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Saturday, October 31, 2020

The Dangers of Making Profit


By: Joceline Cristie Gasmen-Mangapit

Abstract

          Businesses and multinational companies aim to maximize profit in order to expand their industries. However, a number of businesses are making profit unethically. A firm comes into existence with different goals. These goals may either be profit maximization or welfare maximization. A profit-oriented firm will adopt measures that are consistent with their aim and the same will happen to the welfare-maximizing firms who will adopt measures that will maximize the welfare for individuals. Some of the profit-oriented firms tend to make large profits in the short-term unethically without thinking its long-term negative impact to the organization. These organization and/or individuals who reap maximum benefits and profits in the short-term, practices unethical behavior in the organization. The following are the unethical profit maximization practices: manipulation and exploitation of employees; unfair competitive practices; bending the company rules; lack of transparency; unethical treatments to suppliers and customers; deceptive sales practices; and harming the environment.

            Moreover, the consequences of those bad ethical practices in profit-making are: misappropriation of assets; civil and criminal penalties; loss of reputation; and loss of human capital. These consequences may result to foreclosure or bankruptcy of the business if not well-managed and addressed. In order for the organization to be able to manage the risk of possible unethical practices in profit-making of their businesses, they should consider the following: customer loyalty; employee relations; avoid negative legal consequences; favorable publicity; and access to capital.

            In addition, businesses will do everything possible to ensure there is proper market capitalization, and the available resources are being utilized in the desired manner in order to gain more profit. In financial management, profit maximization is the primary goal of manager in order to fulfill short-term needs but we need also to consider long-term impacts and possibilities. Thus, there is a need for us to strengthen the ethical decisions we make in order to gain profit without making bad ethical practices like other successful companies have done.

Keywords: Profit, ethics, profit maximization

 

Introduction

The main objective, and indeed, the primary motivation of a business come from the need to make profits. This is true, of course, unless one is running a non-profit organization. In which case, the company must still make some profit, and it could be in terms of the social health of the society they are serving. This means no matter what, every business must have a goal, which upon achieving, the organization can count a profit.

A profit calculated as what remains after expenses and cost of production has been deducted from the overall income. Expenses, in this case, include taxes. For the case of a non-profit organization, they don’t pay taxes, and they don’t make monetary profits, but their success is seen through the results of their input. If, for instance, an organization is created to feed a starving community, they profit when the community receives all the necessary items for survival. Their focus is not on gaining monetary value but in creating a more conducive environment for human existence.

Whatever the case, the organization has to reap maximum benefits. And many factors determine how a company reaches these objectives. For a start, it will depend on the size of the company, the industry, the profit margin, and the volume of sales, factors that vary from business to business. Business owners and managers, regardless of their individual situations, share the desire to utilize the available resources with optimum efficiency. They all strive to improve their business’ performance. And for this to happen, there are two important competing methods: profit maximization and revenue maximization.

Profit maximizers include strategies that companies following to build more net income as much as possible utilizing the resources and market share currently available. In other words, the company will use every weapon in their arsenal to reap as many profits as possible from an investment. To many, it is the goal of every company to make profits. It is logical. However, if a company focuses only on profit maximization, chances are they will lose on the opportunities that don’t offer and immediate financial gain. They may, for instance, fail to establish a good relationship with consumers, which is critical for long-term benefits.

According to Horton (2014), there are number of factors that play a part in making a business profitable, including expert management teams, dedicated and productive employees, consistent consumer demand, and a careful watch over the bottom line. In addition to these well-known business practices, companies that implement a management philosophy that relies heavily on business ethics are proven to be more successful than those that operate in an unethical manner. Although it may not be the first variable considered in analyzing the profits of a company, ethics in profit-making is an equally important catalyst to the success of a company.

The company's ultimate goal to increase profits may lead some businesses to profit-motivation conflicts. While many companies grow profits ethically, others maximize profits unethically via deceptive marketing, slashing employee expenses, lowering product quality or impacting the environment negatively. Unethical business practices can lead to smeared public relations and a loss of trust and respect on the part of the consumer (Chron.com, 2020).

This paper will give a stringent analysis of the various unethical practices in making profit and the effects that they have on the organization and society. The paper will bring in ideas, information, and examples of unethical business practices in major organizations.

 

Profit defined

Profit describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question. Any profits earned funnel back to business owners, who choose to either pocket the cash or reinvest it back into the business. Profit is calculated as total revenue less total expenses.

Profit is the money a business pulls in after accounting for all expenses. Whether it's a lemonade stand or a publicly-traded multinational company, the primary goal of any business is to earn money, therefore a business performance is based on profitability, in its various forms.

