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External Influences External Influences Unit 1: Investigating Business Icons key: For more detailed instructions, see the Getting Started presentation Teacher’s notes included in the Notes Page Flash activity. These activities are not editable. Extension activities 11 of of 40 40 Sound Web addresses © Boardworks Ltd 2007 Learning objectives What external influences affect the way that businesses operate? How do businesses respond to competition? How do economic conditions affect the profits of a business? What laws must businesses follow to protect the environment? 2 of 40 © Boardworks Ltd 2007 External influences Every business wants to achieve its aims and objectives to make a profit. It will try to do this by organizing what it can influence internally: employees, resources, quality etc. But a business is also affected by external influences which it cannot control: business competition internal environmental influences constraints economic conditions These external influences change from time to time and a business must be able to adapt to them. 3 of 40 © Boardworks Ltd 2007 Business competitors All types of business activity involves competition. There are usually many suppliers offering similar products, meaning that most businesses operate in a competitive market. After a sale, a business will encourage the customer to buy from them again. Competitors, however, will ‘fight’ for the customer by trying to offer more attractive products. How might businesses try to keep customers? How might competitors try to ‘steal’ customers? 4 of 40 © Boardworks Ltd 2007 Competitive features Every business wants to increase its market share. To do this, a business must keep its existing customers and try to gain new ones. Customers buy because of competitive features: price availability quality location additional features. What changes could a failing business make to its competitive features to gain more market share? 5 of 40 © Boardworks Ltd 2007 Business competitors 6 of 40 © Boardworks Ltd 2007 Price Price is a very important competitive feature of any business. It must cover the business’s costs: production, distribution and promotion, and attract customers. Many businesses charge low prices to sell large quantities of stock, such as the clothing retailers Primark and Matalan. High prices are charged by businesses which trade on their reputation for quality; for example, the designer clothing labels Gucci and Chanel. What would happen if Primark raised its prices or Gucci lowered its prices? 7 of 40 © Boardworks Ltd 2007 Competitive features – price 8 of 40 © Boardworks Ltd 2007 Competitive features – quality 9 of 40 © Boardworks Ltd 2007 Competitive features – availability 10 of 40 © Boardworks Ltd 2007 Competitors Group the following businesses or products into pairs of competition groups: Pick one pair and then investigate their competitive features. How do they compare? 11 of 40 © Boardworks Ltd 2007 The types of competition There are two types of competition: direct and indirect. Direct competition includes businesses that sell similar products, e.g. Ford competes with Peugeot and Toyota. Indirect competition includes businesses that sell slightly different products, e.g. Burger King competes with Starbucks. Business that sell totally different products are also in indirect competition, e.g. Rimmel competes with iTunes and Topshop for the money which teenage girls spend. Give an example of two businesses in direct competition and two in indirect competition. 12 of 40 © Boardworks Ltd 2007 The types of competition 13 of 40 © Boardworks Ltd 2007 Types of competitors The competitors a business competes with are not always the same. There are three types of competitor: local competitors national competitors multinational competitors. A multinational business has operations in more than one country and adapts its products for each particular market. Can you name any multinational businesses? How has IT made it easier for businesses to compete for customers around the world? 14 of 40 © Boardworks Ltd 2007 Knowing the customer Understanding what it is that customers need and want will give a business an edge over the competition. The Marketing department builds up customer profiles of the types of customers who buy the business’s products including the following criteria: age: age ranges of customers gender: number of males and females income: what customers can / will pay lifestyle: likes / dislikes, children, pets geography: where the customers shop. How do businesses use the data they collect from customer profiles? 15 of 40 © Boardworks Ltd 2007 How Tesco attracts customers Tesco operates market segmentation because it caters for a variety of customers: students, career people, families with young children and older people. To be competitive, Tesco offer price differentiation by selling different priced ranges: Value, own brand and Finest products. In addition to groceries, Tesco sell clothing, entertainment, and electrical products and energy, financial, Internet and travel services. It also provides additional in-store facilities such as pharmacies and cafes. Apart from other supermarkets, what other types of businesses are competitors for Tesco? 16 of 40 © Boardworks Ltd 2007 Creating customer profiles 17 of 40 © Boardworks Ltd 2007 Customer profiles Here is an example of a trendy wine bar’s typical customers: Age: 25 – 40 Gender: male and female Income: £20 – £50,000 Geography: south-east Lifestyle: no children gym members holiday abroad eat out regularly spend a lot of money on fashion. Design a customer profile for a business in your local area. 18 of 40 © Boardworks Ltd 2007 The economy An economy is the system within a country which influences the production, distribution and consumption of products, and the supply of money. Britain’s economy affects every British business and citizen in some way. It is, therefore, very important that the British government organizes the economy properly. A British cabinet minister acts as the Chancellor of the Exchequer. He or she must manage the British economy by taking advice from the Bank of England and the Treasury. Do you know who the Chancellor of the Exchequer is? 19 of 40 © Boardworks Ltd 2007 Economic conditions The British economy is affected by three areas: interest rates prices exchange rates. Businesses and customers can be affected when changes are made to interest rates, prices or exchange rates. Changes to the economy can make it difficult for a business to plan ahead and for customers to plan when to spend or save. 20 of 40 © Boardworks Ltd 2007 Interest rates The base interest rates of England and Wales are set by its central bank: the Bank of England, who issue the banknotes. The base interest rate is the fee the Bank of England charges its customers, usually other banks, for borrowing money. It determines how much extra must be repaid on top of the original sum in a loan. However, customers (including businesses) can be charged higher interest rates than the base interest rate because other banks and credit cards set their own rates. Do businesses prefer high or low interest rates? 