Transcript External Environment

External Environment
GCSE Business Studies
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Revision Presentations 2004
External factors affecting business
Social (E.g. greater numbers of older and retired people
in UK population)
Legal (E.g. Human Rights Act – customers right to remain
private)
Economic (E.g. Increase in income tax reduces amount
customers have to spend)
Political (E.g. decision to spend more on public services
such as education and health)
Technological (E.g. effect of widespread use of Internet)
Ethical (E.g. changing attitudes to employing older
people)
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Changing External Environment
Markets keep changing
Customers develop new wants and needs
 E.g. want DVD’s rather than CD’s
New competitors enter a market
New technologies emerge
 E.g. image mobile phones
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External factors: threat or opportunity?
They can be both!
Depends on what business does and how it responds to
changing environment.
Example: an increase in Minimum Wage
 A change in a political and economic factor
 Might increase costs of some businesses (e.g. clothing
factories)
 Allows employees to spend more money on goods or
services sold by other businesses (e.g. Bingo Halls)
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Main Economic Sectors
Primary sector
 Extraction and production of raw materials
 E.g. coal, wood and steel
Secondary sector
 Transformation of raw materials in goods
 E.g. manufacturing steel into cars
Tertiary sector
 Provision of services to consumers and businesses
 E.g. cinema and banking
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Chain of Production
Chain of production
 Follows construction of a good from its extraction as a raw
material through to its final sale to consumer
Example: piece of wood:
 Cut from a felled tree (primary sector)
 Made into a table by a carpenter (secondary)
 Sold in a shop (tertiary)
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Specialisation
Occurs when a producer concentrates on:
 Making a small number of products, or
 Providing a narrowly defined service
Examples:
 A baker baking only bread
 Machinery that only cuts sheet metal
 Lawyer dealing only with criminal law
Specialisation means that producer becomes more efficient
 Learns best way to produce at lowest cost
Specialisation also allows a producer to get a higher price from
a customer
 Customer is prepared to pay more for expert / specialist knowledge
(e.g. a cosmetic surgeon)
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Importance of tertiary sector
Now the most important economic sector
Growing faster than the primary or secondary sector
Higher incomes in UK mean that households demand
more services such as more holidays and restaurants
More leisure time means more time to spend on services
Businesses offer more after sales services, e.g. help lines
offered through telephone call centres
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Public and Private Sectors
Private sector
 Private individuals and organisations own business activity
 Businesses usually run with the objective of making a profit
 Businesses owned by “shareholders” or “partners”
Public sector
 Organisations are owned and controlled by Government
 Includes central government, local government and public
corporations
 Objectives usually based on delivering service (e.g.
educational standards) rather than making a profit
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Objectives of Private Sector Businesses
Short term objectives
 Survival
 Make a profit
Long term objectives:
 Expand
 International operations
 Market leadership
 Environmentally aware
 Satisfy investors
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Examples from Public Sector
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National Health Service
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Patent Office
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Royal Mail
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British Tourist Authority
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BBC
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Objectives of Public Sector Organisations
Provision of equitable level of goods and services
 i.e. low price, affordable and available for those who need
good
Provision of products not provided by private businesses
 E.g. free health care and defence
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Mixed Economy
An economy where goods and services are produced by
a combination of:
 Government controlled corporations, and
 Private businesses acting on their own behalf, without
intervention from government
Mixed economy sits between two extremes of centrally
planned economies (communism) and free market
economies
 UK is a mixed economy
 USA has less government intervention
 France has more intervention
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Voluntary Sector
Businesses which are operated “not for profit”
Usually staffed by volunteers who work without pay
 E.g. Voluntary Service Organisation
Some “not for profit” businesses do try to make money –
to help raise money for activities of organisation
 E.g. charity shops
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Economic Environment
Businesses are directly and indirectly affected by changes
in the economy
Key areas that affect businesses:
 Taxation
 Interest rates
 Exchange rates
 Labour market
 European economy
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Taxation
Main taxes affecting businesses:
 Corporation tax – a tax on profits earned by a business
 Income Tax – businesses collect this from employees on
behalf of the Government
 National Insurance – contributions are paid by employees
and their employers
 Value added tax (“VAT”): tax charged on sales – which
businesses collect for the Government
 Council tax: local tax charged by local authorities on
households and businesses
 Customs and excise duties: e.g. tax on wines & spirits;
petrol
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Income Tax
The main tax on employees
Directly affects how much “take-home” pay households
have available to spend
Fall in income tax: (i.e. lower rate of tax charged)
 Leads to an increase in amount of money available for
households to spend on products (known as “disposable
income)
 Increased money available may be spent on products of
business leading to increased sales and profits
Increase in income tax
 Lowers disposable income
 May reduce demand for businesses’ products/services
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Exchange Rates
Exchange rates changes can increase or lower price of a
product sold abroad
Price of imported raw materials may also change when
exchange rates move
Price of competitors’ products may change in home
market.
For example an increase in exchange rate:
 Means that the selling price for a UK business selling
abroad goes up – likely to lower sales
 Price of imported raw materials falls, either leading to a fall
in price and more sales, or an increase in profits
 Competitors’ prices fall, meaning lower sales.
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Interest Rates
Represent the cost of borrowing money
Set by the Bank of England
Effect of an increase in interest rates?
 Decrease demand for a business’ product as consumer less
likely to borrow to fund spending
 Increase business financial costs as interest charges on
existing loans will increase
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Labour market
Labour shortages
 May be more difficult to recruit new people - might prevent
business from growing as fast as it wishes
 Existing workers may demand higher wages because they
know that business will be reluctant to release them
 Competitors may try harder to poach best staff
 Business may have to invest further in staff training and
development rather than rely on “recruiting” new skills into
business
Mobility of labour
 Mobility of labour means speed with which a person can
move into a different job
 Geographical mobility (can they physically move to that
place of work )
 Occupational mobility (do they have skills to do new job)
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Labour & Capital Intensive Industries
Examples of Labour Intensive Industries
 Hairdressing
 House-building
 Teaching
 Fashion industry
Examples of Capital Intensive Industries
 Car industry
 Steel production
 Rail industry
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