Political and legal change can significantly alter the environment in which businesses operate, impacting performance, risk, competitiveness, and long-term decision-making strategies.
Impact on Business Performance and Risk
Political and legal changes can have far-reaching consequences for businesses, shaping the frameworks in which they operate and influencing both opportunities for growth and exposure to risk.
Positive Impacts on Business Performance
When political or legal changes are favourable, they can open up new markets, reduce operating constraints, or stimulate demand.
Trade liberalisation: Reductions in tariffs and the creation of free trade agreements can lower import/export costs and give businesses access to new international markets. For example, the UK's trade deals post-Brexit with countries like Australia have created new export pathways.
Pro-business legislation: Government initiatives, such as tax breaks for small and medium-sized enterprises (SMEs) or the relaxation of employment regulations, can reduce costs and increase margins.
Political stability: In regions with stable governments and consistent legal systems, businesses are more likely to invest confidently and plan long-term, knowing that rules are unlikely to change suddenly.
These favourable changes can improve profitability, market confidence, and investment potential.
Negative Impacts on Business Performance
Conversely, political instability or regulatory burdens can hinder business performance.
Sudden regulatory changes: If laws change unexpectedly—such as the imposition of new environmental or consumer protection laws—businesses may need to rapidly alter their processes, increasing costs and disrupting production.
Higher compliance costs: New legal obligations often come with administrative requirements. For instance, a law mandating stricter data privacy (like GDPR) requires companies to invest in IT infrastructure, staff training, and legal consultations.
Policy inconsistency: Frequent policy reversals or unclear legal frameworks create uncertainty, making it difficult to forecast revenue or costs. This can deter foreign direct investment or large-scale expansion projects.
Influence on Business Risk
Political and legal factors increase the external risk environment for businesses. Key types of risk include:
Strategic risk: Long-term plans may be undermined by political decisions, such as changes in industrial subsidies or trade bans. For example, a solar panel company investing heavily in the UK may suffer if green subsidies are reduced.
Operational risk: Day-to-day business activities may be affected by labour regulations, import restrictions, or licensing laws.
Reputational risk: Non-compliance with new legal standards (e.g. health and safety, environmental standards) can lead to fines and public backlash.
Financial risk: Legal penalties, compensation claims, or the need to restructure operations due to new laws may affect cash flow and solvency.
Businesses must build risk analysis into their strategic planning to anticipate and mitigate these challenges.
Degree of Control in Responding to Political and Legal Change
While political and legal developments are external and often uncontrollable, businesses can differ widely in how effectively they respond. Several internal and external factors determine this ability.
Internal Capabilities That Influence Control
Size and Scale
Larger corporations typically have more resources to respond to legal and political pressures. They can employ legal teams, policy advisors, or external consultants.
Smaller firms may lack these resources and be more vulnerable to abrupt legal changes.
Financial Flexibility
Companies with strong cash reserves are better positioned to invest in compliance, relocate operations, or pivot strategy.
Businesses with tight margins may struggle to absorb regulatory shocks.
Management and Leadership
Strong strategic leadership enables faster, more informed responses.
Businesses that cultivate proactive cultures tend to identify and act on risks sooner.
Legal and Compliance Infrastructure
Firms with dedicated compliance departments and internal audit teams can track legal changes and implement policy updates more effectively.
Flexibility of Operations
Companies with agile supply chains or digital infrastructures can more easily adapt to shifts in regulation or political boundaries.
External Factors That Affect Control
Industry Characteristics
Highly regulated sectors (e.g. banking, pharmaceuticals, energy) face tighter legal oversight and have fewer avenues for control.
Sectors with fewer legal restrictions (e.g. digital services) often enjoy greater freedom to innovate and adapt.
Global Reach
Multinational corporations (MNCs) may relocate operations, diversify supply chains, or leverage international legal protections.
Domestic firms are more exposed to the political and legal climate of their home country.
Stakeholder Influence
Some businesses have strong lobbying power or relationships with regulators, giving them more influence over policy changes.
Public sentiment can also drive legal changes, especially around environmental or ethical issues.
Businesses cannot control the external environment but can strategically manage their exposure and prepare for various outcomes.
Scenario Planning and Risk Management
In uncertain political and legal climates, businesses must prepare for a range of possible outcomes. This is achieved through scenario planning and risk management frameworks.