Some analysts are interested in top-line profitability, whereas others are interested in profitability before taxes and other expenses. Still others are only concerned with profitability after all expenses have been paid.

The three major types of profit are gross profit, operating profit, and net profit--all of which can be found on the income statement. Each profit type gives analysts more information about a company's performance, especially when it's compared to other competitors and time periods (Kenton, 2020).

Profit Maximization Defined

In economics, every company, small or large, seeks to make a profit. They will do everything possible to ensure there is proper market capitalization, and the available resources are being utilized in the desired manner. In this case, profit maximization can be defined in terms of short-run or long-run processes through which a firm sets its price, input, and output levels that bring in the highest profits. And mainstream view normal theorizes the firm as profit maximization.

Understanding profit maximization may not be as straightforward as we may have imagined. It is a subject that takes different forms with a number of perspectives. And this is why there are many approaches that one can use to determine this issue. For instance, considering that profit is equal to revenue less cost, the business can draw a graph, where revenue and cost variable stand as the extent of output than produces a maximum difference. 

Or, taking that there are known specific functional forms for the output of revenue and cost, one can apply calculus to bring out maximum profits based on how far the output goes. The third approach includes using equations of marginal revenue and marginal cost; in which case, the first order for maximization is equal to the two variables, if marginal revenue and minimal costs are available as functions where output is involved.

Furthermore, Another method would include the firm having input cost functions to determine the price of getting any amount of outputs, as opposed to a function allocation production for each possible output level. In this case, the function works hand in hand with production functions, and the reveal the output results are a combination of the output process. Here, a person can maximize profit in relation to input using calculus. The input cost and production functions are used to determine the outcome.

We have already seen how profit maximizers differ from revenue maximizers in the previous section. If a firm operates in a greatly competitive market, its revenue will be equal to its market price multiplied by the number of products made and sold. But in the case of a monopolist market, the level of output is calculated simultaneously with the selling price. In this case, the revenue function considers that high output levels demand reduced prices for consumers to get the products.

Limitations of Profit Maximization

Long-Term Sustainable Goals. Profit maximization might be one of the top goals of financial management but this type of practice doesn’t imply that short-term profit increases will help produce long-term sustainable goals for the company. While profit maximization in financial management has the potential to bring in extra money in the short-term, long-term earning could be drastically diminished.

On the Other hand, lowering production quality for the sake of increased profits will hurt your brand, upset customers, and allow competitors to steal your business. For instance, if your organization decides to unload all available inventory to a demanding client, you’re only alienating loyal clients who would have spent more over time. When it comes to profit maximization in financial management, it’s important to understand if your short-term profit maximization efforts will lead to long-term sustainable goals.

Product Quality. Another limitation of profit maximization in financial management is the potential to decrease product quality. Earning higher profits might be one of the goals of financial management but cutting corners, using lower quality materials, and sacrificing company values to earn a higher profit will affect the reputation of the company and potentially lose customers.

Furthermore, it’s easy to force our employees to work harder without any pay raises or use environmentally damaging products to cut corners and maximize profits but cutting corners is the best way to ruin your brand reputation and cause the company to fail. While profit maximization is a major goal of financial management, it’s best to not cut corners or compromise company values to earn a few extra bucks that could cost you your customers and business.

Employee Training. A great way to reach profit maximization in financial management is to cut employee training or the research and development budget. While this will reduce operating expenses, and maximize short-term profits, it will not help the company reach any long-term sustainable goals and could even potentially cause employees harm. Employee training is essential for any company looking to maintain long-term profits while creating happy employees. Without a satisfied workforce, your company will fail and any corners you cut to maximize profits will not have been worth it.

In addition, there are many goals of financial management with profit maximization being a top priority. It’s important to understand, though, that only focusing on maximizing profits will create business turmoil and could do drastic harm to employees, customers, and the business as a whole. The best way to successfully reach profit maximization in financial management is to focus more on company integrity and long-term, sustainable goals. Short-term goals are a great way to meet long-term goals, but only if they have the company’s future in mind (Hamilton, 2018).

Unethical Practices in Making Profit

 

Manipulation and Exploitation of Employees. Employees are very essential stakeholders in any company because they determine the level of productivity of the company. However, some managers take advantage of defenseless employees to exploit them in one way or another. The vulnerable employees have no choice but to be submissive.

