Political and Legal Change (AQA A Level Business): Revision Note

An introduction to the external environment

• Understanding the external environment is essential for businesses to make informed strategic decisions and remain competitive

• Factors outside of a firm's control can create both opportunities for growth and threats to performance

Key external influences include

• Political and legal change

  • Changes in government policy, regulation, or law can impact business operations.

    • For example, changes to employment law or trade agreements can affect recruitment, costs, or supply chains

• Economic change

  • Fluctuations in interest rates, inflation, exchange rates or economic growth can influence consumer spending and business investment

    • For example, a recession may reduce demand, while economic growth may boost sales

• Social and technological change

  • Shifting demographics, cultural values, and lifestyle trends can shape consumer needs

  • Meanwhile, advancements in technology can create opportunities for innovation — or threaten firms that fail to adapt

• The competitive environment

  • The actions of rivals — including pricing strategies, product launches, or marketing campaigns — can affect a firm’s market position

  • Monitoring competitors helps businesses respond effectively and maintain their advantage

Political change

• Political change refers to the extent to which local and national government influences business operations, including

  • Government stability, its political ideology and national security status

  • Fiscal policy and investment in public services and infrastructure

  • Labour market and environmental policy

  • Relationships with key international trading partners, including trade restrictions

  • Market regulation and encouragement of competition

Government stability and political ideology

• Government stability refers to how predictable and continuous policymaking is over time

  • When leadership changes frequently or coalitions are fragile, businesses face uncertainty about tax rates, regulations and public spending

• Political ideology shows how much the government wants to control markets, taxes and welfare

  • Right-leaning governments tend to cut taxes and reduce rules

  • Left-leaning governments tend to raise taxes and increase state support

Recent UK trends

• The last decade of UK politics has been somewhat volatile, following the 2016 'Brexit' referendum

  • Voters chose to leave the EU, the trade bloc to which the country had belonged since 1971

• Between 2016 and 2024 the UK saw four Conservative prime ministers

  • Theresa May’s resignation over the Brexit deadlock

  • Boris Johnson’s election on a mandate to deliver Brexit

  • Liz Truss’s brief premiership that triggered market turmoil

  • Rishi Sunak’s focus on fiscal consolidation

• Policies switched between spending cuts (austerity), focusing on Brexit and tightened budgets under Rishi Sunak.

  • Leadership changes delayed long-term infrastructure projects and skills investment while increasing volatility in financial markets

    • Many businesses also deferred capital investment, as they lacked confidence that the economy would perform well in the near-future

    • Consumer incomes have been impacted by high inflation and stagnant wages, reducing their spending power

• In 2024 the General Election was won by a landslide by Keir Starmer's Labour Party

  • It has adopted, in the early part of its term of office, a moderate left, fiscally prudent approach, with limited changes to the previous government's tax and spending plans

British Prime Ministers since 2016

Legal change

Competition legislation

• Competition legislation aims to protect the interests of both consumers and businesses by restricting anti-competitive practices

• Legislation covers areas including

  • Abuse of market power so as to limit monopoly power

  • Anti-competitive acquisition activity

  • Cartel activity and collusion

• If the Competition and Markets Authority judges that a business has acted or may potentially act in an anti-competitive manner, it may take steps against that business

  • Prevent a merger

  • Instruct it to dispose of  subsidiaries to correct the market

Recent changes to competition law

Labour market legislation

• Labour market legislation aims to prevent the exploitation of workers while encouraging businesses to take on, develop and retain staff

• Legislation covers areas including

  • Pay and working conditions

  • Equality of employment rights for marginalised groups (e.g. those with disabilities) to avoid discrimination

  • The right to belong to a  trade union and take industrial action

  • Contracts and termination of employment

  • Publishing details about the workforce

    • Gender pay gap

    • Prevention of modern slavery and human trafficking

    • Diversity, employee engagement, training, health and safety policies and other staff-related measures

The effects of employee protection legislation

• To encourage businesses to employ workers, several recent steps have been taken

  • The government pays 95% of the cost of apprenticeship training

    • Businesses only need to cover a small portion of each apprentice’s training costs, reducing the expense of hiring and training new staff

  • Businesses can also send existing employees on training in areas like digital, construction or management

    • They paying 10–30% of the course cost while the governmentcovers the rest

Environmental legislation

• Environmental legislation aims to hold businesses responsible for their environmental impact

• Legislation covers areas including

  • Pollution

  • Destruction of wildlife

  • Traffic congestion

  • Air quality

  • Resource depletion

• Businesses that fail to adhere to these laws may be fined or forced to cease commercial activity until they resolve problems they have caused

Impacts on business of environmental legislation

The impact of government policy

Business enterprise policy

• Governments take steps to encourage the setting-up and expansion of businesses

• In recent years, they have also focused on encouraging businesses to invest in new technology

The role of regulators

• A regulator is an organisation appointed by a government to regulate an area of activity such as banking or industry

• UK examples include

  • The Competition and Markets Authority (CMA) makes sure no single company can unfairly dominate a market

    • It checks big mergers and investigates cartels or price-fixing to protect consumers and smaller businesses

    • Companies can plan new investments knowing that unfair mergers will be blocked, protecting competition

    • However, merger approvals can take many months, delaying growth plans and adding legal fees

  • The Financial Conduct Authority (FCA) oversees banks, insurance firms and other financial services

    • It sets rules on how these companies treat customers, manages risk and makes financial markets work well

    • Clear rules on conduct and capital allow banks to build customer trust and plan long-term lending

    • However, regular compliance checks and reporting requirements increase staff and IT costs

  • Industry regulators such as Ofgem and Ofwat limit how much energy and water companies can charge

    • It enforces rules on pricing, quality of service and network sharing so customers get fair deals and reliable coverage

    • Regulators protect consumers and small firms from excessive bills

    • Windfall taxes and maximum prices have been imposed on transport, energy and water firms that have too much market power

Infrastructure policy and spending

• Infrastructure policy in recent years has focused on investment in large-scale transport and communications networks and housing

  • The government cancelled the northern section of the high-speed rail link known as HS2 and instead upgraded other main rail lines

    • Firms in northern regions face uncertainty about long-distance connections when planning expansion

  • The government plans to build 1.5 million new homes over five years by making it quicker and easier to get planning permission

    • Construction companies and home-builders can plan projects knowing planning rules will be simpler and faster

  • Local bus and tram services will receive extra funding, and many more electric vehicle charging points will be installed

    • Local businesses can schedule staff and deliveries around more reliable public transport and charging points

  • A third runway at Heathrow Airport has been approved, reinforcing its status as a major international travel hub

    • Airport-related businesses must prepare for higher land and labour costs as activity increases

  • Faster broadband internet is being rolled out to almost every part of the country

    • Digital firms and remote-working employers can choose locations with confidence in high-speed internet

Environmental policy

• Environmental policy in recent years has focused on reducing carbon emissions and improving energy efficiency

International trade

• In the UK, international trade policy has been dominated by Brexit over the last decade, though the government has recently established trade deals with countries including New Zealand and the US