Scenario Planning
Scenario planning involves developing multiple plausible futures based on existing political and legal trends. Businesses can then identify how each scenario might impact them and plan appropriate responses.
Steps in Scenario Planning:
Identify key uncertainties: E.g. Will the government introduce new digital tax legislation? Will trade tariffs rise?
Develop multiple scenarios: E.g.
Scenario A: Regulatory environment remains unchanged.
Scenario B: Major legal reforms increase compliance costs.
Scenario C: Deregulation opens up new business opportunities.
Analyse impact: Determine how each scenario would affect operations, revenues, costs, and competitiveness.
Develop response strategies: Create contingency plans, such as diversifying suppliers, adjusting pricing, or entering new markets.
Example: A UK-based manufacturer may prepare for scenarios involving post-Brexit trade barriers with the EU, including longer delivery times and increased import/export costs.
Scenario planning is not about predicting the future but about increasing strategic agility.
Risk Management
Risk management focuses on identifying, assessing, and controlling risks associated with legal and political change.
Tools and Strategies:
Risk audits: Periodic assessments of potential legal exposures and compliance gaps.
Legal compliance training: Educating employees on updated regulations and company policies.
Insurance: Political risk insurance can cover losses due to civil unrest, nationalisation, or trade embargoes.
Legal counsel: Hiring in-house or external experts to interpret policy changes and advise on responses.
Contingency Measures:
Relocating operations to jurisdictions with more stable policies.
Revising employment contracts to align with new labour laws.
Adjusting financial plans to accommodate changes in taxation or tariffs.
Firms that invest in forward-looking risk management are more likely to maintain operational continuity during periods of political uncertainty.
Industries More and Less Affected by Political and Legal Change
Some sectors are deeply influenced by political and legal developments due to the nature of their products, markets, or regulation. Others experience fewer direct effects.
Industries More Affected
Energy Sector
Highly exposed to environmental legislation, such as carbon pricing, emissions targets, and renewable energy quotas.
Reliant on infrastructure policy and government subsidies, especially in oil, gas, and renewables.
Subject to geopolitical instability, particularly in regions where energy resources are concentrated.
Example: A UK energy firm may face significant cost increases if the government imposes a new carbon tax or tightens emissions rules.
Financial Services
Heavily regulated for consumer protection, transparency, and systemic risk.
Closely monitored by regulators like the Financial Conduct Authority (FCA) and Bank of England.
Exposed to legal changes in taxation, digital currency laws, or Brexit-related adjustments in passporting rights.
Healthcare and Pharmaceuticals
Dependent on government health budgets, public sector contracts, and NHS procurement policies.
Subject to drug approval laws, patent protections, and pricing regulations.
Affected by shifts in health policy, such as changes in public funding or insurance coverage.
Industries Less Affected
Technology Startups
Typically less regulated unless operating in sensitive areas like data processing or fintech.
May be impacted by changes in data protection legislation, but often benefit from regulatory lag.
Can adapt rapidly due to flexible business models and low fixed costs.
Retail (especially online retail)
Affected by consumer rights laws, but often with predictable and stable regulations.
Can adjust supply chains and product lines relatively quickly in response to legal shifts.
Face less direct impact from macroeconomic or geopolitical policy unless operating internationally.
Creative Industries
Less exposed to regulation unless involved in intellectual property, licensing, or public funding.
Businesses in media, design, and publishing often have greater autonomy and fewer formal compliance burdens.
May benefit from cultural policy or arts funding, but are not structurally dependent on legal change.
Strategic Actions to Manage Political and Legal Change
To stay competitive and resilient, businesses often implement structured approaches for dealing with political and legal dynamics.
Monitoring and Intelligence
Establish dedicated regulatory tracking systems or subscribe to legal update services.
Maintain close communication with industry associations, government departments, and regulatory bodies.
Monitor upcoming elections, budget announcements, or legislative consultations that may affect business policy.
Lobbying and Influence
Participate in public consultations or submit policy feedback through trade bodies.
Establish internal public affairs teams to advocate for industry-friendly legislation.
Build relationships with policymakers and regulators to gain early insights.
Flexibility and Innovation
Invest in modular production systems or agile project management to adapt quickly.
Use regulatory compliance as a marketing point (e.g. “GDPR-compliant platform”) to win customer trust.
