Business and ethical issues
Contents: 7 sections
Ethical is not the same as legal
An ethical decision is one taken on the basis of what the business believes is right, rather than what is cheapest or what the law forces it to do. The gap between the two is the whole topic. A supplier in another country may be paying wages that are perfectly legal there and far below what the same work earns elsewhere, and a business buying from that supplier has a decision the law does not make for it.
That gap is why an ethical question is a business question. The business is choosing between a lower cost and a reputation, and both of those appear in its accounts sooner or later.
The issues 0264 names
| Issue | What it means in practice | Why the business is exposed |
|---|---|---|
| Child labour | Children working in a supplier's factory or fields instead of being at school, often several steps down a supply chain the business does not own | It is illegal in most markets the business sells to, and one photograph ends years of brand building |
| Paying fair wages to employees | Paying above the legal minimum where the minimum is not enough to live on, and paying overtime properly | Low pay raises labour turnover and absenteeism, and the cost of constantly recruiting can exceed the wage saved |
| Paying fair prices to suppliers | Not using buying power to force a small farmer or workshop below the cost of production, and paying on agreed terms | Suppliers squeezed too hard cut quality, miss deliveries or go out of business, which interrupts production |
| Using suppliers who do not damage the environment | Checking that materials are not produced by clearing forest, polluting rivers or dumping waste | Customers and large retail buyers ask, and a business that cannot answer loses the contract |
The last of those is the one place this subtopic and 6.3 genuinely touch. Handle it as a supplier choice here, because that is what makes it an ethical issue, and leave the damage itself and the laws controlling it to 6.3.
How a business responds
- Write a code of conduct setting out the standards suppliers and employees must meet, and put it in the contract so it can be enforced.
- Audit suppliers, by inspecting factories rather than accepting a written promise, and drop those that fail.
- Pay a certified fair price, using a scheme whose label customers recognise on the packaging.
- Raise its own wages above the legal minimum, and publish what it pays.
- Train buyers so that purchasing targets do not quietly push suppliers below cost.
- Publish a supplier list, which invites scrutiny but makes the commitment credible.
- Refuse the order. Turning down a contract that can only be met by cutting standards is the response that costs most and proves most.
Doing nothing is also a response, and it is the one most businesses under price pressure take. Say so where the case points that way, because pretending otherwise makes an answer read as opinion rather than analysis.
What it costs and what it earns
| Advantages of being ethical | Disadvantages |
|---|---|
| Better reputation, which supports a higher price and wins contracts with buyers who audit their suppliers | Costs rise, because ethical suppliers, higher wages and audits all cost more than the alternative |
| More loyal customers, so sales are steadier | A higher price may push price sensitive customers to a cheaper competitor |
| Easier to recruit and keep employees, cutting turnover and training costs | Some markets and suppliers have to be given up, so the choice of supplier narrows |
| Less risk of fines, boycotts and the cost of a public scandal | Profit falls in the short run, which shareholders may resist |
| A defence when a rival is caught doing the opposite | The claim must be true. Being caught overstating it does more damage than never claiming it |
Attach figures to that, because a business answer with numbers in it beats one without. Suppose a clothing business has revenue of $1000000 and cost of sales of $600000, so gross profit is $400000. It moves to suppliers who pay their workers properly, and its cost of sales rises by 15%:
New cost of sales = 600000 x 1.15 = $690000
New gross profit = 1000000 - 690000 = $310000
Gross profit has fallen by $90000. To get back to $400000 the business needs revenue of $1090000, a rise of 9%. So the real question is whether the ethical claim will lift sales or prices by that much, and that is a marketing judgement, not a moral one.
Making the decision, which is where the evaluation marks are
The 8-mark part will be something like "Do you think this business should stop using this supplier? Justify your answer." Both sides are easy; the mark comes from what the answer depends on.
- Who the customers are. A premium brand selling to shoppers who read labels gains far more from an ethical claim than a discount retailer whose customers buy on price.
- Whether it sells to consumers or to other businesses. A consumer brand is visible and vulnerable. A component maker selling to factories is judged on price and reliability, though its large customers may audit it.
- How visible the business is. A well-known name attracts attention that a small one does not.
- The size of the cost against the size of the risk. $90000 of extra cost is worth paying to avoid a scandal that would cost far more, and not worth paying if nobody will ever know or care.
- The time frame. Ethical decisions usually cost now and pay later, so a business fighting for survival this year may decide differently from one planning ten years ahead.
Finish with a decision. "It depends" on its own earns nothing; "it should change supplier, because its customers pay a premium for the brand and losing that reputation would cost more than the $90000" is a justified decision.
Common mistakes
- Answering that the business should be ethical because it is the right thing to do. Examiners award marks for business consequences, not for moral statements.
- Confusing ethical with legal. Following the law is the minimum, and ethics is what a business does beyond it.
- Giving only the advantages of being ethical when the question asked for both sides.
- Saying being ethical always increases sales. It only does so if customers know about it and are willing to pay.
- Ignoring the cost entirely, so the answer has no trade-off in it and cannot reach the top of the evaluation band.
- Writing about pollution and legal controls, which belong to 6.3, when the question is about how the business treats employees and suppliers.
- Assuming all customers care. Price sensitive customers often do not, and saying so is a real evaluation point.
- Ending with "there are advantages and disadvantages" instead of a decision with a reason.
What the syllabus asks for on this topicSyllabus points
Syllabus points
- Identify ethical issues that may affect businesses, including child labour, paying fair wages to employees, paying fair prices to suppliers, and using suppliers who do not damage the environment.
- Explain how businesses may respond to ethical issues.
- Explain the advantages and disadvantages of a business being ethical.
Related CIE 0264 Business topics
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