Flashcards in Chapter 6 and 7(external influences on business activity) Deck (54):
The main factor that affects most business
The main factor that affects most business is the degree of competition
degree of competition
how fiercely other businesses compete with the products that another business makes.
other factors that can affect the business are
Social – how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population.
Legal – the way in which legislation in society affects the business. E.g. changes in employment laws on working hours.
Economic – how the economy affects a business in terms of taxation, government spending, general demand, interest rates, EXCHANGE RATES and European and global economic factors.
Political – how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works.
Technological – how the rapid pace of change in production processes and product innovation affect a business.
Ethical – what is regarded as morally right or wrong for a business to do. For instance should IT TRADE with countries which have a poor record on human rights.
main reasons why markets change rapidly
Customers develop new needs and wants.
New competitors enter a market.
New technologies mean that new products can be made.
A world or countrywide event happens e.g. Gulf War or foot and mouth disease.
Government introduces new legislation e.g. increases minimum wage.
Types of competition in the market?
Many small rival businesses – e.g. a shopping mall or city centre arcade – close rivalry.
A few large rival firms – e.g. washing powder or Coke and Pepsi.
A rapidly changing market – e.g. where the technology is being developed very quickly – the mobile phone market.
A business could react to an increase in competition (e.g. a launch of rival product) in the following ways
Cut prices (but can reduce profits)
Improve quality (but increases costs)
Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money)
Cut costs, e.g. use cheaper materials, make some workers redundant
Social change is when the people in the community adjust their attitudes to way they live. Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of children's drinks, because parents feel their children are having too much sugar in their DIETS.
These are the way they act towards the different parts of society that they come into contact with.
is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. For example, the building of an attractive new factory provides employment opportunities to the local community.
A social cost
is where the action has the reverse effect – there are costs imposed on the rest of society, for instance pollution.
Economies go through a regular pattern of ups and downs in the value of economic activity (as measured by gross domestic product or GDP
The business cycle is characterised by four main phases
Boom: high levels of consumer spending, business confidence, profits and INVESTMENT. Prices and costs also tend to rise faster. Unemployment tends to be low as growth in the economy creates new jobs
Recession: falling levels of consumer spending and confidence mean lower profits for businesses – which start to cut back on INVESTMENT. Spare capacity increases + rising unemployment as businesses cut back and reduce stocks
Slump / depression: a prolonged period of declining GDP - very weak consumer spending and business INVESTMENT; many business failures; rapidly rising unemployment; prices may start falling (deflation)
Recovery: things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to INVEST again and build stocks; but it takes time for unemployment to stop growing
Businesses whose fortunes are closely linked to the rate of economic growth are referred to as "cyclical"businesses. Examples include
Overseas tour operators
Construction and other infrastructure firms
Government spending is also known as public spending and in Britain, it takes up over 45% of GDP. Spending by the public sector can be broken down into three main areas
what are the 3 main areas of government spending?
Current Government Spending
Transfer payments are welfare payments made available through the social security system including the Jobseeker's’ Allowance, Child Benefit, State Pension, Housing Benefit, Income Support and the Working Families Tax Credit. The main aim of transfer payments is to provide a basic floor of income or minimum standard of living for LOW INCOME households.
Current Government Spending
This is spending on state-provided goods & services that are provided on a recurrent basis every week, month and year, for example salaries paid to people working in the NHS and resources for state education and defence. The NHS claims a sizeable proportion of total current spending
Capital spending includes infrastructure spending such as new motorways and roads, hospitals, schools and prisons.
government spending has direct and indirect effects on firms selling goods and services to individual consumers and to other firms. what are they?
Increased government spending may mean higher taxes
Higher taxes reduce the ability of customers to purchase goods and services, which is likely to reduce consumer spending
businesses that supply services to the public sector, demand is directly linked to how much government is spending. Good examples include
Construction firms that build and repair the road network
Publishers who supply schools and colleges
IT systems consultants who develop computer systems for public sector organisations
is the value of one currency expressed in terms of another. So £1 may be worth $1.55 and €1.33.
is where businesses hire workers.
industry is where a business relies heavily on machinery and technology in its transformation of inputs into outputs. Good examples include the car industry, steel production and the rail industry.
A business that needs more people and less machinery. Hairdressing, house building, teaching and the fashion industry are examples of labour intensive industries.
is where there are people you are willing and able to work but cannot find employment at the going wage rate. For example a machine worker who cannot get a job because there are no jobs for machine workers in the area. High unemployment, though it can be bad for local sales, can provide a business with a good source of cheap labour.
shortage of labour might cause difficulties for a business
It may be more difficult to recruit new people - which might prevent the business from growing as fast as it wishes
Existing workers may demand higher wages because they know that the business will be reluctant to release them.
