Chapter 47- Impact of External Influences

Question 1

PESTLE

Answer 1

Used to identify where the threats may come from and to plan for them:

• Political
• Economical
• Social
• Technological
• Legal
• Environmental

Question 2

Political

Answer 2

Some parts of the world are politically volatile and special attention has to be paid if businesses venture into politically unstable countries

– however political factors can also influence businesses in stable, democratic countries. Issues such as national security, being members of trade groups and legislation.

Question 3

Economical

Answer 3

– Can have a huge impact on business activity – since the financial crisis a number of countries have suffered a recession, which has made trading conditions difficult.

– falling unemployment might help increase demand for businesses – stable prices would create more certainty, which should encourage businesses to invest for the future – a strengthening exchange rate could make exporting more difficult

– however, in contrast, imports become cheaper

Question 4

Social

Answer 4

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

– in the UK greater numbers of people going to university could increase the quality of human recourses, which would benefit businesses

– ageing population could affect demand patterns

– increasing migration may make recruitment easier.

Question 5

Technological

Answer 5

The rate of technological change seems to gather pace all the time

– businesses usually welcome technological developments because they provide new product opportunities

– changes in technology can shorten product lifecycles as new products are developed faster

– developments often mean businesses can replace labour with capital

– better social media improves communication

Question 6

Legal

Answer 6

The government directs legislation at businesses to protect vulnerable groups that might otherwise get exploited

– EU legislation can affect tax laws

– calls for the ban of advertising of alcohol

– pressure to reduce the amount of sugar + salt

Question 7

Environmental

Answer 7

People are increasingly protective of the environment, for instance because of the threats posed by global warming

– people are inclined to buy green goods

– new ways of generating power using renewable recourses

Question 8

Impact of a changing competitive environment on businesses

Answer 8

New entrants – when competition gets stronger, new entrants occur in the market, existing businesses have to consider their position e.g. rise of online shopping

New products – 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 a aggressive marketing campaign.

Consolidation - 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 pose more of a threat to the others – these 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.

Question 9

Monopoly

Answer 9

A market dominated by a single business

Question 10

Oligopoly

Answer 10

A market dominated by a few large businesses

Question 11

Porters 5 Forces

Answer 11

5 forces which will determine the competitiveness of a business and the profitability of an industry

1. • Bargaining power of suppliers
2. • Bargaining power of buyers
3. • Threat of new entrants
4. • Substitutes
5. • Rivalry among existing firms

Question 12

Bargaining power of suppliers

Answer 12

More power a supplier has over its customers, the higher the prices it can charge and the more it can re-allocate profit from the customer to itself

Question 13

Bargaining power of buyers

Answer 13

If buyers and customers have significant market power, they will be able to beat down prices offered by suppliers

– for 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 relatively few number of major car manufacturers in the world

Question 14

Threat of new entrants

Answer 14

If businesses can easily come into an industry and leave it again 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 that if their profits rise too much, this will attract new suppliers into the market who will undercut their prices.

Businesses can counter this by erecting barriers such as patents and copyright or advertising campaigns

Question 15

Substitutes

Answer 15

The more substitutes there are for a particular product, the fiercer the competitive pressure on a business making the product.

Equally, a business making product with few or no substitutes is likely to be able to charge high prices and make high profits.

A business can reduce the number of potential substitutes through research and development, and then patenting the substitutes itself.

Question 16

Rivalry among existing firms

Answer 16

If rivalry is fierce, businesses can reduce that rivalry by forming cartels or engaging in broad range of anti-competitive practices. In UK and EU law this is illegal but is not uncommon.

Businesses can reduce competition by buying up their rivals.