Some unethical practices that harm the employers include low wages and unsafe working environment. Some employers have made it a routine to have their private cloakrooms while the other employees use unsanitary cloakrooms. Essentially, any practices that make the employees uncomfortable in the work place are unethical, as they do not comply with the federal working standards.

Unfair Competitive Practices. All business people aim at gaining a competitive advantage over their competitors to win the trust of many customers. Companies would spend millions of dollars to employ strategies that would enable them to enhance their sales. However, there are those business people who opt to employ unfair and unethical business practices that result into unfair competitive practices.

 

Bending the Company Rules. In many companies, employees are obliged to submit to their supervisors and managers. They have to obey the authority and perform all their commands. In fact, junior employees have a tendency of alleging to their supervisors in every aspect. Therefore, regardless of how wrong an instruction is, the junior employees are sometimes obliged to abide by the rules of their supervisors and managers.

It is noteworthy that performing unethical practices in the work environment is wrong regardless of where the orders came from. Some junior employees are obliged to withhold information regarding the unethical practices of their bosses for the fear of intimidation, which that is also unethical.

Lack of Transparency. Companies are always obliged to portray transparency in all their activities. However, cases have occurred where company executives hide some controversial information from the most important stakeholders of the company. Some companies will present false statements to the investors to clarify why they cannot afford to pay the dividends.

Whenever the investors resolve to have the company investigated, the company managers and other executives resist the investigations. The executives of some companies have taken advantage of humble investors to mishandle their propriety. Some executives are even sued for creating false financial statements to deceive the investors.

Moreover, company executives evade form paying the taxes using the false statements. Cases have occurred where auditors are bribed to certify false financial statements so that powerful companies can evade from paying the rightful amounts of taxes to the government.

Unethical Treatments to Suppliers and Customers. Every business must have suppliers of raw materials and customers who purchase their finished products. Essentially, the relationship between the company, its suppliers, and its customers ought to have mutual benefits. However, some businesses are too greedy to allow the other parties to enjoy some good profits.

Some companies pay their suppliers so low, such that the suppliers lack the value of the efforts that they input in their work. As if that is not enough, some companies go ahead to produce low quality or unsafe products.

In case the company faces strict regulations in the country of production, the unsafe products are shipped into third world nations. This very sad incidence affects innocent individuals who purchase such products unknowingly. Some companies are used to offering the intermediaries with kickbacks so that they can continue purchasing their products.

Deceptive Sales Practices. Companies’ sales managers are obligated to try all possible ways of making massive sales. However, that does not mean that the companies should involve themselves in deceptive sales practices. In the GlaxoSmithKline case, the company promoted its unapproved antidepressants for human consumption (Thomas & Schmidt, 2012).

The unethical business practice clearly indicated that the executives of the company were extremely selfish. No amount of fine can compensate for the unethical practice of selling unapproved drugs to humans. Further, the company distorted the data of a diabetic drug that recorded very high sales, and it marketed other drugs improperly.

Once consumers know that a company employs unethical business practice in their operations, the effects are inerasable. A company like GlaxoSmithKline that has had some good reputation for many years can have its brand name torn down because of a single unethical incident. Therefore, companies that are practicing deceptive and unethical sales practices should know that their practices would tore the company down in a matter of seconds.

Harming the Environment. All companies ought to adhere to the pollution norms set by the government. Moreover, the companies should adhere to the corporate social responsibility policy that obliges companies to honor the surrounding environment and the people in it. However, cases have occurred where companies are involved in unethical behaviors that harm the environment.

Some companies release chemical pollutants into the air or into water bodies. Such companies do not care about the repercussions of their ill deeds. The companies release toxics that harm the lives of the living things around their locality.

They evade the expenses that are associated with the treatment of toxics before they are released into the environment. This sad incidence clearly indicates that the greedy executives of such companies care less about those individuals and other living things that are affected in one way or another (Ivy.Panda, 2019).

 

Consequences of Bad Ethical Practices in Profit-Making

According to Freedman (2018), Unethical practices in profit-making motivated by bonus incentives, pressure to obtain financing or a desire to appear successful are not always illegal, but they almost always have an adverse effect on your business. The common theme of these practices is that they sacrifice the short-term gain of apparent financial viability for long-term negative consequences.

Misappropriation of Assets. A business owner might think he's only using his own assets when he takes business goods for personal use, such as a ream of copy paper or a pizza at the end of the night, but an employee might see things differently. The employee may see the use or appropriation of business goods for personal needs as a benefit of being an employee. Before long, the employee who witnessed the owner's borrowing has become a borrower himself and others are seeing this employee's behavior as acceptable.

