external inﬂ uences on business activityrevision.peterhouse.co.zw/business studies/as... · •...

1 Chapter 6 © Cambridge University Press 2010

External infl uences on business activity

66Activity 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]

Th e government may have decided that there was a need to protect worker rights • to ensure that fi rms do not abuse their power. Th e wide-ranging laws will set out minimum standards that fi rms 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. Th us, 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.

Benefi t business interests:As well as protecting the rights of workers, employment laws also set out the • duties of employees towards the employer. Th us, 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 • benefi t 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. Th us, 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 fi rms 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 fi t. Legislation may make it diffi cult to reduce the workforce in times of economic diffi culty.

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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 aff ect international competitiveness.•

Evaluation may:contrast the increased costs imposed by legislation with the longer-term benefi ts in • terms of a more satisfi ed workforcerecognise that legislation may not aff ect all businesses equally, as some employers will • believe in corporate social responsibility and, therefore, treat workers well anywayconsider that the extent to which employment law modifi es the market is signifi cant • − 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 fi rm might have broken the employment and other laws of your own country. [6]

Specifi c 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 fi rm was based in your own country? [4]

Answer dependent on country-specifi c employment laws.

In some countries, Gowri would be able to appeal to an employment tribunal on the grounds of unfair dismissal. Th e 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 off ered 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.

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

Employment laws should be observed:Th e business operates as part of a wider society. Th e 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. Th is could put the business at a competitive disadvantage.Th e 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. Th is • could lead to fi nes, suspension of production or even complete closure. Th e 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 profi t, 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 benefi t 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 benefi ts 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:Th ere is disparity in power between a large business and an individual consumer. • Businesses have more resources and knowledge than the consumer; this gives a signifi cant advantage to the business in its relationship with the consumer.

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Th e complexity of modern products means that it is diffi cult 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:Th rough 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. Th e 1999 Consumer Protection Act in Malaysia outlaws all misleading and deceptive conduct by fi rms 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:Th ere 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 fi rms to substantially change their culture as well as their practices. Changing culture may have proved expensive.Th e more rights that consumers have, the more likely it is that fi rms will • be taken to court to defend their actions. Th e 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 benefi cial 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 benefi t from misleading customers because once customers have • been attracted to the website by low advertised prices, they may well continue

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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. Th e publicity generated highlights the fact that Ryanair is off ering fl ights at • these low prices, even if there are restrictions applicable. Th is free publicity may encourage consumers to check Ryanair’s website when searching for cheap fl ights.

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 off ence, 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. Th is 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:Th e 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 off ence to an individual or group were banned, then fi rms • 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 offi cer of Ryanair, how would you respond to this bad publicity and the threat of legal action? Justify your answer. [10]

Th ere are several courses of action the chief executive could pursue:He could withdraw the off ending advert of the woman dressed as a schoolgirl • and comply with the warnings over misleading advertising. Th is will avoid legal action being taken and thus, potentially, save Ryanair being fi ned and suff ering 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 diffi cult 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. Th us, Ryanair risks losing passengers to other low-cost airlines. Th e problem with this strategy is that if the Offi ce 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.Th e airline may launch a counter off ensive to try and win public support. • Th e 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.

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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. Th ere 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. Th e employee values leisure time more highly than work.Working part time may fi t 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 benefi ts could a business gain from employing:

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

more staff on temporary contracts?• [6]

Benefi ts of more part-time staff :Th ere is greater fl exibility. 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 diff er signifi cantly.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 fi nd it diffi cult to recruit and retain suffi cient full-time staff due to the nature of the work / low rates of pay.Some businesses have actively recruited older employees as they are oft en • considered more reliable. Part-time work may be particularly attractive to older workers who have retired or are approaching retirement age.

Benefi ts of more temporary staff :Th ere is greater fl exibility to alter staffi ng costs to match the economic cycle. • Th us, in an economic recession, businesses will be able to reduce costs by not

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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. Th ese are short-term, seasonal jobs such as waitress, spa position, dive instructor, tour coordinator.Th ere 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 diff er signifi cantly between permanent and temporary staff .

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

Th e trends will not suit all workers. Many workers will prefer full-time • employment for fi nancial reasons; the increasing number of part-time contracts may make it more diffi cult to fi nd 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 signifi cant ongoing fi nancial commitments and cannot aff ord 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 aff ect an employee’s • ability to contribute to a pension fund. Th is may mean that workers have to continue working for longer in order to be able to aff ord 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 diffi cult to recruit new • employees from the younger age group as young people remain in education. Th us, the business will need to retain older staff or actively attract older staff to fi ll vacancies. Greater attention may need to be paid to off ering a defi ned career structure to attract long-term employees.

