Chapter 3: Impact of social and legal environment on business Page 12

Ch # 3 social & legal environment of business

SOCIAL FACTORS AND THEIR INFLUENCE ON BUSINESS

▪ Attitudes, values, ethics, and lifestyles influence what, how, where, and when people
purchase products or services, are difficult to predict, define, and measure
▪ People of all ages have a broader range of interests.
▪ The demographics, or characteristics of population, change over time.
▪ As the proportions of children, teenagers, middle-aged consumers, and senior citizens in a
population change, so does the demand for a firm’s products.
▪ Business manager should be well versed with that external social environment
▪ Business need to respond to changes in society, including demographic changes.
▪ If they do not, they will continue to offer products and services that are less relevant.
▪ Examples of some social, cultural and demographic factors are:
- Outing and dining out habits of a particular area or particular region.
- Social media addiction.
- Domestic travelling and international travelling, especially in vacations.
- People interested and concerned with their looks when attending social gatherings.
- People concerned about health and weight.

Social factors in the environment refer to changes in habits, tastes, values and preferences. In the
short-term social attitudes and habits are also affected by fashion.

Cultural factors are the customs, traditions and behaviours of people in a given country it also
includes fashion trends and market activities influencing actions and decisions.

Demographic factors are concerned with a specific aspect of society – the size, spread and
distribution of society.

Some key social factors that have a significant influence on businesses are discussed in the
upcoming areas (headings)

Attitudes and Lifestyle

▪ Consumer lifestyles and attitudes are continually changing due to education, globalization,
urbanization, social media, advancements in technology and advertisements.
▪ These factors rapidly impact the dressing, house decor and food preferences.

Culture

▪ Businesses must understand the dynamics of different cultures. Eg.

- More focus on family values and joint family units in Pakistan than in the Europe
- A tea manufacturer would do better in Pakistan rather than US (who are coffee lovers)
- In only Pakistan you can see Tikka Pizza, Baluchi Pizza, Seekh Kebab Pizza etc.

Social and culture responsiveness

▪ It refers to people’s attitude to work and wealth; role of family, marriage, religion and
education; ethical issues and social responsiveness of business.
▪ Social environment of a given region can have a significant impact on success.
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Values and Ethics

▪ Ethics is “discipline dealing with what is good and bad and moral duty & obligation”.
▪ Moral managers follow the law not only in letter but also in spirit.
▪ Moral management approach is likely to be in best interests of organization in the long run.
▪ They practice and portray the following values:
- Honesty
- Integrity
- Trustworthiness
- Loyalty
- Fairness
- Responsibility (Corporate Social Responsibility)
- Obedience to elders
- Respect of others
- Righteous means of earning.

Demography

▪ It is study of key statistics about the segments of a society, such as, age, gender, race and
ethnicity and location.
▪ It help the businesses define the markets for their products and services.
▪ It also determines the size and composition of the workforce.
▪ Demographics are at the heart of many business decisions.
▪ Businesses today must cater to the unique shopping preferences of different generations or
age groups, each of which require different marketing approaches and targeted products

Age groups

▪ Businesses much pay attention to buying needs and pattern of different age groups; E.g.
- Consumers born after 2000 (millennials) have been exposed to so much change in the
world as compared to parents, they demand products more aligned to their mentality.
- These are technologically savvy with comparatively larger disposable incomes to spend.
They spend more freely and spoiled by more options around them
- Other consumers such as Generation X (born between 1965 & 1980) and baby boomers
(between 1946 & 64) have their own spending patterns.
- Many boomers are nearing retirement and have money that they would prefer to spend
on health and comfort or other investment opportunities
▪ As the population ages, businesses are offering more products that appeal to middle-aged
and senior markets.

Ethnicity and nationality

▪ It is the segmentation or identification of people based on their cultural distinctiveness.

▪ This is generally expressed in language, values, religion, ritual, origin and ancestry.
▪ Companies should recognize the way different ethnic groups behave or react.
▪ Companies should also be mindful of the ethnic sensitivity. E.g.
- In Pakistan, an advertisement of hotel room showing a wine bottle is not acceptable
- Neckless with hanging cross would have good marketability in Christian community.
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Ageing population

▪ For some Western countries, there is an ageing population issue.