Civil and Criminal Penalties. If company management is unethical to the point of financial fraud, the company could be subject to civil and criminal penalties. For publicly traded companies, the Sarbanes-Oxley Act prescribes fines and prison time for knowingly falsifying financial information. Further, investors of the company may be able to successfully sue the company and its owners for civil damages to cover their losses. Small-business owners should exercise caution, as not understanding accounting practices and standards is not a defense for fraudulent reporting. If a reasonable person believes a manger should have known about fraud in the business, this may be enough to allow the jury to side with the plaintiff.

Loss of Reputation. If you operate your small business in an unethical manner, word will eventually get out. This is especially true for small businesses in tight-knit communities. In general, customers would rather shop at businesses that operate ethically, take care of their employees and support their communities. If your company does not operate ethically, this can affect the willingness of customers and suppliers to conduct business with you. Over time, this may destroy your business.

Loss of Human Capital. Many good employees do not want to work for a company that is unethical. Accounting professional standards require that accounting work is performed ethically and with integrity. If you pressure company accountants to behave unethically, these accountants can't uphold the standards of their profession, and they might risk loss of their license or credentials. Reputable accountants will not work for an employer who expects unethical behavior.

 

Ethical Considerations in Making Profit

According to Hill (2020) society sets standards for what is considered right versus wrong behavior -- referred to as ethics. Ethical considerations by business people sometimes involve a conflict between doing the right thing and making a choice that results in more sales. Small business owners find that building a reputation for consistently ethical behavior can have positive long-run effects on the company’s performance.

Customer Loyalty. Treating customers fairly and delivering on promises made by sales and customer service people increase the probability that customers will do business with the company in the future. Customer loyalty has a positive effect on profitability, because there is no incremental marketing cost to doing business with a customer you already have. Finding new customers and convincing them to buy from you does require marketing expenditures. Companies with high customer satisfaction benefit from word-of-mouth marketing. Existing customers share their positive experience with friends, family and colleagues. These endorsements for the organization can result in new customers - help the organization make money.

Employee Relations. Employees expect that the business owner will treat them in an ethical manner. They might be promised, for example, that additional staff will be hired to relieve them of a workload that is too high. If the owner doesn’t follow through on the promise, the employees will lose respect for the owner and may conclude they were deliberately misled. Morale and eventually productivity can decline. One demoralizing ethical lapse is a supervisor taking credit for an employee’s superb idea that helps the company generate revenues or cut costs. The employee may not bother to contribute his ideas in the future. The company’s financial success depends on retaining the brightest, most talented people and keeping them motivated. If an employee concludes the owner or other members of the management team do not behave ethically, she may elect to leave. Recruiting new employees requires an expenditure of time and often money.

Avoid Negative Legal Consequences. Serious ethical lapses include behavior such as selling a product the business owner knows to be unsafe, or knowingly polluting the water or air in violation of government regulations. Companies that get caught doing these things can suffer negative financial consequences, such as being subject to litigation or fines. The company’s image may be damaged to an extent that it loses customers who seek out more ethical companies from which to buy.

Favorable Publicity. Ethical lapses that result in litigation will cause bad publicity for the company, but presenting an image to the marketplace of adhering to the highest ethical standards can result in the company receiving good press coverage. This can bring in new customers and is in effect free advertising. Receiving accolades, such as being named one of the best places to work or one of the most ethical companies, can help recruit the top talent to join your organization.

Access to Capital. When making decisions about whether to put money into a company, venture capitalists and angel investors evaluate the integrity and honesty of the management team. Investors may go so far as screening companies based on ethical principles, and the social and environmental responsibility they exhibit. Investors don’t want to deal with situations where the business owner lied to them about the company’s prospects for growth or hid potential problems from them. The owner’s high ethical standards make it easier for him to obtain financing.

 

The Essence of Goodwill in Making Profit

The positive feeling stakeholders have for any particular company is called goodwill, which is an important component of almost any business entity, even though it is not directly attributable to the company’s assets and liabilities. Among other intangible assets, goodwill might include the worth of a business’s reputation, the value of its brand name, the intellectual capital and attitude of its workforce, and the loyalty of its established customer base. Even being socially responsible generates goodwill. The ethical behavior of managers will have a positive influence on the value of each of those components. Goodwill cannot be earned or created in a short time, but it can be the key to success and profitability.

