Transcript External Influences

External Influences
External Influences
Unit 1: Investigating Business
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Learning objectives
What external influences affect the way that
businesses operate?
How do businesses respond to competition?
How do economic conditions affect the profits
of a business?
What laws must businesses follow to protect
the environment?
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External influences
Every business wants to achieve its aims and objectives to
make a profit. It will try to do this by organizing what it can
influence internally: employees, resources, quality etc.
But a business is also affected by external influences
which it cannot control:
business
competition
internal
environmental
influences
constraints
economic
conditions
These external influences change from time to time
and a business must be able to adapt to them.
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Business competitors
All types of business activity involves competition. There are
usually many suppliers offering similar products, meaning
that most businesses operate in a competitive market.
After a sale, a business will
encourage the customer to
buy from them again.
Competitors, however, will
‘fight’ for the customer by trying
to offer more attractive products.
How might businesses try to keep customers?
How might competitors try to ‘steal’ customers?
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Competitive features
Every business wants to increase its market share. To do
this, a business must keep its existing customers and try to
gain new ones.
Customers buy because of
competitive features:
price
availability
quality
location
additional features.
What changes could a failing business make to its
competitive features to gain more market share?
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Business competitors
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Price
Price is a very important competitive feature of any business.
It must cover the business’s costs: production, distribution and
promotion, and attract customers.
Many businesses charge low prices to sell large quantities
of stock, such as the clothing retailers Primark and Matalan.
High prices are charged by
businesses which trade on their
reputation for quality; for
example, the designer clothing
labels Gucci and Chanel.
What would happen if Primark raised its prices or
Gucci lowered its prices?
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Competitive features – price
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Competitive features – quality
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Competitive features – availability
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Competitors
Group the following businesses or products into pairs of
competition groups:
Pick one pair and then investigate their
competitive features. How do they compare?
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The types of competition
There are two types of competition: direct and indirect.
Direct competition includes businesses that sell similar
products, e.g. Ford competes with Peugeot and Toyota.
Indirect competition includes businesses that sell slightly
different products, e.g. Burger King competes with Starbucks.
Business that sell totally different products are also in indirect
competition, e.g. Rimmel competes with iTunes and Topshop
for the money which teenage girls spend.
Give an example of two businesses in direct
competition and two in indirect competition.
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The types of competition
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Types of competitors
The competitors a business competes with are not always
the same. There are three types of competitor:
local competitors
national competitors
multinational competitors.
A multinational business has operations in more than one
country and adapts its products for each particular market.
Can you name any multinational businesses?
How has IT made it easier for businesses to
compete for customers around the world?
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Knowing the customer
Understanding what it is that customers need and want will
give a business an edge over the competition.
The Marketing department builds up customer profiles of
the types of customers who buy the business’s products
including the following criteria:
age: age ranges of customers
gender: number of males and females
income: what customers can / will pay
lifestyle: likes / dislikes, children, pets
geography: where the customers shop.
How do businesses use the data they
collect from customer profiles?
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How Tesco attracts customers
Tesco operates market segmentation because it caters
for a variety of customers: students, career people, families
with young children and older people.
To be competitive, Tesco offer
price differentiation by selling
different priced ranges: Value,
own brand and Finest products.
In addition to groceries, Tesco sell clothing, entertainment,
and electrical products and energy, financial, Internet and
travel services. It also provides additional in-store facilities
such as pharmacies and cafes.
Apart from other supermarkets, what other types
of businesses are competitors for Tesco?
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Creating customer profiles
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Customer profiles
Here is an example of a trendy wine bar’s typical customers:
Age:
25 – 40
Gender:
male and female
Income:
£20 – £50,000
Geography: south-east
Lifestyle:
no children
gym members
holiday abroad
eat out regularly
spend a lot of money on fashion.
Design a customer profile for a business in
your local area.
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The economy
An economy is the system within a country
which influences the production, distribution
and consumption of products, and the supply
of money.
Britain’s economy affects every British
business and citizen in some way. It is,
therefore, very important that the British
government organizes the economy properly.
A British cabinet minister acts as the
Chancellor of the Exchequer. He or she must
manage the British economy by taking advice
from the Bank of England and the Treasury.
Do you know who the Chancellor of the
Exchequer is?
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Economic conditions
The British economy is affected
by three areas:
interest rates
prices
exchange rates.
Businesses and customers can be affected when changes are
made to interest rates, prices or exchange rates.
Changes to the economy can make it difficult for a business to
plan ahead and for customers to plan when to spend or save.
