rer iad So antl-compettve practices (restrictive trade practices) attempts by rms to prevent or restrict competion barriers to entry restctons that mean its difleut for new fims to enter a market En ‘government intervention government becoming involved in an argument, ight or ther dificult situation in order to change what happens {for purpose usable oy 2 consumer for the purpose for which it was intended compensate to replace or balance the fect of something bad ‘Some examples of UK consumer legisiation are: |B Sale of Goods Act 1979: This states ‘hat products sold by businesses must be ofan appropriate quality and fi for ‘the purpose. For example, customers ‘cannot be sold paint that pees off in the sun ater one month ora ‘waterproof coat that lets in the rin, | Food Safety Act 1990: This law means ‘that food shouldbe it for human ‘consumption and comply with safety standards. For example, a business should not sll rozen food if thas defrosted and been retrozen or fresh produce thats decaying. Creer ne INFRASTRUCTURE PROVISION In most countries, the government is responsible for developing and ‘maintaining the nation’s key infrastructure. This includes building schools, hospitals, roads, bridges, dams, railway systems, power generators and government offices. These projects can be very expensive, often costing millions or even billions of dollars. For example, in 2015, the Ugandan government announced that infrastructure investment was its top medium- term economic priority. A 10-year US$1 1 000 milion spending programme was planned involving upgrading transport networks and increasing electricity generating capacity. Heavy expenditure on large-scale projects like this can have big benefits for businesses. This is because private sector businesses are likely to get most of the work. Construction companies, and their suppliers, are likely to benefit most. However, there willbe a multiplier effect. This means that employees will spent some of the money received by these businesses from the government. This will boost demand for all types of businesses. In the Ugandan exampie, it was expected that the 10-year spending programme would have positive effects on agriculture, manufacturing and trade. LEGISLATION Without government intervention, some businesses may not meet the needs of certain stakeholders. Some might go further and exploit vulnerable stakeholders. One of the roles of the government is to provide a legal framework in which businesses can operate and ensure that vulnerable groups are protected. Three areas where legislation has a particular impact on businesses are outlined below. Consumer protection Consumers want to buy good quality products at a fair price and receive good customer service. They want information about products that is acourate and Clear. They do not want to buy goods that may be dangerous, overpriced or sold to them on the grounds of false claims. Without government regulation, some firms may exploit consumers by using anti-competitive practices or restrictive practices. These might include: | increasing prices to higher levels than they would be in a competitive market | price fixing, where a number of firms agree to fix the price of a product to avoid price competition restricting consumer choice by market sharing raising barriers to entry by spending huge amounts of money on advertising, which smaller companies could not match, for example. ‘Some countries have a lot of consumer legislation. Such legislation covers a variety of consumer issues and aims to protect consumers from some of the practices mentioned above. Figure 12.4 shows some examples. Legisiation exists to prevent businesses from making false claims about the performance of their products, selling goods that are not fit for human consumption and selling goods that are not ft for purpose. If businesses break consumer laws, they may be fined and have to compensate consumers for any loss.Tec >> Figue 124 Consumer issues covered by legislation SUBJECT VOCABULARY ‘merger two or more businesses joining together to form one new firm ‘> Pollution from industry can damage the ceaviroament The way products ae promoted The qually of products Competition policy Governments should try to promote competition. This helps to prevent anti- competitive practices and consumer exploitation. How might they do this? | Encourage the growth of small firms: If more small firms are encouraged to join markets there will be more competition. With more small firms the market is less likely to be dominated by one very large firm. Lower barriers to entry: If barriers to entry are lowered or removed then more firms will join a market. This will make it more competitive. For example, in some countries public transport was provided only by the public sector. However, laws have bean changed to allow private ‘companies to provide public transport services. Introduce anti-competitive legislation: Many countries have laws that help to encourage competition. Such laws are often designed to protect ‘consumers from exploitation by monopolies, mergers and restrictive practices. Some countries have special bodies or agencies that are responsible for managing all policy relating to competition and consumer protection. They may also carry out enquiries into mergers, takeovers and anti-competitive practices. Environmental legislation Business activity can have a negative impact on the environment. For example, water pollution may be caused by businesses dumping waste into rivers, streams, canals, lakes and the sea. Air pollution may be caused by businesses releasing waste or gases into the air. Also, some businesses waste resources.rer iad Ce Seay Ua} For example, many argue that some of the packaging used by businesses is unnecessary and that insufficient use is made of recycled materials. One approach used by many govemments is to pass new laws to minimise the damage done by businesses to the environment. Much of the pressure for environmental legislation has emerged owing to the growing concems about global warming. If businesses fail to comply with environmental laws they may be fined or forced to close until the problem is solved. TRADE POLICY Despite the benefits of international trade, governments sometimes believe protectionism use of trade bares to that iti in the nation’s interests to restrict trade. This is called protectionism protect domestic producers maligne ubed te infant industries