21 of 40 © Boardworks Ltd 2007 The effects of interest rates 22 of 40 © Boardworks Ltd 2007 Fluctuating interest rates 23 of 40 © Boardworks Ltd 2007 Inflation Prices can increase or decrease over time. When prices are generally rising, this is called inflation. Inflation can cause major problems for smaller businesses because raw materials (produced in the UK) become more expensive to buy. Businesses will then put up their prices to compensate for inflation, but it can lower their sales. Staff will also demand pay rises which creates even more cost. What would happen if the opposite of inflation: deflation, occurred? 24 of 40 © Boardworks Ltd 2007 Case study 25 of 40 © Boardworks Ltd 2007 Inflation 26 of 40 © Boardworks Ltd 2007 Exchange rates The exchange rate is what one currency is worth in another currency. In the UK it is how much one British pound, called sterling, is worth in a different currency. On holidays abroad, it determines how much a tourist’s money is worth. A strong currency is worth a lot – good for tourists; a weak currency is worth little – bad for tourists. For example, if you were going to the USA you would need some US dollars. If the exchange rate was $1.93 to £1 and you exchanged £45, you would receive $86.85 as 1.93 x 45 = 86.35. Would a US tourist visiting the UK want the US dollar to be stronger or weaker than sterling? 27 of 40 © Boardworks Ltd 2007 Exchange rates Businesses are affected by exchange rates all the time as many of them sell to, or are supplied by, businesses abroad. When a business in the UK exports (sells products overseas), it expects to be paid in pounds sterling. If a UK business imports (buys products from abroad), it will have to pay in the currencies of those countries. Would a business that exports prefer a strong or a weak British pound? 28 of 40 © Boardworks Ltd 2007 Exchange rates The exchange rate alters because of international supply and demand. If more people are selling pounds than buying them, the exchange rate will go down, making the pound weaker. If more people are buying pounds this creates a demand for sterling and increases their value. 29 of 40 © Boardworks Ltd 2007 Exchange rates – good or bad? 30 of 40 © Boardworks Ltd 2007 Managing the UK economy The Chancellor of the Exchequer, the Treasury and the Bank of England try to create economic stability for businesses and customers so they can plan when to spend or save. Through taxation and interest rates, they: raise taxes to discourage spending lower taxes to encourage spending raise interest rates to discourage spending lower interest rates to encourage spending. Explain why high taxes and interest rates cause low levels of spending. When is this useful? 31 of 40 © Boardworks Ltd 2007 Environmental constraints Business activity can damage the environment. The UK Government is trying to reduce pollution and wastage by introducing laws to minimize the negative impacts and by setting specific targets that must be met. What kinds of problems can excessive pollution and wastage cause to the environment? 32 of 40 © Boardworks Ltd 2007 Pollution Unless it is carefully controlled, business activity can cause a variety of environmental problems: air pollution noise pollution water pollution. 33 of 40 © Boardworks Ltd 2007 Wasting resources Some of the resources that a business uses end up as waste. It makes sense for a business to reduce the amount of waste it produces for financial and environmental reasons by: recycling and composting consuming less energy using fewer resources reducing waste disposing of waste properly. Design a poster to encourage businesses to reduce the amount of wastage they produce. 34 of 40 © Boardworks Ltd 2007 Environmental laws The Environment Agency and local authorities ensure that businesses follow the environmental laws set by the Department for Environment, Food and Rural Affairs (DEFRA). Two of these laws are: Environmental Protection Act 1990 tries to reduce significant emissions affecting water, air and land regulates about 3,000 manufacturing plants. 35 of 40 Pollution and Prevention Control Act 1999 tries to reduce pollution, waste and energy used regulates less significant emissions from about 20,000 businesses. © Boardworks Ltd 2007 Environmental policies at Innocent Innocent is a business that makes fresh fruit drinks. It tries to live up to its name by doing more than just following the law. Innocent try to be ethical by: using alternative fuels and power producing recyclable packaging offsetting its carbon emissions by 120% each year buying from suppliers certified by the Rainforest Alliance donating 10% of its profits to charity. Why do you think Innocent have set themselves these environmental targets? 36 of 40 © Boardworks Ltd 2007 External influences activity 37 of 40 © Boardworks Ltd 2007 Question time! 1. Give three tactics a business might use to steal customers from its competitors. 2. Explain what the difference is between direct and indirect competition and give three examples of each. 3. Why do businesses who are exporters dislike it when the sterling exchange rate is very strong? 4. Who suffers when interest rates increase? 5. Why does inflation create extra costs for a business? 38 of 40 © Boardworks Ltd 2007 Who wants to be an A* student? 39 of 40 © Boardworks Ltd 2007 Glossary 40 of 40 © Boardworks Ltd 2007