(Continued)

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Change Impact on employment policy

An increase in the female participation rate from 44% to 49%

Increasing rates of female participation in the labour • force may require that the business off ers more fl exible 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 off er more child-friendly hours to female employees. Part-time employment contracts may also be desirable.Th e business will miss out on the skills and contribution • of female employees if policies are not changed.

Increasing level of educational attainment − the proportion of university-educated participants in the labour force estimated to rise to over 35%.

It will be increasingly diffi cult to recruit employees • to fi ll 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]

Benefi ts 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.Th ere will be a reduction in labour turnover due to a more satisfi ed workforce.• Th ere 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.•

Th e costs of providing more than basic legal minimum:Th ere will be the increased costs of providing health and safety equipment and • training.Th ere will be the increased costs associated with paying more than the • minimum wage, off ering longer holidays and other positive terms of conditions of employment.Increased costs may put the fi rm 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 eff ect on the consumer. However, the eff ect will also depend on:

Attitude towards employment issues in society − in many countries, it is an • increasingly important consideration for employees. Th is 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 fi rms to recruit employees.Competitor behaviour − if competitors have low employment standards, then a fi rm • will be put at a cost disadvantage if it adopts high standards itself.

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

1 Analyse why Virgin Atlantic is making eff orts 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 profi table.To generate publicity − environmental issues are increasingly newsworthy as • concern grows about global warming. Th e 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 benefi t 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 benefi t 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 infl uenced by the environmental credentials • of Virgin? Th ey are, perhaps, more likely to make decisions based on price, convenience and comfort of travel. Th erefore, the impact of the publicity will be negligible on business travellers.Th e publicity is potentially benefi cial to the image and reputation of Virgin.• Th e environment is a signifi cant issue. Any eff ort by a business to reduce pollution • is likely to be commended by consumers. Th us, 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]

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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 suff ering 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 fi nd it easier to recruit good-quality staff and retain them. Th us, 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 aff ord to pick and choose the jobs they want and ethical factors will infl uence their choice.

Commercial benefi ts of making operations more socially responsible − a reputation for social responsibility will lead to an increase in sales and profi ts. 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. Th e 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. Th is 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 profi tability’? [3]

Although businesses are increasingly adopting the language of social and environmental responsibility, their primary reason for existing remains that of profi t. Th e profi t motive is still central to most private-sector activity. Th e chairman of Ford is answerable to shareholders and cannot, therefore, abandon a commitment to profi tability.

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

Costs Benefi ts

Shell will have to alter its behaviour • substantially to become the leading multinational in economic, environmental and social responsibility. Th is may be costly. Shell is competing in industries that naturally have a signifi cant 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 fi ndings of those audits.A failure to apply high standards will • lead to negative publicity. Shell will fi nd itself subject to much scrutiny if it is seen as being socially irresponsible.

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 profi ts.Improved reputation will reduce • the negative publicity that Shell has traditionally suff ered from.It will provide a competitive • advantage to Shell in competing with other organisations, such as BP. Th rough diff erentiating 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 . Th is will reduce costs in the long term.Th ere 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.Th e risk of infringing the law • will be reduced. In 2007, BP was fi ned 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 benefi ts.

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]

Th e pressure group is seeking the following changes in strategy:Th ey want BP to sell its 2.2% stake in PetroChina. Th ey want BP to honour its • ethical policy on human rights and the environment. Th ey want PetroChina to abandon the proposed pipeline that passes through Tibet.•

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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 infl uence 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 profi ts.• 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. Th is will increase BP’s expenditure on promotional activity.Concerted action against BP could even force the business to sell its stake in • PetroChina. Th e 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 infl uencing the success of the campaign:Media interest − the extent of media coverage in newspapers and on TV will • aff ect 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. Th e level of public support for the campaign − consumer boycotts have been • successful in infl uencing 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 eff ect 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 infl uenced 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 infl uence of the Chinese government worldwide.

Evaluation may consider:BP is primarily infl uenced by judgements on what is in its commercial interest, that is what the impact on profi tability is of any particular course of action. Th e success of the Free Tibet Campaign is likely to hinge on whether suffi cient 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.

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Revision case study 1 (page 106): Co-op Bank fi nds 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 lawby reducing carbon dioxide emissions by 60% since 1997, the Co-op is reducing • the external costs that it imposes on societyby refusing to lend money to businesses involved in ‘unethical activities’, • including the weapons industry, oil production and cigarette manufacture

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

Th e social audit will reinforce the claims made by the Co-op Bank that it is acting ethically. Th e benefi ts include:

Positive publicity will result from the social audit. It will enable the Co-op to • undertake eff ective public relations. Th ere will be an improvement in the Co-op’s image.Th e 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. Th e Co-op will be able to promote itself as an ethical alternative to mainstream banks.Th e Co-op has succeeded in attracting ‘large numbers of liberal-minded • middle-class customers’. More consumers will be encouraged to buy the products off ered by the Co-op, • e.g. its investment and savings vehicles.An increased level of custom will increase revenues and profi ts of the bank.• Th e 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.

