:
• Unions, where they exist, and/or all employees should be consulted. This is
necessary to ensure that employees understand the need for the technology and
impact of it on working practices. Consultation may reduce opposition to the
technology and help avoid conflict / industrial unrest.
• If the technology will lead to redundancy, then further consultation with unions
will be needed. This is a statutory requirement in some countries. Managers will
have to determine the criteria on which redundancies will be made, ensuring
that they do not breach employment rights. Voluntary redundancy may be
favoured to reduce conflict.
• Finance will have to ensure that sufficient capital is available for purchasing the
system.
• Different systems will have to be assessed to compare cost and effectiveness.
• Operations will need to plan carefully the timing of the changeover for introducing
the technology. Managers may utilise techniques such as critical path analysis.
There is likely to be disruption of the supermarket as the technology is installed.
• Human resource management (HRM) will need to provide training for
employees to ensure they are familiar with and able to operate the technology.
• Marketing may wish to publicise the changeover in advance to prepare
customers. Once introduced, staffing levels may need to be temporarily
increased to inform and guide customers as to the use of RFID technology.
• The new technology will have to be monitored to assess whether it is providing
the expected benefits, and, if not, what can be done to improve the performance.

Evaluation may consider:

Evaluation may focus on the need for effective planning to ensure that disruption is kept
to a minimum. The costs of disruption will relate to dissatisfied customers and lost sales.

Alternatively, the importance of human resource management may be emphasised and

the costs to the business of not overcoming possible employee opposition.

5 Research task.

Chapter 6 © Cambridge University Press 2010 18

A Revision case study 4 (page 108): Chinese toys recalled

1 Were Fisher Price and Mattel right to withdraw millions of suspect toys from the
shops? Perhaps consumers might not have noticed the dangers anyway. Justify your
answer. [10]

Definitions of ethical behaviour, ethical codes of practice and corporate social

responsibility may be included.

No, the toys should not

Yes, the toys should have been withdrawn have been withdrawn
• Legal issues − if found out, Fisher Price and • Shareholders − the
Mattel could face legal action and fines. shareholder view is
• Loss of sales − if consumers or trading that a company’s first
standards officers had discovered the high levels responsibility is to its
of lead in the paint, then this would have caused shareholders. Recalling
catastrophic publicity for Fisher Price and millions of toys will cost
Mattel – particularly as this relates to toys for Fisher Price and Mattel
children. Such publicity would potentially lead thousands of dollars in
to a significant decline in demand both in the lost sales and thus reduce
short term and the long term. profit.
• Brand image − Fisher Price and Mattel are • Loss of sales − the
leading brand names. Bad publicity would recall draws attention
undermine their brand image that has taken to the problem which
years to build. otherwise might have gone
• Swift action − the swift action by Fisher Price unnoticed. Consumers
and Mattel reinforces their reputation for may doubt the safety of
quality and customer care. other toys made by Mattel
• Unethical − it would be unethical to supply the and Fisher Price, leading
toys with high levels of lead. to a loss of sales.
• Corporate social responsibility − Fisher Price
and Mattel have a responsibility to stakeholders,
such as customers.
• Quality − the paint used breaches their own
specifications and, therefore, undermines
quality.

Evaluation may consider:

Evaluation may contrast the short-term benefit of not taking action against the
potentially damaging long-term consequences if consumers found out about unethical
behaviour. As this has a direct impact on consumers, it is particularly important that
the two companies withdraw the dangerous products.

2 Do you think that toy companies should be allowed to use persuasive TV and other
forms of advertising directly aimed at children? Justify your answer. [10]

Chapter 6 © Cambridge University Press 2010 19

A Persuasive advertising aimed at children
is OK
• Ultimate responsibility lies with parents
for deciding whether a toy is bought for
a child.
• In many countries, advertising aimed at
children is accepted.
• Children are aware of what advertising is
and have an understanding of its purpose
– they are sophisticated.
• A business has responsibility to its
owners. Businesses exist to make profit.
Advertising is just one element of the
marketing mix at a firm’s disposal to
influence customers. Pursuing profit is
good for society as a whole.
• Advertising helps fund television
programmes for children. Some of this
TV output is educational and arguably
beneficial for the development of the
child viewer.
• As long as the advertising is not
misleading, then it is OK.
Persuasive advertising aimed at
children is unacceptable
• Younger children are vulnerable
to persuasive advertising and do
not have the capacity to make
decisions about what toys are
good/bad for them.
• Direct advertising at children
leads to parents being pestered.
The pressure to buy can be
great; this becomes a particular
problem when parents are
pressured into buying toys they
cannot really afford.
• Businesses have a social
responsibility to their
stakeholders. They should take
into account the consequences of
their marketing decisions.
• Advertising is a cost to business
and simply leads to higher prices
for goods.

