External Influences on Business Activity

Question 1

How the government provides goods and services?

Answer 1

UK central and local government provides a range of products, including:
• Healthcare
• Education
• Defence
• Policing
• Library services
• Refuse disposal

Question 2

The key areas of legislation that affect businesses are:

Answer 2

• Health and safety
• Employment protection
• Consumer protection
• Environmental protection
• Competition policy

Question 3

• The Competitive environment refers to the:

Answer 3

• Number and strength of competing firms in an industry (power and market share)
• The ease of entry for new competitors

Question 4

The competitive structure

Answer 4

• The number of competing firms in an industry; their strength and ease of entry for new firms have an impact on:
  1. The amount of choice for consumers
  2. The level of competition (price, promotion, new product development)
  3. The profitability

Question 5

Level of competition Depends Upon

Answer 5

1. Number of businesses in market (direct rivals)
2. Behaviour of competitors
3. Nature of product being sold
4. Size of market

Question 6

Monopoly

Answer 6

• Is a market with one seller.
• A business with a market share of more than 25% is often referred to as having monopoly power (e.g. Tesco =32%)
• Not face much competition, if at all.
• Has significant control and power to set prices because consumers have no alternative.
• Has high barriers to enter the market/industries for other competitors
• Governments have laws and regulations to prevent monopolies.
• market is regulated by government to protect consumer interests and so business doesn’t abuse power

Question 7

Monopoly examples:

Answer 7

Transport for London
Camelot Lottery
Water Companies

Question 8

Monopsony

Answer 8

• is a market with one buyer
• has a significant control and power to set prices because sellers have no alternative
• Governments have laws and regulations to prevent monopsonies on national level but this is more difficult on a local level

Question 9

How do monopolies develop?

Answer 9

• Invention of new products or processes that are then legally patented to give the inventor a monopoly in its production.
• Merging or taking over firms in the same industry.
• The existence of ‘barriers to entry’ into an industry e.g. high advertising costs to get established, these barriers will prevent, or make very difficult, the start-up of new competitors.

Question 10

How are consumers affected by monopolies?

Possible benefits:

Answer 10

• Lower prices if large scale production reduces average costs of production.
• Increased expenditure on new products and technical advances as the monopolist will be able to protect their position and make monopoly profits from the new idea.

Question 11

How are consumers affected by monopolies?

Possible drawbacks:

Answer 11

• Higher prices if the monopolist has so little competition that consumers have no option but to buy from this one firm.
• Limited choice of products.
• Less investment in new products as a result of little competition.
• No incentive for the firm to lower costs and improve efficiency.

Question 12

Fair Competition

Answer 12

Fair competition is where firms compete on equal terms in a way that offers consumers the best choice of products and prices

Question 13

Unfair competition

Answer 13

• firms do not compete fairly, but act in a way that restricts consumer choice
• If unfair competition is ‘against the interests of consumers’ then the Competition commission will intervene

Question 14

Examples of unfair competition:

Answer 14

• Monopolies charging high prices due to the lack of competition
• Agreeing to restrict supply or fix high prices
• Producers only supplying retailers that refuse to stock rival products
• Full-line forcing: forcing your customers to stock all your range of goods with the threat of discontinued service of the profitable ones.
• Predatory pricing: Occurs when a firm cuts its prices in a deliberate attempt to undercut a rival so that it goes out of business.
This is illegal, however, it’s is very common because the potential rewards outweigh the fines

Question 15

How to analyse a business’ position in the competitive environment?

Answer 15

• Michael Porter’s 5 Forces Analysis suggests that a firm can gain a competitive advantage over its rivals by understanding the industry context in which it operates.
• Porter’s 5 forces analysis of competitive position should be used when analysing/evaluating the competitive strength and position of a business.
• The results of the analysis will help a firm to decide on the most suitable strategic choice to achieve their goals.

Question 16

Porter’s 5 Forcers

Answer 16

1) - Buyer Power
2) - Supplier Power
3) - Competition Rivalry
4) - Threat of New Entrants
5) - Threat of Substitutes

Question 17

Threat of New Entrants

Answer 17

This refers to the ease with which other firms can join the industry and compete with existing businesses. This threat is greatest when:
• Low economies of scale
• Cheap technology
• Easy access to distribution channels
• No legal protection or patent restrictions on entry
• Low product differentiation

Question 18

Buyer Power

Answer 18

This refers to the power that customers have on the producing business. Customers in this context are not individual customers but other businesses (B2B). E.g. in the UK there are four major supermarket groups who have a great buyer power over food producers.
Buyer power is increased when:
• The size of the customer
• There are many undifferentiated small supplying firms
• The cost of switching suppliers is low

Question 19

Supplier Power

Answer 19

Supplier power is increased when
• The cost of switching suppliers is high
• They have a strong brand
• They are large enough to undertake vertical forward integration
• Your size as a customer is very small which limits the amount of bargaining power you have.