Innovate in response to legal change—for instance, developing biodegradable packaging to meet new environmental rules.
Workforce Preparedness
Train staff on employment law, equality and diversity, and health and safety requirements.
Develop policies that go beyond minimum legal compliance to future-proof HR strategy.
Geographic Diversification
Expand into regions with more favourable legal environments.
Reduce overreliance on politically unstable regions.
Reconfigure supply chains to bypass heavily regulated zones or tariff-heavy trade routes.
By understanding the interplay between politics, law, and business operations, firms can build sustainable strategies that allow them to anticipate challenges and turn regulatory changes into opportunities.
FAQ
Political lobbying allows businesses to influence legislation and policy in ways that align with their strategic interests. Through direct communication with policymakers or via industry associations, firms can argue for favourable laws, exemptions, or regulatory frameworks. This proactive engagement can reduce uncertainty, delay unfavourable policies, or secure funding incentives. For example, automotive firms have lobbied for extended deadlines on emissions standards. While lobbying does not guarantee outcomes, it can significantly reduce the negative impact of sudden legal changes and improve long-term policy alignment.
In politically unstable countries, frequent policy reversals, inconsistent enforcement, or leadership changes can create a highly unpredictable environment for businesses. Scenario planning enables firms to prepare for a range of possible outcomes, from tax reforms to regulatory overhauls or even nationalisation. By modelling best-case, worst-case, and likely scenarios, companies can build operational flexibility and develop contingency strategies. This proactive approach reduces exposure to shock events and ensures the business can maintain continuity, manage risks, and safeguard investments despite political turbulence.
Regulators such as the Competition and Markets Authority (CMA), Ofgem, or the Financial Conduct Authority (FCA) enforce laws and standards specific to industries. Their interpretations, enforcement actions, and guidance significantly influence how businesses must respond to legal changes. Regulators may issue compliance deadlines, approve business practices, or impose penalties. Businesses that engage regularly with regulators are better positioned to anticipate rule changes and adjust operations early. Ultimately, regulators act as intermediaries between legislation and business practice, shaping both risks and opportunities.
International political changes—such as foreign elections, trade disputes, or sanctions—can impact UK businesses even if domestic laws remain stable. For instance, new US tariffs on steel or a change in EU data protection rules may require UK firms to adapt products, change suppliers, or adjust legal contracts. Global supply chains mean UK firms are exposed to overseas regulations, diplomatic tensions, and shifting alliances. Political shifts in major economies can also affect exchange rates, trade routes, and investment flows, making international awareness essential for UK firms.
Legal uncertainty makes long-term planning difficult because businesses cannot accurately predict future costs, risks, or returns. For example, if employment law is under review, a firm may delay opening a new facility due to potential labour cost increases. Similarly, uncertainty about future environmental regulations may halt investment in traditional manufacturing processes. Investors and boards often prefer stable legal environments where compliance costs are predictable. Therefore, unresolved or ambiguous legal frameworks can freeze capital investment, slow growth, and reduce strategic confidence in expansion projects.
Practice Questions
Analyse how political and legal change might influence the strategic decisions of a UK-based energy company. (10 marks)
Political and legal change can significantly affect a UK energy firm's strategic choices. For example, stricter environmental laws, such as increased carbon taxes, may lead the business to invest in renewable energy sources to reduce long-term costs and avoid penalties. Government commitments to net-zero targets could also shift strategy towards sustainability and innovation. Conversely, reductions in subsidies for green energy might force a reassessment of expansion plans. Trade policy changes, such as tariffs on imported technology, could alter supply chain decisions. Overall, the business must remain flexible and integrate scenario planning to respond effectively to a shifting external environment.
Evaluate the extent to which businesses can control the impact of political and legal changes on their performance. (12 marks)
While businesses cannot prevent external changes, they can manage their impact to varying degrees. Larger firms with strong compliance teams, financial resources, and flexible operations can adapt more easily, mitigating risk. For example, multinationals may shift production to more favourable regions or influence policy through lobbying. However, small firms or those in highly regulated sectors, like finance or energy, often face limited control and higher exposure. Scenario planning and risk management can improve preparedness, but unpredictable political events or sudden legal reforms may still disrupt performance. Therefore, although control exists, it is often partial and dependent on internal capabilities and industry context.
