impact of external factors

8/11/2019 Impact of External Factors

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There is a simple rhyme which goes:

Environment to each must beAll there is that isnt me.

You can see therefore that the business environment

consists of all those things outside the business.

The business needs to keep a watchful eye on the

environment because it is continually changing.

Key elements in the environment are:

1. Competition. Rival companies are continuallychanging what they have to offer. They may lower

prices, bring out new products, engage in exciting

new advertising campaigns, and a range of other

activities.

2. Political factors. The action of government affects

business and other organisations. Governments

are continually changing the rules and the laws

that affect business. This is illustrated by the way

in which government rules affect schools. Simon

Jenkins in an article in The Sunday Times, on

24 September 2006 illustrates this well when he

wrote: This government tries to keep control of

every school. Since coming to office its education

department has issued 500 regulations, 350 policy

targets, 175 efficiency targets, 700 notes of guidance,

17 plans and 26 separate incentive grant streams.

3. Economic factors. The economy consists of

businesses, individuals and government. Theinternational economy consists of the economies of

all the countries in the world. The economy consists

of many markets the market for goods, the market

for services and the market for money are key

parts of this. These markets determine the price

that business has to pay for its resources such as

labour, and raw materials. Businesses are continually

affected by changes in the economy.

1 .4 Impact of external factors in the businessenvironment on organisations

[40] BTEC National Business Book 1 |2nd edition


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Unit 1 Exploring business activity [41]

4. Social factors. Society is made up of all the people

in a given area. It is important to be able to find

out what the main trends are that are happening

in society because these trends affect business.For example, changes in age patterns, such as

the increasing numbers of older people in the

population, determine which goods are popular.

Then there are social trends which are affected by

fashion for example this year some goods will be

in, whereas next year nobody or very few people

will want to buy them.

5. Technological factors result from the developmentof new techniques, i.e. new types of products and

new processes to make products. For example,

recent years have seen a massive change in

information technology which has transformed the

way we run our lives. For example, today more than

90% of young people possess a mobile phone.

Political factors

Nationalandinternationallaw

Government creates laws that affect business. There

are many laws (referred to as legislation) that affect a

business or industry. Businesses are affected by laws at a

number of levels.

Local laws affect local businesses. For example, local

traffic laws determine which roads lorries and vans are

allowed to travel on when making deliveries. Parking

regulations determine when and where goods vehicles

are allowed to load and unload. These local laws will be

created by local councils and enforced by local officials.

Parliament creates national laws such as Acts of

Parliament and rules and regulations. Examples of

national laws are those such as extending licensing hours,

or banning smoking in public places. These laws affect

businesses such as pubs, brewers and cigarette companies.

International laws are created by international bodies.

In particular Britain is affected by European Union

laws. Today the European Union courts are increasingly

important in making judgements which apply across

the union. European Union laws are regarded as having

supremacy over national laws.

Key Term

Government regulationsRules set out by

government that businesses need to abide by.

1.4

Case study

CGA-Centro, the market research group, found that 65%

went out later since the new rules were brought in, often

after 11pm. A lot of 18- to 35-year-olds prefer to drink at

home or in pubs. They are less willing to pay entry fees

into nightclubs. All this means that nightclubs fill up later

with people who have less to spend.

1. Identify one political factor mentioned above that has

affected business.

2. Identify one social factor that has affected business.

3. Is it possible to separate social and political factors

or should they be seen as closely related? 4. How might night clubs respond to the political and

social factors mentioned above?

Nightclubs affected by new regulations

At the end of 2006 many British nightclubs were

reporting falling profit figures. Some nightclubs, such asEntrepreneurial Leisure which owned Heaven and Hell

nightclubs, and Barvest which ran Po Na Na, both got

into serious financial difficulty.

Nightclub owners blamed government regulation for their

difficulties. In November 2005 licensing laws were

relaxed so that pub opening hours were extended. At the

same time worries about binge drinking frightened away

some people from visiting town centres.These factors affected patterns of when and where

people drink. A survey of 18- to 35-year-olds by


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BTEC National Business Book 1 |2nd edition[42]

There are two main types of rules that the European

Union (EU) makes:

Type of rule Description Example

Regulations

These are directly binding on member states. National

legislation is not required to put them in place.

Regulations therefore provide the most powerful element

of EU law making.

The European Design Regulation applies to individuals

and business and involves creating a system of Community

Patents whereby designers can protect their ideas through

a single EU-wide patent system.

