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External Influences
This section builds on the AS subject content and students should be familiar with these topics.
15.1 Economic Opportunities and Constraints
Interest Rates – The cost of borrowing , money and the return for lending money.
Exchange Rates – The price of one country’s currency in terms of another.
Inflation – An increase in the general level of prices of goods and services within an economy, which means that
there is a fall in the purchasing power of money.
Business cycle – The regular pattern of ups and downs in demand and output, or of gross domestic product (GDP)
growth over time. It is characterised by four main phases: boom, recession (or downturn), slump, and recovery (or
upturn).
Labour market - The demand for labour and the supply of labour, which together determine the wage and salary
rates paid.
Skills surplus – an excess supply of people with particular skills.
Skills shortage – an excess demand for people with particular skills.
International competitiveness – the ability of a company or product to compete with other businesses or products in
overseas markets. Issues such as price, exchange rates, delivery times, quality and reputation may all be relevant in
determining competitiveness.
Economic growth – the increase in a country’s national income (GDP). This means that the economy is producing
more goods and services than it did last year. This is the way in which citizens of the country can enjoy higher living
standards.
Gross Domestic Product – this is the total value of all goods and services produced in an economy in one year. It is
a way of measuring the size of an economy.
European Union (EU) – a political and economic organisation comprising 25 western European countries. The UK
has been a member since 1973 and the EU is the most important market for UK exports.
Pan-European strategy – a business strategy based on selling products or services across Europe. This will involve
establishing a strong brand image in a number of different European countries and developing an effective distribution
network.
Issues
The state of the economy and the level of interest rates, inflation, the exchange rate and unemployment all have an
important bearing on the performance of a business. The UK is a trading nation and it is important that UK businesses
remain competitive in international markets. The UK’s membership of the EU and the expansion of the EU in May
2004 present opportunities for and threats to UK firms.
15.2 Governmental Opportunities and Constraints
Aggregate demand – the total spending power in the economy made up of spending by consumers (C), business
investment (I), Government (G) and foreign demand for UK exports (X). Fluctuations in the level of aggregate demand
will influence the level of output, unemployment and inflation in the economy.
Fiscal policy – Government policy regarding the level of taxation and government spending in the economy.
Changes will have an impact on aggregate demand and thus output and employment.
Monetary policy – government policy based on changing the money supply to influence the economy. This is now
rarely used in the UK and interest rate policy is the government’s preferred approach to influencing the economy.
Intervention – a political/economic philosophy which is based on the belief that the government should intervene to
improve the working of the economy and protect individuals and the environment from the undesirable consequence
of uncontrolled business activity eg. minimum wage and anti-pollution legislation.
Laissez faire - a political/economic philosophy which is based on the belief that the government should not interfere
in the economy and that businesses should be left to regulate their own activities. It is argued that interference raising
costs and reduces efficiency.
Privatisation – a policy of selling off State owned assets to the private sector. During the 1980’s and 1990’s the
Conservative government privatised industries such as the railways and the water, gas and electricity industries. They
are now owned by private shareholders and run for profit.
Issues
Government fiscal and interest rate policy aimed at managing inflation and unemployment will have an impact on
businesses. There are inevitably those who demand more government intervention in the economy to protect
stakeholders eg. minimum wage and anti-pollution legislation. Others take the view that government intervention
raises costs to business and creates unnecessary bureaucracy.
15.3 Social and other Opportunities and Constraints
Stakeholders – any individual or group who has an interest in the business or is affected by the activities of the
business eg. employees, customers, the local community etc.
Social responsibilities – responsibilities that a business may owe towards stakeholders other than its shareholders
eg. to use more environmentally friendly production methods, to promote equal opportunities.
Ethics – a set of values and beliefs.
Pressure group – a group which represents a particular interest or viewpoint and which engages in activities aimed
at persuading business or government to change its approach eg. Friends of the Earth, the AA, the Transport and
General Workers Union etc
Lobbying – the process of bringing pressure to bear on politicians and other policy-makers eg.meeting with MPs,
presenting petitions, sponsoring MPs etc.
Direct action – engaging directly in activities designed to bring pressure to bear on businesses and harm the firm’s
public image eg. demonstrations outside the business, boycotting a firm’s products etc.
External costs - those costs of business activity which are not borne by the firm itself but by the wider community eg.
increased noise and chemical pollution, road congestion. Company accounts show only private costs incurred by the
business such as wages and salaries, fuel and packaging costs and not the impact of the business on others in
society.
