3.1.3 Understanding that businesses operate within an external environment.

Question 1

What factors effect a business?

Answer 1

Political.
Ethical.
Social.
Technological.
Legal.
Environmental.

Question 2

What is PESTLE mainly used for?

Answer 2

To assess the key features of the external environment facing a business.

Question 3

What are the external influences on demand?

Answer 3

Price.

Tastes & Fashion.

Price of other goods.

Marketing and advertising.

Seasonal factors.

Government action.

Question 4

Outline the general link between demand.

Answer 4

A rise in demand = a rise on cost which can equal a possible rise in price.

A fall in costs and possible fall in price = a rise in demand.

Question 5

What are the five key factors in the external environment influencing costs?

Answer 5

Competition.
Incomes.
Interest rates.
Demographic Factors.
Environmental issues & fair trade.

Question 6

What determines how competitive a business is?

Answer 6

Investment in new equipment and technology.

Improvement to operational procedures.

The marketing Mix.

Innovation (investment and R&D).

Financial planning & control.

Incentives for staff.

Quality procedures.

Staff skills, education and training.

Enterprise.

Question 7

What are the 7 p’s?

Answer 7

Price.
Product.
Place.
Promotion.
People.
Processes.
Physical evidence.

Question 8

What is meant by price?

Answer 8

As price for a product rises, demand will fall. Consumers may in response, turn to alternative products. If price falls, demand will rise.

Question 9

What is meant by tastes & fashion?

Answer 9

Overtime, peoples tastes will change. This can effect demand for products and services.

Question 10

Outline a substitute of a product.

Answer 10

Close alternatives to particular products. If the substitutes price increases, the original will appear to be much better value for money in comparison and demand will increase.

Question 11

Outline a complementary product.

Answer 11

Products used alongside each other, if demand for one increases, demand for the other will in turn. E.g. xbox console and xbox games.

Question 12

Outline government action.

Answer 12

To encourage demand for a product the government can subsidise a product to reduce the price. To reduce demand, they can do this through taxation. For example, cigarettes are heavily taxed.

Question 13

Outline investment in new equipment and technology.

Answer 13

Machinery and computers can improve the speed, reliability and quality of products, meaning that labour and other costs can be reduced as a result. Businesses that fail to adopt new processes are likely to have higher costs and thus become uncompetitive.

Question 14

Outline improvements to operational procedures.

Answer 14

Such as factory layout, the location of the organisation, stock control and the processes used in the factory or outlet can all reduce unit costs. Businesses that fail to focus the quality of their operational procedures may find their cots and therefore their prices are too high compared to their competitors.

Question 15

Outline enterprise.

Answer 15

Desire to become your own boss can create cultural independence, hard work and flexibility, which helps to supply the needs of larger organisations as well as providing alternative products and services.

Question 16

How does income effect business costs?

Answer 16

If income increases because the national wage increases then business rates will rise. Where a business judges that it can maintain its profit margins and pass the increased costs onto the customer, the prices of goods may rise. Where it believes it cant, the price of goods may fall.

Question 17

Outline the effects of rising income on demand.

Answer 17

When income increases, a consumers overall demand for a product is a likely to rise and the pattern of their demand for different products is likely to change. Rise in income is likely to increase demand for luxury products. May not affect the demand for a range of essential products.
Businesses may need to employ more people to meet demand.

Question 18

Outline the effects of falling income on demand.

Answer 18

Demand for luxury products will fall. Demand for essential will more or less remain the same.

Question 19

What are the consequences of falling income on demand?

Answer 19

As a result of demand falling:
Excess stock may eventually lead to reduced prices and the business may need to reduce levels of output. Can lead to lower profits and workers being unemployed.

Cost saving strategies may be introduced. Rationalisation through, perhaps, delayering, in order to increase efficiency.

Many of these may lead to a business becoming uncompetitive.

Question 20

Outline how a fall in interest rates may effect business costs .

Answer 20

Fall in interest is beneficial
Firms with extensive long term loans will see fixed costs fall - in turn reducing unit costs and the level of sales a business needs to break even and begin making profit. Alternatively, as unit costs fall, profit margins will rise, unless price is reduced.

Question 21

Outline how a rise in interest rates may effect business costs.

Answer 21

Likely to lead to a rise in costs. Fixed costs will rise and in turn so will unit costs and the level of sales needed to reach break even and to make profit will also increase. Prices may have to ride, meaning profit margins may have to fall and a firm is less competitive.

Question 22

Outline how a fall in interest rates may effect demand.

Answer 22

Saving money is less attractive because less interest is received.

Mortgage payments and other loan and credit payments will fall, meaning home owners will have more discretionary income.

The costs of goods bought on credit will fall, this will affect luxury goods, the demand for which tends to rise when income rises.

Cheaper to purchase expensive capital equipment on credit, firms may bring forward future investment or actually increase the level of investment.

Question 23

Outline how an increase in interest rates may effect demand. \

Answer 23

Likely to result in a fall in demand.

Saving money is more attractive as more interest is received. Demand will fall.

Mortgage payments and other loan and credit repayments will rise, meaning that homeowners will have less discretionary income to spend.

The cost of goods bought on credit will rise, effecting, particularly, luxury goods.

Expensive to purchase expensive capital equipment on credit, firms may delay future investments or actually increase the level of investment - because the return on projects is likely to be less than interest payments that must be borrowed funds or that could be received by investing the firms own funds elsewhere.

Question 24

Outline the demographic factors.

Answer 24

Ageing population.

Ethnically diverse population.

Size of household.

Geographical shifts.

Question 25

How might an ageing population effect demand?

Answer 25

Analysts suggest that over the next 10 years, two thirds of all retail spending growth will come from those aged 55 and over. The rising influence of this age group is likely to result in increasing demand for the categories of goods and services they favour.

Question 26

Outline how an ethically diverse population may effect demand.

Answer 26

Areas where migrant populations tend to settle (e.g. London or Urban areas) will effect business as they will be strongly influenced by their needs - demand to fulfil those will increase.

Question 27

Outline how the size of a household may effect demand.

Answer 27

Households are getting smaller. These demographic characteristics lead to an increasing demand for smaller pack sizes.

Question 28

Outline how geographical shifts can effect demand.

Answer 28

A shift in the geographical spread of the population to, for example, the southeast of England is leading to an increase in demand for housing and other goods and services in this area.

Question 29

How can a geographical shift be seen as a threat to a business?

Answer 29

A business that ignores these trends (demand increase in certain areas of business) are less likely to be successful and could become uncompetitive.

Question 30

How can a geographical shift be seen as an opportunity to a business?

Answer 30

A business that takes note of the changes in demographic trends will ensure that the goods and services they offer meet the need of an ageing and ethnically diverse population.

Question 31

Outline some environmental issues effecting businesses.

Answer 31

Damaging rainforests and woodlands, through logging and agricultural clearing.
Polluting and overfishing oceans and lakes.

Question 32

Outline how environmental issues affect costs.

Answer 32

Businesses face dilemmas about low cost production versus environmentally responsible production.

Also must consider waste and by-products generated by production processes.

However, engaging in environmentally responsible production is likely to increase production costs. This may in turn reduce profit margins, unless the business is able to pass the increased costs onto the consumer, in the form of higher prices.

Question 33

Outline how environmental issues affect demand.

Answer 33

A good relation to environmental issues can act as a positive marketing tool that encourages consumers to chose one brand over the other. The products must be as good as the non-green products to attract additional demand. However these businesses may not always be favoured, as very cheap price are sometimes the result of lower labour and production costs, which in turn may be the result of operating in environmentally or ethically questionable circumstances.