new industries that are yet to be established 1H protect jobs if foreign competitors threaten the survival of domestic dumping where a business sels goods in producers another county often below cost 1 protect infant industries (new industries that are yet to get established) frase territatonerta ioc sted prevent dumping (where foreign producers sell goods below cost in a reveal domestic market) quota physical mt onthe quantiy of BS nave import allowed ito a country Governments can use trade barriers to restrict trade. subsidy financial support given toa 1H Tariffs: a tax on imports, which makes them more expensive. domestic producer toelp compete with Quota: a physical limit on the amount allowed into the country. ‘overseas firms Subsidy: the giving of financial support, such as grants or tax breaks, to exporters or domestic producers that face fierce competition from imports. Administrative barriers: the use of strict health and safety or environmental regulations and specifications to make importing more awkward. Governments can also influence businesses by forming a trade bloc. This ls where a group of countries in the same geographical region sign a trade agreement to reduce or remove trade barriers. The main benefits to businesses of trade blocs include: the opportunity to specialise in the production of those goods and services which they can produce more expertly or at a lower cost access to wider markets 1B lower costs, if economies of scale can be exploited when sales and output rise 1B protection from large predatory multinationals from outside the bloc. However, trading blocs do have disadvantages. For example, they might protect inefficient businesses or lead to conflict and tensions if the benefits are not shared out fairly between countries. eae seo Hite Interest is the cost of borrowing money and the reward to savers, Interest rates are usually controlled by the authorities and can therefore change. The use of ' 7 interest rates to help control the economy is called monetary policy. Higher interest rates mean that its more expensive to borrow money so demand interest price of borrowed money (and the in the economy is likely to fall. In contrast, lower interest rates will increase ‘reward to savers) demand in the economy because it will be cheaper to borrow. Changes in the ‘monetary policy using changes in interest interest rate can influence businesses. Generally, high interest rates are bad for rales and the money supply to manage the businesses for the following reasons. economyiad Ce Seay ara} When the interest rate rises, costs will increase for any business that has already taken out a loan. The majority of businesses have loans, mortgages or overdrafts (see Chapter 25) to help fund their activities. Higher interest rates will therefore reduce profits. This will cut the rewards of business for the owners and shrink the funds avallable for new investment. Lower levels of investment could reduce the growth of businesses. The purchase of capital goods funded by borrowing is discouraged because its more expensive. This means that businesses will be reluctant to invest in new machinery, equipment and research and development. If businesses postpone or cancel investment, they may fail to keep up with ‘changes in technology. This could affect their competitiveness and their ability to grow. | Higher interest rates usually mean that demand in the economy falls. This is because consumers are less willing to borrow money to fund spending, ‘This will clearly have an impact on businesses. However, certain industries are likely to be affected more than others. Businesses that produce goods bought with borrawed money, such as cars, houses and consumer durables, are likely to sutfer the most. Finally, changes in the interest rate will have a bigger impact on those businesses that have lots of debt. It must also be remembered that lower interest rates can have a very positive effect on businesses. When borrowed money is cheap businesses are likely to invest more and grow faster. > ies cages attest Z, 5% of 0%, | oes BIAORP DUE RERORIIIS, — csarces nwa rasestot cartes soran omic on eur uatasor. Generally higher interest rates are bad for consumers BUT not all of them. | House-owners with mortgages will be affected negatively when interest rates rise. This Is because most people's mortgage payments rise. As a result, they will have less disposable income (income remaining after taxes and bills are paid for) to spend, Obviously, people with larger mortgages: will be hit harder than those with smaller ones. The cut in consumer spending that results from higher mortgage payments will clearly be more severe for businesses. The construction industry and the housing market will be hit hard because most people buy houses using a mortgage.rer iad > Figure 125 EU interest rate, 2008-16 Creer ne | Demand for goods bought with borrowed money will fall when interest rates rise. Many people use loans, overdrafts and crecit cards to fund their spending. When interest rates rise, funding expenditure with borrowed money becomes less affordable; consequently their demand for certain ‘goods and services is likely to fall. They are likely to spend less on non- essential items such as jewellery, new clothes, holidays and entertainment. ‘They may also reduce demand for expensive items like cars, furniture and white goods. 1 Savers will be hit if interest rates are low. This is because they will earn less interest on their savings. Consequently, consumers that rely heavily ‘on income from savings, such as the retired community, will have less to ‘spend. As the global population ages, the impact of lower interest rates on ‘savings will be felt more. Since the beginning of the financial crisis in 2008, interest rates in many countries have been very low as governments tried to stimulate more demand to encourage firms to employ more people, invest more and grow. Figure 12.5 shows the interest rate in the EU between 2006 and 2016. Interest rato (%) 2008 2008 2010 202 zor 2016 Pane sss) ‘All businesses can be influenced by government objectives and policies. For example, if the government allows interest rates to rise, both large and small firms are likely to feel the impact. Both will pay more interest on loans and overdratts for example. However, some of the laws passed by ‘the government may not always apply to small businesses. Sometimes, new business laws only apply to