4. Impact of external influences

Question 1

what are external influences

Answer 1

Sometimes, businesses have to deal with events and issues that are completely beyond their control. These are called external influences and can impact on businesses unexpectedly

Question 2

what is PESTLE analysis

Answer 2

PESTLE analysis - analysis of the external political, economic, social, technological, legal and environmental factors affecting a business

Question 3

PESTLE Analysis: Political factors + examples

Answer 3

Some parts of the world are politically unpredictable. It is important to pay special attention if businesses try to operate in politically unstable countries. However, political factors can also influence businesses in stable countries. The activities of pressure groups can play a role in influencing business activity.

Some examples of political factors include the following.

1. Members joining or leaving a trading bloc. This could disrupt financial markets and create a great deal of uncertainty. For example, in 2016, the UK voted to leave the EU.
2. The issue of national security has become a priority for many governments. If measures designed to improve national security restrict the movement of goods, people and capital, this could have either a positive or a negative impact on businesses.
3. Pressure groups such as trade unions, which aim to protect the rights of workers, can affect businesses. For example, they may be able to force up wages for their members. This will raise business costs.
4. Changes in government. For example, a new government may want to introduce laws which might have an impact on some businesses.

Question 4

PESTLE Analysis: Economic factors + examples

Answer 4

The general state of the economy can have a huge impact on business activity. Since the financial crisis in 2008, a number of countries have suffered a recession. This has made trading conditions very difficult for many businesses.

However:

1. falling unemployment might help to increase demand for many businesses
2. stable prices would create more certainty, which should encourage businesses to invest for the future
3. a strengthening exchange rate might make exporting more difficult but it might also make importing cheaper
4. lower interest rates would make borrowing cheaper and encourage more investment
5. some businesses may suffer badly during a recession - Businesses that produce goods and services that are income elastic will tend to be worst affected during a recession. These include car producers, house builders, holiday companies, computer games companies and ‘white goods’ companies (dealing with freezers, cookers and washing machines, etc.). This is because people can postpone purchases of these items until incomes pick up again.

Question 5

PESTLE Analysis: Social factors + examples

Answer 5

Over time there are likely to be changes in the way society operates. Although social and cultural changes tend to be gradual, they can still have an impact.

examples

1. In some countries, greater numbers of people are going to university. This could increase the quality of human resources, which might benefit certain businesses.
2. The population in many countries is ageing. This could affect demand patterns and create new opportunities for some businesses.
3. Increasing migration (i.e. large numbers of people moving from one place to another) might increase the size of the potential workforce, making recruitment easier. It might also provide a boost to demand.
4. People appear to be becoming more health conscious. This might create opportunities for certain businesses, such as those selling healthy foods or running fitness centres.

Question 6

PESTLE Analysis: Technological factors + examples

Answer 6

The rate of technological change seems to be increasing all the time. Businesses usually welcome technological developments because they can provide new product opportunities or help to improve efficiency.

examples:

1. Changes in technology can shorten product life cycles. This is because new products are quickly developed to replace ones that use older technology.
2. Developments in technology often mean that businesses can replace labour with machines. This is welcomed because human resources are often said to be the most expensive and difficult to manage. New technology also lowers unit costs.
3. The development of social media has helped to improve communications between businesses and customers. This allows businesses to keep track of changing consumer needs.

Question 7

PESTLE Analysis: Legal factors + examples

Answer 7

The government provides the legal framework in which businesses operate. However, it also directs legislation at businesses to protect vulnerable groups (i.e. groups that are easily hurt or damaged) that might otherwise be exploited. EU businesses are also affected by EU regulations.

examples

1. EU legislation can affect tax laws. For example, a few years ago the rules changed so that EU VAT would be charged in the country where products were bought as opposed to the country where they were sold. The legislation only applied to digital products, such as e-books, online courses or downloads.
2. Businesses in the food industry are currently under pressure to reduce the amount of sugar and salt they add to products. In some countries, governments have imposed taxes on the use of sugar in certain products
3. In some countries, the government states that it wants to reduce the number of rules and regulations addressing business behaviour. This might benefit a wide range of businesses.