Directives

These bind member states to the objectives to be achieved

within a certain time limit, but leave national authorities to

decide on how to implement them. Directives have to be

implemented in national legislation.

The Directive on Privacy and Electronic Communication

recognises that the development of new advanced digital

technologies requires the protection of personal data and

the privacy of the user.

Legislation is very complex and can cover thousands of

pages of complicated text. Here we describe just a few

examples of laws:

Employmentlegislation

Employment legislation consists of UK and EU regulations

and directives that concern employers and employees.

The EU has passed a number of employment directives,

including: The Equal Treatment Directive 1975 sets out that

there should be no discrimination on grounds of

sex, nor by reference to marital or family status, in

access to employment, training, working conditions,

promotion or dismissal. The Equal Pay Directive 1975 states that all

discrimination on the grounds of sex in respect to

pay should be eliminated.

The EU Employment Directive 2000 required

member states to implement laws prohibiting

discrimination on grounds of sexual orientation

and religious discrimination by the end of 2003.

Legislation on age discrimination came into force

from October 2006.

The EU Race Directive 1976 (Amended 2003)

is concerned with principles of equal treatment

of people, irrespective of their racial or ethnic

background.

The Working Time Directive (1993) sets out that:

there should be a minimum rest period of 11consecutive hours for every 24-hour period

there should be a rest break if the working day is

longer than 6 hours

there should be a minimum rest period of one day

per 7-day period

there should be a minimum of 4 weeks paid annual

leave there should be an average of no more than 8 hours

work per night in a 24-hour period.

The governments new age discrimination laws (2006)give individuals important new rights, extend existing

rights and remove traditional barriers. These laws

will help ensure that people are no longer denied jobs

or harassed because of their age, and in most cases,

workers of all ages will have an equal chance of training

and promotion.

The current upper age limit for unfair dismissal and

redundancy rights has been removed. This means

that older workers get the same rights to claim unfair

dismissal or to receive a redundancy payment as

younger workers. Employees have a legal right to

request working beyond compulsory retirement, which

employers have a duty to consider. Employees must

also give workers at least six months notice of their

retirement date.

Contract of employment

In addition to employment legislation, employees

have rights under their contract of employment. An

employment contract is a legal agreement between an

employer and an employee, setting out the terms on

which one agrees to employ the other. An employmentcontract will deal with many issues, including the

employees job description and duties, hours of work,

pay, holiday and sick leave.


4/18Unit 1 Exploring business activity [43]

A contract should include the following items:

names of employer and employee job title or job description

date employment started, the place of work and theaddress of the employer

amount of pay and how often it will be paid

hours of work

holiday pay entitlement sick pay arrangements

pension arrangements

notice periods

for temporary jobs, the date employment will cease disciplinary rules.

Other important employment

legislation includes equal pay laws,

whereby employers must give women

and men equal treatment in the terms

and conditions of their employmentcontracts.

The national minimum wage is an

important part of UK government and

EU policy to provide employees with

decent minimum standards and fairness

in the workplace. It applies to nearly

all workers and sets hourly rates belowwhich pay must not be allowed to fall. It

helps businesses by ensuring companies

will be able to compete on the basis of

quality of the goods and services they

provide and not on low prices based

on low rates of pay. The rates set are

based on the recommendations of the

independent Low Pay Commission.

Consumerrights

Businesses must make sure that their goods and

services meet general safety requirements. They

must make sure that everyone on their premises is

safe. In addition, they must ensure that what they

offer the customer is accurately described and that

the claims they make about their products aretrue.

The national minimum wage

protects all workers

1.4

Remember

A contract of employment is a legal agreement

between the employer and the employee setting outa range of work-related details.

Practice point

Carry out an Internet search putting in the terms

minimum wage and the year in which you do your

search. This should give you the latest figures for

the minimum wage.


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Consumer legislation provides real challenges for business:

Compliance costs money. Making sure that you keep

within the law is a costly business, but is well worth

it in the long run in order to maintain a reputation. Consumer legislation helps to further inform

consumers about their rights. This leads to ever-

increasing pressures on business to operate in a safe

and reliable way. Businesses must invest in training staff to comply

with relevant consumer protection laws.

Failure to act as a consumer champion can lead to a

loss of competitive edge over rivals.It is helpful to examine in brief some of the most

important pieces of legislation involving consumers. To

find out more about these laws carry out an Internet

search using a search which includes the name of the

relevant piece of legislation.