firms above a certain size. Finally, large firs might feel the impact more of some changes in government spending. For example, a cut in spending on the infrastructure in a country is likely to hit large firms more. This is because it is mainly large firms that take on government contracts.Et rer iad Cease) Mees a Sec U Ua > 1 Which of the following is a trade > 3 Which of these measures might barrier? help a company manufacturing A Interest rates power boats? B VAT A Lower levels of corporation tax © Corporation tax B Higher VAT D Tariff Higher income tax D Higher interest rates > 2 Which of these effects are likely to result from lower interest > 4 Which of the following is likely to rates? rise when taxation is decreased? ‘A Savings will increase A Unemployment B Inflation will fall B Business investment Consumer spending may rise Average costs D Less business investment D Taritts Diz feed rascal eat Recor aN fiewsracniuntvans of taxes will be for the next year or six mere ‘tax allowances part of income that is ‘not taxed > cuts in spending on roads and motorway construction Pe ATS Sa TAU Se TUS SS} Most governments set a budget each year, which outlines their spending plans for the future. It also states how revenue is to be raised from taxes. In 2016, a government budget planned some constraints on spending. For example, expenditure on roads and motorways was to be cut by 20 per cent. There would also be a freeze on public sector pay for three years. However, there were a number of measures to help businesses. Some examples are outlined below. ® Tax allowances on investment were increased (this makes investment cheaper 1 terest rates would be held at their current low levels for soveral years. 1 Corporation tax would be reduced from 25 per cent to 20 per cent. 1 Tariffs would be introduced for a range of imported shoes, clothes and fashion accessories Some out of date consumer legislation would be cut ® Negotiations would begin to join an established trading bloc.rer iad Sa ‘budgetary measures actions taken by the ‘government to influence business and the economy Ce Seay Ua} Peau U ty 11 What is meant by the term tariff? 2 Suggest two practices that consumer legislation might attempt to prevent. 3 Describe one possible impact on businesses of the 20 per cent planned spending cuts on roads and motorways. 4 Why do businesses prefer lower interest rates? Give at least two reasons in your analysis. 5 Assess the possible impact of the budgetary measures designed to help businesses.aon at 13 EXTERNAL FACTORS eeu cg Understand the nature of external factors Understand how social, technological, environmental and political factors affect business decisions > Figure 13.1 Global adspend by businesses on social media GETTING STARTED Business decisions are influenced by external factors other Pee Ce Ey Aer eC) environmental, social, technological and political factors. Over time, these change and create opportunities and constraints for businesses. Look at the example below. CASE STUDY: SOCIAL MEDIA AND BUSINESS One of the most revolutionary external factors to affect businesses in recent years is social media. Social media Is the use of web-based platforms, such as Facebook, Twitter, YouTube and Instagram, to exchange news, information, ideas, photographs and other images. Electronic devices, such as smartphones and tablets, enable people to exchange this wide range of data instantly and globally. Social media has become a powerful phenomenon and it is no surprise that businesses are making increasing use of it ~ particularly for marketing their products. In 2016, it was reported that every day around 500 milion tweets were posted on Twitter, 4500 milion ‘Likes’ were expressed on Facebook and {95 million photos were uploaded onto Instagram. Businesses can use social media to gather huge amounts of data about their customers, such 40000 008 2aaio 28000 5 20000 7740 ‘Asspand (USS miton) 11960 10000 5000 ° 2013) 2014 2015 2016 Yeariad aon at as their profiles, their preferences and what they think of products. This is a valuable resource. Businesses have set up links to some of these social media platforms, which allows them to tell people about their products and listen to their views. Businesses can use social media to raise and strength brand awareness, run targeted adverts with real-time results, increase traffic cn their own websites and find out what competitors are doing, > Business and social media en ' 4. Why is social media so important to businesses? 2 How might businesses use social media”? 3 In groups, discuss your own experiences of interacting with businesses. Con social media. Make a list of the possible benefits of such interaction and present the information to the rest of the class. Pen Semele: buinesoas have o del wit vers and esueo tal re complet beyond their control. These external forces can impact on businesses unexpectedly and usually mean that businesses have to make changes to the way they operate. The effects of external factors can be both positive and negative. For example, in 2014, the global price of oil fell by more than 50 per cent. ‘The speed and extent of the fall was unexpected and had both positive and negative effects. Companies in the oil industry were hit hard; their revenues fell sharply and many were forced to reduce their exploration activities, for ‘example. However, in complete contrast, businesses in the transport industry, such as delivery contractors, benefitted because their fuel costs fell significantly. This would have provided a welcome boost to profits. External factors may fall into a number of different categories, which are outlined below.rer iad > Businesses have to adapt to any changes that occur in society. Some Sa urbanisation process of constructing more ‘and more buildings on rural and [recinowoy ‘The development of new technology continues to have a huge impact on SE capital-intensive use of relatively more ‘machinery than labour in production Cicer: ‘examples of changes that have occurred in recent years are outlined below. Increased consumer awareness: Consumers have higher expectations than ever before. They have easy access through the Internet to lots of information about products and are more aware of their rights. As a result, ‘many businesses have become more customer-focused. Changing demand patterns: Changes in society bring about changes in ‘demand for products. For example, modern lifestyles mean many people ‘expect goods to be delivered to their doors. Consequently, there has been ‘a growth in home delivered goods, such as takeaway food and a whole range of personal, domestic and other services. The rapid growth in online businesses has also led to changes in these demand patterns. lm Increased numbers of women at work: In many countries, more and ‘more women have abandoned the traditional childcare role and have ‘combined family life with employment and running businesses. This has increased the supply of labour and helped to increase the number of new businesses. More part-time workers: In many countries there has been a huge increase in the number of people taking on part-time work. This has helped to improve flexibility in business organisations because part-time labour is, more adaptive. Urbanisation: In some countries, such as Brazil, India and China, very large ‘numbers of people have left rural areas to live in towns and cities. This has provided businesses with more labour and created additional markets to ‘which goods and services can be supplied. businesses. New technology results in new products, which in turn provide new market opportunities. Also, new technology means production becomes more capital-intensive and costs are reduced. Inthe primary sector, the use of tractors, mechanical harvesters, grain- ‘drying machines and automatic feeding systems have helped to lower Costs in agriculture, Chemicals and pesticides have also helped to increase crop yields, 1H In the secondary sector, the introduction of robots on production lines has reduced costs. They aré cheaper to employ than people because they can ‘work 24/7. In some factories, production is entirely automated. Computers are used to design products and the information is then fed into CNC (computer numerically controlled) machines that can carry out tasks such as culting, milling, sewing, moulding and welding, The use of technology in service industries has reduced costs. For ‘example, the use of automatic check-in facilities in some hotels has reduced labour costs in the hotel industry. Internet banking has also helped to reduce banking costs because customers can manage their accounts, ‘online. A whole new online retail industry worth billions of dollars has. emerged and looks set to continue its growth. Tho use of IT has helped to reduce administration and communication costs in business. For example, computers can carry out many routine tasks quickly. Huge amounts of data can be gathered, processed, analysed, stored and accessed using computer databases. A wide range of different information can be sent electronically anywhere in the world instantly rarear rer iad Cicer: ‘The rate of technological change seems to increase all the time. Businesses usually welcome technological developments because they often provide new Product opportunities or help to improve efficiency. Changes in technology can shorten the amount of time products can be ‘marketed for. This is because new products are quickly developed to replace ones that use old technology. | Developments in technology often mean that businesses can replace labour with capital. This is welcomed because human resources are often ‘said to be the most difficult to manage. New technology also lowers unit costs. |The development of social media has helped to improve communications between businesses and customers. This allows businesses to remain aware of changing consumer neds. ‘The impact of technology in marketing and in production is discussed in detail in Chapters 34 and 43, respectively cara CASE STUDY: 3D PRINTING 30 printing is @ rapidly developing new technology. Chuck Hull invented itin 1986. However, only in recent years have businesses really started 10 exploit the new technology on a commercial scale. Between 2016 and 2022, the 3D printing market is expected to grow to US$30190 milion although other forecasts are less optimistic. ‘30 printing involves producing a physical object from a 3D digital design made on a computer. The physical object is produced by laser printers. that build up a model by printing very thin layers on top of each other repeatedly over a period of time ~ perhaps several hours. However, 3D printers do not use ink because it would never build up enough volume. Instead, the printer deposits layers of liquid plastic and sticks them together with a type of glue or ultraviolet light. ‘3D printers reduce the need to produce hand-built models. They are said to be around ten times faster than other methods of model production and five times cheaper. This means that models of new products can be produced in hours rather than days. This will help to speed up product development. Another attraction of 3D printing is its wide range of applications. The technology can be used to: |§_make components for cars, aeroplanes and spacecraft produce prosthetics (artificial body parts) for the medical industry provide models and shapes that can be used in education produce a range of personalised products such as jewellery, fashion accessories and toys. ‘3D printers do have some disadvantages. They may cost between Us§25000 and US$50000, although this is less than the more sophisticated rapid prototyping (RP) machines, which can cost between US$100000 and US$500000. The surface on the models is also a little rough compared with production using RP machines. Models can only be made from one or two materials and there are only two colours.Et rer iad aon at > 30 printing aol 1. Assess the possible benefits to businesses of new technology tke 30 printers. Make a clear judgement in your evaluation. J evronment Evidence suggests that as economies grow environmental damage increases. Businesses are often blamed for pollution and congestion. Some examples of other environmental issues are outlined below. GLOBAL WARMING Many governments are becoming increasingly concerned about global warming, which may be affecting weather patterns and climates. Some of the greenhouse gases, such as carbon dioxide, which contribute to global ‘warming, come from factories. Also, economic development means that car ownership and air travel increases. The emissions from cars and aircraft also add to global warming. HABITAT DESTRUCTION ‘Some business development destroys wildlife habitats and spoils the natural environment. For example, around one-half of the forests that once covered the planet are now gone. Forests are