Question 20

Threat of Substitutes

Answer 20

Substitutes in this context refer to substitute products in other industries and not alternatives (rivals products) in the same industry.
Threats of substitutes will exist when:
• New technology makes other options available
• Price comparison forces customers to consider alternatives
• The opportunity cost of increase choice for consumers to spend their disposable income on.

Question 21

Competition Rivalry

Answer 21

This is the key part of this analysis because all the other 4 factors which Porter identified help determine the level of competition or rivalry in an industry.
Industry rivalry will be high when:
• Low barriers to enter
• Increase in substitute products
• Suppliers have much power
• Buyers have much power
• Market share concentration ratio is similar for all firms in the industry.
• Slow market growth forces firms to take a share from rivals if they wish to increase sales

Question 22

Porters Five Forces and Strategic decisions

Answer 22

This model enables managers to think about the current competitive structure of their industry. Firms can then use this strategic model to help decide on their strategic decisions e.g.:
• Should you enter a new market or not?
• Should you leave your current market or not?
• Develop strategies to improve their own competitive position through e.g. product differentiation, takeovers of competitors/suppliers/customers.

Question 23

The Technological Influence on business activities

Answer 23

Technology means the use of tools, machines and science in an industrial context.

I.T definition= the use of electronic technology to gather, store, process and communicate information.

Question 24

The responses of businesses to changes in the technological environment
These can be split into 3 main types:

Answer 24

1) Processes-
• Advancements in manufacturing technology and automation.
• This reduces both costs and the likelihood of expensive errors

2) Products-
• New product opportunities using microelectronic technology, e.g. mobile phones.

3) Communications links- developments in IT
• Businesses can now communicate cheaply and quickly across the globe
• Developments like video conferencing allows communication face to face in different locations
• Email allows communication immediately and free
• The internet will continue to have a huge impact on the ways goods and services are marketed

Question 25

Benefits of technological change:

Answer 25

• New products/markets:
E-commerce, M-commerce

• Increased profit:
Use a Price Skimming method on consumers prepared to pay premium prices for hi-tech products
(this can be retained by gaining a patent)

• Cost savings:
especially in operations management

• Improved efficiency
Reduced waste

• Improved working environment
Employees work in safer conditions

• Culture:
Technology could force changes in staff attitudes and the way business operate

Question 26

Drawbacks of technological change:

Answer 26

Research and Development:
• Firms in technology related markets will face demands to research new products and to implement more efficient methods of production
• Businesses operating in markets experiencing rapidly changing technology can find it too expensive to keep up with other producers.
• Small firms can be particularly vulnerable.
• This is one factor leading to mergers and takeovers

• Business culture
  May not accept it (resist change) especially if they don’t fully understand it
• HR management issues:
  Training, redundancies (industrial relations problems?), short-term difficulties accepting change
• Rapid obsolescence of existing technology-
  How do you know what technology to buy and when? Will new technology be compatible with existing technology?
• Cost of technology:
  Purchasing, training, maintenance costs, etc

Question 27

The Social and Environmental Influence on business activities

The social Environment focuses on 3 main factors:

Answer 27

• 1) Social factors:
• 2) Demographic factors:
• 3) Environmental issues:

Question 28

Social Factors

Answer 28

Change in social attitudes
• The desire the purchase environmentally friendly prodcuts;
• Awareness of treatment of farm animals;
• Increase in vegetarians;
• firms more aware of all stakeholders interests and not just their shareholders;
• increasing number of single-person households
• Businesses need to react to these external social forces in which they operate

Question 29

Demographic Factors

Answer 29

Characteristics of human populations and population groups (age, ethnicity, gender, religion and sexual orientation)
• Age, ethnicity, gender, religion and sexual orientation
• (the pink pound market and the grey pound market)
• Population growth
• Ageing population
• More households
• Multiculturalism of the UK
• Education
• Immigration
• Zero hour contracts

Question 30

Environmental Factors

Answer 30

Change in positive/negative environmental issues/attitudes

Question 31

What are ethics?