A company’s name, its corporate logo, and its trademark will necessarily increase in value as stakeholders view that company in a more favorable light. A good reputation is essential for success in the modern business world, and with information about the company and its actions readily available via mass media and the Internet (e.g., on public rating sites such as Yelp), management’s values are always subject to scrutiny and open debate. These values affect the environment outside and inside the company. The corporate culture, for instance, consists of shared beliefs, values, and behaviors that create the internal or organizational context within which managers and employees interact. Practicing ethical behavior at all levels—from CEO to upper and middle management to general employees—helps cultivate an ethical corporate Positive goodwill generated by ethical business practices, in turn, generates long-term business success. As recent studies have shown, the most ethical and enlightened companies in the United States consistently outperform their competitors (Byars & Stanberry, 2018).

 

 

Conclusion

Indeed, unethical business practices harm a series of people, whereas; only a few greedy incumbents enjoy the fruits of their ill deeds. Essentially, if the global economy is to be on the safe side, companies must adopt ethical business practices. Business executives must ensure that their businesses spend their investors’ monies in worthwhile projects.

Moreover, they should ensure that the investors obtain their dividends in time. As discussed, some vulnerable employees suffer in silence, and it is upon the business managers to ensure that they treat all their employees equally. The managers have a responsibility of offering a favorable working environment for all their employees.

Furthermore, they have to ensure that the employees’ salaries are disbursed at the right time. In the case of customers, the involved stakeholders of the company must ensure that the customers obtain quality products and services. Business managers should never take advantage of their might to disadvantage their competitors. In addition, company managers should understand that the government depends on taxes to develop the nations.

Therefore, company executives are obliged to ensure that the company pays taxes exclusively. Finally, companies are requested to have a corporate social responsibility. Polluting the environment should be outdated, as companies ought to employ practices that are environmentally friendly.

Implementing a sound ethical policy at a company ensures a positive impact on all stakeholders, from investors to employees to consumers. Companies that lay the framework for business ethics in all facets of operations are more likely to become and remain profitable than those that conduct business in an unethical manner.

Thus, viewed from the proper long-term perspective, conducting profit-making ethically is a wise business decision that generates goodwill for the company among stakeholders, contributes to a positive corporate culture, and ultimately supports profitability.

References

Byars, S., & Stanberry, K. (2018). Business Ethics. Houston, USA: Openstax. Retrieved from https://opentextbc.ca/businessethicsopenstax/chapter/ethics-and-profitability/

Chron.com. (2020, October). smallbusiness.chron.com. Retrieved from https://smallbusiness.chron.com/ethical-issues-maximizing-profit-34328.html

Freedman, J. (2018, April 20). Consequences of Bad Ethical Practices in Accounting. Retrieved from https://yourbusiness.azcentral.com/consequences-bad-ethical-accounting-practices-7750.html

Hamilton, J. (2018, March 25). Profit Maximization Strategies for Managers. New York, USA: Essay.Biz. Retrieved from https://essay.biz/article/profit-maximization-strategies-for-managers

Hill, B. (2020, May 26). Ethical Behavior and Making Money. Retrieved from https://yourbusiness.azcentral.com/consequences-bad-ethical-accounting-practices-7750.html

Horton, M. (2014, June). Are Business Ethics Important for Profitability? Los Angeles, California, USA. Retrieved from https://www.investopedia.com/ask/answers/040715/how-important-are-business-ethics-running-profitable-business.asp

Hubbard, K. (2016, July). Can Businesses Pursue both Ethics and Profits. Manchester, USA: Saint Anselm College. Retrieved from https://www.anselm.edu/ethics-governance/blog/can-businesses-pursue-both-ethics-and-profits

Ivy.Panda. (2019, August 27). Unethical Business Practices and Their Effects. Retrieved from https://ivypanda.com/essays/unethical-business-practices-and-their-effects-term-paper/

Kenton, W. (2020, July 21). Investopedia.com. Retrieved from https://www.investopedia.com/terms/p/profit.asp

Pribanic, E. (2020, January 6). Three Limitations of Profit Maximization in Financial Management. Techfunnel.com. Retrieved from https://www.techfunnel.com/fintech/3-limitations-of-profit-maximization-in-financial-management/

Thomas, K., & Schmidt, M. (2012, July 2). Glaxo Agrees to Pay $3 Billion in Fraud Settlement. Retrieved from https://www.nytimes.com/2012/07/03/business/glaxosmithkline-agrees-to-pay-3-billion-in-fraud-settlement.html

 

The Role of Ethics in Business and Competition

Edina Monique G. Tahilan

Divine Word College of Laoag, Laoag City, Ilocos Norte, Philippines

Abstract

Competition is everywhere. Even in businesses, competition in the market always exists; you won’t find any field where there isn’t any competition. Companies are fighting to succeed, competition is rampant, and success in terms of money and fame is harder to come by because markets are cluttered and competitive. It can be easy to overlook the essentials that form a sturdy foundation on which individuals and businesses learn and grow. These essentials include ethics and integrity.

