advantages and disadvantages of a business being ethical

6.4.1 Ethical Issues

What does “being ethical” mean for a business?

An ethical business carries out its activities in a way that is morally right and socially responsible. This means:

• Treating employees fairly and safely.
• Providing honest information and fair treatment to customers.
• Protecting the environment and minimising negative externalities (unpaid side‑effects such as pollution).
• Contributing to sustainable development – meeting present needs without compromising the ability of future generations to meet theirs.
• Complying with all relevant laws and regulations.

Stakeholder groups and their objectives

Key stakeholder groups and what they expect from the business:

• Customers: safe, reliable products and honest marketing.
• Employees: fair wages, safe conditions and opportunities for development.
• Community & environment: reduced pollution, responsible use of resources and contributions to local wellbeing.
• Government & regulators: compliance with health, safety and environmental legislation.
• Investors: long‑term profitability and sustainable growth.

Why does ethics matter?

Ethical behaviour influences a company’s long‑term success because it affects each stakeholder group. Satisfying their expectations builds reputation, strengthens relationships and supports sustainable profitability.

Externalities – definition and examples

An externality is a cost or benefit that affects a third party who is not directly involved in the transaction.

• Negative externality: a factory releases pollutants that harm local residents – the firm must invest in cleaner technology.
• Positive externality: a business funds a community training programme, improving local skills and enhancing its public image.

Sustainable development – definition and business contribution

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Businesses contribute by:

• Using resources efficiently.
• Designing recyclable or biodegradable products.
• Investing in renewable energy and low‑carbon processes.

Legal controls – impact and marketing advantage

Health, safety and environmental legislation set minimum standards that firms must meet. Compliance can be marketed as a competitive advantage, for example:

• Meeting pollution‑limit regulations → can be advertised as “environmentally compliant”.
• Adhering to strict waste‑disposal rules → reduces risk of fines and demonstrates responsibility to customers.

Advantages of a business being ethical (six points – in the order required)

1. Enhanced reputation and trust – e.g., a clothing brand that publicly discloses its supply‑chain practices gains goodwill. Why it matters: a strong reputation attracts new customers and can command premium prices.
2. Customer loyalty and repeat business – e.g., a supermarket that consistently offers fair‑trade products encourages shoppers to return. Why it matters: loyal customers provide a stable revenue stream.
3. Motivated and retained staff – e.g., a factory that pays a living wage attracts skilled workers who are less likely to leave. Why it matters: lower recruitment and training costs and higher productivity.
4. Reduced legal and regulatory risk – e.g., a chemical producer that follows strict waste‑disposal rules avoids fines and shutdowns. Why it matters: fewer unexpected expenses and smoother operations.
5. Access to capital – e.g., ethical investors are more willing to fund a renewable‑energy start‑up with strong environmental policies. Why it matters: cheaper finance and greater growth opportunities.
6. Operational efficiency (long‑term cost savings) – e.g., a company that reduces energy use through efficient machinery lowers its utility bills. Why it matters: lower operating costs improve profit margins over time.

Disadvantages of a business being ethical (five points – exact wording required)

1. Short‑term cost increase – e.g., higher wages or more expensive eco‑friendly materials raise immediate expenses. Why it matters: profit margins may fall in the early stages.
2. Possible loss of price competitiveness – rivals that cut ethical corners may be able to sell at lower prices. Why it matters: market share can be eroded if price is a key buying factor.
3. More complex managerial decisions – managers must balance profit motives with ethical considerations. Why it matters: decision‑making takes longer and may require additional expertise.
4. Risk of being perceived as insincere (green‑washing) – if ethical claims are not genuine, the business can suffer reputational damage. Why it matters: loss of trust can undo any previous goodwill.
5. Limited demand in markets that do not value ethics – some consumer groups may be indifferent to ethical standards, reducing potential sales. Why it matters: revenue growth may be slower in those segments.

Stakeholder objective conflicts

Different stakeholder groups often have competing aims. For example, paying higher wages (meeting employee objectives) can increase production costs, which may reduce price competitiveness (a concern for customers and investors). Managers must evaluate such trade‑offs when deciding how far to go with ethical policies.

Environmental & ethical issues – opportunities and constraints

Each of the three syllabus sub‑topics can act as both a constraint on operations and a source of opportunity.

• Externalities – Negative externalities (e.g., pollution) force firms to invest in cleaner technology (constraint). Positive externalities (e.g., community training) improve the firm’s image and can open new markets (opportunity).
• Sustainable development – The need to use resources responsibly may limit short‑term profit‑maximising projects (constraint), but it also creates opportunities for innovation such as recyclable packaging.
• Legal controls – Health, safety and environmental legislation constrain how a business operates, yet compliance can be marketed as a competitive advantage, attracting ethically‑aware customers (opportunity).

Summary comparison

Key takeaway

Adopting ethical practices may involve higher immediate costs and more complex decision‑making, and it can create conflicts between stakeholder objectives. However, the long‑term benefits—stronger brand reputation, loyal customers, motivated employees, reduced legal risk and opportunities for sustainable growth—generally outweigh the disadvantages, especially in markets where stakeholders increasingly value corporate responsibility.