External Factors

Question 1

What are external factors? And can the business control them?

Answer 1

External factors are the different situations that impact on the success of an organisation that arise outside the organisation, the business can’t control external factors.

Question 2

What are the external factors?

Answer 2

(PESTEC)

• political factors
• economic factors
• social factors
• technological factors
• environmental factors
• competitive factors

Question 3

Political factors

Answer 3

• political factors affecting organisations arise from decisions made and actions taken by the government either at local or national level
• this can be changes in laws and legalisation or alterations to a governments fiscal policy which impacts upon spending in an economy by altering tax rates and levels of public spending

Question 4

What are the different political factors that that affect a business?

Answer 4

• changes laws and legalisation
• changing income tax rates
• changing VAT rates
• changing corporation tax
• public spending on infrastructure

Question 5

Changing laws in legalisation

Positive and negative impact?

Answer 5

Positive impact
-The government could introduce environmental protection laws and policies such as ‘zero waste Scotland’ and by complying, organisations will be seen in good light. This is good PR and can attract potential customers.

Negative impact
-The government could increase the minimum wage so that organisations have higher wage costs, this will result in a lower profit for the year

Question 6

Changing income tax rates

Positive and negative impact?

Answer 6

Positive impact
-The government could reduce taxes (money collected by the government to fund public spending), such as income tax. This will give customers a higher disposable income. This means customers will be more likely to buy products.

Negative impacts
-The government could increase income tax. This will give customers a lower disposable income. This means customers would be less likely to spend money on a businesses products, unless it is essential. This will reduce sales overall.

Question 7

Changing VAT rates

Positive and negative impact?

Answer 7

Positive impact
-The government could lower VAT (added value tax) this is a tax on goods and services. Reducing the VAT rate will make products more affordable for customers, increasing sales for a business.

Negative impact
-The government could raise VAT this will increase the selling price which could put customers off purchasing products, and reduce sales.

Question 8

Changing corporation tax

Positive and negative impact?

Answer 8

Positive impact
-many types of businesses, such as limited companies have to pay a tax on their profits (corporation tax). The government could lower the rate of corporation tax which would mean less money is taken from the business and given to the government, which would increase profits.

Negative impact
-The government could raise the rate of corporation tax which means more money would be taken from the business and given to the government, which would reduce the profit of the organisation.

Question 9

Public spending on infrastructure

Positive and negative impact?

Answer 9

Positive impact

• The government could decide to fund the development of infrastructure. Examples include building new motorways, car parks, tram networks, and so on. This will increase the likelihood of attracting customers for businesses in these areas.
• public spending also creates jobs which gives people wages and enables them to spend money on other goods and services.

Negative impact
-public spending is a contentious issue as it only improves certain areas. For example, the Edinburgh tram network greatly improved Edinburgh’s infrastructure; however, businesses in Glasgow so no benefit. This is known as opportunity cost i.e. the cost of spending money on one area is that it can’t be spent in another.

Question 10

What is the completion policy?

Answer 10

-in 2014, the competition and markets authority (CMA) was launched by the UK government. It’s aim is to investigate markets and enforce competition policy in order to promote competition for the benefit of consumers.

Question 11

What are the reasons for promoting competition?

Answer 11

It is the governments interest to promote competition for the following reasons:

• Price are kept low for consumers
• Products and services are high quality
• customer service is good
• entire markets improve and grow creating jobs and raising GDP
• healthy markets can attract foreign investment

Question 12

What are some Impacts of competition policy?

Answer 12

• cartels
• mergers
• anti-competitive behaviour
• consumer protection

Question 13

Cartels

Answer 13

Organisations cannot participate in cartels. This means colluding with other organisations to fix prices to make higher profits. If found guilty of participating in cartels, owners or management can be fined or even sentenced to prison.

Question 14

Mergers

Answer 14

The CMA can block mergers if it is likely to lead to a ‘substantial lessening of competition’ in any market p. The CMA can also impose conditions that must be met for a merger to be given the green light. For example, when the CMA investigated the Sainsbury’s/Asda merger they forced them to divest (sell) a number of stores, mostly to Morrisons to ensure there was enough competition in certain towns.

Question 15

Anti-competitive behaviour

Answer 15

Organisations cannot use their dominant position in the market to change drastically low prices, pay lower prices to suppliers or control the supply of goods to the detriment of the market.

Question 16

Consumer protection

Answer 16

Consumers have rights and are protected from unfair practices such as hidden charges and poor customer service.

Question 17

What do economic factors arise from?