Competitors may try harder to poach the best staff.
The business may have to INVEST further in staff training and development rather than rely on “recruiting” new skills into the business.
Mobility of labour
means the speed with which a person can move into a different job. There are two main types:
There are two main types of Mobility of labour
Can they physically move to that place of work? This depends on the transport links as well as people’s desire to move house to get a job.
Do they have the skills to do the new job? This depends on the education and training that people have.
refers to the changes in production techniques and production equipment. It could be a change in the machinery used to make a product or the computers to design a product.
A business can be affected by the following technological change
In provision of services
In the office
Technological change in production
Computer-aided manufacturing ( CAM)
Computer-integrated manufacturing (CIM)
Computer-aided design (CAD)
Computer-aided manufacturing ( CAM) this reduces labour costs, is more accurate and faster and can work at any hour of the day. The computer controls the machinery.
here, computers control the whole production line. Best example is in car production where robots undertake much of the work, reducing the need for labour to perform boring, routine tasks.
Computers are used to help design products using computer generated models and 3D drawings. Reduces the need to build physical models to test certain conditions, known as prototypes. This can be expensive to produce just for testing purposes (e.g. aircraft or new cars.
is the ability of businesses to TRADE with the world via websites
technology involves the following additional costs
Purchasing the equipment
In summary technological change can bring the following benefits to a business
Reduced running costs
Lower costs per unit of product
Improved quality of service (e.g. speed of service)
However it may need to consider the social costs of new technology
Motivation of workers – worried about machines taking over their jobs (through extra training to work with machines may provide some increased motivation)
Loss of traditional skills
is best thought of as a process that results in some significant changes for markets and businesses to address
example of Globalisation
An expansion of TRADE in goods and services between countries (an opportunity for many businesses; a threat for others)
An increase in transfers of financial capital across national boundaries including foreign direct INVESTMENT (FDI) by multi-national companies and the INVESTMENTS by sovereign wealth funds (e.g. Middle Eastern governments buying assets in the UK)
The internationalisation of products and services and the development of global brands such as Starbucks, Nike, Sony and Google
Shifts in production and consumption – e.g. the expansion of outsourcing and offshoring of production and support services, which has traditionally benefitted countries with lower labour costs & skilled labour markets such as India, at the expense of jobs in developed economies like the UK
Increased levels of labour migration – which has the effect of lowering wage costs in many industries, but for others is a problem (e.g. a loss of skilled workers leaving an economy)
The emergence of countries playing a bigger role in the GLOBAL TRADING system including China, Brazil, India and Russia
The motivations for successful businesses to operate globally are?
Higher profits and a stronger position and market access in global markets
Reduced technological barriers to movement of goods, services and factors of production
Cost considerations – a desire to shift production to countries with lower unit labour costs
Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost)
Avoidance of transportation costs and avoidance of tariff and non-tariff barriers
Extending product life-cycles by producing and marketing products in new countries
There are some key reasons why government needs to levy taxes; the main ones are
To raise revenue to FINANCE government spending
Managing aggregate demand - to help meet the government’s economic objectives
Changing the distribution of income and wealth
Market failure and environmental targets – taxes may help correct market failures (e.g. pollution)
Environmental laws and regulations are wide and varied, but essentially businesses have to make sure that they:
Store and treat waste safely and securely
Protect employees and environment from air pollution
Don't produce excessive noise, smoke, fumes & other forms of pollution
Comply with rules for storage and use of hazardous substances & waste
To meet their obligations for the environment, businesses need to focus on
Use of raw materials, water and other resources (inputs)
Energy use and its impact on climate change
Waste and pollution produced by the business
A sustainable business is a business that has no negative overall impact on the environment
minimise” their net effect on the environment. These are activities such as:
Using packaging that can be reused or recycled
Minimising or eliminating the use of hazardous chemicals and processes that produce harmful by-products
Working with suppliers to assess and improve their sustainability, or switching to more sustainable suppliers
Using more energy-efficient equipment, or using renewable sources of energy
Collaborating with other businesses that can use waste (or supply by-products that can be used as raw materials)
Eliminating unnecessary activities – e.g. replacing some business travel with conference calls instead
Ethics are moral guidelines which govern good behaviour
Ethical principles and standards in business
Define acceptable conduct in business
Should underpin how management make decisions
behaving ethically is not quite the same thing as behaving lawfully: what is the difference?
Ethics are about what is right and what is wrong
Law is about what is lawful and what is unlawful
Ethical codes are increasingly popular – particularly with larger businesses and cover areas such as:
Corporate social responsibility
Dealings with customers and supply chain
Environmental policy & actions
Rules for personal and corporate integrity
is the process of transforming inputs into outputs by adding value. There are three main sectors of business activity: