External influences on business activity

All businesses operate within an external environment (laws, political and social factors,
economic conditions, level of technology, competitors, etc.) which influences their activities.

Privatisation and Nationalisation

Privatisation aims to transfer the ownership of government-owned industries to the private

sector by selling their shares. There are both advantages and disadvantages to privatisation.
Advantages:
1. Private sector businesses lead to greater efficiency than when a business is supported
and subsidised by the state.
2. Decision-making in state bodies can be slow and bureaucratic.
3. It gives responsibility to managers and employees, which can be motivating.
4. Market forces operate: failing businesses will be forced to change or die; successful
ones can expand.
5. Important business decisions are taken for financial reasons, not political reasons.
6. Sale of nationalised industries can raise finance for the government, which can be spent
on other state projects.
7. Private businesses will access the private capital markets and this will lead to increased
investment in these industries.
Disadvantages:
1. The state should take decisions about essential industries. These decisions can be
based on the needs of society and not just the interests of shareholders, This may
involve keeping open business activities that private companies may consider
unprofitable.
2. Privately operated businesses are unlikely to reach a conclusion that may benefit the
whole country.
3. Through state-ownership, an industry can be made accountable to the country.
4. Many strategic industries could be operated as private monopolies if left completely in
the hands of the private sector.
5. Breaking up nationalised industries perhaps into several competing units, reduces the
opportunities for cost saving through economies of scale.

Nationalisation is when the state buys privately owned businesses.

Advantages:
1. The government will have control of major industries.
2. Integrated industrial policy should now be possible.
3. It prevents private companies operating as monopolies exploiting consumers.
4. Economies of scale can be achieved by merging all private businesses in an industry
into one nationalised corporation.
Disadvantages:
1. There is less profit motive, and thus less incentive to operate efficiently.
2. Governments may intervene too much in business decision-making for political reasons.
 3. The cost to the government of buying private companies could be very high.
4. It removes the ability of industry to raise finance from private sources.

Legal constraints on business activity

Governments may introduce laws that control the business decisions and activities.
Why laws regarding employment exist:
1. Prevent exploitation of workers by powerful employers by insisting on appropriate levels
of health and safety and minimum wages.
2. Control excessive use of trade union collective action
What laws affect:
1. Recruitment, employment contracts and termination of employment
2. Health and safety at work
3. Minimum wages (employers are not allowed to pay less than the set minimum wage)
How employees are protected:
1. A written contract of employment so that the employees are fully aware of the pay,
working conditions and disciplinary procedures to be followed.
2. Minimum ages at which young people can be employed.
3. Maximum length of the working week
4. Holidays
5. No discrimination during recruitment
6. Protection against unfair dismissal (pregnancy, refusal to work overtime, joining trade
unions, incorrect dismissal procedure)
In most countries, providing a healthy and safe work environment is now a legal requirement.
These include:
1. Protection of workers from injuries and discomfort at work.
2. Equip factories with better and safer equipment.
3. Adequate toilet facilities.
4. Adequate breaks
5. Training and protection from dangerous machines

Impacts on businesses of health and safety laws

Benefits:
1. Workers feel more secure, which may increase their motivation.
2. Reduces the risk of accidents, which may help avoid court cases filed.
3. Good brand image, which will help attract more high-skilled labour and customers.
Costs:
1. Higher supervisory and wage costs.
2. Higher number of workers now necessary, leading to an increase in wage costs
3. Protective equipment

Consumer rights
Why consumers are protected:
1. Difficult to make rational decisions due to influential marketing and products becoming
more scientific and complex.
2. Selling tricks have gotten more specialised and niche
3. Globalisation has led to an influx of brands, creating many more options to choose from

Impact of Consumer protection laws

1. Business costs rise - redesigning ads, improving quality control

2. Requires a change of strategy and culture
3. Reduces chances of legal action being taken against them, which would improve brand
image
4. Increased sales and profits
5. Better brand loyalty

Competition

Benefits to the consumers:

1. Wider choice
2. Lower prices
3. Improve quality, design and performance of the product
4. International competition helps boost domestic economy

Monopolies

There exists only one supplier with 100% market share.

How monopolies develop:
1. Invention of new products
2. Mergers and acquisitions
3. Legal protection
4. Barriers of entry

Impact of monopolies on consumers

Benefits;
1. Lower prices
2. Better quality
Costs:
1. Higher prices
2. Limited choice
3. Lower efficiency
4. Less investment
This can even lead to restrictive practices to reduce competition:
1. Refusal to supply a retailer if they don’t agree to the prices set
 2. Manufacturers may force retailers to stick to one line of product
3. Market sharing agreements and price fixing agreements
4. Predatory pricing, where firms charge low prices to drive out other firms in the industry

Social Audits

A report on the impact a business has on society - stakeholders, environment, community. They
include:
1. Health and safety records
2. Pollution levels
3. Contribution to local community events
4. Proportion of supplies from ethical sources
5. Employee benefit schemes
6. Feedback from customers and suppliers on the ethical nature of the business’s activities
Benefits:
1. Identifies the social responsibilities met by a business
2. Sets target for improvement
3. Improves company image
4. Increases sales
Drawbacks:
1. Expensive
2. Takes up a lot of time
3. Consumers’ main aim is high quality goods
4. May be window dressed

Impact of technology on business activity

Benefits:
1. Accurate, thus needing less administrative staff
2. Quicker communication which may help reduce costs
3. Flexible
4. Increased productivity and efficiency, which add to a firm’s competitive advantage
5. Wider target market
Limitations:
1. Increased capital and training costs
2. Reduced job security which will lead to a fall in motivation
3. Legal constraints on the use of IT

IT and business decision-making

1. Data is obtained quickly, and thus decisions are made faster

2. Better communication, but can lead to information overloads, which may cause loss of
data
3. Power can be abused, while also diminishing the authority
 4. Reduced job enrichment and motivation

Environmental constraints on business activity

Corporate Social Responsibility is when a business adopts a wider perspective than just profit.
Adopting environmentally friendly business strategies has both pros and cons.
For:
1. Marketing and promotional advantage
2. Better brand reputation
3. Avoid pressure group activity
4. Avoid legal problems and court fees
5. Access to skilled employees
6. Long-term financial benefits
Against:
1. Higher costs, increased prices, lost sales
2. Loss of competitive advantage
3. Reduced profits, limiting expansion
4. For developing countries, economic development is more important than the
environment

Pressure Groups

A pressure group is an organisation created by people with a common interest or aim who put
pressure on businesses and governments to change policies so that an objective influences
elected officials to take action or make a change on a specific issue.