Answer 17

Economic factors arise from the state of the economy

Question 18

What is an economy?

Answer 18

• An economy is the state of a country or region in terms of the production and consumption of products and a supply of money
• in other words when the UK economy is doing well, businesses produce more products, which creates more jobs and leads to more people having more money to spend. However, the economy alternates between good and bad times, you will perhaps remember the global recession that hit in 2008 when unemployment was high and businesses were going bust.

Question 19

What does the economic cycle diagram illustrate?

Answer 19

The economic cycle diagram illustrates the different stages of an economy in terms of a countrys gross domestic product (GDP)

Question 20

What is GDP?

Answer 20

GDP is a figure that sums up the amount of goods and services produced and consumed by a country, so GBD is a good indicator not only for output and profits of a business, but also employment and the wealth of citizens too.

Question 21

What are the 3 stages of the economic cycle?

Answer 21

• boom
• recession
• recovery

Question 22

What is the definition and impact of boom?

Answer 22

Definition

• GDP and employment levels are very high
• demand for products is high

Impact

• businesses can take advantage of the demand for products and the wealth of consumers by increasing prices. This will improve profits for the business.
• however a side-effect is an increase in inflation. This is a rise in prices over time and often leads to wage rises, so people can afford to keep up with an inflation.

Question 23

What is the definition and impact of recession?

Answer 23

Definition

• GDP and employment levels fall
• demand for products fall

Impact

• businesses have to react to a falling demand by making staff redundant, which will cost them redundancy payments and Lose them skills and knowledge of employees.
• prices will have to be cut to try and increase demand which will lower the amount of profit a business can make and may even lead to loss.

Question 24

What is the definition and impact of recovery?

Answer 24

Definition

• GDP and employment levels begin to rise
• demand for products increases

Impact

• businesses can rely on consumers being in a better position to spend money due to rising employment, so therefore sales will increase.
• businesses can develop new products and start to increase prices which will lead to bigger profits for the business.

Question 25

Economic policy

Answer 25

-it is the role of the government to try and control the economy through a number of measures, called economic policy.

Question 26

What two areas are the economic policy of a government divided into?

Answer 26

• fiscal policy

- monetary policy

Question 27

Fiscal policy

Answer 27

A governments fiscal policy concerns the tax rates it sets and its level of public spending (as covered in the political section of external factors)

Question 28

Monetary policy

Answer 28

A governments monetary policy is the ways in which it controls the supply of money into the economy and therefore affect spending. This can be done by varying interest rates.

Question 29

What do interest rates determine?

Answer 29

Interest rates determine the percentage that is added to borrowings or savings.

Question 30

All financial situations…

Answer 30

Such as banks or building societies, set their own interest rates

Question 31

Who sets the base rate and what is it?

Answer 31

The government bank, the Bank of England, sets the base rate of interest which is the minimum rate of interest that banks and building societies must apply to loans and savings

Question 32

By increasing rates the Bank of England..

Answer 32

Attempts to curb spending and therefore reduce inflation.

Question 33

By decreasing interest rates the Bank of England…

Answer 33

Attempts to encourage spending in order to avoid a recession or to recover the economy.

Question 34

Rise in interest rate,
Effect on savings,
Effect of borrowing?

Answer 34

Effect on savings
Customers are more likely to save due to attractive rates as they will earn more money on their savings. This means customers will spend less on businesses products as they are saving their money instead.

Effect on borrowing
Customers are less likely, or able, to take out loans or to spend using credit cards as they will have to pay back more money on their borrowing. This means customers will be able to spend less on businesses products.

Question 35

Reduction in interest rate,
Effect on savings,
Effect on borrowing?

Answer 35

Effect on savings
-customers are less likely to save as interest rates are unattractive, so are more likely to spend money on businesses products.

Effect on borrowing
-customers are more likely to borrow money as it is less expensive to pay back loans and credit card debts, so are more likely to spend money on businesses products.

Question 36

What does an exchange rate determine?

Answer 36

An exchange rate determines the amount of one currency that can be bought using another currency. For example, if the exchange rate of £(pounds Sterling) to the €(euro) is 1.25, it means for every £1 exchanged, €1.25 is given. The exchange rate of the pound Sterling against foreign currencies changes on a daily basis.

Question 37

What is a high value or ‘strong’ pound caused by?

Answer 37

-A high value or ‘strong pound’ is caused by a high demand for the currency.
If UK products are selling well abroad (known as exports) the pound will be in demand and the price will rise.
-The Bank of England can affect this too through interest rates, as high interest rates will attract savings from abroad and again the price will rise.
-the opposite is also true, A high demand for goods purchased from abroad imports (imports), low demand for exports and low interest rates will cause the demand for the pound are fall and therefore the price of the pound to fall too.

