3.7 External environment Flashcards
The EU Is a single market- trade between member states is easy
§ The European single market- very few trade barriers between EU member states
§ The single market smooths out price differences between member states.
§ The EU customs union means the same customs duties apply to all good entering the EU
§ There’s freedom of movement within the EU for all raw materials, finished goods and workers. EU citizens can
work in any country in the EU, businesses have the opportunity to expand into other EU countries
Competition Laws:
§ Fair competition - companies are motivated to provide good quality products - reasonable prices. Competition
encourages companies to innovate, provide product differentiation
§ The competition Act 1998 sets out the laws on competition and what constitutes unfair business practices. CMA
responsibility to prevent breaking of laws
-business can’t fix prices
-can’t conspire to limit production to charge higher prices due to a shortage
-can’t divide up market to avoid comp. (e.g only supply in US and other only supply asia)
Businesses have a dominant position if
market share is 50% or >25% working monopoly
Laws to stop businesses doing this:
- Dominant businesses can’t demand ‘exclusivity’ – that wholesalers or retailers only buy from them
- Tying- stipulating that a buyer wishing to purchase one product must also purchase other products e.g. printer ink
especially for that printer - Predatory pricing
A monopoly is when one business has complete control over the market. The CMA can prevent monopolies from
occurring by stopping takeover and mergers- have to use other strategies to expand their business
Regulatory capture-regulating body is influenced by the company they’re regulating
methods to induce competition
Competition- promotes dynamic efficiency
§ Anti- trust cartels- elimination of agreements that restrict comp including price-fixing by firms who hold a dominant
position
§ Market liberalisation- introducing competition in previously monopolistic sectors
§ State aid control
§ Merger control
how does Environmental policy imp.
Businesses can turn these restrictions into USP- being the most environmentally friendly
§ Businesses have to ensure their production processes don’t cause pollution- pressure groups
§ Businesses must get authorisation before carrying out processes which create smoke or make noise. Environmental
health officers can force factories to stop making noise at night if its disturbing
RW APP - environmental policy
RTN
§ The EU’s Emissions trading system gives greenhouse gas emissions allowances to businesses in the EU. Companies
can trade their allowances, they can sell some to a business that has run out
§ ‘green subsidy schemes’ pays businesses that use renewable energy to heat their buildings
§ The UK gov and EU fund organisation that encourage more efficient use of raw materials, such as the Waste and
Resources Action Programme (WRAP)- helps achieve a circular economy
Employment Law
An employee has a legal right to fair treatment while at work, and also while looking for employment
The equality act 2010 protects employees from discrimination based on age, gender, race, religion, disability ‘protected
characteristics’
§ Direct discrimination- treating someone less favourably as they have a protected characteristic
§ Indirect discrimination – when everyone is treated the same but it has a worse effect on one group of people than
another. E.g. a rule that employees mustn’t wear head coverings
Discrimination laws affect all aspects of businesses:
§ Recruitment, Pay, Promotions and redundancies
§ Avoiding discrimination when recruiting - businesses will recruit a more diverse workforce, wider range of
skills, talent and experience
§ Equal pay for both genders, same benefits too
§ Businesses can’t discriminate against young people for a promotion as they’re more likely to change jobs
Employment tribunals settle disputes
§ If employees feel they’ve been treated by their employers they can make a claim to a tribunal
§ Employer may have to pay compensation or give the employee their job back in an unfair dismissal case
+ve NMW
§ Introduced in 1999 to prevent employees being paid unfairly low wages. In 2016 the NLW was introduced to replace
the minimum wages for over 25’s
§ NLW- increase motivation, reduce absenteeism, allows company to market themselves as an ethical employer
Employment contract
sets out the conditions of employment- legally binding agreement between the employer and
employee about duties and rights. Employees are entitled to receive a written statement of employment within 2
month of starting work
Business and the political environment
Government policies encourage enterprise
§ New businesses increase productivity- creates new jobs. Gov is keen to promote enterprise in areas that need
economic regeneration- provides opportunities
Strategies for this:
§ Government schemes allow enterprises to borrow money at low I/R and encourage private investment in businesses.
