Topic 5 - External Factors

Question 1

Competition Policy

Answer 1

Reasons:
- Prices are kept low for customers
- Customer service is good
- Quality of products is high
- Markets grow and improve, creating jobs
- Healthy markets can attract foreign investment

Impact:
- Cartels - businesses cannot partake in cartels by colluding with other businesses to fix prices to maximise profits.
- Mergers - mergers may be blocked if they are likely to lead to a substantial lessening of competitions or conditions may be imposed before it can take place.
- Anti-competitive behaviour - businesses cannot use their dominant position in the market to set drastically low prices, pay lower prices to supplier or control the supply of goods to the detriment of the market.
- Consumer protection - consumers are protected against unfair practices such as hidden charges or poor customer service.

Question 2

Economic Policy

Answer 2

Fiscal Policy:
Concerns the tax rates the government sets and the level of public spending.

Monetary Policy:
The ways in which the government controls the supply of money into the economy and affects spending.

Question 3

Political Factors

Answer 3

• Legislation and regulations will ensure that a business needs to comply with the laws
• Governments can raise or lower corporation tax which will affect profits
• Governments can change VAT (value added tax) which will affect sales
• Governments can introduce new health and safety legislation meaning that the business has to change the way it operates

Question 4

Economic Factors

Answer 4

• In a recession consumers will not be spending as much on goods and services
• Interest rate increases make it more expensive to borrow money
• Interest rate decreases make it more attractive to borrow to invest
• A weak pound makes raw material imports from suppliers overseas more costly
• During a period of inflation increased costs may be passed on to customers, raising prices
• A weak pound makes it easier to sell overseas since UK products are cheaper
• In times of high unemployment firms will have more choice of workers to recruit
• In times of low unemployment firms may have to pay higher wages to attract staff

Question 5

Social Factors

Answer 5

• Lifestyle changes mean that consumers are becoming more health conscious, so healthy foods and health/sports apps are becoming more popular
• Ethical considerations mean that there is increased social pressure on businesses to reduce waste, ensure that they are eco-friendly, pay fair wages, and provide goods and services that are ethically produced and marketed
• Such changes mean that businesses must continually carry out market research to determine current and future demand for their products. Businesses will need to change their product portfolios and marketing strategies to ensure they are taking into account the lifestyle trends or fashions or they will start to lose customers
• Demographic change is most commonly used to reflect changes in population such as birth rate, life expectancy and levels of immigration. An ageing population means that there will be greater demand for goods and services in healthcare

Question 6

Technological Factors

Answer 6

• Research and development - refers to the steps businesses take in the innovation of new products, systems and services which has resulted in many new technologies being used by businesses, including 3D printers, smart phones and apps
• E-commerce - widens the number of customers, lowers the costs of production and enables customers to buy online
• Automation - enables machines to do work that was previously done by people, reducing unit costs of production and making the business more profitable
• As technology changes, organisations must keep up-to-date to maintain a competitive advantage but this may require a large financial investment

Question 7

Environmental

Answer 7

• Bad weather can mean a loss in sales if an organisation is affected by flooding
• Agricultural produce can be affected by poor weather in spring and summer
• Bad weather can disrupt deliveries
• A hot summer can lead to a rise in sales of soft drinks and sun tan lotion
• Ethical considerations mean that there is an increased social pressure on businesses to reduce waste, ensure that they are eco-friendly, reduce their carbon footprint, pay fair wages, and provide goods and services that are ethically produced and marketed

Question 8

Competitive Factors

Answer 8

• Competition opening up a physical store right next to a business can be good as it provides more choice for customers and brings passing trade to the area
• Competition improves a market as it brings with it more choice, new ideas and keeps prices low, which can benefit all businesses in the market
• Competition could lower prices, undercutting another business. Businesses will either have to lower prices too, reducing profits, or risk losing customers to competition
• Competition could launch new or improved products. Businesses will have to spend money researching and developing products to keep up with competition