Sale of Goods Act 1979

This was amended by the Sale and Supply of Goods Act

1994 and sets out that goods must be:

of satisfactory quality i.e. free from significant faults

fit for purpose they should do what they are

supposed to do

as described by the seller or on the package.

These laws also relate to the supply of services, for example

by a hairdresser or cleaner. A service should be carried out:

with reasonable care and skill

within a reasonable time at a reasonable charge, if no price has been fixed in

advance.

Sale and Supply of Goods to

Consumers Act 2002This Act sets out that:

for the first six months after purchase/delivery, the

burden of proof when reporting faulty goods is

reversed in the consumers favour

guarantees offered by manufacturers or retailers must

be legally binding, and written in plain language.

Trade Descriptions Act 1968

Thismakes it a criminal act for a trader to describe

goods falsely.

Consumer Credit Act 1974

(updated 2005)

The 1974 and 2005 Acts relate to agreements made

between a debtor and a creditor. The Acts: regulate the formation, terms and enforcement of

credit agreements

require those giving credit to be licensed

set out that advertisements for credit must show the

true cost of the credit agreement set out restrictions on doorstep selling

set out that those taking out credit must be informed

about:O the total charge for credit, e.g. 1000 over two years

O the Annual Percentage Rate of charge (APR),

e.g. 20% APRO the price at which the goods can be bought for cashO state that all credit agreements must be in writing

and the customer must be given a copy

set out cooling off periods in which the customer

can withdraw from the agreement.

The 2005 Act sets rules for businesses providing credit

card services, hire purchase agreements and loan deals.

This affects all retailers that offer their customers credit

terms.

Environmentalissues

The environment has become a major issue. Businesses

need to show that they are aware of green issues if they

are to keep various stakeholder groups happy, including:

customers who may want to buy green products

employees who may not want to work for a

company with a poor environmental record shareholders who may only want to invest in green

businesses

pressure groups like Friends of the Earth and

Greenpeace.

Businesses like Tesco have gained a competitive edge

over rivals by taking initiatives such as offering a green

tray for consumers to carry their shopping in, having

environmentally friendly shopping bags, selling a widerange of organic products, etc.

The government has introduced a range of regulations

that affect businesses. These include the following:



6/18Unit 1 Exploring business activity [45]

Pollution Prevention and Control (1996) is a legal set

of rules for controlling pollution resulting from some

industrial activities. Businesses are required to use the

Best Available Techniques (BAT) to control pollution.

The European Unions Pollution and Prevention

Controls cover emissions to air, water and land.

Companies must apply for permits to create pollution.

The EU Directive on Packaging and Packaging Waste

(1994, amended 2004) sets targets for waste recovery

and recycling. Businesses that handle packaging are

required to recover and recycle given amounts.

The Hazardous Wastes Directive (1998) deals with how

dangerous wastes should be managed. They must be

stored in special containers.

The Producer Responsibility (Packaging Waste)

Regulations (1994, amended 2004) limits the amount

of waste that businesses can use and create. Businesses

must make sure that they minimise the waste and

packaging they use.

Other environmental regulations relate to how asbestos

is disposed of, and restrictions on how hazardous

substances are stored.

The Waste Electronic and Electrical Equipment

Directive implemented in 2004 requires computers to

be disposed of in a safe way. Computers contain small

amounts of dangerous chemicals such as cadmium.

Fraud

Fraud costs the UK economy up to an estimated 14bn

a year (2006). Although there is an increased amount

of fraud which takes place as a result of cybercriminals

hacking into company databases, the majority of fraudtakes place within companies. It is estimated that much

of this fraud may take place with the collusion of senior

managers and members of Boards of directors.

Typical examples of company fraud include:

stealing company assets directors making the profits look better than they

are so that they can take more out of the company in

profit share schemes

employees and suppliers altering invoices

for example adding goods bought for private

consumption to a company invoice forging signatures on company cheques

stealing cash and equipment.

The banking group HBOS carried out a survey which

showed that nearly half of all companies with morethan 36 employees had been hit by fraud.

The problem is that many companies dont have

effective fraud controls. This means that they are prey

to the harmful actions of unscrupulous people.

1.4

How are environmental regulations likely to affect

business costs?

Thinking point

Real lives

Rogue Trader

You may have seen the film Rogue Trader. It is

based on the story of a young employee, Nick

Leeson, who was working for one of this countrys

best known investment banks Barings. His jobwas to make investments for the bank in overseas

markets. At first he was very successful, and the

bank put more and more trust in him. However,

unfortunately he made some bad investment

decisions and lost a lot of money. To try to cover it

up he risked more and more of the banks money.

All this time Leeson was not being checked up on.

He created more and more debts for Barings so

that eventually the bank collapsed and had to be

sold for 1.

1. Were Leesons actions fraudulent in your view?

2. Who was responsible for the problem Leeson

or his superiors?

3. What should businesses be doing to prevent

fraud taking place?

4. Taking one other example of fraud explain what

checks a business could make to prevent this

fraud.


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Governmenttaxesandsubsidies

Government actions have a direct impact on business.

Each week the government creates new regulationsabout health and safety at work, employment rights,

consumer protection, fraud, e-commerce and many

other areas of business life.

Another major area of government activity comes in

the form of taxes and subsidies.

The government taxes various activities:

to raise revenue for government spending to discourage certain activities such as the creation of

pollution.

Tax involves taking money away from a business or

individual. For example, income tax is paid at a given

rate (e.g. 30%) on income earned above a certain level.

In addition, employers are expected to pay other tax-

based costs such as National Insurance contributions.

This is a contribution that the employer makes to

covering provision for the state pension, sickness,

unemployment and other benefits for individual

workers.

Another major form of tax is Value Added Tax (VAT).

This is a tax on spending. Providers of goods and

services pay a tax to the government on the value they

have added to the goods they provide for you. Theythen pass this tax on to you. For example, when you

have your car serviced you will see VAT added on to

your bill.

By levying income tax the government is able to pay

for the services it provides such as spending money on

schools, hospitals and the police.

Taxation directly affects business. When the government

raises taxes this immediately raises costs to business. For

example if the government increased VAT by 2% then

businesses would have to buy raw materials, machinery

and equipment which is 2% more expensive.

Another form of tax that directly affects business is

Corporation Tax. This is a tax on company profits.

Businesses are not happy when this is raised because it

immediately eats into their profits.The opposite of a tax is a subsidy. Here the government

gives money to producers to support their activities.

The government subsidises certain activities to

encourage them. For example, in this country the film

industry is subsidised by the government. British film

companies with budgets up to 20 million for a film are

entitled to 4 million a film. The British film industry

is regarded to be very important and the government

wants to give priority to it.

Other examples of government subsidies are subsidies

to farmers through European Union farm support.

Farming is thought to be very important because it

provides us with our food supplies.

Economic factorsThe economy has a major effect on business. For

example, if consumers spend more then businesses will

receive more revenue. If the government raises taxes

then this raises business costs.

Businesses therefore need to be very aware of what is

going on in the economy. They need to know about all

sorts of economic variables such as what is happening

to key costs such as wages and energy prices.

Paylevels

Wages typically account for 70% of the costs of running

a business. Controlling costs is therefore essential. Forexample, two or three years ago lots of football clubs in

this country got into trouble because they let their wage

bills rise too high. One exception is Manchester United

which seeks to keep its wage bill at less than 50% of

revenue. But Manchester United is the exception.

Costofcredit

Much business activity is funded by credit. For example:

businesses often buy machinery and equipment

through some form of borrowing arrangement businesses buy supplies and raw materials on credit

terms.

Key Terms

CreditInvolves receiving a good or service now and

paying for some or all of it over a period of time.



8/18


The interest rate is the cost of borrowing money. When

someone lends you money they will want to be paidback with interest because they are sacrificing their

ability to use that money. Businesses must be careful

not to borrow more than they can afford because

interest repayments can rise, causing a drain on the

business.

A driving force in determining interest rates is the

Bank of Englands base lending rate. This is the rate atwhich the Bank of England is prepared to lend money

to financial institutions like banks. They will therefore

set their own interest rates based on this. The Bank of

Englands rate is determined by the Monetary Policy

Committee, made up of the Chair of the Bank of

England and a panel of independent experts. They raise

or lower rates according to whether they think people

in this country are borrowing and spending too muchmoney or not.

Businesses must be aware of the current interest rate

and likely changes, for the following reasons:

Rising interest rates add to business costs. If a

business has borrowed 100,000 for one year at 2.5

per cent then it will only have to pay back 102,500

(2500 in interest). However, if the rate is 5 per centthen the interest repayment will be 5000.

