Effects Of Due Diligence On Unethical Trade Commerce Essay


In this era, many businesses have ignored the words or process of due diligence in their dealings with the intention of gaining maximum profits and minimize the cost without caring the ethics in the business or in the supply chain. However, the consequences of this act may filter the whole organization in the most dangerous position in the market. Due diligence is the foundation act that has to be considered by the entire stakeholders who involve in the trade in order to stay longer and uphold their position as well as to remain powerful in the global market. This essay was divided into a few parts to discuss about the link between the supply chain management, business ethics and due diligence. Furthermore, this essay also carries out the discussion about the importance of due diligence, the process of due diligence and the multipurpose of stakeholders as well as the effects of due diligence on unethical trade.


Due diligence

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First of all, what is due diligence? According to Howson (2003), due diligence is a process of inquiry or survey made by the potential buyer in order to make sure that they understand exactly what they are buying. This also was supported by Lucier (2002), by defining the process of due diligence "as the care a reasonable, prudent person exercises in the examination and evaluation of risk affecting a business transaction"33. Principally, we can conclude this process of due diligence as a process of careful consideration in order to choose the stakeholders or business dealer. However, according to Mcdonald, Frow and Payne (2011), due diligence is a compulsory process for both shareholders and the organization in order to ensure that the trade are out of risk. This process helps both the shareholders and the organization to examine on the recent performs of procedure and strategies to focus and generate the possible outcome in the future. Businesses that forsake the process of due diligence will have negative impacts on the potential business grow in the market. Doubtless, due diligence process concern the areas of finance, legal, working environment and working conditions, labor, tax, environmental factors, and the market situation of the company (Bing, 1996).

Supply Chain Management

Secondly, the supply chain management also an important element in the due diligence process. Stahl (2003), "defined supply chains as a set of three or more companies directly linked by one or more of the upstream and downstream flows of products, services, finances and information from a source to a customer" p. 545. Supply Chain management is the administration of a network of interrelated trade engaged in the provision of manufactured goods or service encloses obligatory by the last purchaser in the supply chain. For an understanding, we can define supply chain management as a mixture of art and science that helps to develop the method that the organization used to find out the raw materials which required by the organization in order to produce the goods and services as well as in distribution. There are five basic components in the supply chain management like plan, source, make, deliver and return (Blanchard, 2010). Planning is the main strategic segment of supply chain management in order to manage all the resources that assembled to meet the demands of consumer towards the products or services (Lee and Katzork, 2010). This strategy helps the supply chain remain efficient; reduce costs and delivers high quality and value to the consumer. The second strategy in supply chain management is the source. At this stage, the organization needs to select the dealers who are able to deliver the goods and services by meeting the demands of the organization. The third strategy is known as a manufacturing step of making (Pankow, 2008). This is where the organization plans the work-in-progress activities as production, testing, packing and distribution in order to ensure the quality levels, production output and the employees' productivity. The fourth step in supply chain management is the delivery of goods and services (Collier and Evans, 2011). This is where the organization will direct the reception of orders from customers, build up a system of storehouses and set up an invoicing system to receive payments. The final stage in supply chain management is known as return (Horch, 2009). This return stage is as identified very complicated stage in the supply chain management. The organization needs to create a system for receiving imperfect and surplus goods return by the consumer as well as helping them to solve problems as distribution, maintenance and fixing goods.

Business ethics

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Business ethics are playing an important role in today's world market. Moreover, today's market is known as consumer market due to the purchasing power of the consumer. Consumers only purchase the goods that offer them utmost pleasure. Businesses cannot endure in the long run if the ethics of business are not considered by the organization. According to Fernando (2009), business ethics are moral values that direct the way an organization reacts. However, Chryssides and Kaler (1993), explained business ethics as the moral principles that applies in the trade which can give both positive and negative impacts on business cycles. Basically, there are three most common or important things that consist in business ethics. First is the avoidance from breaking the criminal laws of one's work related activity. Second is the avoidance action that may result in civil lawsuits against the company. Finally are the avoidance actions that are bad for the company image (Roleff, 1996).

