Theme 4 - Business

  • Created by: iampriyal
  • Created on: 12-05-19 22:03

Implications of economic growth

Employment patterns:

  • Growing economies start to see changes in employment patterns; working women, migration, the rise of the multi-job, home working and the search for a better work-life balance. 
  • The countries that manage to pull themselves out of poverty and get richer are those that are able to diversify away from agriculture and other traditional products. 
  • As labour and other resources move from agriculture into modern economic activities, overall productivity rises and incomes expand.
  • These economies see a structural change in employment from primary sector businesses to secondary and tertiary. 
  • In essence, there is the rise of the service sector as incomes rise and so does the demand for; cleaners, gardeners, hairdressers, restaurants, shopping etc. 

Trade opportunities:

Economy growth = rise in disposable income & consumption growth = increase in demand for goods = increased revenues and profits = opportunities for trade

Basically – economic growth means more money and more money means trading can be made easier/possible – can afford to pay tariffs etc. for imports and exports. 

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Indicators of growth

  • GDP (Gross Domestic Product) – a measure of the size of an economy, the sum of everything a country produces. 
  • Health – e.g. life expectancy. Higher life expectancy = more years paying taxes which is good for the economy. 
  • Literacy – the percentage of adults who can read and write. The higher the literacy level the better. 
  • HDI (Human Development Index) – it combines; life expectancy, education and income of the population. 
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Specialisation and Competitive Advantage

Specialisation = a production strategy where a business focuses on a limited scope of products or services – in order to gain greater degrees of efficiency. 

Competitive advantage = the idea that a business should specialise in any area where it can perform better than its competitors. 

(Comparative advantage = the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals). 

Benefits of specialisation:

  • Increased productivity and output = reduced average costs and economies of scale.
  • More resources being devoted to the industry = the scale of production can be increased to gain economies of scale. 
  • Increased productivity leads to GDP growth and increased sales which will boost economic growth. 

Disadvantages of specialisation:

  • A country may become overly reliant on one industry – this does not spread risk.
  • Other countries may become cheaper in the same industry as well – therefore making it harder to compete. 
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FDI (Foreign Direct Investment)

FDI = investing by setting up operations or buying assets in business in another country. (When a foreign business invests in another). 

  • Many businesses outgrow their home markets and in order to grow need to expand into other markets. 
  • Most firms want to grow larger because higher sales levels help to boost total profit.

FDI benefits to the host country:

  • Brings high paying, new jobs.
  • Brings new technology and creates new markets.
  • Increases exports. 
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Trade Liberalisation

Trade liberalisation = the process by which international trade is made easier through a relaxation of the rules which govern it.

Benefits etc. of trade liberalisation:

  • Makes markets more competitive.
  • Creates opportunities for business.
  • Consumers benefit as liberalised trade can help lower prices and broaden the range of quality goods and services available. 
  • Companies benefit as liberalised trade diversifies risk and channels resources to where returns are highest. 
  • Trade openness can also facilitate investment and increases in productivity. 
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Political Change

How has political change led to globalisation?

  • Politics used to be carried out by individual governments who wanted to protect the interests of their country. 
  • NOW – politics happens on a global scale with regular meetings between heads of state, etc. Think EU & other organisations such as the WTO (world trade organisation). 

What has the impact of political change been on business?

  • Has led to less protectionist policies (tariffs, quotas, etc.) and more open trade between nations. The planet is now one market. 
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Reduced cost of transport and communication

How has it led to globalisation?

Communication – Television, mobile phone technology and the internet have allowed information and ideas to travel quickly. 

Transport – has become cheap and quick. – E.g. people from other countries can travel to the UK to seek better paid jobs. & Businesses can ship products and raw materials all over the world more easily. 

What has the impact of reduced costs of transport and communication been on business?

  • Large containers now means that it is possible to reduce costs so that UK businesses can produce goods overseas and still be competitive. 
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Increased significance of transnational companies

Transnational company = a multinational company that works across national boundaries.

How has it led to globalisation?

  • Flows of goods and capital have driven globalisation. These flows are made possible by the gradual lowering of barriers to trade and investment across national borders. – Thus allowing for the expansion of the global economy.
  • TNCs use cheap labour in LEDCs to mass produce goods for global market. & TNCs spread globalisation through heavy global advertising. 

What has the impact of the increased significance of transnational companies been on business?

  • The lack of minimum wage means this keeps costs low, which gives the TNC productive efficiency and high profits. – They use this to invest in new technology and product innovation to crush competition. 
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Increased investment flows (FDI)

How has FDI led to globalisation?

