1.3 Understanding That Businesses Operate Within An External Environment

Question 1

Factors influencing costs and demand to include the effect of:

Answer 1

Competition
Market conditions
Incomes
Interest rates
Demographics
Environmental issues and fair trade

Question 2

External environment links closely to:

Answer 2

Decision making
Business objectives
Competitiveness
Sales forecasting
Budgeting
Marketing mix

Question 3

Competition

Answer 3

• Competitors with a high market share can reduce demand of a business’s products
• May need to invest more to keep pace with competition
• Competitor’s investments in innovation/devolopment can attract customers from other firms, reducing demand (of competitors)

Question 4

Market conditions

Answer 4

• It is the attractiveness of a business of the overall market in which it operates
• Market conditions tend to affect all businesses in an industry, although their ability to take advantage or respond to the market conditions changes will vary
• indicators of market conditions are Economic growth (GDP) and market demand

Question 5

Economic Growth
(GDP - Gross Domestic Product)

Answer 5

Measures the value of output/activity in the economy

Demand is influenced by the rate of Economic Growth

GDP varies depending on the state’s economic cycle - fluctuations of the Economic expansion and contraction

The long term growth varies per country. A mature economy such as the UK has a long term growth of around 2-3%

Question 6

Market demand

Answer 6

How much of a good or service a consumer wants and can pay for.

The size and growth of a market is a key indicator of market conditions

A market that is fast growing may encourage new entrants as well as benefit existing customers

A slow growing or declining market makes market coditions much tougher

Question 7

Incomes

Answer 7

Incomes is the amount of disposable income available to customer. This may be impacted by:

Price inflation
Wage growth
Employment level
Interest rates
Government tax policy

Question 8

Market demand & Incomes

Answer 8

Incomes are closely linked to market demand

A rise in income would give individuals more money to spend

Demand for normal goods should increase

An increase in demand may lead to an increase of production costs

Question 9

Interest rates

Answer 9

An interest rate is the reward for saving, and the cost for borrowing expressed as a percentage of the money saved or borrowed

Question 10

Negative impacts of an increase in Interes rates

Answer 10

Interest rates can affect both costs and demand

A business with variable rate loan may see it’s monthly payment increase if there is a change in interest rates - leading to an increase in costs

Increase in interest rate can affect the demand, as individuals may have less disposable income to spend on normal goods and services.

Question 11

Demographic factors

Answer 11

Concerned with size and composition of a population

Changes in population occur slowly, but can be significant for a business

Impacts in UK - ageing population and high net immigration

Question 12

Environmental issues and Fair trade

Answer 12

Reputation damage of a business, can go from pollution to noise.

Businesses with a clear focus on environment can attract more customers, experience increased demand and reduced costs by waste materials

Question 13

Environmental issues and Fair trade (part 2)

Answer 13

Lower raw materials costs & waste disposal charges

Longer assets life by recycling/repairing

Trading opportunities with environmentally friendly suppliers

Inproved customer will