Rising interest rates also choke off consumer

expenditure. When interest rates rise consumers

will borrow less so that demand for the outputs of

business will fall. A dramatic fall in sales can hit abusiness hard.

Competitivepressures

Competition is one of the biggest influences on

business.

Businesses compete through:

1. Prices higher or lower than rivals.

2. Differentiating their product.

There are many different ways to beat the competition.One of the current trends in competitive strategy is to

be the greenest in the business. The table on page 48

illustrates competitive strategy in green supermarkets.

1.4

Case study

In the end a settlement was agreed between the figure

demanded and the figure offered.

1. Why do you think that BT would be reluctant to offer

8%?

2. Do you think the union was justified in demanding

8%?

3. What do you think the effect on ongoing company

profits will be of allowing high wage increases?

4. Do you think that there would be a knock-on effect on

other businesses from allowing high pay increases?

Explain how this effect would work.

Wage demands at BT

In the spring of 2005, the telecoms giant BT was facing

demands from its employees trade union that would

have added more than 300m to its payroll costs. The

Communications Workers Union demanded an 8% pay

rise for BTs 100,000 staff.

BT felt that this figure was unrealistic and only offered

2%. However, the Communications Workers Union statedthat this was too little. They said their demand was

realistic because BT had made profits of 1.09 billion in

the previous six months. The Union said that it was only

fair that the employees should share in the profits.

Practice point

Read the minutes of the Monetary Policy Committee

on www.bankofengland.co.uk/publications/minutes.

Find out how interest rates have changed over the

last 12 months, and list any predictions for future

changes. How would this information help you to

advise a business that was thinking about borrowing

more money to expand?


9/18


Tesco Asda J Sainsbury Wm Morrison Waitrose

Cutting carrier bags.

Between 2006 and 2008

will reduce numbersgiven out by 25%. Is

cutting deliveries to

stores to cut congestion.

Introducing regional

counters in stores to

promote local produce.

Plans to have no waste

going to landfill sites

by 2010. Has invested40m on new recycling

facilities at distribution

centres. Introducing

biodegradable packaging

on organic food.

All ready meals to

move to compostable

packaging by end of2007. Installing state-of-

the-art recycling centres

in many stores. Carbon

emissions from its sites

reduced by 20% since

2000.

Introducing recyclable

packaging for some own-

brand products. Highestproportion of seasonal

UK vegetables of any UK

supermarket. 72% of all

store-generated waste is

recycled.

Trying out scheme to

allow local suppliers to

deliver goods directlyto stores. No GM

ingredients in any own-

branded food products.

Globalisation

One of the major changes to affect British business

since 2000 has been the impact of globalisation.

Globalisation involves the creation of global markets.

Key aspects of globalisation include:

Huge economies like China and India entering the

marketplace. These economies are very competitive.

For example, if you have bought a cheap T-shirtlately then there is a good chance that it was made in

China. The fact that these huge economies are able to

produce large quantities of products at very low costs

makes life very difficult for UK-based competitors.

The creation of global brands people round the

world instantly recognise global brands like Magnum

ice cream, Apple iPod, Nokia phones, and Coca-Cola. Sony has been creating cult electronic products since

the 1950s. Today the same innovative approach that

developed the transistor radio and Walkman Personal

Stereo continues to give Sony the lead in the new

digital entertainment world. Sonys BRAVIA range of

flat screen products leads the way in high definition

entertainment and in digital imaging. Cyber-shot

cameras have redefined digital photography with

Real Imaging Processors and advanced CCD chip

technology. Sonys music, movies, game and onlinebusinesses are also global leaders.

The creation of global products and global

marketing. The same products and marketing and

advertising campaigns can be used worldwide. This

significantly lowers costs. For example, a Christmas

advert for Coca-Cola can be shown on television in

hundreds of countries.

The creation of almost instant communications.Transport links move goods and people around

the world within hours. Information and

communications technologies enable instant link-

ups between people on opposite sides of the world.

Each of these factors has led to a reduction in the

costs of products. This forces businesses to become

competitive. Large British-based companies likeCadbury-Schweppes (producing confectionery),

Vodafone, and Shell need to engage in global strategies

if they are to compete with overseas rivals.

Of course, businesses should also see globalisation as

an opportunity. A UK company can expand quickly

by producing goods and services that are wanted by

consumers across the world.