Question 8

PESTLE Analysis: Environmental factors + examples

Answer 8

People are increasingly protective of the environment; for example, because of the threats posed by global warming. Business activities also sometimes threaten wildlife and natural habitats.

examples:

1. Some people prefer to buy environmentally friendly goods. This provides opportunities for businesses that specialise in these products.
2. There are new ways of generating power using renewable sources rather than by burning fossil fuels, such as oil and coal, which are providing new opportunities,
3. The trend towards recycling is gathering pace in many countries. By using recycled resources, businesses can cut their costs.

Question 9

What do external influences affect in a business

Answer 9

1. deman
2. cost
3. operations

Question 10

how do external influences impact costs

Answer 10

• Businesses will be concerned if external influences reduce demand for their products. This is likely to result in lower revenues, lower profits and weaker cash flows,
• For example, a sharp rise in the exchange rate will have a negative impact on most businesses that rely heavily on exports.
• In contrast, importers such as retailers will benefit from the rise. Their purchases will be cheaper and so they may sell more

Question 11

how do external influences impact costs

Answer 11

• Some external influences are likely to raise costs. This will reduce profit margins or force businesses to raise their prices.
• For example, a surge in the global oil price will raise costs for many businesses. This is because oil is an important input for many businesses —particularly in manufacturing.
• However, oil producers will clearly benefit from the price rise.

Question 12

how do external influences impact operations

Answer 12

• Businesses often have to change their operational methods as a result of an external influence.
• For example, a government may introduce a new minimum wage. This may force a multinational company to relocate production to a country with lower wages in comparison to its current location.
• The development of new technology might force firms to adopt new production methods or risk losing their competitive edge

Question 13

what is competition

Answer 13

Competition is the rivalry that exists between firms when they are trying to sell goods in a particular market. In some markets

Question 14

characteristics of a competitive market

Answer 14

1. In a competitive market, there is likely to be a large number of buyers and sellers, and the products sold by each business are close substitutes for each other.
2. Barriers to entry in competitive markets will be low and businesses have very little control over the price charged. For example, if a firm tries to charge more than its rivals, it is likely to lose business.
3. Finally, there will be a free flow of information about the nature of products, availability at different outlets, prices, methods of production and the cost and availability of production factors.

Question 15

uncompetitive markets

Answer 15

• Some markets are dominated by a single producer or just a few large businesses. In a small number of markets, such as rail travel and water supply, a monopoly exists.

Question 16

what is a monopoly + examples

Answer 16

• This means that just one business supplies the entire market.
• For example
  
  1. if you want to get a train from Glasgow to Edinburgh in Scotland, UK, there is only one train service provider — ScotRail.
  2. A monopoly might also exist in a local market. For example, a village shop might serve the whole community without any competition from other shops. .

Question 17

how do monopolies try to exploit consumers

Answer 17

Monopolies may attempt to exploit consumers by charging higher prices and preventing competition. For example, they may erect barriers to entry. Therefore, the government may choose to monitor the activities of monopolies closely

Question 18

what is an oligopoly

Answer 18

A market that is dominated by a few very large producers is called an oligopoly

Question 19

what are characteristics of an oligopoly

Answer 19

1. One of the key features of an oligopoly is interdependence. This means the actions of one business will affect other businesses. For example, if one business gains an extra 4 per cent of the market, others must have lost the 4 per cent between them.
2. There are usually high barriers to entry in this type of market. The larger firms can exploit economies of scale.
3. Also, because of interdependence, prices tend to remain stable for long periods of time. This is because all firms in the market are afraid of a price war. In an oligopoly, businesses are more likely to engage in non-price competition, such as advertising and promotion

Question 20

what is one way governments try to make markets more competitive + example

Answer 20

governments around the world have tried to make markets more competitive by reducing the amount of regulation.