The enterprise investment scheme is a gov scheme that offers tax incentives to people who invest in small businesses
§ To make It easier for small businesses to succeed they don’t pay business rates and an employment allowance means
their national insurance contributions bill is reduced by £2000
Regulation
Privatisation- many state owned firms were sold into the private sector to improve efficiency and make a profit. E.g.
British gas, British telecom, British Steel and water companies
§ Some industries are natural monopolies. When privatising a natural monopoly the gov needs to build in regulation to
prevent the new owners from exploiting their position and raising prices
Infrastructure
is made up of physical things, transport networks, pipes, wires that allow water, energy and information to
move about
Improvement in infrastructure - good for the economy – businesses more productive. This reduces costs of productions for
firms as transporting goods and services around the country and internationally becomes easier thus increasing efficiency
competitiveness which in the short and long run increases economic growth. Profitability for firms also increases as their
cost of productions reduce, this allows them to re-invest into their business and allow for their growth to persist over time.
Additionally, infrastructure improvements - allow for businesses to compete internationally, as they are more price and
quality competitive.
infaustructre RW app
refer to notes
Policy changes can make international trade easier or harder:
§ Tariffs (import taxes) discourage international trade. removing or reducing tariffs between countries provide
opportunities for business by making international trade easier and cheaper
§ Quotas are trade restrictions set by governments that put limits on imports and exports, using import quotas allow
countries to protect their own economies and jobs- protectionist policy. Two or more countries sign a free trade
agreement which removes quotas between them to encourage international trade
§ Trade embargoes ban trade with a particular country. Less extreme are sanctions
GDP indicates the size of a nations economy
RTN
§ GDP growth = higher incomes, revenues and profitability for businesses
§ Gives the potential for economies of scale
§ Sustained growth increases confidence and helps businesses plan
§ Economic growth affects the type of strategic decisions the business makes. In periods of sustained growth
senior managers might decide to expand, launch new products
§ Fast growth may cause shortages of raw materials and labour= prices up
§ If growth is still to fast, usually followed by a recession, a general slowdown in economic activity
Business and the economy
§ Rapid growth is usually followed by a recession- gov tries to keep growth at sustainable level
§ Boom- GDP is high. As production reaches capacity, shortages and price increases. Shortages of skilled labour
mean wages rise
§ Recession, incomes decrease, demand reduces, confidence is restored
§ In a slump, GDP is at a low. Redundancies= U/E is high. Businesses become insolvent and go bankrupt
§ Recovery- production increases and employment increases. People have more money to spend
§ How much a business is affected by this cycle depends on the YED. Businesses selling income elastic goods find
that demand shoots up in recovery and reduces in a recession. Income elastic goods aren’t affected much by these
changes
Businesses deal with changes in economic activity locally and globally
§ During booms, businesses can raise prices= increases profitability and this slows down demand a bit
§ Long lasting boom- businesses invest in production facilities to increase capacity. Diversify- take advantage of
increased consumer income
§ Recessions- businesses may make workers redundant to save wage costs and increase capacity utilisation
§ Local recession, business can market their goods elsewhere. National recession- business can market h their product
overseas
Inflation affects Business strategy:
§ Companies producing premium goods are most likely affected by inflation, customers look to cheaper alternatives.
Manufactures of premium products can react by reducing prices or by investing heavily in advertising
§ Periods of high inflation – good time to expand for firms- I/R lower- cheap to borrow money to invest in machinery.
The interest they’d earn on savings would be less than the amount prices would have gone up by in the same time-
makes sense to save rather than spend
§ Inflation can disrupt business planning and lead to lower capital investment
§ Rising inflation is associated with higher i/r this reduces economic growth and can lead to a recession
§ Difficult for businesses to plan when inflation is high
§ Deflation- increase i/r – increases cost of borrowing, increases savings- less consumption- businesses lower prices
to profit maximise- controls deflation
Deflation is a sustained decrease in the general price level
efectcs of deflation
§ Causes a fall in productivity as companies wont keep endlessly supplying the market with goods nobody wants.