▪ Birth rate is historically low, and the traditional family system is not being appreciated
▪ At same time, average life has been increasing and more people are living until an older age
▪ So a larger proportion of population will be of an older age
▪ In some years, there might be a relatively small working population and a relatively large
number of people in retirement.
▪ So businesses should pay attention to this change in ageing pattern in those countries

Government policy for demographic change

▪ A government might try to develop a policy for social and demographic change.
▪ E.g. in a country with ageing population, government might consider following measures.
- Permitting immigration of people from other countries under a controlled scheme
- Increasing average age at which individuals may retire with state entitlement pension.
- Encouraging individuals to work beyond their normal retirement age.
- Providing some form of tax-incentive to individuals/couples who have more children.

Migrated or immigrant population:

▪ In modern world the international boundaries are fading away due to constant and ever-
increasing migration from one country to another due to several reasons.
▪ In many western countries, now there is a decreasing fertility rate however at the same
time the number of migrant population is increasing and their fertility rate is higher.
▪ This is directly affecting the market and businesses in Western world.
▪ Now there is a large market for the Eastern goods and products as well in those countries

Wealth distribution – income and social status

▪ Socio-economic issues affect consumer spending such as poverty and unemployment

▪ Businesses have to define their target markets around different income groups. E.g.
- Luxury watch company would not advertise in classified ad sections of the newspaper.
- Supermarket targets middle to lower income segments by claiming lower prices
▪ Production plans of companies are made on basis of affordability of the relevant market.

Health

▪ Health and well-being are important for businesses to prosper in a society.

▪ Healthy individuals can contribute to economic progress in a country.
▪ Birth rates and life expectancy are important social indicators related to health that
businesses use while doing business planning.
(E.g. a higher birth rate would indicate a greater need for baby products)
▪ Life indicators could also have vital implications for health insurance companies
▪ Also a nation with a higher life expectancy is equipped with a larger labour force.
▪ Also for industries related to drugs, pharmaceuticals and medical equipment the health and
well- being statistics are an important factor to devise business strategies.
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Education

▪ Businesses compete in global economy requiring higher levels of education and training.
▪ Illiteracy among the population threatens the ability of businesses to compete globally.
▪ Quality & quantity of educated population in a society directly impacts the strategy
▪ Good supply of educated and skilled work force helps companies to acquire good talent.
▪ Companies also adapt their advertising and communication according to the literacy level

Law and Order

▪ Law & order situation in either a specific vicinity, city or entire country affects the business.
▪ Following are some negative effects of an unfavorable law and order situation;
- Loss of staff and customers.
- Insurance/security costs become expensive.
- Loss of profits due to stolen goods from businesses.
- Businesses spend money on installing effective security measures e.g. alarms.
- Foreign investment is discouraged and tourism is reduced.
- Business lose skilled people resulting to a decline in productivity.
- Cost of damage to property increases as businesses pay higher insurance premiums to
protect themselves.
- Lower profits affect the decision to expand and employ more people/pay higher wages.
- Crime causes increase in health costs of employees due to injuries or stress.

E.g. During the period of political turmoil in Karachi, many businesses were threatened by
extortionists and they closed their units in Karachi and relocated them in other cities.
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LEGAL ENVIRONMENT AFFECTING BUSINESS

The Role of Legislation in Business

▪ Legal system of a country is very important to businesses.

▪ Law regulates business practices, defines business policies, rights and obligations involved
in business transactions. For example, business laws may:
- Make a business or a transaction illegal
- Impose conditions on certain businesses
- Regulate the rights and duties of people carrying out business to ensure fairness
- Protect people dealing with business from harm caused by defective services
- Ensure the treatment of employees is fair and un-discriminatory
- Protect investors, creditors and consumers
- Regulate dealings between business and its suppliers
- Ensure a level playing field for competing business
▪ Government can change the rules and regulations concerning businesses from time to time.
▪ Managers should ensure that they are up to date with laws.

Different types of Laws affecting businesses

Companies law

▪ In Pakistan, the requirements for incorporation, management, operations and winding up

of companies are provided in the Companies Act, 2017, issued by SECP.
▪ Companies Act regulates companies for protecting interests of shareholders, creditors,
other stakeholders and general public and inculcate principles of good governance.
▪ Companies are required to comply with the requirements of the Act
▪ Companies which do non-compliance will be subject to relevant penalties imposed by law

Partnership law

▪ Law relating to partnership businesses in Pakistan is Partnership Act, 1932.

