External environment theory

External environment illustration

Reasons for regulating business activity

Regulation means providing rules and frameworks for business and other activity. Some aspects of business activity are self-regulating - for example the Advertising Standards Authority provides a voluntary code of practice for the regulation of advertising in this country. However, in many areas it is important to establish some form of compulsory regulation backed up by legal sanctions such as fines, and even prison sentences for directors (and employees) for malpractice.

Today we are bound by European Union regulations which are directly binding on all Member States without the need for national legislation to put them in place.

Regulation takes place:

  • to guarantee minimum standards e.g. of consumer protection, health and safety at work etc
  • to protect the weak against the strong e.g. small companies against larger companies or groups of companies that work together to fix prices
  • to provide benchmarks of good practice for business to set as minimum standards
  • to provide an appropriate framework for ethical business behaviour
  • to create standards where none exist.

In a number of industries that were formerly under government control, regulators have been appointed to make sure that prices are fair, and that there are no restrictive practices carried out by the newly privatised businesses that operate in these markets e.g. OFWAT is the official regulator for the water industry.