Companies exhibiting a business ethical code of conduct consistently outperform companies that do not display ethical conduct. If firms use unethical or illegal, socially unproductive means to gain competitive advantage, then competition may not lead to socially desirable outcomes or it may implicate many devastating results. Unethical behavior may damage a firm’s reputation and make it less appealing to stakeholders. Profits could fall as a result. A company with good ethical standards, by comparison, is bound to succeed in the long run because it promotes growth and raises income. A company stands to profit from a reputation for acting with honesty and integrity. Thus, building a strong competitive culture is vital to the reputation, growth, and finances and could be a very valuable long term asset of an organization.

As all companies always try to search for new things or use possible instruments to gain a competitive advantage, this paper tries to analyze how competition may encourage ethical and unethical business practices in a competitive world.

 

Keywords: Business Ethics, Competition, unethical practices

 

Introduction

Why is it important for a business to be ethical? Can a business survive without ethics? In this paper, we will analyze the ethics of competition among firms and we will explore the growing issue of business ethics particularly as a competitive advantage.

In our global economy today, businesses have become highly competitive, and the management of corporate ethics has become one of the vital issues companies cannot afford to ignore. The business ethics of a firm have been defined as one of the invaluable intangible assets for competing. In general, intangible assets are assuming increasingly competitive significance in rapidly changing domestic and global markets. As the speed of comparable tangible assets acquisition accelerates and the pace of imitation quickens, firms that want to sustain distinctive global competitive advantages need to protect, exploit and enhance their unique intangible assets, particularly integrity (building firms of integrity is the hidden logic of business ethics) (Morales 2014)."Competitive Advantage" is a long-term advantage over competitors. It’s an advantage, which competitors find difficult to emulate (Kar 2014).

Cohen, et. al. (1997) argue that ethical companies have an advantage over their competitors. “Consumers are used to buying products despite how they feel about the companies that sell them. But a values-led company earns the kind of customer loyalty most corporations only dream of-because it appeals to its customers on the basis of more than a product”.

There is also an argument that ethics are natural market consequences of business-customers, clients, employees all want their companies to be ethical, so it is the company’s best interests to be so.

When a company is implementing a value-creating strategy not simultaneously being implemented by any current or potential competitors, then we can say the company has a competitive advantage. And when potential or actual competitors are unable to duplicate the benefits of this strategy, then we can say that the company has a competitive advantage that derives from business ethics (Morales 2014).

Competitive the advantage is about finding a “hole in the market,” something that other competitors would have trouble providing. If you have strong and observable business ethics and core values, you have a huge competitive advantage, because you are different from most others (Triplett 2015).

With these arguments, we can say that business ethics is not just used to enhance the image of a corporation but the very foundation of the success of every business. Companies are able to create a global sustainable competitive advantage when they implement a strategy that others cannot imitate. Furthermore, a company must make changes in order to achieve a sustainable competitive advantage.

 

Advantages of Being Ethical in Business

The advantages of business ethics can extend beyond moral obligation; they can also benefit a company's bottom line. Ethical behavior can serve to differentiate your brand from those of your competitors if you operate in an oversubscribed market, offering you a competitive edge. Identifying your product and business practices as being founded on strong ethical principles make your product or service more attractive to consumers — a good example of this model would be the Body Shop, a cosmetics company whose products are not tested on animals (Breslin 2019).

Customers, who cares about high ethical standards, are the ones who can contribute to the biggest potential profits on ethically produced goods. There should not be any hesitation in being ethical as this is a long term investment in making current and future customers your loyal partners. When companies work ethically, they naturally outpace competitors who are unethically working for expanding profits. It is simply because customers see them as a trusted partner, not only for what they do but for how it is delivered.

Business ethics is very important to stop business malpractices. It helps the business survive for a longer time and it helps in the protection of consumer rights. It facilitates healthy competition, creates goodwill of the business, it helps maintain customer satisfaction, and avoids legal problems which is very prominent in many companies at present.

 

World’s Most Ethical and Successful Companies

According to Ethisphere Institute, the global leader in defining and advancing the standards of ethical business practices, among 2020 world’s most ethical companies listed there are Accenture, Canon, Colgate-Palmolive Company, Dell, H&M, HP, Intel Corporation, IBM, L’Oreal, Microsoft, Nokia Corporation, Sony (the list includes 132 companies spanning  21 countries and 51 industries and includes 14 first-time honorees and seven companies that have been named to the list every year since its inception). The companies on the list have met rigorous criteria across five categories covering the quality of their ethics and compliance program, organizational culture, corporate citizenship and responsibility, governance, and leadership, and reputation.