▪ It includes process of registration and dissolution of firms, rights and duties of partners etc.
▪ Partnership firms have ease of doing business as they don’t have to follow those strict
requirements as imposed by Companies Act on the companies

Health and safety law

▪ Provides rules and regulations about minimum health and safety requirements that must
be provided in the place of business
▪ Employers are sometimes required by law to provide a safe workplace (where employees
are not exposed to unreasonable physical dangers or unreasonable risks to health).
▪ There should also be detailed regulations for particular types of industry/business or type
of business premises (e.g. transport, food, construction and chemical processing)
▪ There might also be voluntary health and safety codes that the government encourages but
does not enforce as legal requirement
▪ Specialist health & safety officers might be employed by company.
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Employment law

▪ To provide protection to employees, against unfair treatment or exploitation by employers.

▪ Business organisations are directly affected by employment laws.
▪ Some of the aspects of employment law are given in the table below:

Minimum wage ▪ Minimum hourly / monthly rate of pay that may be paid to any employee
Working ▪ Maximum hours of work per week or month.
conditions ▪ Maximum retirement age etc
Unfair dismissal ▪ Rights against unfair dismissal by an employer.
▪ Employer must demonstrate that dismissal was not for a reason that law
would consider ‘unfair’.
▪ Otherwise, it might be required to re-employ the individual or pay
him/her huge compensation.
Redundancy ▪ Law may require transferring an employee to another job before opting
for redundancy.
Discrimination ▪ Against various categories of employee
(On grounds of physical disability, gender, race, religion and age)
Gender Equality ▪ Countries including Pakistan have laws for anti-harassment to eliminate
gender biasness, women protection at workplace and gender equality

Data protection law

▪ It might be considered illegal that organisation should be able to:

- Gather and hold personal data about individuals without a justifiable reason, and
- Make use of that data without individual’s permission.
▪ Someone holding and using personal data about individuals should also be under a legal
obligation to:
- Make sure that the personal data is accurate, and
- Ensure its security (not be accessed by any irrelevant person)

Cyber laws

▪ It applies to internet and internet related transactions.

▪ To safeguard individual’s information and confidentiality of clients where transactions are
made over some network, collecting, storing, retrieving and disseminating of data.

Competition law

▪ To encourage fair competition in markets and avoid anti-competitive practices

Monopolies

▪ When a company has a monopoly of a market, it might engage in unfair business practices
(e.g. charging higher prices than a competitive market)
▪ There might be laws to prevent a company from acquiring monopoly control over a market.
▪ When a company grows to that level Government might take measures to protect public.
▪ Similarly restriction or additional conditions can be imposed on a proposed merger to
avoid / resist monopolies
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Anti-collusion regulations

▪ Collusion occurs when some business entities secretly agree to do something for their
mutual benefit that is against public interest.
(e.g. a secret agreement to raise prices, and avoid competition etc)
▪ In many countries, collusion is a criminal offence.

Price controls

▪ Government might impose price controls on certain key products or services (e.g water,
electricity or gas).
▪ Official approval might also be required for any increase in prices.

Sale of goods legislation

Usually specifies there are certain terms in the contract that a consumer may rely on. For
example buyer is entitled to assume:

▪ Title
That the seller of goods actually owns them (i.e. has title to them).
▪ Description of goods
That those goods correspond to the seller’s description.
▪ Quality
That the goods supplied in the course of a business must be of satisfactory quality for the
purpose intended.

Copyrights, Patents and Licenses

▪ To prevent the intellectual property of individuals

▪ Copyrights safeguard “original creations” such as writings, art, architecture and music
from being copied or reproduced. Owner has exclusive right to display and share that work
▪ A Patent is a registered right that gives the owner exclusive right to features and processes
of inventions (including its formula)
▪ A License is a permission to carry out certain business activities or practice under specific
government regulation or certification body.

Legal Environment and Ease of Doing Business

▪ Economic activity requires sensible legal system that encourages growth in marketplace.
▪ These laws include rules that establish and clarify property rights, minimize the cost of
resolving disputes and provide contractual partners with core protections against abuse.
▪ Businesses get strategic analysis to understand the dynamics of the business environment.
▪ A business manager examines many factors, like overall quality of an economy’s business
environment, financial system, market size, rule of law, and the quality of the labour force.

World Bank Ease of Doing Business Index (2003)

▪ This Report ranking is an assessment of business regulations across 190 economies.

▪ There are many other assessments as well but this annual ranking is often cited as the most
authentic indicator of the regulatory environment for business operations.
▪ Ease of Doing Business Index comprises 10 Indicators on basis of which ranking is issued;
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- Starting a Business
- Getting credit
- Construction permit
- Getting electricity
- Registering property
- Protecting minority investors
- Resolving insolvency
- Enforcing contracts
- Trading across borders
- Paying taxes