2.5 External Influences Flashcards
Inflation
High Inflation On:
Finance
Operations
Marketing
Human Resources
Sustained Increase in price in an economy
The Consumer Price Index ( CPI ) measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation
High Inflation on Finance:
- ‘Real’ Value of debt being eroded ( e.g 10 year loan, fixed repayments )
- Assets appreciate in value ( Property / Stock value ↑ )
- More secure statement of financial position
High Inflation on Operations:
- Cost of raw materials and components likely to increase
- Suppliers may increase prices
- ∴ Leave prices unchanged = ↓ Profit Magrin
- Increase prices = ↓ Quantity Demand
High Inflation on Marketing:
- May lead to ↑ Revenue if inelastic PED
- Consumers have lower real income = Brand Down
- If inflation is higher in UK vs. World = ↓ International Competitiveness
High Inflation on Human Resources:
- Workers ‘real’ wage may fall ∴ ↑ Wages = ↑ Cost Of Production
- Industrial Action ( e.g. Trade Union / Work Councils )
- Negative Industrial Relations
Exchange Rates
Exchange Rates = The value of one currency expressed in terms of another.
E.g. £1 = $1.50
Effective Exchange Rate = An index that describes the strength of a currency relative to a basket of other currencies. e.g. Trading Partner
Appreciation:
The Impact on Exporting Businesses =
- Sales are likely to fall as products become more expensive when compared to overseas competitors.
- To remain competitive exporting businesses may need to lower prices and accept lower profit margins.
The Impact on Importing Businesses =
- Costs are likely to fall as supplies from overseas become cheaper
when compared to those domestically produced.
- Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits.
Depreciation:
The Impact on Exporting Businesses =
- Sales are likely to rise as products become cheaper when compared to overseas competitors
- Businesses may choose to increase selling prices to increase profit margins
The Impact on Importing Businesses =
- Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically produced.
- Businesses may seek domestic suppliers to reduce costs and
maintain profit levels.
Interest Rates
The interest rate is a percentage reward offered for saving money and the percentage charged for borrowing money
Impact of Interest Rate Changes
Consumers / Producers
Increase / Decrease
Increase ↑:
Consumers =
- Discourage Borrowing
- Those with savings will save more
- Existing debts will cost more to service
Producers =
- Existing debts may have ↑ interest repayments ∴ Interest Costs
- Discouraged from future investments due to higher borrowing costs
- Less sales from consumers
Decrease ↓:
Consumers =
- Those with savings may save less going forward
- Encouraging Borrowing
- existing debts will cost less to service
Producers =
- Existing debts may have ↓ interest repayments ∴ ↓ Costs
- Encouraged to invest as its cheaper to borrow
- More sales from consumers
Government Taxation
Set Taxes rate 🠮 Collect Tax Revenue 🠮 ( Public services + Health + Social Care + Pensions + Welfare )
Personal Tax ( Income Tax )
increase rate =
- Consumers have Less Disposable Income
- Spend Less On Businesses
- Business Sales will fall
- Revenues Reduced
Business Taxes ( Corporation Tax, Income Tax )
increase rate =
- Increase Cost For Businesses
- Lower Profits
- Less Finance For Reinvestment
Spending Taxes ( Value Added Tax e.g. VAT )
increased rate =
- Price of product ↑
- Demand for product ↓
- Sales ↓
- Revenue may ↓
Recession / Boom
A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative economic growth
A boom is defined as a period of time where an economy experiences increasing / high rates of economic growth
Recession
Characteristics & Impacts
Characteristics:
- Increasing / high unemployment
- Low confidence for firms / households
- Low inflation or deflation
- Increase in government expenditure
Impact on businesses:
- Customers have less disposable income and are likely to reduce spending or postpone significant spending decisions, leading to lower revenue
- Businesses may find it relatively easy to recruit workers from a larger pool of candidates
- Businesses may delay spending decisions and focus on reducing risk and survival
- Production levels are likely to be reduced
- Businesses often stockpile products
- Increased spending on welfare benefits and spending on infrastructure projects
Boom
Characteristics & Impacts
Characteristics:
- Decreasing unemployment and increasing job vacancies
- High confidence and more risky decisions taken
- Increasing rate of inflation
- An improvement in the government budget as tax revenues rise and government expenditure falls
Impact on businesses:
- Customers’ disposable income increases leading to higher sales revenue
- Recruitment and staff retention may become more challenging and businesses may need to pay higher wages
- Businesses look to expand and maximise profit
- Production levels are likely to increase
- Product or market development strategies are more likely
- Interest rates are likely to rise and the higher cost of borrowing will increase the risk of capital investment
- Lower government spending may impact on business growth plans
- Public sector pay controls may cause Industrial unrest and affect business operations
Economic Uncertainty
Economic uncertainty occurs when it is difficult to forecast the level of supply and demand in an economy
Legislation
( Five areas of legislation in Businesses )
Legislation refers to laws and regulations passed by governments that require businesses and individuals to conduct their behaviour in a particular manner
Five areas of legislation in Businesses:
1. Consumer protection
2. Employee protection
3. Environmental protection
4. Competition policy
5. Health and Safety
The Competitive Environment & Threat
The competitive environment concerns the degree to which a business is affected by rivals that operate in the same market
The threat competition presents to businesses operating in a market will determine how quickly the business responds
The greater the threat, the quicker the response required
- and vice versa
The Market Size
Market size is essentially the number of customers and sellers in a particular market
Consumer Income
Increase / Decrease
Consumer Income 🠮 Consumer Spending = Total amount of household expenditure on goods and services in a economy
Increase:
… possibly because the economy is performing well
∴ Consumers are likely to spend more on the goods and services that businesses sell
Businesses may react buy = ↑ Stock Levels, ↑ Investment Levels
Decrease:
… possibly because the economy is performing less well
∴ Consumers are likely to spend less on goods and services that businesses sell
Businesses may react by = ↓ Stock Levels, ↓ Investment Levels
Just in Time - JIT
Pros / Cons
Just in Time ( JIT ) is an inventory management strategy where stock (raw materials, work-in-progress, and finished goods) is received or produced only when needed
PROS:
- Reduce Waste
- Greater Productivity
CONS:
- Higher average unit cost
- Very reliant on supplier
- Risk of failing to meet unexpected demand