  • Businesses outside of an important market trading bloc will invest in a business or set up production inside the trading bloc to get around tariffs. 

What has the impact of FDI been on business?

  • Can have a damaging effect on domestic producers, competition and possible loss of production for domestic rivals, loss of control over key industrial sectors. 
  • Positive impact – can give a country income generation, jobs, GDP growth, skills transfer, and the local businesses will experience the multiplier effect etc. 
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Migration

How has migration led to globalisation?

  • Many countries maintain extensive legal barriers to prevent foreigners seeking work or residency from entering their national borders.
  • Immigration policies across the world are becoming stricter as governments attempt to minimise the economic, cultural and security impacts of large movements of people between nations.
  • In the EU there is free movement of people between nations to work. 

What has the impact of immigration been on business?

  • Immigration provides a source of low income workers for the host nation as well as a pool of young able bodied skilled workers. 
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Structural change

How has structural change led to globalisation?

  • Rise of new economic powers has been driven by a shift for LDCs to secondary sector activities from primary activities such as mining and agriculture.

What has the impact of structural change been on business?

  • Manufacturing is often labour intensive which generates jobs, income and demand for the nation. 
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Tariffs

Tariff = a tax placed on an import to increase its price and decrease its demand.

  • Tax can be imposed by governments to raise revenue and to restrict imports.
  • A tariff is likely to raise the final price to the consumer – therefore a fall in demand for the goods. – Consumers will switch consumption to domestic goods.

Tariff – impact on business:

  • To protect fledgling domestic industries from foreign competition. 
  • To protect ageing and inefficient domestic industries from foreign competition. 
  • Foreign producers who face the tariffs cut production due to reduced demand – a reduction in production can mean loss of jobs. 

Why are they imposed?

  • To raise tax revenue.
  • For environmental reasons; a tariff could be placed on goods which may have negative externalities. 
  • Protectionism; to allow domestic firms and infant businesses a chance to grow without being swamped by international competitors. It also protects the balance of trade. 
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Tariffs cont..

Tariffs - Advantages

  • Domestic goods do not incur the tariff and so are likely to be cheaper
  • Allows domestic businesses to sell more because they gain a price advantage compared to imports
  • It can protect new infant businesses from being swamped by international competition 
  • It can aid economic growth by improving GDP
  • It can raise important tax revenue for the government which can be spent on infrastructure 
  • It reduces imports so improves the balance of trade

Tariffs - Disadvantages 

  • High import prices won't put off many people
  • Unfair competition 
  • May just increase prices for consumers
  • Restricts the volume of trade
  • Other countries may impose their tariffs in response to this on their imports - could start a trade war. 
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Import Quotas

Quota = a physical limit on the quantity of a good imported or exported. It is an example of a physical control (opposed to a monetary control). 

  • Imposing a limit on the quantity of goods that are imported will increase the share of the market available for domestic products (made in the home country). 

Why are they imposed?

  • Allows a country to be sure of the amount of the good imported from the foreign country. 
  • To protect jobs of domestic producers.
  • Imposed as a bargaining chip to be used in negotiations on trade.
  • To protect strategic industries such as defence and agriculture. 
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Import Quotas cont..

Import quotas – advantages:

  • Boosts local investment.
  • Protects domestic businesses.
  • Creates more job opportunities. 
  • Goods become less expensive. 

Import quotas – disadvantages:

  • Less exporting opportunity for all producers and higher prices for all consumers.
  • Quotas are complex – require a lot of paperwork indicating exact amounts of products for each country facing a quota.
  • Difficult to measure the precise degree of protection quotas offer.
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Other trade barriers

There are other more subtle ways for a country to protect their domestic producers from foreign competition:

  • Product quality requirements restricting certain products that don’t meet the standards required. E.g. technical barriers to trade (TBT). 
  • Subsidies or tax breaks given to local producers to make their goods more competitive.
  • Insistence on trade marks, intellectual property and copyright protection. 
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Subsidies

Subsidy = a way of a government protecting their domestic markets. 

Advantages of Subsidies

  • Subsidies stimulate demand which may allow struggling firms to improve their order books, allowing investment into more efficient production
  • These have a positive effect on the balance of payments by reducing imports and increasing exports from firms receiving the subsidies 

Disadvantages of Subsidies

  • Artificially inflating profit margins of inefficient  firms can prevent them from striving for efficiency gains that would allow them to be competitive without the subsidy 
  • In order to fund subsidies, the government may need to increase taxation - theoretically burdening the subsidy on firms in industries where subsidies are not given 
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Trading blocs

A trading bloc = a type of intergovernmental agreement to reduce regional trade barriers. 