Question 38

Strong pound,
Effect on exports,
Effect on imports?

Answer 38

Effect on exports
-if the value of the pound is high compared to foreign currencies, UK exporters will struggle to sell their products abroad as they will be more expensive than foreign goods and sales will fall.

Effect on imports

• if the value of the pound is high compared to foreign currencies, imports will become cheaper. This will decrease costs for businesses that source materials from abroad which will increase their profits.
• it will also allow a lower selling price to be charged for products made in the UK to attract customers

Question 39

Weak pound,
Effect on exports,
Effect on imports?

Answer 39

Effect of exports
-if the value of the pound is low compared to foreign currencies, UK exporters will be able to sell more goods to foreign countries as their goods will be less expensive for customers outside the UK.

Effect on imports
-if the value of the pound is low compared to foreign currencies, imports will become more expensive. This will increase costs for businesses that source their materials from abroad and may lead to an increase in prices.

Question 40

What are disadvantages of Britain leaving the EU (Brexit) on a business?

Answer 40

• businesses exporting to the EU will have lower profits due to tariffs (these are taxes placed on goods crossing borders) that dont have to be paid when goods are exchanged in the EU
• prices of materials bought from EU countries will be dearer, again due to increased tariffs as a result of not being part of the EU.
• there will no longer be free movement of labour so business will struggle to attract the best talent from abroad

Question 41

What are the advantages of Britain leaving the EU on a business?

Answer 41

• without the restriction of the EU, UK businesses could be able to trade without tariffs and quotas (restrictions on the amount of goods that can cross borders). This means that they could trade more freely with other markets, such as China and the worlds largest economy, the USA.
• the pound will be weaker, which means industries such as tourism will benefit

Question 42

Social factors

Answer 42

-social factors concern the ways in which society changes and the need for businesses to adapt in the same way. Social factors could either be a change in the demographics, the characteristics of the population, or a change in cultural behaviour.

Question 43

What are 6 social factors that can affect a business?

Answer 43

• UK’s ageing population
• more women with professional careers
• evolving work-life balance
• changing fashion trends
• flexible working arrangements
• ethical considerations

Question 44

UK’s aging population positive and negative impact?

Answer 44

Positive impact
-this is a vast, and growing market segment. Businesses that can produce products tailored for this market should succeed. Many potential customers in the segment are retired and well off so there is a potential to offer quality products at high prices.

Negative impact
-extensive market research must be carried out which cost time and money.

Question 45

More a woman with professional careers negative and positive impacts?

Answer 45

Positive impact
-as more women are taking up high-profile professions and managerial roles they are waiting longer to have a family. As a result couples are generally better off when they have their first child so businesses can offer high quality maternity and baby products and sell for a high price.

Negative impact
-more women will be taking maternity leave once they are established in their careers which will mean organisations have to consider flexible working arrangements, such as part-time or job share. This will result in the organisation having to spend time recruiting and training replacement staff.

Question 46

Evolving work life balance positive and negative impacts?

Answer 46

Positive impact
-fewer employees are working the traditional 9 to 5 working week. As a result, businesses must cater for the needs of a society that works around the clock for seven days a week. This has led to trend of convenience in the UK e.g. 24 hour opening hours, e-commerce, etc. By meeting the convenience meeting needs of customers businesses will ensure repeat custom.

Negative impact
-organisations have to provide more staff to work 24 hours a day, seven days a week to meet customer needs, which will increase wage costs.

Question 47

Changing fashion trends positive and negative impact?

Answer 47

Positive impact
-businesses can cater for the latest fashion trends and offer products that customers want, therefore increasing sales. for example the North face or supreme clothing trend

Negative impact
-businesses have to spend time and money researching and developing new products. Some products also have a very short shelf life.

Question 48

Flexible working arrangements positive and negative impacts?

Answer 48

Positive impact
-flexible working arrangements mean staff will be able to work at a time when they are most productive, which will improve quality in the organisation as well as raising morale. Additionally, businesses can save money on renting office space with more employees work from home.

Negative impact
-flexible working arrangements can lead to a lack of supervision and direction of staff, which can reduce productivity. Organisations may also have to provide staff with equipment such as smartphones and laptops so they can work at home, which can be costly.

Question 49

Ethical considerations, positive and negative impact?

Answer 49

Positive impact
-businesses that practice ethically (doing what is right) will be seen in good light by customers, perspective employees, suppliers and the government. An example would be not exploiting child labour.