In his article, Miranda (2020) mentioned IBM being recognized as one of the 2020 World’s Most Ethical Companies by the Ethisphere Institute. For more than a century, IBM has sought to earn and keep the trust of its clients, partners, employees, and people because of the company’s longstanding commitment to integrity. And this earned trust is why 95 percent of Fortune 500 companies rely on IBM to handle their data. From the company’s start, IBM has adopted policies that promote inclusion and treat people with dignity and respect. IBM’s Principles of Trust and Transparency is just a reflection of a new era of their ethics-one where technology increasingly influences every aspect of society, from how the government services are delivered, to how we shop and entertain ourselves, to how our children learn, and also to how physicians treat patients.

 

 Disadvantages of a Lack of Ethics on a Business Environment

A lack of ethics leads to a wealth of problems in business. Businesses without values are businesses at risk. Their reputations suffer in the marketplace, depressing stock prices and eroding consumer confidence; recruitment of talented personnel is more difficult (Driscoll, 2017).  Furthermore, lack of business ethics endangers the future of their company, jeopardizes the public good, and can have many other negative effects on a business environment. So businesses small and large must act ethically to protect themselves and their business environments. Otherwise, they pose a threat to their employees, customers, and communities (Mack, 2018).

Poor ethical decisions can affect companies in a variety of ways. Unethical actions in businesses may result in negative publicity, declining sales, and even legal action. Businesses that act unethically in ways that break the law may face large fines and other penalties. Also, a lack of ethics within a company affects the way employees do their job. People can decide that because leaders can break the rules, they can too. This can lead to them to damage the company. They may also become discouraged or not see the need to work hard in an unethical environment. When a company is unethical, it affects its reputation. Not only will the leaders and company lose respect from employees, but they will also lose credibility with the general public as well. This can result in reduced sales, lost customers, and significant financial harm.

 

Common Unethical Business Practices in Competition

One of the biggest threats to any business is its competitors. All businesses aim at gaining a competitive advantage over their competitors to win the trust of many customers. They would spend millions of money to employ strategies that would enable them to enhance their sales. However, some companies try to give themselves an unfair advantage by attacking their competition through a few different types of unethical business practices that result in unfair competitive practices. In a recently published article, Kane (2020) states the following types of unfair activities through competition that a company may engage in.

·         Trademark infringement, such as one business using another's trademarked property without permission. For example, using the Coca-Cola trademark on a soda container manufactures by a competing beverage maker.

·         False advertising which involves making claims that are misleading or untrue, such as a company making false claims about a drug's abilities to promote weight loss when such claims had never been proven.

·         Unauthorized substitution such as when a seller replaces one brand of goods with another without authorization. This could involve substituting a low-cost handbag for a designer handbag. It could also mean false advertising or false representation of products or services, such as exaggerating a software program’s spell-check capabilities. In either case, consumers are not getting what they thought they were paying for.

·       Bait-and-switch-tactics  such as substituting a lower-cost product from a different brand for a more expensive, higher-quality product.

·         Misappropriation of trade secrets such as stealing a competitor’s proprietary formula. Consider an employee who is entrusted with or stumbles upon the exact recipe for KFC's chicken batter. They then rent a fast food restaurant establishment and begin selling chicken on their own using that same recipe.

·         Below-cost selling occurs when a company intentionally and willingly sells a product or service to consumers for less than the market rate. A retail seller might actually charge consumers less than what it paid for an item, taking a loss. Another company might sell one or more of its services at a rate that virtually ensures it cannot make money. 

·         Dumping such as selling products abroad for far less than what they would fetch in a local market.

·         Rumor mongering such as written or verbal communications that would ruin or harm a company’s reputation in the industry.

The unfair competitive practices would only earn a company massive profits in the short run. However, upon investigation and publicity of the matters, the company will have its reputation destroyed. Unethical business practices will result in bad publicity, and the company may never win the publicity in the future even though it struggles to employ ethical conducts. Moreover, as a consequence of unethical practices, the company can lose their credibility, general morale and productivity can decline, or it can result in significant fines and/or financial loss.