For example, at one time in the UK, only local councils were allowed to operate bus services. However, today it is easier for those who meet the minimum requirements to get a licence and provide bus services on any route they choose

Question 21

what is consolidation and how does this occur

Answer 21

• This means that there are now fewer businesses in the market.
• This might result from a takeover or merger activity when two
  or more firms join together.

Question 22

examples of changes in the competitive environment

Answer 22

1. Retailing has become more competitive due to an increase in the number of consumers using online shopping facilities. For example, people can buy products from all over the world when shopping online, e.g. from Amazon or All Babe.
2. There has been a significant consolidation in the global airline industry. For example, in 2005 there were 11 US airlines sharing 96 per cent of the domestic market, In 2016 this had fallen to just seven airlines sharing the majority of the market. In Europe, there were mergers between national airlines. British Airways, Iberian Airlines and several others merged to become IAG, now one of the biggest carriers in the world, Air France and KLM have also merged, as have Swiss Air and Lufthansa.
3. In India, the handheld mobile phone market, which was thought to be worth $15 billion in 2017, is expected to consolidate. There were about 100 brands, but intense competition is expected to reduce this number in the near future. Industry analysts say that the market will be consolidated because it is not possible for smaller competitors to survive.

Question 23

what are types of changes that can occur in a competitive market that impact businesses

Answer 23

1. new entrants
2. new products
3. consolidation

Question 24

how do new entrants impact businesses + example

Answer 24

When new entrants in the market increase competition, existing businesses have to consider their position.

For example, the growth in online shopping has forced many retailers to offer their own online shopping services. In some cases, retailers have collapsed (i,e. they went out of business) as they failed to compete online. In 2017, an estimated 7795 US retail stores closed down according to research by UBS. This was a record number, and one chain, Radio Shack®, closed down 1470 stores alone.

Not all of these closures are due to online shopping; however, retailers may find it hard to survive if they do not offer an online service in the future,

Question 25

how do new products impact a business + example

Answer 25

• When a new product appears in the market, businesses may be forced to make changes of their own. They might adapt their own products, lower the price of existing products or invest in an aggressive marketing campaign.
• example - In the banking industry, a number of new entrants have appeared offering peer-to-peer (P2P) lending Traditional banks have noticed this, and some have started to respond. The majority have looked to join up with online services that are already running.

Question 26

how does consolidation impact businesses

Answer 26

• When consolidation occurs in markets, the number of businesses in the market falls but some of the existing businesses get bigger. These bigger organisations are likely to be more of a threat to the others; they may be able to lower their costs and they will have a larger market share,
• Other businesses in the market might respond by organising mergers or takeovers of their own.
• Alternatively, they may look to develop their products, diversify, or cut their costs in some way, As a last resort, they may continue to operate in much the same way but accept lower profit margins.

Question 27

what does failure to respond to changes in competitive markets lead to

Answer 27

Failure to respond effectively to the changing competitive environment could negatively affect the performance of a business. At worst, certain changes may threaten the business’s survival.

Question 28

what is porters five forces model

Answer 28

• Another way of looking at the competitive environment is to consider a model put forward by Michael Porter in his book, Competitive Advantage: Creating and Sustaining Superior Performance (1985).
• In the book, he outlines five forces, or factors, which determine the profitability of an industry. He argues that the ultimate aim of competitive strategy is to cope with and ideally change those forces in favour of the business.

Question 29

what happens when the collective strength of five forces is favorable and unfavorable

Answer 29

• Where the collective strength of those five forces is favourable, a business will be able to earn acceptable or average returns on their investments.
• Where they are unfavourable, a business will have low or unpredictable returns.