  • Depending on how closely the members wish to integrate their economies they may form different types of trading blocs such as: 

Free trade areas, customs unions (e.g. airports), commons markets and full economic & monetary union (trading in the same currency). 

Advantages of being in a trading bloc:

  • Freedom to trade.
  • Enlarged market.
  • Protection from international competition outside of the bloc.
  • Freedom of movement of people.

Disadvantages of being in a trading bloc:

  • Retaliation – other blocs may be created as a result.
  • Protectionist – having a trade bloc may not help trade liberalisation - the WTO want a reduction on barriers to trade between all countries. 
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Examples of Trade Blocs

EU and the single market:

The EU is a single market (also known as a ‘common market’). 

The single market guarantees the free movement of people, goods, services and capital throughout the member states.  

  • Businesses do not have to send their goods through customs controls or pay taxes when taking goods from England or Scotland. 
  • Since 1973 there have been no taxes or tariffs or customs controls between EU countries. 

ASEAN:

= The Association of South East Asian Nations

  • It is a 10-member international body that represents more than 500 million people living in the region. Some members include: Thailand, Indonesia, Malaysia, the Philippines and Singapore. 
  • It has negotiated a free trade agreement among member states and with other countries such as China, as well as eased travel in the region for citizens of member countries. 
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Conditions that prompt trade

Push factors = threats in a domestic market that force a business to sell abroad. 

Examples of push factors:

  • Saturated domestic market. 
  • Competition. 
  • Low growth opportunities. 
  • End of the product lifecycle at home.

Pull factors = opportunities that encourage a business to sell abroad. 

Examples of pull factors:

  • Opportunity to gain economies of scale
  • Opportunity to exploit competitive advantages in new markets. 
  • Risk spreading.
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Conditions that prompt trade 2

Offshoring:

Offshoring = when a business relocates its operations to another country. 

  • This is to take advantage of low labour costs in manufacturing, cost efficiencies and supply chains. 
  • It has to be more economical to produce goods abroad and transport them to the UK than to pay UK wages to be profitable. 

Outsourcing:

Outsourcing = when a business contracts out a function to a third party business that may or may not be located in another country. 

  • May be marketing research, legal work, accountancy, or even human resources functions can be carried out by outsourced companies. 
  • The most common example is a call centre in India. 
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Trade Blocs Dis/Advantages

Advantages

  • Free movement of goods between members gives the potential to create a larger 'single market' 
  • External tariff walls insulate the business from competition from another part of the world
  • As trade grows between neighbours, it becomes economic (and necessary) for governments to provide infrastructure support
  • The advantages become much greater if there is free movement of labour as well as free movement of goods i.e. EU

Disadvantages 

  • Competition increases due to freer trade so those with monopoly power may find it competed away
  • To create a single market new rules and regulations may be agreed including minimum wage rates. 
  • The availability of easily accessed neighbouring markets may reduce enterprise in relation to distant but dynamic ones such as China
  • There may be common factors which create problems e.g. low commodity prices 
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Assesment of a country...

Assesment of a country as a market

  • Levels and Growth of disposable income
  • Ease of doing business
  • Infrastructure 
  • Political Stability 
  • Exchange rate

Assessment of a country as a production location

  • Cost of production
  • Skills and availability of labour force
  • Infrastructure 
  • Location in trade bloc 
  • Government incentives 
  • Ease of doing business 
  • Political Stability 
  • Natural Resources
  • Likely return on investment
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Reasons for global mergers and joint ventures:

  • Merger = 2 or more companies merging to become one company.
  • Joint venture = 2 companies deciding to work together on a specific project. 
  • Reasons why: To spread risk over different countries/enter new markets, to acquire brand names, to get resources the company needs more easily/cheaply than going after them themselves, to increase global competitiveness.
  • Joint venture evaluation = (+) lower level of commitment/risk, (+) good way to test waters to see how well companies work together, (-) much more limited scope, (-) can’t benefit from integration. 
  • Merger evaluation = (+) useful where companies want to become fully integrated, possible savings that can be passed on to customers, knowledge sharing etc., (-) higher commitment/risk, very difficult to reverse, can be difficult to get right, difficult period of time for employees etc. 
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Reasons for global mergers and joint ventures