Answer 31

• Values, attitudes, beliefs, and opinions
• what you think is the ‘right’ thing to do
• Your own ethics are shaped by parents, friends, religion, and society
• Business ethics are the moral principles that should underpin decision making.
• Ethical behaviour involves actions and decisions that are seen to be morally correct.
• An unethical company can still behave legally

Question 32

Pragmatic drivers of CSR

Answer 32

Taking a practical course of action

1. Contingency planning, ie the driving force is pragmatic, to provide the right corporate image to withstand a crisis
2. Strategic (or ‘proactive’), e.g. when competition is hot for the brightest graduates, firms may plan ahead and fund graduates university courses.
3. Reactive, ie a remedial strategy - put in place to rebuild consumer confidence

Question 33

Ethical drivers of CSR

Answer 33

• Personal mission – relatively easy for the CEO of a private company; much tougher to achieve in a public one (Pepsi?)
• A function of the ownership structure (John Lewis; Coop) or the historic background of the business (Cadbury)
• In both the above, the key is whether CSR becomes part of the culture (and the Kraft takeover shows how culture can be damaged)

Question 34

Advantages (Opportunities) to a firm of good social & environmental responsibility & ethical behaviour:

Benefits to society:

Answer 34

• Problems such as unemployment and pollution are likely to be reduced
• Quality of life is likely to be improved

Question 35

Advantages (Opportunities) to a firm of good social & environmental responsibility & ethical behaviour:

Marketing opportunities:

Answer 35

• a good reputation can act as a positive marketing tool:
• Enhanced brand image and reputation
• Firms identify niche markets, e.g. organic veg
• Use the environmentally friendly nature of their products or processes as a USP
• Increased sales and customer loyalty
• Opportunity to charge a premium price

Question 36

Advantages (Opportunities) to a firm of good social & environmental responsibility & ethical behaviour:

Human resource opportunities:

Answer 36

• Better working conditions= lower labour turnover
• a green/ethical reputation can affect perceptions of new employees
• Increased ability to attract and retain employees

Question 37

Advantages (Opportunities) to a firm of good social & environmental responsibility & ethical behaviour:

Financial opportunities:

Answer 37

• Reduced operating costs
• Reduction in the chances of the business breaking laws designed to protect the environment; therefore avoiding heavy court fines.
• Firms may find it easier to gain finance.

Question 38

The potential benefits of CSR to Business

Answer 38

Financial Costs:
• Looking after employees e.g. training, pay and working conditions
• Ethical Suppliers (direct and throughout the supply chain)
• Product Safety
• Environmentally friendly practices throughout the business’ operation
• Appointing a director to be responsible for CSR

Not meeting corporate objectives
• Short term shareholder’s returns
• Growth – entering new markets

Opportunity Cost
• Time spent on CSR, policies, reports, monitoring etc
• Day to day functions

The costs for Business
Financial Costs
• Are the costs to the business passed on to the consumer in the form of higher prices?
• Taxes imposed by the government

Opportunity Costs
• Restrictions in availability of goods and services e.g. Flight times to reduce noise pollution

Expectations on stakeholder behaviour
• Ethical codes of practice for employees
• Suppliers forced to adopt policies and procedures specified by larger businesses or the government
• Pressure on consumers to change their buying habits

Question 39

The potential benefits of CSR to Stakeholders

Answer 39

Employee
• Inclusion and equal opportunities
• Health and economic wellbeing
• Sense of pride and greater job satisfaction

Customer
• Availability of information allowing informed decision making
• Sense of wellbeing: ethical behaviour, H&S and environment

Suppliers
• Fair prices and working conditions
• Accountability throughout the supply chain

Community
• Socially responsible behaviour by businesses: environmental impacts and H&S
• Local economy: local suppliers, employment, training and development

Government
• Achievement of environmental targets: UK, EU and World Summits
• Delegation of responsibility to businesses

Shareholder
• Long term profitability and competitiveness
• Ethical Investments

Question 40

Pressure Group

Answer 40

A pressure group are an external stakeholder organisation, created by people who share a common interest or aim. They put ‘pressure’ on businesses and government to change policies so that an objective is reached.

Question 41

General pressure group aims

Answer 41

• Governments to change policies to support their view points
• Governments to change laws to support their view points
• Consumers to change their buying or using/consuming behaviour which goes against their view points

Question 42

Tactics used to achieve these aims:

Answer 42

• Publicity through national media
• Influencing consumer behaviour
• Lobbying of government