important for the survival of the planet. ‘At least 120 out of 620 living primate species will be extinct in the next 10 to 20 years. Many other species are under threat, such as tigers, mountain gorilas and pandas. RESOURCE DEPLETION In addition to the loss of forests, many other resources are at risk of running out | Oil, coal, gas and minerals are non-renewable resources and, therefore, cannot be replaced. Because of this, as business development gathers pace, these resources are depleted. Fish stocks are falling. The world's marine catch increased from 18.5 iin tonnes in 1950 to 82.5 million tonnes in 1992. This huge growth is threatening millions of people who depend on fishing for their livelihoods. ererer iad ‘sustainable development idea that people ‘should satisty their basic needs and ‘enjoy improved living standards without ‘compromising the quality of life of future generations: Cicer: | Fertile soil, which is needed to grow food, is being lost. The loss is caused bby deforestation, poor farming practices, over-grazing, the increasing size of urban areas and land pollution, SUSTAINABLE DEVELOPMENT Many governments are promoting the idea of sustainable development. ‘This means that people should satisty their needs and enjoy better living standards without doing so in ways that will reduce the quality of life of future generations. Business development that denies future generations of resources is not sustainable. This means that the use of resources by businesses and consumers needs to be reduced. If businesses take a sustainable approach, they wil also find it easier to comply with regulations, reduce costs, improve their image and increase profits. Businesses may respond to environmental issues in a number of ways. For example to help reduce resource depletion businesses could: design packaging that can be reused or recycled muse more energy-efficient equipment or renewable energy sources explore ways of seling waste to other businesses as a by-product | reduce business travel and use video conferencing for meetings. rane POSTS) ARS Glee Te a} Most car manufacturers are either developing, or have already launched, alternatives to petrol-fuelled vehicles. This is mainly because of the damage done by cars to the environment and the pressure on ‘governments to reduce emissions as part of global agreements. Evidence suggests that car makers are focusing on electric vehicles (EVs). For ‘example, in 2015, Volkswagen decided to speed up the development of EVs after the emission scandal (Volkswagen was caught changing test results to deceive consumers). Hyundai-Kia plans to launch eight EV models by 2020 and Ford has invested US$4500 milion in EVs and plans to launch 18 models by 2020. ‘Consumers can already choose from the Nissan Leaf range of EVs that produces zero emissions. The car can use a battery that will recharge in four hours and give drivers a range of 107 miles (about 170 km) on one charge. EVs are very cheap to run compared to petrol-fuelled cars: fuel may only cost USSO.04 per mile (US$O.06 per kilometre), at least 20 times less. ‘Another reason why car manufacturers thought that EVs would be popular ‘was because of high oil prices. However, in the last couple of years global cil prices have been low. Figure 13.2 shows the global cil price between 2012 and 2016, 41 Describe two external factors that have contributed to the development of Evs. 2 What are the advantages of EVs for consumers? Give at least two advantages in your analysis. 8 Assess the impact global cil prices might have on the plans of car manufacturers in the future.rer iad Cicer: Figure 132 Global ol prices, 2012-16 ‘Source: http://www.nasdaq.com 3 ty b R Price (USSMbarra) 886s 8388 ey 2012 2013 2018 2015: 2016 ‘Some parts of the world are poiitically unstable. Businesses need to be cautious if they develop interests in such countries. For example, few businesses would have considered setting up operations in Syria, Western ‘Turkey, Iraq and Libya in 2016 owing to severe poltica intabilty. However, Lnstabe fey to change suddenly nd aoitical factors can also influence businesses in stable, democratic countries. become worse ‘The activities of pressure groups can also play a role in influencing business ‘pressure groups group or organisation that activity, Some examples of political factors may include the following. ties to iftuence the opinions of ordinary ope and persuade the government todo qin. 2015, some felt that Greece might leave the EU. This could have something disrupted financial markets and created a great deal of uncertainty in the Eurozone. In 2016, the UK voted to leave the EU. Not many people would have predicted this and the effects of Brexit, as it became called, ae still to be etermined. However, one immediate outcome was a fallin the exchange rate. The value of stering fell by more than 10 per cent against most currencies after the Brexit vote 1m The issue of national security has become a priorty for many governments. If measures designed to improve national security restrict the movernent Cf goods, people and capital, this could have a negative impact on businesses, 1m Pressure groups, such as ASH, which aims to eliminate the harm done by smoking, can affect businesses. For example, it might post some information on its website that further discourages people to smoke. This could clearly affect the tobacco industry. Anew government might be elected which is very pro-business. This might encourage more people to become entrepreneurs. It might also mean that ‘more foreign investment may be attracted, 10rer iad a ease) Businesses of all sizes can be affected by external factors. For example, ‘the unexpected fallin cil prices in 2014 might have benefitted a wide range of businesses from taxi drivers operating as sole traders to a muttinational chemical processor using oil as a raw material. However, it ‘might be argued that large firms might be in a better position than small firms to cope with the negative effects of extemal factors. This is because ‘they might make detailed contingency plans and because they have more resources to fall back on. Tee) Which of these external factors i A Social B Political © Environmental D Technological to help reduce production costs? > 2 Which of the following is a possible social factor that might affect, businesses? A Attitude towards saving B Industrial action by employees © Global warming D The development of