 

Conclusion

Fair competition in the marketplace is good both for the business and consumers. It is healthy for businesses, yet that rivalry is so intimidating. If business competition is fair, it meets the requirements of high ethics, and it is one of the fundamental sources of economic development.  An integrity approach to business facilitates the delivery of quality products in an honest, reliable way thus consumers can get the best possible prices, quantity, and quality of goods and services. So, companies should know that continually improving the ethics environment is an essential element of becoming a preferred choice by customers, employees, shareholders, communities, business partners, and investors.  Ethical business is indeed a good business so it is increasingly important to include ethics in the company’s strategy and potentially implement it in a way that achieves a competitive advantage and adds value to the stakeholders. This could result in a life-long competitiveness in the business environment. And despite many issues in competition among firms, being ethical plays a critical role in maintaining a good company reputation and helps the organization remain competitive in years to come.

Business competition means to test the efficiency of an organization. The existence of competition helps the business in becoming more dynamic and innovative so as to make itself better than its competitors. It also sometimes encourages the business to indulge in negative activities like resorting to unfair trade practices. The bad feature of the competition is that it can be very stressful to the business players greatly caused by unethical practices of some companies. And the effects of unethical behavior on businesses are detrimental to a company and one incident that contradicts a customer’s belief in the company is often enough to destroy their trust. Therefore, companies must make decisions to act ethically or else face the damaging effects of unethical acts in their business and their representatives. “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett

 

References

 

Morales, J. (2014). Re: Does corporate ethics lead to a competitive advantage? Retrieved from:https://www.researchgate.net/post/Does_corporate_ethics_lead_to_competitive_advantage2/53deb555d3df3e86338b469d/citation/download

 

Kar, B. (2014). Re: Does corporate ethics lead to a competitive advantage? Retrieved from:https://www.researchgate.net/post/Does_corporate_ethics_lead_to_competitive_advantage2/53deb555d3df3e86338b469d/citation/download

 

Triplett, J. (2015) How Your Business Ethics Can Be a Great Competitive Advantage & Profitable Sales Tool Retrieved from https://www.businessbankoftexas.com/business-resource-center/how-your-business-ethics-can-be-a-great-competitive-advantage-profitable-sales-tool.htm

 

Kane, S. (2020) What is Unfair Competition Retrieved from https://www.thebalancecareers.com/unfair-competition-2164416

 

Miranda, G. (2020) IBM named one of the World’s Most Ethical Companies Retrieved from https://www.ibm.com/blogs/corporate-social-responsibility/2020/02/ethisphere-2020/?fbclid=IwAR2CXigFTR00KGaRaJThEWmeB6zoTBEjSNjhS90-xv2RqB5is0i_7HzMDz0

 

Spooner, A. (N.D). Importance of Ethics in Business             Retrieved from https://business.lovetoknow.com/business-operations-corporate-management/importance-

ethics-business

 

Moment, R. (2019) 7 Ways to Be More Ethical Than Your Competition Retrieved from https://www.thebalancesmb.com/be-more-ethical-than-your-competition-2951404

 

Mack, S. (2018) Effects of Lack of Ethics on a Business Environment Retrieved from https://yourbusiness.azcentral.com/effects-lack-ethics-business-environment-7840.html

 

Driscoll, D. (2017) Why Ethics Matter: A Business Without Values is a Business at Risk  Retrieved from: https://www.corporatecomplianceinsights.com/why-ethics-matter-a-business-without-values-is-a-business-at-risk/?fbclid=IwAR0h6iHfRbLI0nE2X18nil5ts20He65GjpYbiUF4SBYPiubMiN4Y-f6HPyY

 

Cohen, B. Et. Al. (2017) Ben & Jerry’s Double Dip: Lead With Your Values and Make Money, Too Retrieved from https://www.referenceforbusiness.com/small/Bo-Co/Business-Ethics.html?fbclid=IwAR3KBWEisteU3GrAm0IemjlUpqO9ChcSBJd881TFQ6elD1-oQ0LrMNLlPYQ

 

Bowes, B. (N.D). Unethical actions have serious consequences Retrieved from: https://www.legacybowes.com/tools/articles/unethical-actions-have-serious-consequences?fbclid=IwAR1IP6oQKbeRWh0veT8gSs0d53dU40vUNjR4ks_4FvrqbZL4Xb-jaiCqWHo

 

Karpe, A. (N.D). It’s Profitable to be Ethical Retrieved from: https://www.pmi.org.in/manageindia/articelDetails.aspx?id=564&fbclid=IwAR29UQ1UX9ybsDPK1YSkuAwjMt5QAGEBTFsFlq8GSC7qAhxhhld6sJNHZAE

 

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