Download Understand that businesses operate within an external

Understand that businesses
operate within an external
environment
Section 3.1.3
Starter
Use your 5 questions from effects of ownership homework on the
person next to you
Key terms
• Market conditions refers to number of features of a market such as
the level of sales, the rate at which they are changing and the number
and strength of competitors
• Demand term used by economists to indicate the amount of a
particular good or service that consumers or organisations want and
can afford, to buy at given prices. It shows the level of sales that
businesses can expect
• GDP measures the value of a country’s total output of goods and
services over a period of time (normally 1 year)
• Real income incomes that are adjusted for the rate of inflation (or
increase in prices) to show changes in purchasing power
Key terms
• Fair trade social movement that exists to promote improved trading
terms and living conditions for producers of products in less
developed countries
• Sustainable production occurs when the supply of a product does not
impose costs on future generations
Learning objectives
By the end of this section you will know the ways in which
• Market conditions
• Competition
• Interest rates
• Demographic factors
• Environmental issues and fair trade
Affect a business’s costs and demand
What is the external environment?
• External forces that can influence a businesses' activities
Economic factors
Environmental and
social factors
Demographic
factors
TESCO
Market factors
What is the external environment?
• Some factors are unpredictable and can change suddenly without
warning e.g. recession (negative impact) and migration of people to
UK (positive impact)
• Can be 1 single factor that has an impact or a number of different
factors
• AS level focus is on effect of external factors on demand and costs
Positive or negative impact??
Look at the impact of these factors on demand and costs
Factor
A product becomes popular (trendy) increasing demand
A major competitor leaves the market
Number of consumers in a country increases (migration)
Consumers demand more ethically produced goods (increasing production
costs)
A new business enters the market i.e. new competitor
Interest rates fall
Rise in wages/income
Recession creating rise unemployment
Positive
Negative
Market conditions and competition
What is market conditions?
• Broad term
• Encompasses a number of factors that can affect a market
• Good market conditions examples – rising sales, rising prices,
competition that’s not too threatening
Market conditions and competition
What is competition?
• Number of competitors
• Size of those competitors
• Power of those competitors
• Potential new competitors
Example
Supermarket industry – dominated by big 4 – Aldi and Lidl have joined
in and big 4 facing competitor from them
Case study
Microsoft
Entered mobile phone market
So what impact does this have on…
• Mobile phone market
• Existing suppliers e.g. Samsung, Apple
• Impact on demand for existing suppliers?
• Impact on costs for existing suppliers?
Market conditions and competition
Factor
Effects on demand
Effects on costs
Market conditions
Companies stand to make many
more sales when their market is
growing at a fast rate than when
their market is growing slowly
Business costs may rise in the
short tem when a market is
experiencing strong growth.
However these costs can level off
in the long term as the business
experiences economies of scale
Competition
The success of rivals can take
market share away from other
companies which then leads to a
decrease in demand. Likewise, if
competition within a market is
weak, a business can take
advantage of this by promoting its
goods and increasing consumer
demand
If a market is particularly price
competitive any business looking
to gain advantage must be able to
offer the lowest prices possible.
This can lead to high costs for a
business when compared to the
profits it stands to earn from
selling its goods/services
Incomes
•
•
•
•
Income earned by customers has impact on demand for products
Rise in income = rise in sales
Incomes are determined by GDP e.g. rise in GDP will mean rise in incomes
Rise in GDP means more people are spending which increases demand on
products
• Income rise can also affect production costs e.g. wages costs in production labour
Fall in income
Rise in income
Necessities
Luxury items
Local or no holidays
Holiday abroad/exotic locations
Eating in
Eating out
Basic food items
Luxury food items
Interest Rates
• Normally expressed as a % e.g. HSBC offer loan of £10,000 with 10%
interest charge
• Bank of England set the base rate and other financial companies
follow on from this
• Current UK interest rate is ?? – this is to encourage
borrowing/spending and discourage saving which boosts demand for
products which boosts production and employment levels
Buying on credit
Mortgage Interest Rates
Pensions/Savings
If interest rate low then
people more like to buy on
credit e.g. demand
increases
If interest rate low then
people more likely to
spend surplus income on
other products
If interest rate low then
people unable to earn
more from
pension/savings which
affects their spending
Interest Rates
What does it mean for businesses?
• Most businesses borrow money
• Rise in interest rate = rise in their costs
Ineos
2014 announced it had to borrow £230million to build new
infrastructure
If interest rates rose by 0.5% then their costs of this loan would
increase by £1.15million
Demographic
• Demography is the study of human populations
• Size and make up of a population can impact a business
• Population is made of consumers and workforce (2 stakeholder
types)
What do we know about UK population?
• 2nd highest growing population in Europe
• 64 million people live here (2013)
• Net migration (those entering – those leaving) 183,400 in 2013
• More births than deaths (212,000)
Demographic
So what does this mean for businesses?
• Increase in population means increase in demand for products e.g.
housing, clothing, food, drink
• Migration is usually low income households so demand more likely on
public transport than luxury goods
• Older population may be increased demand on products for older people
• Migration affects wage costs e.g. if good supply of labour then wage costs
are stable
http://www.pwc.co.uk/issues/megatrends/demographic-and-socialchange.html
Environmental/fair trade
• Environmental activities attracts interest from media e.g.
environmental pollution can cause negative publicity
• Consumer have higher expectations in terms of environmental and
ethical responsibility from a business
• Being environmentally friendly can provide a business with that
competitive advantage
• Environmental issues – pollution, global warming, waste
• Businesses contribute significantly to environmental damage – HOW?
• Governments have introduced laws to protect environment
Environmental/fair trade
What does it mean for businesses?
• Being environmentally friendly can positive impact e.g. differentiation
on products/brands, charging higher prices
• Can have negative impact e.g. higher costs
Fair trade
https://www.youtube.com/watch?v=4tvLHDxv4B4
• Impact of fair trade has similar impact on businesses as
environmental issues
Task 1
New government legislation calls for all companies to recycle at least
25% of their waste materials.
In response to this a luxury car dealer is considering installing a large
scale system that will recycle up to 40% of its waste. The recycling
system costs £50,000 to buy while a system that recycles 25% of waste
would cost £40,000.
Identify and explain the benefits and drawbacks of the business
purchasing the more expensive recycling system.
Should they go ahead with more expensive system??
Task answer
Benefits
Drawbacks
Causes less harm to environment
High initial costs for purchasing new system
More ethically minded consumers attracted to the
business
Profits might not be high enough in future to sustain
the purchase
Can use system as point of ethical
branding/promotion and gain competitive advantage
System may not attract any more customers
May need to employ more skilled workforce increase
firms core base skills
May need to employ skilled workers therefore
increasing costs
System may attract more highly skilled workers who
have strong environmental values
Long term costs decrease as business minimises its
need for waste removal
Task 2
Complete the table to show how the factors can affect a luxury car dealer’s demand and costs…
Task 2 answers