External Influences on Business Activity Flashcards
(42 cards)
How the government provides goods and services?
UK central and local government provides a range of products, including:
• Healthcare
• Education
• Defence
• Policing
• Library services
• Refuse disposal
The key areas of legislation that affect businesses are:
- Health and safety
- Employment protection
- Consumer protection
- Environmental protection
- Competition policy
• The Competitive environment refers to the:
- Number and strength of competing firms in an industry (power and market share)
- The ease of entry for new competitors
The competitive structure
- The number of competing firms in an industry; their strength and ease of entry for new firms have an impact on:
1. The amount of choice for consumers
2. The level of competition (price, promotion, new product development)
3. The profitability
Level of competition Depends Upon
- Number of businesses in market (direct rivals)
- Behaviour of competitors
- Nature of product being sold
- Size of market
Monopoly
- Is a market with one seller.
- A business with a market share of more than 25% is often referred to as having monopoly power (e.g. Tesco =32%)
- Not face much competition, if at all.
- Has significant control and power to set prices because consumers have no alternative.
- Has high barriers to enter the market/industries for other competitors
- Governments have laws and regulations to prevent monopolies.
- market is regulated by government to protect consumer interests and so business doesn’t abuse power
Monopoly examples:
Transport for London
Camelot Lottery
Water Companies
Monopsony
- is a market with one buyer
- has a significant control and power to set prices because sellers have no alternative
- Governments have laws and regulations to prevent monopsonies on national level but this is more difficult on a local level
How do monopolies develop?
- Invention of new products or processes that are then legally patented to give the inventor a monopoly in its production.
- Merging or taking over firms in the same industry.
- The existence of ‘barriers to entry’ into an industry e.g. high advertising costs to get established, these barriers will prevent, or make very difficult, the start-up of new competitors.
How are consumers affected by monopolies?
Possible benefits:
- Lower prices if large scale production reduces average costs of production.
- Increased expenditure on new products and technical advances as the monopolist will be able to protect their position and make monopoly profits from the new idea.
How are consumers affected by monopolies?
Possible drawbacks:
- Higher prices if the monopolist has so little competition that consumers have no option but to buy from this one firm.
- Limited choice of products.
- Less investment in new products as a result of little competition.
- No incentive for the firm to lower costs and improve efficiency.
Fair Competition
Fair competition is where firms compete on equal terms in a way that offers consumers the best choice of products and prices
Unfair competition
- firms do not compete fairly, but act in a way that restricts consumer choice
- If unfair competition is ‘against the interests of consumers’ then the Competition commission will intervene
Examples of unfair competition:
• Monopolies charging high prices due to the lack of competition
• Agreeing to restrict supply or fix high prices
• Producers only supplying retailers that refuse to stock rival products
• Full-line forcing: forcing your customers to stock all your range of goods with the threat of discontinued service of the profitable ones.
• Predatory pricing: Occurs when a firm cuts its prices in a deliberate attempt to undercut a rival so that it goes out of business.
This is illegal, however, it’s is very common because the potential rewards outweigh the fines
How to analyse a business’ position in the competitive environment?
- Michael Porter’s 5 Forces Analysis suggests that a firm can gain a competitive advantage over its rivals by understanding the industry context in which it operates.
- Porter’s 5 forces analysis of competitive position should be used when analysing/evaluating the competitive strength and position of a business.
- The results of the analysis will help a firm to decide on the most suitable strategic choice to achieve their goals.
Porter’s 5 Forcers
1) - Buyer Power
2) - Supplier Power
3) - Competition Rivalry
4) - Threat of New Entrants
5) - Threat of Substitutes
Threat of New Entrants
This refers to the ease with which other firms can join the industry and compete with existing businesses. This threat is greatest when:
• Low economies of scale
• Cheap technology
• Easy access to distribution channels
• No legal protection or patent restrictions on entry
• Low product differentiation
Buyer Power
This refers to the power that customers have on the producing business. Customers in this context are not individual customers but other businesses (B2B). E.g. in the UK there are four major supermarket groups who have a great buyer power over food producers.
Buyer power is increased when:
• The size of the customer
• There are many undifferentiated small supplying firms
• The cost of switching suppliers is low
Supplier Power
Supplier power is increased when
• The cost of switching suppliers is high
• They have a strong brand
• They are large enough to undertake vertical forward integration
• Your size as a customer is very small which limits the amount of bargaining power you have.
Threat of Substitutes
Substitutes in this context refer to substitute products in other industries and not alternatives (rivals products) in the same industry.
Threats of substitutes will exist when:
• New technology makes other options available
• Price comparison forces customers to consider alternatives
• The opportunity cost of increase choice for consumers to spend their disposable income on.
Competition Rivalry
This is the key part of this analysis because all the other 4 factors which Porter identified help determine the level of competition or rivalry in an industry.
Industry rivalry will be high when:
• Low barriers to enter
• Increase in substitute products
• Suppliers have much power
• Buyers have much power
• Market share concentration ratio is similar for all firms in the industry.
• Slow market growth forces firms to take a share from rivals if they wish to increase sales
Porters Five Forces and Strategic decisions
This model enables managers to think about the current competitive structure of their industry. Firms can then use this strategic model to help decide on their strategic decisions e.g.:
• Should you enter a new market or not?
• Should you leave your current market or not?
• Develop strategies to improve their own competitive position through e.g. product differentiation, takeovers of competitors/suppliers/customers.
The Technological Influence on business activities
Technology means the use of tools, machines and science in an industrial context.
I.T definition= the use of electronic technology to gather, store, process and communicate information.
The responses of businesses to changes in the technological environment
These can be split into 3 main types:
1) Processes-
• Advancements in manufacturing technology and automation.
• This reduces both costs and the likelihood of expensive errors
2) Products-
• New product opportunities using microelectronic technology, e.g. mobile phones.
3) Communications links- developments in IT
• Businesses can now communicate cheaply and quickly across the globe
• Developments like video conferencing allows communication face to face in different locations
• Email allows communication immediately and free
• The internet will continue to have a huge impact on the ways goods and services are marketed
