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2.1 Technology and its influences on business

2.1.1 Technology and marketing
The internet
The main two types of e-commerce are B2B buying and selling and B2C buying and
selling

B2B buying and selling

- The internet has helped to cut the costs of ordering new components, parts
and stocks of goods.
- Buyers can use databases for information about items for sale all over the
world.
- Major companies have worked together to create databases of suppliers for
car components. The benefit is that it reduces production cost.

B2C buying and selling

- The internet provides businesses with a way of developing a relationship with
customers.
- The company’s website can reach anyone in the world with internet access.
It is a much more powerful sales and marketing tool than the traditional shop
window.
- If the website is well constructed, buying over the internet can be a time-
saving and less expensive way of making a purchase.
- A good website should have content, community and commerce.
- Benefits of a good website are as follows:

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Problems of e-commerce:
- It is expensive and time consuming to create an attractive and easy to use
website. Businesses need to employ specialist website designers to create
the site and manage it for them.
- The business may lose customers as some of them are reluctant to make
purchases online. They may be afraid of fraudsters stealing users’ bank
details.
- There is not face-to-face communication between buyers and sellers. This
might be important for some customers.
- Poor customer service may occur. Deliveries may be late and customers may
be unable to contact customer services.
- There is limited or unreliable internet access in some countries.

Promotion
- Promotion works best when satisfied customers spread the word of mouth
about products and brands. This can be provided by the internet and social
media sites which are great ways of generating discussion about, and interest
in, products.
- Companies build discussion forums such as wikis and blogs into their
commercial websites.
- Customers spread the message to their friends through links to social media
sites such as Facebook.
- Companies can encourage consumers to provide online feedback to them in
discussion forums.
- Advertising is geared to provide ‘talking points’ about products to encourage
customers to interact with each other.

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2.2 Ethical and environmental considerations

2.2.1 Ethical considerations
Ethics: are the values and principles that influence how individuals, groups and
society behave.
Business ethics: are the values and principles that operate in the world of business.
Some practices may not be ethical but they are still legal

Ethical decisions:
- All business decisions have an ethical dimension.
- Examples:
o Should products that damage consumer health like cigarettes be
withdrawn from the market?
o Should firms make sure that business activities don’t harm the
environment?
- Acting in an ethical way may increase business costs, and some customers be
lost leading to reduction in profits.

Social responsibility:
Corporate social responsibility (CSR): describes the way in which an ethical business
contributes to society.
Examples:
- Firms that don’t use child labor or buy from suppliers that use child labor.
- Provide fair wages for employees.
- Giving a fair price to suppliers – fair trade.
- Minimizing waste and eliminating or reducing pollution.

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2.2.2 The impact of business activity on the environment

Pollution and global warming
- Business activity may benefit the economy as it creates goods such as food
and clothing.
- It may harm the environments as it creates pollution and industrial waste

Water pollution
- Businesses can release waste into water sources, which can lead to depletion
of fish stocks and many more harmful effects.
- Businesses need to budget for wase disposal that conforms to correct
environmental standards.

Air pollution
- Air pollution from business activity such as the generation of coal-fired
energy use to heat and power factories, offices and other businesses is one of
the most serious threats. Keeping to regulations will increase the cost of
businesses.

Global warming
- It is the rise in air and sea temperatures that may be caused by increasing
industrial activity. This may be caused by human activity like cutting down
forests and burning fossil fuels.
- Development: is where people enjoy consuming goods and live longer in
societies that become more prosperous.
- The challenge is to make sure that this growth in prosperity increases over
time.
- Sustainable development: a continued growth in well-being.

Sustainable development
- Businesses contribute to well-being by providing goods and services for
customers, but they may create waste and may harm the environment.
- The challenge to businesses is to produce ‘sustainable’ goods that create less
waste and pollution.
- Many businesses now care for the environment. For example, using wind
farms and solar energy plants, or non-polluting forms of transportation like
electric cars.
- A lot of products that care for the environment are traded. For example,
energy-saving light bulbs, rechargeable batteries, devices that measure
electricity consumption in the home and washing powder that can be used
with cold water.
- Recycling is becoming important in many countries.

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- Recycling: involves converting ‘waste’ products for reuse.

- For example, collecting waste materials, washing them and reprocessing
them into textiles and newspapers.
- Many countries now have collection points for consumers to recycle
materials such as glass, paper and plastic and businesses exist that deal with
processing of these wastes.