water powered cars > 3 The formation of a pressure group campaigning for manufacturers to use less sugar in products is an example of which type of factor? A Technological B Environmental © Ethical D Political > 4 Arise in the number of retired people making themselves available for work is an example of which factor? A Political B Environmental © Social D Human CASE STUDY: ATERRO RECYCLING ‘Aterro Recycling was set up when its founder, Rohan Gupta, wanted to throw away an old laptop without harming the environment. He realised that India did not have a system to deal with the vast quantities of electronic waste (e-waste) that was building up around the country. Computers, laptops, television sets, mobile phones and electronic office equipment are examples of e-waste. In one Indian city, Bangalore, e-waste amounts to 18000 tonnes per year and is stil growing 20 perA. Example of e-waste > Figue 18.3 Projected siz ofthe global reoycting market by 2020 Cicer: cent annually. The growth is driven by rapid developments in technology with the frequent arrival of new, updated and attractive electronic products. E-waste is now the world's fastest growing and most toxic waste material Rohan and his brother wrote a business plan, managed to raise USS6 milion from some venture capitalists and built a smetting factory to iprocess e-waste in Roorkee, a city in the state of Uttarakhand. The business now collects and processes about 1000 tonnes of e-waste a month from over 500 cities in India. The factory uses processes to extract precious metals like platinum, gold and selenium from the e-waste. Revenue is growing rapidly and in 2013 reached US$15 mi ‘Aterro Recycling is now expanding and has processing plants in Mexico and Ireland. Provided e-waste continues to build up and new entrants do rnot monopolise the recycling industry, the future is bright for Aterro. 25000 21000 Recyeing mart value mon) 8 CHAPTER QUESTIONS 11 What is meant by extemal factors? 2 How will Aterro Recycling help to reduce resource depletion? 3 How might developments in technology have impacted on Aterro Recycling? Businesses may be affected by political factors from time to time, 4 Discuss how political factors can affect business decisions. 5 Assess whether Aterro Recycling will thrive in the future. rr14 MEASURING SUCCESS IN BUSINESS ete ed Ure UC SRR e Et cn Revenue Cory Ce ON me ety Orme Ca Employee satisfaction PSE Cs CIN en CU ig OR CON a Ret SR eee eee a Ca A ene Reo main objective is to maximise profit, the amount of profit made by a business can be used to measure its success. Look at the Sens PESTS AU Re ERC) Malaysian-based DiGi is a global telecommunications provider. It has around 12 million customers in Malaysia and provides them with mobile voice, Internet and digital services. In 2015, DiGi won an award for the “Best Managed Public Company in Asia’ (in its category). Its a successful company and the information in Figures 14.1 and 14.2 tends to support this view. > Figure 14.1 DiGi revenue, 2011=15 Revenue (MYR mation) 7200 5800 6800 6400 200 7019 eats 5s) eore 2013) 2018 2015rer iad > Figure 14.2 DiGi prot after tax, 2011=15, Prot MYR ation) 2011 2012, 2013 24 2015 Year 4. What evidence is there to suggest that DiGi is a successful business? 2 In pairs, discuss what other information might be helpful to measure the ‘success of DiGi. Draw up a list and present the information to the rest of the class. ena ‘The success of a business can be measured in different ways. Several approaches are outlined below. REVENUE ‘The amount of revenue generated by a business is a guide to its success. If revenues increase each year, most business owners would feel that they were making a success of their venture. In ‘Getting started’ above, DiGi's revenue rose from MYR 5954 million to MYR 6914 milion over five years. This is an increase of 16.1 per cent. Whether this can be regarded as a success depends €n DiGi’s sales objectives, tracing conditions over the time period and the revenues received by rivals in the industry. Look at the examples below. 1m If DIGI had set an objective of increasing its revenue by 15 per cent over the five-year period, then success can be claimed since the target has been exceeded, 1m Iftrading conditions had been very dificult between 2011 and 2016, then again DiGi might claim that it had been successful 1m If other companies in the same industry had seen thelr revenues increase by, say, 80 per cent, then DiGi’s 16.1 per cent increase does not look so impressive. MARKET SHARE ‘Some businesses aim to increase their market share each year. It is better for a business to have a larger market share than a smaller one. With a large market, share a business might be able to dominate the market; this will raise the profile of the business and perhaps allow it to charge a higher price. Therefore, If a business were continually increasing its market share, it would be considered as successful because it is winning sales trom its rivals. However, measuring market share might be challenging. Information would be needed about the size of the total market and the revenues of the main suppliers in that market. Some of this information might be difficult to obtain. Therefore, Using the value of market shares to measure success may not be easy, as it needs to reflact the market context.a rer iad key Hi canis Bi sip Hogs I borarcan Hl canking Wi ober > Figure 14.3 Market shares inthe aluminium can industry in aFar Eastern country, 2010 and 2015 r\aia Pe SS eS ‘Aluminium can production in a Far Easter country is dominated by four businesses: Zcan, Singh Holdings, Bettercan and CanKing, Figure 14.3 shows the market shares in the industry for 2010 and 2015. In 2010, the total market was worth US$450 million. By 2015, the market had grown to Us$560 million, 2010 2015 4 What is the change in Canking's revenue between 2010 and 2015? 2 Do you think Canking has been successful over the time period? 3 Which company has been most successful over the time period? Explain your answer. 