Social auditing – the process of regularly assessing the firm’s impact on the environment (green audit) or on other
stakeholders such as employees, the local community etc.
An increasing number of businesses now produce an annual social audit alongside their financial accounts. It may
then form the basis of plans to become more environmentally responsible, reduce discrimination in the workplace etc.
Issues
A traditional view may be that managers’ only duty is to run the company efficiently and profitably for the owners of
the business. However, a modern corporate responsibility stance is that managers have responsibilities to a wide
range of stakeholders such as workers, customers, the local community etc. Increasingly some firms find that their
activities attract the attention of pressure groups which may campaign against what they see as undesirable
business activities. Some firms now carry out social auditing to assess the impact of their activities on the wider
community.
Examples of recent exam questions
Paper 6 questions are based on a real life business case study. The emphasis is on analysis (why?) and evaluation
(judgements based on evidence). Knowledge needs to be applied to the business in the case study. The questions
below must be read in the context of the case study they are taken from.
1. Assess the value to Shell of carrying out a social audit.
2. To what extent might there be conflicts of interest amongst Shell’s stakeholders?
3. Discuss the extent to which P&O might benefit from the potential opportunities created by the enlargement of the
European Union.
4. To what extent is the declining profitability experienced by P&O in its passenger ferry business the result of
external factors beyond its control?
5. To what extent is it possible for large businesses to eliminate unethical behaviour by staff ?
6. It is believed that the government will now make control of inflation a priority in its economic policies. Assess the
impact this may have on Odyssey plc.
7. Discuss whether the Directors were right to be concerned about the apparent interest shown by the Chief
Executive in social responsibilities.
8. Some suppliers question the ethics of large supermarkets forcing “rock bottom” prices on them and driving them
out of business. To what extent is the supermarkets’ policy justified ?
9. Assess the likely impact of the changing economic situation on the trading conditions faced by RS Ltd.
10. Assess the reasons why Jaspar Toys Ltd may have been vulnerable to recession.
11. Discuss whether Jaspar Toys Ltd was ethically correct to aim its advertising at the 8-12 age group.
12. To what extent is Interactive Software likely to be affected by a sharp rise in UK interest rates.
13. Outline two major external constraints which might affect Plamate Ltd over the coming year or two. Discuss the
strategies Melanie and Daniel could develop to cope with them.
Objectives and strategy
This section builds on the AS subject content and students should be familiar with these topics.
15.4 Impact on firms of a change in size
Internal/organic growth – the usual way in which a business grows. Profits are reinvested to enable the business to
purchase new fixed assets, open more stores etc.
External growth – growing by merging with or taking over other businesses (integration). It can be a faster way of
growing (eg. RBS/Nat West and Morrisons/Safeway) providing the necessary finance is available.
Overtrading – expanding the business without adequate working capital. Liquidity problems can easily arise if
revenues from past credit sales are insufficient to support the costs of the growing business.
Ltd. – private limited company. Shares cannot be sold on the Stock Market and financial affairs are fairly private.
PLC. – public limited company. Shares can be sold on the Stock Market and results must be published.
Retrenchment – describes a business reducing its scale of operations. This may be a deliberate strategy or it may be
forced on the business as a result of recession or competition.
Merger – two or more firms voluntarily agree to join together to form a larger business which may benefit from
economies of scale.
Takeover- one business gains a controlling interest in another.
Synergy – the belief that integration will enable the new combined business to be greater than the sum of the
individual parts : 1 + 1 = 3. For example, one business may have an excellent distribution network while the other has
a wide product range. In theory, combing both should produce a number of advantages. In reality it can be difficult to
successfully integrate two or more businesses, particularly if they have different corporate cultures.
Horizontal integration – a business merges with or takes over another which is involved in the same line of business
(same stage of production) eg. two banks
Vertical integration - a business merges with or takes over another which is involved in a different stage of
production. Backward vertical integration involves taking over a business at an earlier stage eg. an oil refiner takes
over an oil exploration company, while forward vertical integration usually involves securing an outlet for the product
eg. a brewer takes over a chain of restaurants.
Conglomerate merger/takeover – integrating with a totally unrelated business eg a pet food manufacturer takes over
a chain of estate agencies. The aim of such a diversification may be to spread risk.