2.2.3 Costs and benefits of business activity

Financial costs and benefits
- A business need to look at financial costs and benefits of carrying out
decisions.
For example:
• Cost of borrowing
• Cost of building a factory
• Cost of labor
• Revenue earned from the factory
- A business will consider the amount of profit earned from running a business
when taking decisions.
Net financial return = Financial Revenues – Financial costs
- However business activity will cause external costs and benefits. Then social
cost and social benefit ought to be considered.

Social costs and social benefits

Social benefit: include financial benefits to a company in addition to other
positive benefits from a business activity.
Examples of external benefits: reducing unemployment and increasing GDP.
Social costs: include financial costs to a company plus all other costs resulting
from a business activity.
Examples of social costs: pollution and traffic noise
Net benefit = All benefits – All costs
Example: costs and benefits to a large supermarket chain of setting up a new store in
a large city.

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- Owners and management of the business are interested in financial costs and
revenue.
- Other stakeholders are interested in social costs and benefits which affect
them directly.
- Business activity should only take place if social benefits exceed social cost.
- It is sometimes hard to calculate social costs and benefits and give them a
monetary value. For example, noise pollution.
- Cost-benefit analysis is used as part of the decision-making process,
especially for government projects.

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2.3 Effects of the economic climate on business

2.3.1 Interest rates
Interest rate: is the cost of borrowing money. It is a charge made by the bank for
lending money. It is expressed as a percentage.
- Almost all businesses have to borrow money. They would benefit if the interest
rate is lowered at the time of repayment of debts.
- On the other hand, they will be harmed by a rising interest rate as profits will be
reduced.
- Usually the rate of interest is agreed / fixed at the start of a loan but some times
a variable rate may be charged.

Fluctuating interest rates:

- Interest rates are unpredictable
- The government of a country sets the overall rate of interest through the central
bank. Then the commercial bank will set similar rates.
- The central bank will raise interest if it wants to discourage borrowing in a
country.
- If interest is raised then individuals and businesses who have borrowed earlier
will suffer because they have to pay more money to the bank.
- It will lower the interest rate if it wants to encourage spending.
- If interest is lowered people and businesses are more likely to borrow as they will
pay lower interest. This may be risky as they may be unable to repay the loan
before interest rates rise again.

Islamic finance:
- The earning of interest (riba) is not allowed in Islamic finance.
- Businesses need to be conducted in line with sharia law.
- Banks in Islamic societies use the following forms of finance:
- Ijara: a bank will buy an item like a machine and then lease it back to the
customer. Each month the customer pays lease. The bank is the owner of the
item.
- Murabaha: the bank buy an item for the customer for example, factory building.
Then the customer repays the bank over a period of time in installments. The
payment will be greater than the cost of the item to allow the bank to make a
margin to cover its own costs.
- Musharka: The bank will set up a joint venture with the customer and the two
parties share in any profits.

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Advantages of Islamic finance:

- Costs of borrowing are predictable for borrowers. In contrast to societies where
interest is charged, interest payments can fluctuate on a regular basis as lenders
can change their rates.

2.3.2 Employment, spending and the trade cycle

The business cycle / trade cycle

Business cycle: shows changes in the economy where periods of growth
are followed by periods where growth starts to fall.
Recession: is a period in which economic growth declines from two
consecutive quarters, so over six months.
Slump: is recession that lasts for a long period – around 3 to 4 years or
more.
o Output falls
o Firms lay off workers
o Wages and prices fall
o Prosperity falls
o Business do badly (some cease trading)

Recovery: is a period in which the economy grows following a recession.

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Boom: is a period of prolonged economic growth.

o Output of goods rises
o Firms take on more employees
o Wages and prices rise
o Prosperity rises for many people
o Business boom
Businesses and the business cycle
- Businesses prosper during Boom. Orders are the highest. It is easiest
to sell goods.
- As boom reaches its peak, costs are likely to rise, it becomes difficult
to recruit labor, and wages and other costs rise.
- In the downturn in the cycle businesses will cutbacks such as
reducing the size of labor force and postponing the purchase of new
machinery.
- During recession, businesses should be cautious about taking out
loans and taking on additional fixed costs.
- During periods of recovery and boom, businesses are prepared to
take more risks. The can expand by borrowing more, increasing the
number of employees, expanding into new markets or producing
wider range of products.
Employment and consumer spending
Full employment: is a period where everyone who wants to work can
find a job.
Businesses will flourish when employment is high because there will be a
high demand for goods. The opposite is true
In a global economy, rising unemployment in a large country will lead to
falling spending across many other countries.

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2.4 Globalization
2.4.1 What is globalization?
The nature of globalization
Globalization: involves the free movement of goods, capital, labour and
technology.
- It involves intense competition because products and resources can
be transferred and brought to market all over the world.
- Products, people and capital are highly mobile.

Globalization – opportunities and threats

Globalization: potential opportunities for businesses

Opportunity Impact on businesses

- Domestic entrepreneurs can - Lower fixed costs and higher profit
set up joint ventures with margins.
- more sales revenue leading to
overseas partners. They will
higher profits
use capital and input from both
business owners.
- The joint venture will benefit
from access to local knowledge
and contacts. The foreign
partner provides additional
capital and access to global
markets.
- The internet provides a channel
for accessing global markets,
especially niche markets.
-
- Large companies will benefit - Company can survive better and is
from economies of scale as less likely to bankrupt
they produce in a large scale.
They benefit from low-cost
mass production, advertising
and marketing, competitive
pricing, global recognition, and
mass sales.

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Exporting to other countries – opens up + Increase potential sales – online

foreign markets selling allows for goods to be sent in
from abroad.
- Selling products abroad may be
expensive.
- Products may not be popular
abroad so consumers may not buy
them
Open factories/operations in other + cheaper to make goods in other
countries (become a multinational – countries than at home
high status) - Quality may be lower than at home
- Ethical issues may be involved like
poor working conditions
- Expensive to set up operations in
other countries
Import products from other countries to + importing goods and services from
sell to customers in home country other countries and selling them
domestically may be profitable.
- Products may need
maintenance and support which may
not be provided by the foreign
producer.
Import materials and components from + may be cheaper and easier to
other countries to produce final goods purchase these supplies from other
in home country countries due to the free trade and e-
commerce.
- Suppliers may not be reliable.
- Transport cost may be expensive.

Globalization: potential threats to businesses

Threats Impact on businesses
increased competition at home due to + local businesses may be forced to
increased imports become more efficient as they fear
competition
- Sales of local business may fall if
the imported products are cheaper or
of better quality
- Domestic producers will incur
high cost of transporting their
products overseas.
- Another cost is that of
marketing their products in
new countries.

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Increased investment from + some local firms could become

multinationals to set up operations in suppliers to these multinationals and
home country their sales could increase
- Multinationals create further
competition
- Multinationals may have
economies of scale and able to
afford the best employees
Employees may leave businesses that + this may encourage local businesses
cannot pay the same or more than to use a range of motivational methods
international competitors to keep their workers
- Employees will have greater
choice about where to work and for
which business which will make it
harder for local businesses to keep
their best employees.

Summary:
Globalization led to:
+ More consumer choice
+ Lower prices
+ Businesses trying to be more efficient
+ Many mergers with foreign businesses to sell in foreign markets
- Loss of jobs in poorest countries

Tariffs and quotas:

- A tariff: is a tax that has to be paid in order to trade goods across
borders.
- A quota: is a limitation on the number (or weight) of goods that can
be traded.
Reasons for imposing trade restrictions:
- They can allow infant industries to develop in a country.
- They can protect jobs in a local market.
- It is very difficult for local firms to compete with large global
producers that benefit from lower costs and charge lower prices.
Taxing their products would lead them to charging a higher price to
cover the extra cost. This is beneficial to local producers.

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2.4.2 Multinational companies

A multinational: is a company that has its headquarters in one country
but produces and sells its products in other countries.
Advantages of MNC:
- MNC have the capacity to make use of natural resources in many
countries. For example, oil companies such as Shell drill for oil in
almost every continent.
- MNCs make use of labor in other countries. For example, Nike
produces some products in Vietnam and Indonesia where laborers
have the right skills, but labor cost is low.
- MNCs can access a global market.
The impact of multinationals:
Positive impact:
- MNCs create employment in the countries in which they operate.
- MNCs often help to build up the infrastructure of a country.
- They can help to spread expertise in new technology to a country.
Negative impact:
- MNCs can cause pollution an local environments are damaged
through chemical leaks and destruction of forests.
- MNCs can undercut local firms.
- They take profits out of the domestic economy and pay

2.4.3 Exchange rates

A country’s foreign exchange rate: is the price at which its own currency
exchanges for that of others. For example, the Euro in exchange of
Japanese Yen.
The impact of the exchange rate to business:
- If the business imports goods or services, the exchange rate will
influence the price of its purchases and any changes will make pricing
more difficult.
- If the business exports goods and services, the exchange rate will
affect the amount of foreign currency coming in, and this will change
the amount the business earns.
- It will affect the profit margins.

