how physical environmental issues might influence business behaviour

6.1 External Influences – Environmental

Objective

To understand how physical environmental issues influence business behaviour and how firms can respond strategically, in line with the Cambridge IGCSE/A‑Level syllabus.

1. Definition of Physical Environmental Issues

Physical environmental issues are natural conditions or processes that exist outside a firm’s control but affect its resources, operations and strategic environment. They are external and beyond direct managerial control. Typical examples include:

• Climate change and global warming
• Resource scarcity (water, minerals, fossil fuels)
• Pollution and waste‑management challenges
• Natural disasters (earthquakes, floods, hurricanes, landslides)
• Biodiversity loss and ecosystem degradation

2. How Physical Environmental Issues Influence Business Behaviour

The syllabus groups the influence of environmental issues into six headings. Each heading is illustrated with the main impacts and a brief example.

1. Costs
   • Higher energy, water and raw‑material prices when resources become scarce. Example: a 5 % rise in electricity cost can increase a manufacturing firm’s production cost by roughly 2 %.
   • Increased insurance premiums and repair expenses after natural‑disaster damage.
2. Supply‑Chain Disruption
   • Transport routes blocked by floods, landslides or sea‑level rise.
   • Suppliers unable to deliver because of drought‑related crop failures or mining restrictions.
   • Businesses often use supplier‑risk matrices to map vulnerability to specific environmental events.
3. Regulatory Pressure
   • Carbon taxes, emissions caps, stricter waste‑disposal laws and mandatory reporting (e.g., carbon‑footprint disclosures).
   • Compliance mechanisms such as permits, emissions‑reporting systems and regular inspections.
   • Key regulatory frameworks: EU Emissions Trading Scheme (ETS), UK Climate Change Act (2008), local waste‑disposal ordinances.
4. Reputation and Consumer Preference
   • Growing demand for “green” products and ethically sourced brands.
   • Negative publicity from spills, plastic waste or habitat damage can erode brand equity.
   • Pressure also comes from NGOs, investors and local communities, not just consumers.
5. Innovation and Competitive Advantage
   • Development of low‑carbon technologies, renewable energy, sustainable packaging and circular‑economy models.
   • Early adopters can differentiate themselves, capture new market segments and achieve cost savings.
6. Strategic Planning & Risk Management
   • Environmental risk assessments are incorporated into business‑continuity and investment decisions.
   • Scenario analysis (e.g., 2 °C warming, sea‑level rise of 0.5 m) helps anticipate future operating conditions.
   • Embedding sustainability into long‑term strategy by setting measurable targets (e.g., 30 % reduction in Scope 1‑2 emissions by 2030) and integrating them into corporate planning.

3. Embedding Sustainability into Long‑Term Strategy

Businesses that treat sustainability as a strategic driver typically:

• Set clear, time‑bound environmental targets (e.g., carbon‑neutral by 2050).
• Integrate these targets into the overall corporate strategy and performance‑management systems.
• Report progress to stakeholders (shareholders, NGOs, local communities) to demonstrate accountability.
• Link sustainability performance to the triple‑bottom‑line – economic profit, social responsibility and environmental stewardship – a key phrase in the syllabus.

4. Environmental Audit & Management Systems

An environmental audit is a systematic, documented review of an organisation’s environmental performance and compliance. It provides evidence of accountability to stakeholders and identifies improvement opportunities.

• Purpose: verify legal compliance, reduce waste, improve resource efficiency, support strategic sustainability goals, and demonstrate accountability to stakeholders.
• Typical 5‑step Process:
  1. Define audit scope and objectives (e.g., energy use, emissions, waste).
  2. Collect data on resource flows, emissions, waste, water use, etc.
  3. Compare performance against legal requirements and internal standards.
  4. Identify non‑conformities and opportunities for improvement.
  5. Produce an audit report with corrective‑action recommendations and a timeline.
• Key Tools & Frameworks:
  • ISO 14001 Environmental Management System (EMS) – provides a framework for policy setting, objectives, monitoring and continual improvement.
  • Carbon‑footprint calculators – quantify greenhouse‑gas emissions from operations and products.
  • Life‑cycle analysis (LCA) – assess environmental impacts from raw‑material extraction to disposal.

5. Summary Table – Physical Environmental Issue, Business Impact and Typical Response

6. Case Study Snapshot – Retailer’s Response to Plastic Pollution

A leading UK retailer faced public criticism for single‑use plastic packaging. Its strategic response demonstrates how an environmental issue can be turned into a competitive advantage.

• Set a target to eliminate all non‑recyclable plastic by 2025.
• Introduced biodegradable alternatives for own‑brand products.
• Partnered with suppliers to redesign packaging for recyclability and reduced weight.
• Launched a consumer‑awareness campaign highlighting the environmental benefits.

Result: packaging costs fell by 8 %, and brand perception among environmentally‑conscious shoppers improved markedly, illustrating the link between sustainability, cost savings and reputation.

7. Key Take‑aways

• Physical environmental issues are external forces that affect costs, supply chains, regulation, reputation, innovation and strategic planning.
• Businesses must monitor environmental trends, comply with evolving regulatory frameworks and embed sustainability into long‑term strategy.
• Environmental audits and ISO 14001 EMS provide a structured approach to continual improvement and stakeholder accountability.
• Proactive, sustainable responses can create competitive advantage, meet stakeholder expectations and support the triple‑bottom‑line.