4 Why might it be difficult to measure success using market share? CUSTOMER SATISFACTION Many businesses will look at how consumers’ needs and wants have bbeen satisfied when measuring success. Ifits customer service is good, a successful business will find that it has loyal customers and a growing customer base. Many businesses are becoming more customer-focused and make efforts to get feedback from their customers. They may monitor customer complaints. very carefully. They might do this by having a formal complaints procedure or monitoring comments on social media. This should encourage customers to record complaints without them feeling uncomfortable or threatened. Many businesses recognise that it takes a lot of effort for customers to complain, Therefore, the subject of any complaint should be taken seriously and action should be taken to make improvements, ‘An increasing number of businesses use customer surveys to gather information about customer satisfaction. For example, Booking.com, the online hotel booking company, send emails to customers after every booking made to ask for feedback. The information they gather can be analysed and used to assess customer satisfaction levels. If customer satisfaction levels rise over a Period of time then the company will consider itis being successfulTec So capital employed amount of money invested in a business “V Table 14.1 EU dofintons of frm size Turnover No. of employees Capital employed Less than €2 million Less than 10 Less than €2 million PROFIT Most private sector businesses aim to make a profit. Therefore rising profits should signal improving success. However, a number of factors have to be taken into account I tis possible to make higher profits if there is no competition in the market. Therefore, profits made by a monopoly are not as impressive as profits made in a competitive market. | The amount of profit made by a business will often depend on its size. For ‘example, a large multinational company is likely to make more profit than a sole trader. Itis possible to take into account the size of a business when ‘measuring profit. One approach is to compare the profit to the amount ‘of money invested in the business by calculating the retum on capital ‘employed. Another is to compare the profit with the size of turnover by calculating the profit margin. Both of these approaches are discussed in detail in Chapter 31 | Profit should also be compared with that made by other businesses in the same industry. This will provide a better measure of success because different industries often expect different profit levels. For example, it may not be appropriate to compare the profit made by a farmer with that made by an insurance company. Profit can only be used to measure success if the objective of the business is to maximise profit. For example, some small business owners are often content to make a ‘modest’ amount of profit. They may not want the responsibility or hard work that often comes with striving for higher profits. GROWTH Many businesses aim to grow, therefore the size of the business is important when measuring success. However, there are several different ways of ‘measuring size. The main ones are listed below. 1 Tumover or revenue: The revenue of a business could be used to measure size. For example, Lenovo, the Chinese computer company, is a large business. Its revenue in 2015 was over US$46300 milion. 1 The number of employees: A business with thousands of employees may be considered large. For example, Ford, the US car giant, employed over 199000 peopie in 2015. Market share: It could be argued that a business with a 43 per cent ‘market share is more successful than one that has a 9 per cent market share in the same industry. Coca-Cola, for example, had a 28.5 per cent share of the global soft drinks market in 2011 The amount of capital employed: Capital employed is the amount of money invested in a business. The more money invested the larger the business. EU definitions of size: The EU defines the size of firms according to turnover, the number of employees and the capital employed. The definitions are summarised in Table 14.1. a a Less than €10 million €10 million to €50 million Greater than €50 million Les than 50. $30 c0 249 Greater than 249 Less than €10 million €10 million to €43 million Greater than €43 millionara So ‘overtrading taking on more work than a business can afford to fund effectively rer iad ID You KNOW? 4n 2015, Ergon Energy, the Australian energy company, employed 4447 people. In contrast, Kresta Holdings, the Australian window and soft furnishings company, employed 570 people, Clearly, Ergon is the larger business if size is measured by the number of people employed. However, according to EU definitions of size both would be regarded as large companies. > Paci isa Spanish specialty Figure 14.4 Losada Paclia revenue, 2002-16, ‘A growing business is likely to be considered successful, particularly if growth is sustained over a period of time. However, occasionally businesses try 10 grow too quickly and suffer as a result. They may get caught out overtrading, Which means they run out of resources trying to meet rapidly rising orders. This is discussed in more detail in Chapter 15. Vana ed CASE STUDY: LOSADA PAELLA Marta Losada owns Losada Paella, a food processing business in Murcia, Spain, She manufactures a range of ready-made paella meals ~ a traditional Spanish dish made from rice and a selection of seafood and chicken. She uses secret recipes handed down by her great grandmother. ‘The business was set up in 2002 but has grown sharply since 2008 when she designed her own website. A growing proportion of sales are now generated online. Revenue ( ‘19000 200000 2 002 200820052008. 20NH OTST Year 1. What was the size of Losada Paella in 2016 according to EU definitions? 2 In what year did the size of Losada Paella change? 3 Do you think Losada Paella has been successful?rer iad > Figue 145 BMW dividends per share, 201-15 ‘Source: http/markets.ft.com 1 Figue 146 BMW share price, 2012-16 ‘Source: https://uk-finance yahoo.com OWNER/SHAREHOLDER SATISFACTION How do shareholders judge the success of a business? Most shareholders in public limited companies have bought shares with the aim of making some money; consequently they will focus on dividend payments and share prices. Over time, shareholders would want both dividend payments and share prices to rise. In many countries, large financial institutions, such as insurance providers, pension funds and investment companies, own shares. These groups tend to be very focused on short-term returns. They like to see regular dividend growth and if dividend payments were frozen or cut they might see this a sign of failure or weakness. In their opinion, successful companies are those that increase dividends each year. Figures 14.5 and 14.6 show the dividend payments and share price, respectively, of BMW, the German car maker. It might be argued that BMW shareholders would consider that the company is successful. Its dividends per share have risen steadily from €2.30 in 2011 to €3.20 in 2015. This is, an increase of 39 per cent over the time period. The share price has also increased from around €55 in 2012 to just under €80 in 2016. However, the price did reach €120 in 2015. Shareholders might be a little disappointed that this price was not sustained. 