Evaluation may consider:

• Is the type of toy being advertised beneficial to a child’s education/development?
• The issue may be one of controlling advertising rather than banning it.
• The age group at which the toy is aimed should be considered. Older children are
able to recognise what is good/bad for them.

Further reading
‘The impact of pester power’,
http://www.youtube.com/watch?gl=GB&hl=en-GB&v=pwgFdyEnkl8

OFCOM(UK) on recommendations for controls on advertising food and drink to

children,
http://www.youtube.com/watch?gl=GB&hl=en-GB&v=yXTlmEEZOsw&feature=related

Essay
1 ‘Technology causes business as many problems as it solves.’ Discuss. [25]

General issues are outlined below.

Cost − there are substantial capital costs to adopting a new technology, e.g.
automating a production line with robotic technology. Costs will also be incurred
in training staff to use new computer systems and machinery. If existing staff have
to be replaced, then there will be redundancy costs. Technological change can be so
rapid that new machinery rapidly becomes outdated and needs replacing.

Chapter 6 © Cambridge University Press 2010 20

A Labour relations − if new technology leads to redundancies, then managers will
need to ensure that workers are consulted and kept informed of the changes.
Unions may oppose the introduction of new technology and this may cause
industrial unrest, with the possibility of strike action. Workers will need to be
convinced that the technology is necessary if jobs are to be lost.

Reliability − if technology breaks down, it may be expensive to fix and cause

significant disruption to production schedules. Firms which are dependent on
computer systems are particularly vulnerable to computer viruses and systems
crashing. Specialists may have to be brought in to fix problems rather than being
able to put things right in-house.

Data protection and MIS − the use of computers to store customer and employee
records raises issues of data protection. Many governments have imposed legal
constraints on how and for what purposes data can be stored. Firms will have to
comply with the law and this may require expenditure on security systems being
installed and staff being trained. In recent years, there have been several massive
leakages of customer and employee data from organisations as diverse as Polo
Ralph Lauren, Time Warner, MCI and the large American defence contractor
Science Applications International Corp.

MIS can lead to data overload for managers and employees. This prevents decision
makers from identifying the most important information.

Answers may consider specific types of technology and discuss the benefits and
problems associated with adopting the technology.

Technology Advantages Disadvantages

Computer-aided • improves productivity • expensive to set up
manufacturing • reduces average costs • high fixed costs
• consistent quality control • redundancies
• increases flexibility in
production
Computer-aided • reduces product development • cost
design (CAD) / time − e.g. as recently as 1997 • training of staff
Product life-cycle General Motors was taking • redundancies
management 48 months to develop new
software (PLM) cars; by using modern PLM
software that time has been
reduced to just 12−18 months
Internet / • cheap internal communication • secure systems to
intranet • access to larger potential prevent dangers from
market hackers

Evaluation may consider:

Technology does create problems for business. A key consideration is ensuring that
technology is introduced effectively and that there is clear communication with
employees.

Chapter 6 © Cambridge University Press 2010 21

A Further reading
‘Microsoft censors Chinese blogs’ − Should Microsoft have cooperated with the
Chinese government?
http://news.bbc.co.uk/1/hi/technology/4088702.stm

‘BAE review seeks bribery controls’ − An article on BAE, a company accused of

bribery to win contracts with Saudi Arabia.
http://news.bbc.co.uk/1/hi/business/7384937.stm

‘Marks & Spencer’s How We Do Business report for 2008’,

http://corporate.marksandspencer.com/documents/publications/2008/2008_hwdb_
report.pdf

‘CFS and its approach to corporate social responsibility’,

http://www.article13.com/CBI/CBI%20CSR%20Case%20Study_CFS_May2005.pdf

Chapter 6 © Cambridge University Press 2010 22