  • Merger = 2 or more companies merging to become one company.
  • Joint venture = 2 companies deciding to work together on a specific project. 
  • Reasons why: To spread risk over different countries/enter new markets, to acquire brand names, to get resources the company needs more easily/cheaply than going after them themselves, to increase global competitiveness.
  • Joint venture evaluation = (+) lower level of commitment/risk, (+) good way to test waters to see how well companies work together, (-) much more limited scope, (-) can’t benefit from integration. 
  • Merger evaluation = (+) useful where companies want to become fully integrated, possible savings that can be passed on to customers, knowledge sharing etc., (-) higher commitment/risk, very difficult to reverse, can be difficult to get right, difficult period of time for employees etc. 
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Reasons for global mergers and joint ventures

  • Merger = 2 or more companies merging to become one company.
  • Joint venture = 2 companies deciding to work together on a specific project. 
  • Reasons why: To spread risk over different countries/enter new markets, to acquire brand names, to get resources the company needs more easily/cheaply than going after them themselves, to increase global competitiveness.
  • Joint venture evaluation = (+) lower level of commitment/risk, (+) good way to test waters to see how well companies work together, (-) much more limited scope, (-) can’t benefit from integration. 
  • Merger evaluation = (+) useful where companies want to become fully integrated, possible savings that can be passed on to customers, knowledge sharing etc., (-) higher commitment/risk, very difficult to reverse, can be difficult to get right, difficult period of time for employees etc. 
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The impact of movements in exchange rates

  • If the pound (£) appreciates (gets stronger) against other currencies then UK exports to other countries will be more expensive. 
  • If the pound (£) depreciates (gets weaker) then exports will be cheaper.
  • If a business imports while there is a depreciation it will make those imports dearer. 

Effect of the exchange rate depends on:

  • Inflation; depreciation can cause inflation and this will lead to uncertainty in business.
  • Recession; if there is a weak pound this is great for exports at lower prices but if there is a recession in the country buying the goods then demand will still be low.
  • PED; if goods are price inelastic then the lower price due to the weak pound won’t affect demand. 
  • Raw materials; effect of appreciation or depreciation depends on how many raw materials the business buys. 
  • Competition; effect of appreciation or depreciation depends on how competitive the market is that the business trades in. 
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Michael Porter (1985) – competitive advantage

A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. 

Low-Cost Leadership

  • With this strategy, a business will seek to produce the same quality products as its competitors at a lower price. 
  • The industries typical of this strategy are standard mass produced items
  • Large business typically do well as they can benefit from the largest reduction in average costs and EOS.
  • They may gain cost leadership due to: good resource management, efficient production methods or waste minimisation. 

Differentiation 

This is when a business produces a unique product or gives a unique service. 

  • With uniqueness, the business can charge a premium price to its market segment
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Skills shortages

Skills shortage = when there is a lack of workers with the right qualifications in the industry.

  • Businesses which follow a differentiation strategy are more vulnerable to skills shortages as they will require more skilled staff. 
  • Skills are a key driver of productivity and source of competitive advantage. However other developed countries are outperforming the UK on measures of skills (especially among younger people), which could threaten our ability to compete internationally.
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Marketing

Global marketing strategy = when a business does not differentiate its products or marketing between countries. – The same product is sold in many countries with some fine tuning of the product, price, place, etc. 

Global marketing = viewing the world as a global marketplace, creating products for a global audience.

Advantages to global marketing:

  • Economies of scale in production and distribution.
  • Lower average marketing cost.
  • Power in the market as your brand is known.
  • Consistency in brand image. 

Disadvantages to global marketing:

  • Differences in consumer needs, wants and usage patterns for a product.
  • Differences in consumers’ response to marketing mix elements. 
  • Differences in brand and product development and the competitive environment. 
  • Differences in the legal environment, some which may conflict with those of the market. 
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Glocalisation

Glocalisation = the development and sale of products to customers around the world which reflect specific local customs, tastes and traditions. 

  • This is the idea that a MNC should “think global and act local” to personalise their marketing. 
  • E.g. McDonald’s – adapt food to cater for different preferences around the world. 
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Different marketing approaches

POLYCENTRIC (the international approach) – adapting the marketing mix to each market to appeal to local customers and to maximise sales in different countries. (Expensive).

ETHNOCENTRIC – standardising the product for all markets to keep costs low. – Products sold without adaptations. E.g. Ikea or Apple. 

GEOCENTRIC – a mixture of polycentric and ethnocentric. – Businesses can have some of the pros of a standardised approach to get EOS but cater for needs of individual markets to maximise sales. 