Labour,supplyanddemand

We saw earlier in this unit that markets are made up of

suppliers those prepared to supply a good or service

and demanders those wishing to buy a product or

service. In the labour market the service that is being

traded is manual and intellectual labour brawnpower and brain power. Today there is more and more

emphasis on intellectual intelligence. New knowledge

workers, such as those working in IT, can receive high Sony is a good example of a global brand


10/18


salaries. It is also argued that emotional intelligence

is in short supply. Emotional intelligence involves the

ability to get on with customers. This is very important

in people who interact with customers directly,

e.g. service and telesales workers.

The marketplace brings together suppliers of labour

(employees) with labour to sell and consumers of

labour (employers) wanting to buy intellectual, physical

and emotional labour.

In the case of the market for labour, supply consists of

employees and potential employees who are prepared to

work for a business. Demandconsists of a firms wants

and need for employees to work for them.

When labour is in short supply then wages are likely

to rise. In contrast if there are more people looking

for jobs than there are jobs available then wages will

fall. The number of workers in the UK earning above

average salaries has been increasing. About half a

million people earn at least 100,000 before tax about

400,000 of these are men.

In 2004 the European Union was extended to include

10 new countries including Poland. People from these

new EU countries are now able to work in Britain. This

has increased our labour force by almost half a million

people with a beneficial effect for business of bringing

down wages. At the same time employers have access to

a wider pool of skilled and unskilled labour.

Energyprices

Energy prices are important costs for many businesses.

This is particularly true of manufacturing companies

where power is needed to run machinery. However, it

is also important for service industries, like insurance,which rely on computer networks and in which heating

and lighting costs for the offices in which employees

work can be a substantial cost.

Since October 2003 there have been substantial

increases in energy prices in this country. The effect on

organisations is shown in the following table:

70% average gas price increases for the chemical industrybetween 2004 and 2006

4050% average gas and electricity price increases in the retail

sector over the same period

41 million increase in NHS gas bill between November 2003

and November 2004

100 million combined increase in local government gas and

electricity bills in 2004

Reasons for this include:

the decline in gas supplies in the North Sea

the soaring price of oil owing to diminishing supplies

and because of instability in oil-producing parts of

the world such as Iraq

lack of storage capacity for gas in this country. This

means that we have to buy in gas at inflated pricesfrom Continental Europe.

Key Terms

Demandexists when consumers have wants and

needs backed up by the purchasing power to buy the

products they desire.

1.4

Case study

The plastics industry in the UK

There are 200,000 jobs in the UK plastics industry.

Companies in this sector have seen average rises

of nearly 60% for gas and electricity in 2004 and

2005. As these increases are higher than those

of their mainland European competitors, and as

mainland Europe is the major trading partner for

the industry, these rises have devastating potential

for the industry in the UK.

1. What other industries apart from plastics are

likely to be hit hard by rising energy costs?

2. How will the rising energy costs affect the

prices business can charge for plastic

products?

3. What will be the impact on the competitiveness

of the UK plastics industry?

4. Which business stakeholders are likely to

suffer and how as a result of these rising

costs?


11/18


Social factorsChanges in the population structure of society and

changing patterns of social behaviour also affect business.

Ageingpopulation

The number of older people in Britain is increasing

fast. Statisticians predict that during the next century

there will be a substantial increase in those living to be

over 100. According to recent estimates, the number of

people over 60 could rise by 40% in the next 30 years.

In 1995 there were less than 9 million people over 65

by 2030 there may be about 13 million.

People tend to work and save when they are young and

live off the proceeds when they retire. Wealth peaks

at retirement age and then begins to fall. People have

different patterns of saving and spending at different

times in their lives.As the population ages then we may see more people

spending the proceeds of their previous earnings. They

are also likely to have different spending patterns to

the young. For example, there will be greater demand

for stair lifts, anti-ageing creams, botox injections, and

world cruises. New businesses will spring up to cater

for the needs of the elderly and e-commerce will be a

particularly useful vehicle for selling directly into the

homes of this group. There will be a profound impact

for the pharmaceutical and health industries which

will need to expand to meet the needs of an ageing

population.

Another major impact on business may be increased

labour shortages. Small businesses in particular may be

forced to raise wages to attract labour. As the percentageof the elderly rises in the population the government

may be forced to increase taxes and National Insurance

contributions to support the elderly population.