Th ere is no need to provide a balanced argument as the question only asks for an explanation of the benefi ts.

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

Th e benefi ts 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. Th e 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 diff erentiate 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 profi t 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.

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It attracts good-quality candidates to fi ll job vacancies.• It helps retain staff and thus reduces labour turnover and the costs of recruitment. • Th e 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. Th ere 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 infl uenced by price. Th is is oft en 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 benefi ts. It may be argued that not all businesses can benefi t 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 profi ts and an increasing share price.

Evidence of putting the interests of investors fi rst includes:Petrobras has achieved record profi ts.• A poor safety record indicates that Petrobras has failed to consider the welfare • of employees. Th e recent explosion on its off shore 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.

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Equipment is outdated and, therefore, more dangerous. Th e lack of investment • in new equipment will help enhance short-term profi tability.A number of oil spills refl ects insuffi cient protection of the environment and • imposes costs on society.Industrial waste goes untreated. Th is will impose costs on society.• Employees have a poor attitude toward the environment and safety. Th is 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. Th ese centre on failings within human resource management and operational control.

Th ere is a weak culture of care among employees towards safety; employees • simply do not care. Th is is likely to refl ect the failings of the business to promote safety as an important issue. Th is 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 diffi cult to ensure contractors comply with safety requirements.Th e oil platform was brought into production too soon without proper testing.• Poor working conditions are provided that resulted in employee fatigue. Th is • will increase the likelihood of accidents occurring.Staff were used with inappropriate training – underqualifi ed staff are used • and safety training is recognised as being inadequate. Th is will increase the probability of mistakes being made by workers.

3 Th e 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.Th ere could be increased diffi culty in recruiting and retaining employees as a • result of both the environmental and safety record of the business. Th e 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 fi nes and compensation.Th e long-term costs of accidents occurring may be too great. For example, • fi nancial 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 profi tability of companies, such as Petrobras, depend on meeting high ethical and environmental standards? [10]

Defi nition of ethical/environmental standards − Th e 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 benefi ts of setting high standards.

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Problems that may be encountered

when adopting high ethical/

environmental standards

Benefi ts of 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 fi rms to fi x 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 profi ts.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.

Th ere is the potential for some forms • of unethical behaviour to lead to prosecution and fi nes. 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. Th e Body Shop.High ethical standards are likely to • make recruitment and retention of skilled staff easier. Th is 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 diff erentiate the fi rm from competitors.High environmental standards can • reduce costs in the long term, e.g. greater effi ciency in energy use.Th e environment is increasingly a • signifi cant 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 eff ect 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 fi rm will be put at a cost disadvantage if it adopts high standards itself.Th e 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 suffi cient ethical consumers within societies for it to • really matter.Profi tability 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]

Th is is the use of electronic technology to gather, store, process and communicate technology. It includes:

databases• spreadsheet programs•

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

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

IT system Benefi t to customers

Radio-frequency ID tagging

Queuing at checkouts is reduced, even relative to the use of bar • codes and checkout scanners, because the technology tracks exactly what the customer has as s/he passes a receiver.Cost of processing customer purchases is reduced as fewer checkout • staff are required. Th is 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 fi nd • what they want on the shelves.Speed at the checkout is increased as bar codes can be scanned.•

Checkout scanners

Th e speed of calculating customer bills is increased relative to • the checkout assistant having to input all prices into a till. Th is will reduce queuing time at checkouts.Checkout operator errors will be reduced. Th erefore, the • customer should not be overcharged for any items.

Automatic product re-ordering systems

Stock-holding costs to the supermarkets will be reduced, • enabling prices to be lowered for customers.Th ere will be less instances of stock-outs, that is improved • availability of products. Lower stock levels will ensure that stock is held for a shorter • time, increasing its freshness.

Loyalty cards Th e supermarket will be able to build up a detailed picture of a • customer’s purchasing habits. Th erefore, the supermarket can target the customer with promotions that are likely to appeal to the customer.

Chip-and-pin machines

Th e incidence of fraud will be reduced. Th ere is better • protection for the cardholder, reducing the risk of anybody else being able to make purchases with a stolen card.

Robot-controlled transport systems

More effi cient warehousing reduces costs and, therefore, prices • paid by consumers. Th ere will be less likelihood of damage to products.

