Legal Changes as Opportunities or Threats | AQA Q2.3, Paper 2 2019

Here is a suggested answer to the 16-mark question on whether legal changes create more opportunities than threats.

ANSWER 1

Businesses face a legal environment involving frequent change which is often insignificant, but occasionally very important. However, for every business that is threatened by a legal change, there are likely to be other businesses who see the same change as an opportunity.

Taking WR as an example first, a significant legal change has seen the banning of WR in some locations and restrictions on the number of taxi licences in others. This creates a clear threat to WR’s taxi business since they are excluded from a market when banned and this may lead other cities to consider similar action against WR - leading to a total loss of revenues and profits in those locations. Restrictions on licences means that WR’s growth in a particular location may be restricted, which may threaten WR’s ability to operate profitably there. Of course, the same changes create opportunities for other taxi operators. If WR is banned, then existing taxi operators may increase their market share and new entrants may find it easier to enter the market provided they meet the new safety regulations. The overall impact of the threats these legal changes pose to WR (and the opportunity they offer to competitors) depends on various factors, but particularly the size and growth of the taxi market in question. If, for example, WR was to be banned from operating in London or Barcelona, the change may turn out to be a significant threat. Similarly, WR might respond to these changes by investing in more environmentally-friendly and safer taxis, thereby potentially turning a threat into an opportunity.

Moving beyond WR and taxis, it is often the case that legal changes create additional costs for businesses which, depending on the extent of the costs involved and the ability of businesses to respond, can threaten both the profitability and survival of businesses. A good example is the introduction of the ban on smoking in public places introduced in the UK in 2007. This created extra costs for businesses who had to provide new facilities for smokers and it also threatened the survival of businesses like pubs whose customer base were used to smoking whilst drinking. However, the same legal change actually seemed to create more opportunities than threats, with new customers being attracted into more family and health-friendly venues. The e-cigarette market benefitted from the same change, as vaping doesn’t face the same restrictions. Vaping has boomed as smokers have looked for socially-acceptable alternatives to tobacco products. More recently, the introduction of the Soft Drinks Industry Levy in the UK (or”sugar tax”) was a potential threat to revenues of products like Coca-Cola and Irn-Bru whose products now had a higher price. However, businesses in the soft drinks market have treated the change as an opportunity. Marketing teams have moved quickly to launch reduced or zero-sugar versions of established, popular brands and launched new brands to take advantage of greater demand for healthier products.

So, whether a legal change creates more threats than opportunities, or vice-versa, really depends on the nature of the change and how businesses respond to it. In theory, for every threat there ought to be at least one opportunity, particularly if businesses are are flexible in how they operate and have a culture of embracing change created by external factors. Laws rarely change to make industries less competitive or to make running a business harder. If consumer protection laws are toughened, businesses that fail to comply will be threatened, but those that do can seize an opportunity and gain a competitive edge. If certain businesses, like WR, are banned from operating, it creates a gap into which other competitors will step. And although legal changes often result in short-term costs for some or all businesses affected, this can be a useful motivation for management to change a business’ strategy in an attempt to turn a threat into an opportunity.