Hostingofmajorsportingorculturalevents

Hostingofmajorsportingorculturalevents

Another way in which a business can capture public

attention and thus enhance its position in society

is through hosting important cultural and sporting

events. This is why companies like Coca-Cola seek

to sponsor the World Cup and other football events.

According to this thinking, football is the world game

and Coca-Cola is the world drink.

Companies compete with each other to gain exclusive

rights to sponsor events such as the London PromenadeConcerts or the British Grand Prix.

Celebrityculture

Today a lot of people want to be celebrities. If they cant be

celebrities they want to live like celebrities. We are obsessed

by celebrity, giving rise to a host of magazines such as Helloand OKwhich chart the life and lifestyles of celebrities.

From a business point of view celebrities help to create

demand for products. Celebrities create social trends

Kate Moss exemplifies our modern celebrity culture

Identify three business opportunities that might

develop as a result of the ageing of the population.

Thinking point

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whether it is Madonna wearing a kabbala bracelet or

Victoria Beckham putting extensions in her hair.

Kate Moss exemplifies the celebrity process. In 2006

she earned an estimated 30m from lucrative contractswith Rimmel, Stella McCartney and Agent Provocateur.

Kate Moss is regarded by many to be cool because of

her lifestyle which is regarded to involve beauty, danger

and taste. These characteristics which she is supposed to

represent enable her picture to be used to sell anything

from eye shadow to mobile phones.

Of course, it doesnt always work like this. Sometimes

celebrities can have an adverse effect on a brand. Nothing

kills clothing like the wrong celebrity wearing it.

Technological factorsWe live in an age of technological advance. Indeed one

boast of many advertisers is that their product includes

more technology than their rivals. For example, you can

see this in the way Nike advertises its trainers.

The Internet has changed the way in which businesses

do business. It is a global network linking millions

of computers across the world. Any individual or

organisation can link to this network using a telephone

line or cable connection.

Today it is essential for a business to have a good websitethat is easy to navigate (find your way around) and which

is attractive and appealing to use. Increasingly, the Internet

has come to be accepted as a way of making purchases.

This is illustrated by the following table showing shoppers

using the Internet to buy presents at Christmas:

Year % of shoppers

1998 21999 8

2000 11

2001 12

2002 22

2003 29

2004 32

2005 51

1.4

Can you think of a situation in which celebrities havehelped to make a particular well-known brand

appear uncool? Remember how negative tabloid

press comments connected with her drug use

damaged the prestige of Kate Moss so that H&M

dropped her from their advertising campaign.

Thinking point

Case study

Under the terms of the deal she signed last week to design

a clothing range for one of Britains most successful high-

street retailers, she chooses her own hours, her own ad

campaigns, enjoys an almost limitless budget and has

approval for all designs and merchandise.

(Source: John ArlidgeThe Sunday Times Business

24 September 2006)

1. Why do you think Topshop were so keen to sign Kate

Moss?

2. Why have they given her so much freedom?

3. Do you think the cost to them will be worth the

rewards that ensue? 4. How do you think celebrity can make a brand

cool?

Kate Moss from top model to Topshop

What do you do the morning after you have celebrated

the most unlikely coup in high-street fashion?

If you are the boss, you usually put your feet up. If you are

the new hire you are usually in the office at 8am sharp.

But on Friday morning Kate Moss was nowhere to be seen

at Topshops central London office. Instead, her boss, Sir

Philip Green, was running his fingers along rack after rack

of 15.99 V-neck sweaters. Ive spent all morning

approving next seasons knitwear, he said wearily.

Moss, the worlds most famous model, is the onlyperson in fashion who gets to tell the pugnacious

Green what to do.


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Broadbandandtelephonydevelopments

To access the Internet individuals need to have an ISP

(Internet Service Provider). Today large numbers ofpeople prefer to use broadband services which give

much quicker and more reliable access to the Internet

than dial-up services.

Previously, computer users who wanted to connect to

the Internet had to use a dial-up modem. There were

disadvantages to this; for example, unless you had a

separate telephone line, when someone was using theInternet in your house then you wouldnt be able to use

the phone at the same time, and it was also quite slow.

Broadband has changed all this. Broadband services

provided by telephone and cable companies allow home

users and small businesses to have always-on access to

the Internet, which was previously something only large

businesses could afford. The same phone line can be used

for broadband as is used for the telephone and they canboth be used at the same time, with no interference.