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. Th e customer can take more time over purchases.Ability to compare prices more easily will increase competitive • forces to push prices down.Th e time spent travelling to and from shops to make purchases • will be reduced.

3 Analyse the likely benefi ts 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 staffi ng as there is a reduced need for checkout operators. Reducing costs will contribute to higher profi ts, and prices can also be lowered to increase the level of custom.

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Th ere 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.

Th eft may be reduced as products leaving the store that have not been paid for will be automatically identifi ed.

Th ere will be greater awareness of the original supplier of a product. Th is may help with quality control.

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

Th is question could be answered by considering the role of diff erent functional areas.

Th is is a potentially diffi cult technology to introduce as it will have a signifi cant impact on human resources. Th erefore, it is important to discuss its introduction with aff ected workers:

Unions, where they exist, and/or all employees should be consulted. Th is 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 confl ict / industrial unrest.If the technology will lead to redundancy, then further consultation with unions • will be needed. Th is 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 confl ict.Finance will have to ensure that suffi cient capital is available for purchasing the • system.Diff erent systems will have to be assessed to compare cost and eff ectiveness.• Operations will need to plan carefully the timing of the changeover for introducing • the technology. Managers may utilise techniques such as critical path analysis. Th ere 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, staffi ng levels may need to be temporarily increased to inform and guide customers as to the use of RFID technology.Th e new technology will have to be monitored to assess whether it is providing • the expected benefi ts, and, if not, what can be done to improve the performance.

Evaluation may consider:Evaluation may focus on the need for eff ective planning to ensure that disruption is kept to a minimum. Th e costs of disruption will relate to dissatisfi ed 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.

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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]

Defi nitions of ethical behaviour, ethical codes of practice and corporate social responsibility may be included.

Yes, the toys should have been withdrawn

No, the toys should not

have been withdrawn

Legal issues − if found out, Fisher Price and • Mattel could face legal action and fi nes.Loss of sales − if consumers or trading • standards offi cers had discovered the high levels of lead in the paint, then this would have caused catastrophic publicity for Fisher Price and Mattel – particularly as this relates to toys for children. Such publicity would potentially lead to a signifi cant decline in demand both in the short term and the long term.Brand image − Fisher Price and Mattel are • leading brand names. Bad publicity would undermine their brand image that has taken years to build.Swift action − the swift action by Fisher Price • and Mattel reinforces their reputation for quality and customer care.Unethical − it would be unethical to supply the • toys with high levels of lead.Corporate social responsibility − Fisher Price • and Mattel have a responsibility to stakeholders, such as customers.Quality − the paint used breaches their own • specifi cations and, therefore, undermines quality.

Shareholders − the • shareholder view is that a company’s fi rst responsibility is to its shareholders. Recalling millions of toys will cost Fisher Price and Mattel thousands of dollars in lost sales and thus reduce profi t.Loss of sales − the • recall draws attention to the problem which otherwise might have gone unnoticed. Consumers may doubt the safety of other toys made by Mattel and Fisher Price, leading to a loss of sales.

Evaluation may consider:Evaluation may contrast the short-term benefi t 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]

A


Persuasive advertising aimed at children

is OK

Persuasive advertising aimed at

children is unacceptable

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 profi t. Advertising is just one element of the marketing mix at a fi rm’s disposal to infl uence customers. Pursuing profi t is good for society as a whole. Advertising helps fund television • programmes for children. Some of this TV output is educational and arguably benefi cial for the development of the child viewer.As long as the advertising is not • misleading, then it is OK.

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. Th e pressure to buy can be great; this becomes a particular problem when parents are pressured into buying toys they cannot really aff ord.Businesses have a social • responsibility to their stakeholders. Th ey 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 benefi cial to a child’s education/development?• Th e issue may be one of controlling advertising rather than banning it.• Th e 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‘Th e 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

Essay1 ‘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.

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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 fi x and cause signifi cant 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 fi x 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. Th is prevents decision makers from identifying the most important information.

Answers may consider specifi c types of technology and discuss the benefi ts and problems associated with adopting the technology.

Technology Advantages Disadvantages

Computer-aided manufacturing

improves productivity• reduces average costs• consistent quality control• increases fl exibility in • production

expensive to set up• high fi xed costs• redundancies•

Computer-aided design (CAD) /Product life-cycle management soft ware (PLM)

reduces product development • time − e.g. as recently as 1997 General Motors was taking 48 months to develop new cars; by using modern PLM soft ware that time has been reduced to just 12−18 months

cost• training of staff • redundancies•

Internet / intranet

cheap internal communication• access to larger potential • market

secure systems to • prevent dangers from hackers

Evaluation may consider:Technology does create problems for business. A key consideration is ensuring that technology is introduced eff ectively and that there is clear communication with employees.

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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

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