Joint venture - two businesses cooperate to set up a new business project but retain their separate corporate
identities eg. a supermarket cooperates with a bank to offer financial services to its customers.
Management buyout (MBO)– the managers of a business raise the necessary finance to buy a controlling interest in
the business they work in. This often arises with subsidiaries when the parent company wishes to close the business
or sell it off.
Issues
Growth and change provide challenges for the managers of a business. Growth needs to be properly financed and
sometimes changes are needed in the structure and leadership style of the business. Plcs are vulnerable to takeover
because their shares are traded on the stock market. Mergers and takeovers offer advantages such as increased
market share and economies of scale but also risks eg. Morrisons has struggled to integrate Safeway successfully
15.5 Business objectives
Mission statement – a statement of what the business is trying to achieve or what its values and beliefs are eg. “To
be the market leader in the manufacture of frozen convenience foods in the UK.”
Organisational culture – the way in which the business conducts itself eg. is it hierarchical, democratic, informal,
committed to ethical values or focussed on growth etc.
Issues
The main issue is each business has its own organisational culture and it can be difficult for a new management team
to change this. Individual workers and managers often feel threatened by change and will often resist it.
15.6 Business Strategy
Scientific decision-making – making decisions based upon a logical (scientific) approach rather than hunches or
guesswork.
The marketing model- a scientific decision-making model. Marketing decisions should be arrived at following careful
analysis and evaluation of market data. The model has a number of stages:
1. Identify objective(s) 2. Collect market data 3. Analyse and evaluate alternative strategies based on the data. 4.
Implement strategy. 5. Review strategy and outcomes
Ansoff’s Matrix –a framework for marketing strategy based upon existing products and new products and existing
markets and new markets.
Existing Product
New Product
Existing Market
Market Penetration
Product Development
New Market
Market Development
Diversification
Market penetration = selling more of the same product to the same type of people. This may be possible in a
growing market or by gaining market share at the expense of rivals. This will involve establishing a competitive
advantage over rivals.
Product development = selling new products to the existing customers. This will involve developing new products or
and selling them to the existing customer base. The firm will attempt to exploit its current marketing strength and
brand image.
Market development = selling existing products to new customers. This might involve entering export markets which
can be risky.
Diversification = selling new products to new customers. This is particularly risky because it involves new products
being sold in unfamiliar markets.
Decision tree – a diagram representing possible courses of action, their financial outcomes and the probability of
achieving those outcomes. A decision tree is a scientific decision-making technique which assesses risk.
Corporate plan – is the business’ overall plan. Corporate (strategic) planning is one of the key functions of the board
of directors of a Ltd or plc.
Contingency planning - involves producing a back-up plan to cope with alternative or unexpected scenarios. There
may be costs involved in carrying out contingency planning and these must be weighed against the potential costs or
dangers of failing to plan. Firms should undertake risk assessment.
Issues
The role of senior managers is to undertake corporate planning and develop strategies to achieve corporate goals.
Sometimes a contingency plan is necessary. Managers can adopt a scientific approach to decision making based on
market and other data. Candidates may wish to refer to theories such as Ansoff’s data and Porter’s 5 forces model
when considering strategies.
Recent exam questions
Paper 6 questions are based on a real life business case study. The emphasis is on analysis (why?) and evaluation
(judgements based on evidence). Knowledge needs to be applied to the business in the case study. The questions
below must be read in the context of the case study they are taken from.
1. Assess the value of corporate planning in helping P&O to formulate its strategy for the future.
2. Assess the usefulness of decision trees as a decision-making technique in this case.
3. To what extent might the adoption of contingency planning have helped Dickson Waste Ltd avoid the problems of
the River Elbir case?
4. Many large companies have pursued a strategy of “horizontal, vertical and conglomerate growth”. Do you think
the rewards of such methods of growth are greater than the risks? Justify your answer.
5. Analyse and evaluate the difficulties that a firm might have in diversifying as radically as Vodafone and Nokia.
6. The new chief executive is keen to change the business culture to fit in with his objective of maximising returns to
shareholders. Consider the implications this may have for the future of the business.
7. How might Plamate Ltd be affected by the change from being part of a plc to a management buy-out ?
A number of themes seem to occur regularly in Unit 6:
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Ethical issues and corporate responsibility
The impact of growth and change on the business eg. mergers, takeovers, diversification, buyouts etc.
Problems with differing corporate cultures.
The impact of economic change eg. recession, interest rates