Relationship among the three concepts

In every single business transaction, due diligence process, supply chain management and business ethics link and deal with one another. In order to operate in the long run, the businesses must apply due diligence process to choose carefully the stakeholders to manage the supply chain. Apart from technological advances, global supply chains constantly derive from the interface of community. Wherever the community interrelates, a kaleidoscope of ethical issues appears. If the business fails in the process of due diligence then it has to deal with ethical issues in the supply chain.

Stakeholders in supply chain

According to Hull, Jackson and Dick (2011), a stakeholder is a person or group, business or other entity that has a direct or indirect interest in a system. Top of Form

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The stakeholders that often involve in supply chain management can be divided into two categories which are the internal and external stakeholders (Prasad, 2009). For an example, the internal stakeholders are those who involve in the business dealing within or have a direct link with the organization such as employees, shareholders, and the management (Hiles, 2008). Whereas, the external stakeholders are a group of outsider who are remaining powerful although there is no direct link with the organization but needs to be concerned with the organization in each business dealings. Examples of external stakeholders are customers, government, supplier, vendor and contractor (Broder, 2006).

Ethical Issues in supply chain

Today's global trade is a difficult matter for many organizations due to the trades are remaining competitive and optional. So, each of the organization only focuses to lower their operating costs and gain maximum profits in the trade within the short run. Simultaneously, the consumers are also aware and more knowledgeable about the products and services that deliver to them. As a result, the consumer has a greater hope on the behavior of the organizations that they choose to purchase the products from. There is a range of reasons that influences the purchasing decision of a consumer. Example of factors that influences the purchasing decision of a consumer is the price, quality, the organization's ethical behavior and the environmental track record. Ethical issues in supply chain management as sweatshops have a great impact on the trade. According to Waddock and Rasche (2012), sweatshops can be defined as the factory that violates two or more labor laws as those pertaining to wages and benefits, child labor or working hours. For an example, the ethical issue that arises from the organization of Mark & Spencer and Nike is the issues of child labor. Mark & Spencer and Nike use the child labor to work in their factories to meet the demand of the consumer. Even though the laws banned the children under age from working but yet the world famous company stills intends to do so in order to reduce their cost. The second ethical issues are about the abuses of the working regulations. The companies as Gap and Next in India have abused the working regulations. The workers in India are only paid 25p an hour and forced to work overtime in factories. Workers who refuse to work the extra hours were threatened and fired by the supervisor. Many ethical issues are arousal in today's market that kept on happening one after another.

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The government is playing an important role to ensure that trade is running ethically without using child labor, discrimination on sex or abuses of the working regulations although the government has an interest in the taxation paid by the organization. In order to ensure the businesses operate ethically, the government should take civil actions against sweatshops by imposing a fine as well as sentenced to imprisonment if the organization practices sweatshops. Other than that, the government also should hire public servants or detective to ensure that the organization is not implementing any sweatshop activities in the trades. However, the government can terminate or withdrawn the license of any organization that practices sweatshop activities.


Secondly, the consumers are reigning as a powerful decision maker that can influence and impact the entire market. Absolutely, the consumer often shows their interest in certain stuff as value, quality, consumer care and ethical products. The consumer will protest against the organization that practices sweatshops. They will refuse to purchase or support the particular organization's products in order to let the sweatshops known the impacts of unethical business behavior on others as well as to chase out the organization from the market.


Thirdly, the CEO of an organization is responsible to ensure that the single performances of the organization are ethical in order to meet the demands of the consumer. The CEO should not only focus on the profits and the success of the organization whereas they also focus on sustainability of the organization in the market. This can be done by tracking reports and records as well as keep all black and white copies whenever involve in any business trade.