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Legislation
2.5.1 Employment law, health and safety law and consumer law
The need for legislation
- The government of a country will create law enforcement bodies
responsible for supervising employment, health and safety and
consumer protection laws.
The impact of legislation
- Applying laws will raise business costs. For example, putting safety
guards over machines to prevent accidents raises the cost of
production.
- The benefits should outweigh the costs because of reduced
accidents.
- Training employees to comply with laws is also expensive.

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- Failure to apply legislation will be very costly for business as it will be

held accountable in the law courts for failures leading to industrial
accidents, harm to consumers, etc.
Employment law
- Employment legislation is intended to protect employees in the
workplace.
- Laws covers areas such as :
o Legal minimum wage for their workers so that no worker can
be paid any less than this of a job. LMN can increase costs and
a business may employ fewer people because of the cost
implication.
o Employment contracts. It should set the relationship between
the employer and the employee including terms such as the
scale or rate of pay, the hours to be worked and holiday
entitlement.
o Protection against unfair dismissal. The law establishes the
difference between fair and unfair dismissal. Fair dismissal can
result, for example, from an employee destroying company
property, continually being late,..etc. unfair dismissal would
include dismissing employees for reasons such as
discrimination because they have joined a trade union, or
because of their race, gender or age.
Health and safety law:
- Health and safety legislations covers such areas as suitable
temperatures in the workplace, required training to carry out certain
operations, the maintenance of machinery and equipment, and
lighting in the workplace.
- Failure to comply with health and safety laws will lead to substantial
fines, business premises being closed down and the imprisonment of
directors of companies that fail to comply.
- Training of employees to know how to handle equipment in a safer
manner is also a key obligation of all employers.

Consumer law:
- Consumer protection laws might include:

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o Unfair terms in consumer contracts: Protecting consumers

against unfair terms that are set out in contracts made with
traders. Government consumer protection agencies can
declare contract terms to be unfair if they cause a significant
imbalance in favor of the trader to the detriment of the
consumer.
o Consumer credit act: it states that only licensed traders can
provide credit. They only do so using acceptable credit and
hire agreements.
o Consumer protection from unfair trading: traders should be
honest and fair in dealings with consumers. For example,
goods should appear as described by seller. They should also
weigh as mentioned on the package.
o Consumer protection law helps businesses by setting clear
standards to abide by, which benefit consumers.

2.6 Competitive environment

2.6.1 Competitive markets
Markets and competition
- A market is any situation where buyers and sellers come into contact
with each other.
- A competitive market is one in which there are lots of sellers offering
very similar products
- A non-competitive market is one where consumers only have access
to one or a small number of suppliers.
Consumer spending patterns
- Consumer spending patterns: are the typical goods and services
bought by individuals and groups of consumers.
- Consumer spending patterns depend on:

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o Income: The more income individuals receive the more

spending and savings they will have.
o Lifestyles: which is a way of living and a pattern of buying
associated with individuals. Most people can be grouped in
particular life styles. For example, Western lifestyles which are
associated with high levels of consumption and energy use.
▪ Most consumers are moving into affluent lifestyle
groups: they are more likely to consume a wider range
of products, use more energy and create more waste.
Competitive markets
Reasons for having competitive markets:
- The shrinking globe: nowadays it is easier to transfer products and
services across the world.
- Access to overseas markets: this is due to the agreements made by
governments to reduce taxes and other barriers that previously
prevented imports from entering the home market.
- Low cost of setting up new businesses: businesses can spend capital
to create simple website, selling goods and services, tickets, banking,
insurance and other services.
- Privatization of industries: since 1980s a lot of governments across
the world have sold off some of public enterprises to private
businesses. There are now a number of competing companies in a
range of industries.

- In competitive markets, businesses seek to win custom by:

o Producing high-quality products
o Selling cheap products at lower prices than rivals

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