4 3 32 29 ss 25 _ if ° 26 201 2012 2013 2014 2015, Year vend (6) 130 120 110 100 go = eo 370 Se 40 January 2012 Jaruary 2013 January 2014 January 2018 Jarwary 2016 Year ‘Shareholders in private limited companies may have a slightly different view of success than those of public limited companies. Private limited companies tend to be owned by families or groups of people that are known to each other. ‘They are also likely to be fully involved in the running of the business. Success ‘to them might mean survival in the market, rising salaries or business growth.rer iad ‘Small business owners may also measure success differently. For example, they may feel that a business is successful if it continues to provide financial security. EMPLOYEE SATISFACTION The needs of employees in a business are likely to be different from those of shareholders or other owners. Employees depend on businesses for their livelihood. Most employees have no other sources of income and rely on wages. Like the owners, employees want the business to be successful. fa business is growing and profitable, employees are likely to get higher wages, more benefits and perhaps a bonus. They will also fee! more secure in their jobs. However, employees have other needs, which must be met. They will need to be trained so that they can do their jobs properly. They want good working conditions, opportunities to interact with other employees, fair and honest treatment, and opportunities for promotion. Safety at work is also important, as are issues to do with equal opportunities. Generally, employees will want to maximise their financial rewards and welfare. If their employer is able to satisty all, or most of these needs, then in their opinion the business will be considered as successful. Making a business more profitable may not always mean success from an employee's perspective. For example, it a business is laying off workers to cut costs in order to drive up profits, those workers who are made redundant are ?ot likely to consider that the business is successful. Ture iaLucay . Pre vtantseSTT no Many owners set objectives (targets) when running their businesses. This makes it easier to measure success. For example, a business might plan to grow its market share by 5 per cent. If, by the end of the trading year, market share has grown by 6.5 per cent, the business would be considered successful. Targets might also be used to motivate staff, If targets are met or exceeded staff may receive bonuses. Another advantage of setting targets is that they can be adjusted to take into account the current circumstances of the business. For example, during a period of strong market growth a business might set more challenging targets. ue sasssis) Large businesses, particularly public limited companies, have to mest the demands of their shareholders. Consequently, their performance is likely to be measured by the size of the dividends shareholders receive and by how much the share price has increased. Therefore the performance of large companies is usually measured by profits and growth. Smaller firms may have slightly different objectives, such as personal satisfaction. ‘Therefore, their success can be measured by looking at whether these objectives have been met. Los ea > 1 Which of the following is most likely to be used by shareholders to measure the success of a business? A Revenue B Dividend growth © The quality of customer service D Social impactrer iad 2 RING Tse] > 2 Which of the following might be used by a business to help measure customer satisfaction? A Online survey B Labour turnover C Sales forecasts D Cash flow forecast statement > 3 Employees might measure the success of a business by looking at? ‘A Dividend growth B Turnover © Job security D Net profit margin > 4 What must be taken into account when using profit to measure the success of a business? A Labour productivity B The location of the business © Product mix D The size of the business CASE STUDY: QETIC LATEX PLC Qetic Latex Plo manufactures a range of rubber products, such as concentrated latex. I also markets latex examination gloves to medical professionals, high-pressure water hoses, injection plastic and rubber moulded parts and escalator handrails. In 2016, the company won two high protile industry awards for the quality of its latex products. This was. the result of its commitment to product development and investment in a US$50 milion research centre in 2015. However, in the middle of 2016, Qetic faced some internal problems. In order to improve productivity, one of the moulding sections was to bbe converted to automation. This meant that 180 staff would be laid off ~ 16 per cent of the total workforce. The announcement of the job cuts was received very badly by the employees. Two workers protested by chaining themselves to the main gates to prevent the movement Cf suppliers’ vehicles. A week later, the situation became more severe When a representative of the workers said that they would ‘bring the company to its knees’ if the workers were not given roles in another Part of the organisation or paid reasonable compensation for their loss of employment. Some ugly scenes at the main plant were broadcast on television and it was reported that shareholders were very worried about the continuing conflict. This concern was reflected in the share price, Which fell 12 per cent on the day after the broadcast. n> Figure 147 Getic Latex shareholdings key Hil Francia tits I rr meragaort tar lores, D Figure 14.8 etic Latex dividend per share 2011-15 PU 1 Work out the total number of people employed by Qatic Latex. 2 Is Getic a small, medium-sized or large business? 3 Discuss how consumer satisfaction might be used to measure the success of a business like Getic Latex. 4 Describe how shareholders might measure the success of a business. '5 Assess the success of Qetic Latex. Make a clear judgement in your evaluation.