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Interest rates
The base interest rates of England and Wales are set by its
central bank: the Bank of England, who issue the banknotes.
The base interest rate is the fee
the Bank of England charges its
customers, usually other banks,
for borrowing money.
It determines how much extra
must be repaid on top of the
original sum in a loan.
However, customers (including businesses) can be charged
higher interest rates than the base interest rate because
other banks and credit cards set their own rates.
Do businesses prefer high or low interest rates?
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The effects of interest rates
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Fluctuating interest rates
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Inflation
Prices can increase or decrease over time. When prices are
generally rising, this is called inflation.
Inflation can cause major problems for smaller businesses
because raw materials (produced in the UK) become more
expensive to buy.
Businesses will then put up their prices to
compensate for inflation, but it can lower
their sales.
Staff will also demand pay rises which
creates even more cost.
What would happen if the opposite of inflation:
deflation, occurred?
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Case study
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Inflation
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Exchange rates
The exchange rate is what one currency is worth in another
currency. In the UK it is how much one British pound, called
sterling, is worth in a different currency.
On holidays abroad, it determines how much a tourist’s money
is worth. A strong currency is worth a lot – good for tourists;
a weak currency is worth little – bad for tourists.
For example, if you were going to the
USA you would need some US dollars.
If the exchange rate was $1.93 to £1
and you exchanged £45, you would
receive $86.85 as 1.93 x 45 = 86.35.
Would a US tourist visiting the UK want the US
dollar to be stronger or weaker than sterling?
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Exchange rates
Businesses are affected by exchange rates all the time as
many of them sell to, or are supplied by, businesses abroad.
When a business in the UK exports
(sells products overseas), it expects to
be paid in pounds sterling.
If a UK business imports (buys
products from abroad), it will have to
pay in the currencies of those countries.
Would a business that exports prefer a strong
or a weak British pound?
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Exchange rates
The exchange rate alters because of international supply
and demand.
If more people are selling pounds than buying them, the
exchange rate will go down, making the pound weaker.
If more people are buying pounds this creates a demand for
sterling and increases their value.
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Exchange rates – good or bad?
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Managing the UK economy
The Chancellor of the Exchequer, the Treasury and the Bank
of England try to create economic stability for businesses
and customers so they can plan when to spend or save.
Through taxation and interest rates, they:
raise taxes to
discourage spending
lower taxes to
encourage spending
raise interest rates to
discourage spending
lower interest rates to
encourage spending.
Explain why high taxes and interest rates cause
low levels of spending. When is this useful?
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Environmental constraints
Business activity can damage the environment.
The UK Government is trying to reduce pollution and wastage
by introducing laws to minimize the negative impacts and by
setting specific targets that must be met.
What kinds of problems can excessive pollution
and wastage cause to the environment?
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Pollution
Unless it is carefully controlled, business activity can cause a
variety of environmental problems:
air pollution
noise pollution
water pollution.
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Wasting resources
Some of the resources that a business uses end up as waste.
It makes sense for a business to reduce the amount of waste
it produces for financial and environmental reasons by:
recycling and composting
consuming less energy
using fewer resources
reducing waste
disposing of waste properly.
Design a poster to encourage businesses to
reduce the amount of wastage they produce.
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Environmental laws
The Environment Agency and local authorities ensure that
businesses follow the environmental laws set by the
Department for Environment, Food and Rural Affairs
(DEFRA). Two of these laws are:
Environmental Protection
Act 1990
tries to reduce significant
emissions affecting
water, air and land
regulates about 3,000
manufacturing plants.
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Pollution and Prevention
Control Act 1999
tries to reduce pollution,
waste and energy used
regulates less significant
emissions from about
20,000 businesses.
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Environmental policies at Innocent
Innocent is a business that makes fresh fruit drinks. It tries to
live up to its name by doing more than just following the law.
Innocent try to be ethical by:
using alternative fuels and power
producing recyclable packaging
offsetting its carbon emissions by
120% each year
buying from suppliers certified by the
Rainforest Alliance
donating 10% of its profits to charity.
Why do you think Innocent have set themselves
these environmental targets?
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External influences activity
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Question time!
1. Give three tactics a business might use to steal
customers from its competitors.
2. Explain what the difference is between direct and
indirect competition and give three examples of each.
3. Why do businesses who are exporters dislike it when
the sterling exchange rate is very strong?
4. Who suffers when interest rates increase?
5. Why does inflation create extra costs for a business?
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Who wants to be an A* student?
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Glossary
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