Furthermore, the shareholders of an organization often focus about the returns on their investment, annual profits and the status or rank of the organization in the market. However, the shareholders also should observe the operations of the organization either it is running ethically or unethically. Shareholders should not invest in the organizations that are not practicing an ethical trade. Furthermore, shareholders who fail to discover the ethical standards of an organization may result the organization to face failure in the long run as well as the money that invested by the shareholders also will be frozen.

The application of due diligence

The due diligence process is a vital to perform when selecting suppliers. There are a few tools that can be considered and implement by the organizations in the due diligence process. The first tool that can be implemented by the organizations is the 3P models of people, planet and profits (Jurin, 2012). Whenever choosing a supplier, the manufacturer organization should make an effort to know either their supplier is concerned about the people, planet and profits that involve in the trade. For examples, it is the responsibilities of manufacturer to know the way that the supplier treats the employees, working environment and condition, the supplier legal activities, fulfillment of rules and regulations when dealing earthly resources and so on. This action helps the firm to sustain in the long run as well as eliminating the effects of unethical trade on the business cycle. Furthermore, if a positive impact on people and planet can be achieved whilst it will deliver a profitable growth too. The second tool that can be implemented by the organizations is the IBE Framework (Stadler, 2004). In this framework, there are three steps and questions that the organization needs to ask whenever involve in any decision making activities. The three steps are known transparency, effectiveness and fairness. The transparency stage often deals with the question as "Do I mind others knowing what I have decided?" This shows that the transparency step in IBE Framework focused mainly about the information linkage. "Who does my decision affect or hurt?" The second steps that cares about the people that might affect by the decision making system of an organization. "Would my decision be considered fair by those affected"? The final step of IBE Framework is discussed about the fairness. This step concerned about decision distribution whether within or outside organizations dealing. The third tools that can be used to choose the stakeholders are Trevino & Nelson model (Shaw, 2010). This author has introduced eight steps in order to select the right stakeholder as a process of due diligence. Firstly, the organization has to gather the facts of the stakeholder. The organization has to collect all the information regarding the supplier that the business wants to get into the dealings. Secondly, define the ethical issues that could or have the supplier went through. The third step is to identify the affected parties or stakeholder. This step is done to know the interest of stakeholders towards the business. The fourth and fifth step is to identify the consequences and obligation in the business. Next step is to consider the organization character and integrity. The seventh step in the model is to think creatively about the potential actions subsequently. The final act is in this model to check the organization gut. These tools definitely will help with the manufacturer or organization to make the right decision or choices in order to choose the stakeholders in the process of due diligence.

Law and regulations

There are several laws introduced and imposed in order to protect and decline sweatshop in the global trade. The International Labor Organization (ILO) is an agency that deals with labor issues (Servais, 2011). The ILO registers complaints against entities that are violating international rules; however, it does not impose sanctions on governments. The second law is about the working conditions act. This act is known as Fair Labor Standards Act which deals with health and safety issues of employees (Sciotti, 2004). There are also laws as the Tariff Act of 1930 and the Convention on the Rights of the Child which deal with child labor and working conditions of employees (Bermann and Mavroidis, 2006).

My Opinion

In my opinion, the due diligence process is essential for businesses. If the process of due diligence ignored by the firms, then there will be a lot of unethical issues will arousal in the trade. The due diligence process is the foundation act that gives benefits to stakeholders in the supply chain to run the business ethically and sustain for a long period of time in the market. However, firms that practice due diligence process not only gaining good reputation as well as establish brand loyalty and make sufficient profits from the business trade.


As a conclusion, due diligence is an important process for both newly establish organization and for the organization that already exist in the market. It depends on the business to decide where they want to be in next few years. It is the right time for the organization that wants to remain in the market to fulfill the requirements or demands of the stakeholders within or outside the organization by using the due diligence process in the supply chain. This will helps the business to perform ethically and endure in the business in the long term. Due diligence is the compulsory foundation act that should and must be used by the firms in every single transaction.