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Adapting the marketing mix to global markets

  • Price: decisions around price need to take into account local factors such as incomes, taxes, rents and other costs. Price will also reflect different local factors, such as wage rates and taxes. 
  • Product: can take one of three approaches – polycentric, ethnocentric or geocentric. 
  • Promotion: when promoting products in global markets, businesses need to be conscious of language differences. 
  • Place: Businesses need to take account of how local consumers typically buy their products. E.g. in physical stores or online? 
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Global niche market

Global niche market = 

  • A very small market in each country, but the combination of all the countries together make enough demand to make the business profitable.
  • A subset of a global market.
  • Characterised by loyal customers and premium prices. 

Advantages of selling in a global market niche:

  • There is less competition and greater customer loyalty.
  • Prices are likely to be higher and therefore profits may be greater.
  • Specialist products reduce PED and premium prices may be possible.

Disadvantages of selling in a global market niche:

  • Some of the possible global economies of scale may not be achievable as each market will need individual attention.
  • Co-ordination and communications may be more difficult across differing brands and markets. 
  • Some products may require unique ingredients/ production techniques reducing the scope for EOS.
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Cultural/social factors

Considerations for businesses:

  • Cultural differences.
  • Different tastes.
  • Language.
  • Unintended meanings.
  • Inappropriate/inaccurate translations. 
  • Inappropriate branding and promotion. 
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Multinational company (MNC)

Multinational company (MNC) = a company that owns or controls production or service facilities in more than one country. 

  • Multinationals are a beacon of global capitalism, bringing employment, income and new technologies to poorer countries, driving up incomes and aiding development. 
  • In return, wealthier countries benefit from being able to buy cheaper goods.
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Positive impacts of MNCs in other countries

  • Creates employment – jobs available for local people, thus reducing numbers of unemployment and the resultant drain on local resources.
  • Increases skills base – many MNCs operate training schemes for local people to learn how to use machinery. 
  • Increases standard of living – an increase in earnings increases taxes paid within the country and gives more money to spend on services. 
  • Raises country’s profile – the movement into a particular country is a statement about its pro-business environment and political stability. 
  • Improves balance of payments – many goods made by MNCs are exported to other nearby countries. This increases the amount of money earned by the country.
  • Improves infrastructure – MNCs often improve communication links within a country, e.g. road, rail and port facilities are updates and expanded. 
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Negative impacts of MNCs in other countries

  • Low paid jobs – mainly low paid jobs are provided for local people. Higher paid managerial jobs go to workers brought in from the head office country. 
  • Poor safety record – poorer countries often have poorer safety standards, and governments are willing to turn a blind eye. 
  • Increases urbanisation – most jobs created by MNCs are usually found in or close to urban areas. Hope of securing these jobs attracts more people from rural areas to cities. 
  • Widens poverty gap – although wages are low in factories, they are higher than elsewhere. This increases the cost of living for all, as prices of goods rise. 

Other negative impacts:

  • In developing economies, big MNCs can use their economies of scale to push local firms out of business. 
  • In pursuit of profit, MNCs often contribute to pollution and use of non-renewable resources – puts the environment under threat. 
  • MNCs have been criticised for using ‘slave labour’ – workers are paid a lot less compared to western standards. 
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Ethics

Ethical business behaviour = the branch of ethics that examines questions of moral right and wrong arising in the context of business practice or theory. 

  • Includes working towards the ending of child labour, forced labour, and sweatshops, and looking at health and safety, labour conditions and labour rights. 

Ethical trade = retailers, brands and their suppliers take responsibility for improving the working conditions of the people who make the products they sell. 

CSR = a business assessing and taking responsibility for its effects on the environment and its impact on social welfare. It involves the idea that businesses bear a responsibility that stretches beyond their shareholders. 

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Stakeholders

  • Owners; want high profits, high dividends.
  • Employees; want good working conditions, job security and a living wage.
  • Customers; want ethical products, fair trade, renewable, sustainable, product safety.
  • Suppliers; want orders, contracts and payment on time.
  • Government; want taxes and to ensure employment and emission laws are not being broken.
  • Locals; want low pollution, less industrial traffic lorries, less visual blight, less noise and jobs.
  • Managers; want job prospects, job security, profit-linked bonuses and share issues.

Stakeholder conflicts:

  • Shareholders and employees – employee welfare comes at a cost. A conflict could occur if shareholders insist that rewards to employees should not come at the expense of dividends. 
  • Shareholders and customers – charging higher prices will help boost shareholder returns but reduce the purchasing power of customers. 
  • Shareholders and the environment – in an effort to maximise profit, a business might neglect its responsibilities towards the environment. 
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Controlling MNCs

Factors to consider:

  • Political influence – e.g. from the government. 
  • Legal control.
  • Pressure groups – e.g. Greenpeace. 
  • Social media.
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