Unit 1.3 business

 Unit 1.3 - Understanding that businesses operate within an external environment

An external environment is the factors that can influence a business's activities and can determine its success or failure. The external environment compromises those external forces hat can influence a business's activities.

 The factors included:

Market conditions and competition, Incomes, Interest rates, Demographic factors and Environmental issues and fair trade.

Market conditions and competition- 

Market condition - The features of the market like the level of sales, sales growth, price levels, the number and strength of rivals, their market position and market share etc.

Demand - The amount of a particular good or service that consumers or organisations want and are able to afford to purchase. A good determinant of how desirable a market is for firms.

Incomes- 

Income levels in the market will clearly have an impact n the demand for all goods. Some products like normal and luxury goods will see sales rise as income levels rise. But, some goods may see their demand fall as consumers' incomes rise and these are known as inferior goods.

Interest rates- 

interest rates- are the cost of borrowing money and the return for lending it. They are set by the Monetary Policy Committee of the Bank of England to control inflation and economic growth by impacting consumer and business borrowing and spending. When interest rates are higher it will impact consumer and business spending in the following ways:

Consumers with mortgages, loans and credit cards have less discretionary income available so will spend less.

Sales of consumer products on credit (cars, electrical goods, furniture, holidays etc.) may fall as it becomes more expensive to borrow.

Savings become more attractive than spending because of the interest earned.

The increased cost of borrowing may encourage businesses to delay any investment in growth as the benefit of saving is greater than that of the project. So, the demand for capital goods (machinery etc) will fall.

The cost of borrowing is a fixed cost, therefore a rise will increase unit costs and the break even point and lower profit margins.

The fall in demand for consumer and capital goods will slow economic growth.

When interest rates are lower the opposite will be true.

Demographic factors - 

There are a number of major demographic changes which have created new oppurtunities and threats for firms. They include:

The UK population is increasing - in 2008 there were 61.4 million people living in the UK. This is expected to grow to 71 million people by 2031.

The population is ageing - By 2031, 22 per cent of the population will be aged 65 and over compared to 18 percent aged 16 or younger. The older generation are a major marketing opportunity for all industries, with those aged 50 and over making up 34 percent of the population and being responsible for 80 percent of disposable income.

Ethnic diversity - Increased migration into the UK over recent decades has resulted in a much more diverse population. This has led to different attitudes, demand for different foods and restaurants and different shopping habits providing opportunities but more complex consumer attitudes and demands.

Smaller households - It is projected that the number of one person households in England will increase by 60 percent to nearly 11 million households in 2031 (source- Office of National Statistics). This has also created business opportunities', like smaller convenience product, smaller pack sizes, ready made meals, and greater demand for eating out.

Higher proportion of women working - There has also been a growth in the number of women in employment (source - Office for National Statistics) The proportion of women aged 16-64 in employment grew to 60 percent in 2009, compared to less that 60 percent in 1971. This has resulted in busier households with many people now cash rich but time poor. This has presented opportunities including growth in café culture, convenience products and eating out.

Benefits of demographic changes:

The UK population is increasing

The population is ageing

Ethnic diversity

Smaller households

Higher proportion of women working

Environmental issues - 

Smaller households - It is projected that the number of one person households in England will increase by 60 per cent to nearly 11 million households by 2031.

One of the major externalities that businesses contribute is environmental damage including factory emissions, pollution in distribution networks, congestion and destruction of natural environments including deforestation in growing crops and logging for paper, furniture and other products.

The UK and EU government have introduced a wide range of legislation to improve companies' treatment of the environment (like the Environmental Protection Act 1991) which will influence what firms are able to do. This legislation ensures firms must act more responsibly to avoid fines but these do not always stop companies causing environmental damage.

The UK government also provides grants for firms investing in green technology, like through the Carbon trust.

Being more environmentally responsible can often be more expensive but many firms, like Marks and Spencer with their plan A strategy, have found major cost savings from becoming more environmentally responsible.

General Electric has even found new major sources of revenue by developing environmentally responsible green technology products with their Ecomagination programme.

Fair trade - 

Fairtrade is about better prices, decent working conditions and fair terms of trade for farmers and workers.

This is ethical and helps a firm to be socially responsible.

It can help to add value to products, but will push unit costs up often meaning higher prices must be charged.

This may be acceptable for some consumers but difficult for many others to afford, reducing demand.

Fair trade ensures that reliable suppliers are able too afford to continue trading making the supply chain sustainable and beneficial.

Arguments for being environmentally responsible - 

Improved financial performance of the firm and reduced operating costs, for example reduced waste disposal costs, income from selling recycled materials etc.

Enhanced brand image and reputation resulting in improved sales and customer loyalty.

Will avoid pressure group actions impacting demand 

Growth of ethical investing means more potential capital

It will be attractive to some investors and easier to raise finance

Improved share prices

It is necessary in order to avoid excessive regulation and legislation

Socially responsible actions can be profitable

Arguments against being environmentally responsible - 

Companies' ultimate aim is to make a profit and the only social responsibility of business is to create shareholder wealth

Extra costs will be incurred which will be passed on to consumers

Businesses may not be able to use their resources as efficiently if there are restrictions on how they may produce and where they may locate

It may reduce firms international competitiveness if others are not doing it 

As long as the company complies with legislation they should be able to do what they want.

Is it just a cynical way of marketing products to increase sales? Is it just PR?

Summary - 

There are many external factors that can cause a firm's costs and demand to change both positively and negatively.

Firms must regularly complete PESTLE analysis to fully understand their market conditions and the impacts it will have on their stakeholders.



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