Question 30

explain what is meant by bargaining power of suppliers

Answer 30

Suppliers, like any business, want to maximise the profit they make from their customers. The more power a supplier has over its customers, the higher the prices it can charge and the more it can reallocate (i.e. move) profit from the customer to itself

Question 31

what can limiting power of suppliers do for a business

Answer 31

Limiting the power of its supplier will therefore improve the competitive position of a business

Question 32

strategies for a business limit the power of suppliers

Answer 32

1. It can grow vertically (backward vertical integration) either acquiring a supplier or setting up its own business by growing organically upwards.
2. It can seek out new suppliers to create more competition amongst suppliers.
3. It might be able to engage in technical research to find substitutes for a particular input to broaden the supply base.
4. It may also minimise the information provided to suppliers in order to prevent the supplier realising its power over the customer.

Question 33

what is meant by bargaining power of buyers + example

Answer 33

Suppliers want to charge maximum prices to customers, and buyers want to obtain supplies for the lowest price. If buyers or customers have considerable market power, they will be able to beat down prices offered by suppliers.

example - the major car manufacturers have succeeded in forcing down the price of components from component suppliers because of their enormous buying power and the small number of major car manufacturers in the world

Question 34

strategies for a business to improve its competitive position with buyers

Answer 34

1. One way a business can improve its competitive position with buyers is to extend into the buyers’ market through forward vertical integration. A car manufacturer might set up its own dealership. for example.
2. It could encourage other businesses to set up in its customers’ market to reduce the power of existing customers.
3. It could also try to make it expensive for customers to switch to another supplier. For example, one way games console manufacturers keep up the price of computer games for their machines (which they receive a royalty fee for) is by making them technically incompatible (i.e. unable to work together) with other machines

Question 35

what is meant by threat of new entrants

Answer 35

If businesses can easily enter an industry and exit if profits are low, it becomes difficult for existing businesses in the industry to charge high prices and make high profits. Existing businesses are constantly under threat from new suppliers if the profits in an industry rise too much. This is because the new suppliers can undercut their prices.

Question 36

strategies for a business to protect itself from new entrants

Answer 36

1. Businesses can protect themselves from this by erecting barriers to entry to the industry. For example, a business may apply for patents and copyright to protect its intellectual property and prevent other businesses using it.
2. It can attempt to create strong brands which will attract customer loyalty and make customers less price sensitive.
3. Large amounts of advertising can be a deterrent (i.e. something that stops people from doing something) because it represents a large cost to a new entrant, which might have to match the spending to grow some market share.
4. Large sunk costs, costs which have to be paid at the start but are difficult to get back if the business leaves the industry, can deter new entrants,

Question 37

Porters 5 forces: what is meant by substitutes

Answer 37

The more substitutes there are for a particular product, the fiercer the competitive pressure on a business making the product. Equally, a business making a product with few or no substitutes is likely to be able to charge higher prices and make high profits

Question 38

strategies for a business to reduce the number of potential substitutes

Answer 38

1. A business can reduce the number of potential substitutes through research and development, and then patenting the substitutes itself.
2. Sometimes, a business will buy the patent for a new invention from a third party and do nothing with it, simply to prevent the product coming to market.
3. Businesses can also use marketing tactics to stop the spread of substitute products, A local newspaper, for example, might use predatory pricing if a new competitor comes into its market to drive it out again.

Question 39

Porters 5 forces: what is meant by rivalry among existing firms

Answer 39

The degree of rivalry among existing firms in an industry will also determine prices and profits for any single firm

Question 40

strategies for a business to reduce rivalry and competition

Answer 40

1. If rivalry is fierce, businesses can reduce that rivalry by forming cartels, or engaging in a broad range of anti-competitive practices. In many countries this is illegal, but it is not uncommon,
2. Businesses can also reduce competition by buying up their rivals Again, competition law may intervene to prevent this happening, but most horizontal mergers are allowed to proceed
3. In industries where there are relatively few businesses, often businesses don’t compete on price. This allows them to maintain high profitability. instead, they tend to compete by bringing out new products and increased advertising, thus creating strong brands. As a result, their costs are higher than they might otherwise be, but they can also charge higher prices than in a more competitive market, creating high profits

Question 41

what is a cartel

Answer 41

cartel a group of businesses that act together to reduce competition in a market — by fixing prices, for example