Negative impact
-often unethical practices carried out purely to keep costs low so operating ethically will increase costs and perhaps reduce overall profits. Of course, a bad image from operating unethically could affect sales anyway.

Question 50

Technological factors

Answer 50

Technological factors concern the quickly evolving technological advancements that can impact on organisations, for example, faster broadband connections, cloud computing and social media.

Question 51

What is the difference between internal and external technology?

Answer 51

The main difference is that an internal factor the concern is existing technology, which is the technology the business uses already, while as an external factor the concern is keeping up with technological developments, that is what technology the business needs to invest in to remain competitive.

Question 52

What are the 4 technological factors?

Answer 52

• cloud computing
• social media
• WiFi
• 4G

Question 53

Cloud computing, positive and negative Impact?

Answer 53

Positive impact
-through technology such as OneDrive or dropbox, organisations can save money on their own IT hardware. Additionally, they will not require as many IT staff to maintain equipment, saving on wage costs.

Negative impact
-there is a heavy reliance on ‘the cloud’ performing. If Internet connection is unavailable, the organisation won’t be able to access files stored on the cloud, causing production to stop. There are also privacy and confidentiality issues regarding storing information on the cloud.

Question 54

Social media, positive and negative impact?

Answer 54

Positive impact
-having a social media (e.g. Facebook, Twitter) presence enables organisations to keep in touch with customers and raise their profile to a potentially worldwide market.

Negative impact
-social media can be used by customers to spread bad reviews about an organisation, leading to a poor reputation that could put customers off and cause them to take their business to the competition.

Question 55

Wifi, positive and negative impacts?

Answer 55

Positive impact
-organisations that provide a free Wi-Fi service are likely to attract customers who wish to use Wi-Fi for work or personal reasons, for example a customer choosing a Starbucks coffee house over an independent coffee shop because of Starbucks free Wifi

Negative impact
-there is a financial cost of setting up and maintaining Wi-Fi

Question 56

4G, positive and negative impact?

Answer 56

Positive impact
-4G will enable organisations employees to communicate and download information while on the move much more quickly.

Negative impact
-not all areas are equipped with 4G capabilities, which could leave organisations in these areas behind.

Question 57

Environmental factors

Answer 57

Environmental factors can either arise from the ways in which the natural environment impacts on organisations or the ways that organisations act in an ethical and environmentally friendly manner.

Question 58

What are the environmental factors?

Answer 58

• weather
• recycling
• carbon footprint

Question 59

Weather, positive and negative impact?

Answer 59

Positive impact
-A business could be impacted by spells of favourable weather, for example, during prolonged periods of snow the ski industry in Scotland will see an increase in customers.

Negative impact
-prolonged spells of adverse weather, such as snow, can affect the transport networks across the UK. This will make it difficult for deliveries of materials to arrive and for staff to get to work, therefore causing production to slow down or cease entirely.

Question 60

Recycling, positive and negative impact?

Answer 60

Positive impact
-organisations encourage recycling by their customers in order to impact less negatively on the environment. For example, retailers discourage the use of plastic bags and sell ‘bags for life’ which will lower the cost to the retailer of providing plastic bags and gain the company a favourable reputation for being ‘environmentally friendly’

Negative impact
-organisations need to undertake recycling, for example, of waste paper and printer cartridges, but it takes time, effort and money to recycle rather than just disposing of waste.

Question 61

Carbon footprint, positive and negative impact?

Answer 61

Positive impact
-organisations are encouraged to reduce their carbon footprint. This means to lower the amount of emissions from fossil fuels released into the atmosphere. Businesses that do this, for example by utilising renewable energy, will eventually save money on fuel bills.

Negative impact
-there is a financial cost associated with investing in renewable energy, for example, solar panels or wind turbines to power factories.

Question 62

Competitive factors

Answer 62

• most businesses face competition
• an organisations competition refers to rival organisations that provide the same or a similar product and attempt to take their customers, attract new customers or keep their own customers.

Question 63

Positive and negative effects of competitive factors on a business

Answer 63

Positive impacts

• competition opening up a physical store right next to a business can be good as it provides more choice for customers and brings passing trade to the area.
• competition improves a market as it brings with it more choice, new ideas and keeps prices low, which can benefit all businesses in the market.

Negative impacts
-The competition could lower prices, undercutting another business. Businesses will either have to lower prices too, reducing profits, or risk losing customers to the competition.
-The competition could launch new or improved products. Businesses will have to spend money researching and developing products to keep up with competition.