Low productivity means firms don’t need as many workers- rise in U/E, demand drops further and so do prices
§ Competitiveness is reduced by inflation as exports will cost more to buy and imports will be cheaper. Exp fall and imp
rise could create a deficit in the balance of payments and increase unemployment
§ Discourages saving because the value falls= more attractive to spend (demand pull inflation)
§ Reluctance to save creates a shortage of funds for borrowing & investment. If interest rates increase to reduce
inflation this will also reduce investment
§ Creates uncertainty as rising costs will reduce investment – harming future growth
§ Can cause shoe leather costs and menu costs
§ Extreme case is hyperinflation; often result of governments creating too much money
§ *Business competitiveness: A high relative rate of inflation can reduce competitiveness which will lower demand for
the country’s exports.
§ *Business uncertainty: High and volatile inflation is not good for business confidence partly because they cannot be
sure of what their costs and prices are likely to be. This uncertainty might lead to a lower level of capital investment
spending.
Why is the rate of inflation so high:
THE OPPOSITEEEEE now
§ Falling global commodity prices, oil
§ Slow wage growth in labour market
§ Falling food prices
§ Sustained price deflation in tech products
§ Slower real economic growth
§ Still some spare capacity on the supply side of economy
Exchange rate- is the value of one currency in terms of another currency
Determines how much of one currency has to be given up in order to buy a specific amount of another currency
Exchange rates affects foreign trade:
§ Some manufactures that are based in the UK and export to eurozone countries may consider relocating to those
countries so that their costs on euro- the same currency their customers pay in. They may also decided to pay U
supplier in euro
Ways E/R impacts business activity:
§ Price of exports in international markets
§ Cost of goods bought from overseas
§ Revenues and profits earned overseas
§ Converting cash receipts from customers oversea
Factors affecting significance of e/r:
§ How much they export
§ Whether domestic businesses face strong competition from overseas firms
§ PED
§ How much a business relies on importing goods
What might cause an increase in the E/R
§ Increasing demand for exports= higher demand for
currency
§ Lower demand for imports= lower demand for currency
§ Speculation- traders may bet that e/r will rise
§ An increase in I/R= more attractive to hold the currency
§ FDI= higher demand for the currency
Cost in foreign currency/ exchange rate= cost in GBP
Globalisation;
the process by which economies have become increasingly integrated and interdependent;
§ Is not inevitable- can reverse, indeed the growth of world trade in goods and services slowed in recent years
§ Businesses buy and sell internationally- increase use of e-commerce; adapt marketing mix. Packaging for cultural
diff
Pros of globalisation:
§ Easier to sell products abroad – wider target market, increase sales, inc rev, inc investment
§ Access to cheaper raw materials/ components. Countries specialised = lower prices= lower production costs,
§ Access to cheaper labour- comparatively higher uk wages. Outsource to LED’s with lower wage rates
§ Change locations- nearer to suppliers/ cheaper labour
CONS OF GLOBALISATION
§ Increase competition from abroad- domestic consumers buy overseas- reduce profits
§ Exchange rates will impact sales. Strong pound – exports reduce, less price comp- less revenue
§ Uk WAGES are high- costs of production inc- reduce profit margins,
§ Risk of becoming unethical- worsen reputation
1. Small business- find to gain most from globalisation
2. Small business- in combination with tech are able to get access to int market
Technological changes:
§ CAD- shortening lead times
§ CAM- made production more efficient
Tech has provided access to greater information about consumers and their buying habits as well as access to wider
markets
New tech creates opportunities and threats:
§ Need to monitor the constant flow of new and updated tech to look for opportunities to grow, innovate or improve
functional areas
- The main threat is from even newer technology being brought out before you’ve made your money back on
investment - Threat from competitors as new tech reduces barriers to entry for everyone- businesses need to be wary of
businesses taking market share - Growth of e-commerce- customers relying less on physical shops- businesses close stores
- Businesses that rely too heavily on digital tech- decrease productivity every time something breaks down- financial
trouble
Benefits of technological change:
§ Lower costs- improved efficiency and reduced waste, lower admin costs and distribution
§ Improved communication- quicker and easier- flexible business – more responsive to customer needs
§ Increased sales- access to wider markets is possible
§ Working environment- cleaner, quieter and safer
§ Quality- CAD and CAM have generally bought improvements in quality and reliability
