1.3 Understanding that businesses operate within an external environment.

Question 1

What does the external environment refer to?

What do they include?

Answer 1

The external environment is the factors outside a business that can affect its operation by influencing its activities and choices and determine its opportunities and risks. which include:

• competition
• market conditions
• economic factors (e.g. incomes and interest rates)
• Social and environmental issues
• Demographic factors

Question 2

The factors of the external environment affect what in a business?

Answer 2

• Demand for a product/ service.
• The costs of operating a business.
• The impact on its ability to achieve its strategic goals & objectives.

Question 3

What do almost all businesses operate within?

Answer 3

The competetive environment.

Question 4

What is important for businesses to do as a result of the competitive environment?

Answer 4

Differentiate its own products or services in order to encourage consumers to purchase its products or services.

Question 5

What can competition have an impact on?

Answer 5

Demand& costs.

Firms are likely to compete on price, this is likely to lead to pressure on costs with individual firms looking to reduce costs wherever possible.

Question 6

1) What does market conditions refer to?

&what might this include?

2) What impact will these factors have on the business?

Answer 6

Refers to the characteristics of a particular market.

Can include:

• Size
• Growth rate
• Barriers to entry
• seasonal factors
• The amount and intensity of competition

2) Will have an impact on the business in terms of demand and costs

Question 7

What do the economic factors include?

Answer 7

• Stage of the economic cycle
• Interest rates
• Inflation
• Exchange rates

Question 8

Changes in interest rates will have an impact on what for a business?

Answer 8

Demands for goods and services provided by a business and its cost.

Question 9

What do rising interest rates generally result in?

Answer 9

• Lower demand (as consumers are likely to have less disposable income due to higher borrowing costs for loans and mortgages.
• Consumers will be encouraged to save more as interest rates are rising.

Question 10

What types of businesses will benefit from rising interest rates?

Give an example.

Answer 10

Discount retailers- for example when interest rates are high, lidle and aldi benefit as consumers switch from traditional grocery stores to cheaper alternatives.

Question 11

What happens to businesses if they borrow large sums of money and interest rates increase?

Answer 11

The business will be faced with even higher costs! This paired with a fall in demand can be crippling for some businesses.

Question 12

What will normally happen if interest rates fall?

Answer 12

Sales will increase as more consumers will be able to take out loans.

More businesses will be able to invest and expand.

More sales could result in more revenue and a higher profit.

Question 13

How would interest rates affect a firm in terms of decision making?

Answer 13

High or rising interest rates may lead to a business postponing new capital investment due to the costs involved.

Low or falling interest rates will be more conducive to capital investment.

If a business has large cash reserves- it could benefit from higher interest rates due to the higher interest recieved.

Question 14

1) What will demand in the economy also be affected by?
2) What businesses will be less affected by falling incomes?

Answer 14

1) The level of incomes
2) Demand for necessities will be less affected by changes in income than demand for luxuries.

Question 15

What is demography?

What factors does it include?

Answer 15

It is the study of Human populations.

Includes factors such as:

• age
• gender
• income
• occupation of the population
• birth & death rates
• The level of public health and immigration

Question 16

1) What factors also affect the level and nature of goods and services being purchased?
2) What do they also affect?
3) What happens as a result.

Answer 16

1. The population growing with immigration making a large contribution to its growth. It is also an ageing population.
2. Also affect the structure of the working population itself.
3. Workers are now facing the prospect of working longer before they recieve the state pension.

Question 17

Environmental issues and fair trade- the influence of media and social media means that what?

What can this have an impact on?

Answer 17

Any misdemeanour in terms of pollution and exploitation of people in less developed countries is quickly brought to light.

This can have an impact on their reputation and the sales& costs of the business.

Question 18

In the UK, successive governments have introduced legislation to help protect the environment from pollution- what do businesses have to do as a result?

Answer 18

Spend large amounts on measures to ensure that water, air and the surrounding countryside are kept free of pollution.