Broadband has also brought high-speed Internet to

small businesses and home users, enabling them to

transfer large amounts of data very quickly. This has

provided many cost benefits to business, as well as

opening up many more business opportunities, in

terms of what can be delivered via the Internet andwhat consumers expect from the Internet.

How do external factorsimpact on organisations?So far we have built a picture of a very complex and

rapidly changing business environment. So how dopolitical, social, economic and technological factors

affect business?

Creationofneworganisations

These changes provide an opportunity for new

organisations to set up. For example, because ofenvironmental legislation a range of new organisations

has been created which clear up pollution and process

waste for other businesses.

Changing social trends provide opportunities for lots

of new companies to set up. For example, one of the

reasons that Innocent has been so successful is because

a lot of people today are moving to healthier diets.

Jamie Olivers championing of healthy eating has led to

a substantial decrease in the sale of products like chips,

pizza and drinks like cola and lemonade. This provides

an opportunity for new healthy living businesses to

enter the market.

Young people have a particularly important role in

the success of new products. Many young people are

particularly knowledgeable about new technologies.They are not easily convinced by the advertising hype

that is associated with new products. They are more

interested in word of mouth what other young people

say about products. For example, this has led to the

success of new products such as the iPod, Motorolas V3

Razr phone and Sonys PlayStation.

Windingupexistingorganisations

On the downside we see that adverse environmental

factors can lead to businesses running into difficulty. At the

start of this section we saw that changes in the legal and

social environment have led to a number of nightclubs

winding up. This is where a business has to close downand often has its assets sold off to pay its debts.

Take-oversandmergers

Another way that businesses respond to changes in

the environment is through take-overs and mergers.

These enable businesses to grow in size and to cut outweaker parts of an organisation in order to focus on the

stronger elements.

If a business wishes totake overanother business it will

set out to purchase more than 50% of the shares. As

soon as the investing business has a 50% share plus one

share it is in control. It can make all the decisions as it

cannot be outvoted by the other shareholders.

The business that has acquired the shares is known as

the holding company. The business whose shares have

been acquired is known as the subsidiary company.


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A mergeroccurs when two businesses combine to form

a single company. A merger is very similar to a take-

over except the existing shareholders of both businesses

retain a share interest in the new business.

An acquisitionoccurs where one business gains control

of part of another business. A business may be prepared

to sell off one of its divisions which it no longer wishes

to keep.

Mergers and take-overs occur for a number of reasons,

such as:

because there is too much supply in the market

relative to demand, a firm may take over part of arival in order to reduce supply to the market

to move into new markets. A firm may take over

another business to get access to new markets,

perhaps in other countries

to acquire new technologies. A quick way of

developing new technologies is to take over

businesses which have developed new technologies

to acquire dynamic brands. Businesses whose own

brands are not particularly dynamic may buy up

smaller businesses with more dynamic brands.

Revisionofstrategicplans

Business plans should not be regarded as set in stone.The intelligent business continually changes its plans.

It is essential to continually keep in tune with what is

happening in your business environment and to adjust

your plans to keep in touch with what is happening in

the wider environment.

For example, in September 2006 Richard Branson

announced that his Virgin trains and planes would

invest in new and more environmentally friendly fuels.

He was responding to green pressure groups and the

green consumer movement.

Impactonstakeholders

Stakeholders are affected by external changes, and sowhat they expect of their business has changed. We

can see this, for example, in growing environmental

awareness and health consciousness.

Today:

Customers want healthier, more environmentally

friendly products. Pressure groups are more influential and know

how to use the media to get their point across to

organisations.

The government is more aware of its responsibility

for the environment and the health of the nation

and therefore exerts pressure on business through

regulation.

Shareholders know that their business will only be

profitable if customers are convinced that their businessis environmentally friendly and health conscious.

Employees are most likely to work for companies

with good environmental and health records.

You can see therefore that stakeholders will have a major

influence on the types of strategies that businesses adopt.

The attitudes of stakeholders are shaped by the political,

social, economic, and technological environment.

Functionalactivitychanges

Businesses change their shape to take account of changes

in their environment. For example, during the 1980s

and much of the 90s M&S did not put much emphasis

on marketing. The company thought it knew what it

was customers wanted. However, they were in for arude awakening when customers took their shopping

elsewhere. Today this has changed. M&S is now a market-

driven organisation, listening carefully to its customers.

In the modern world some functions of a business have

become particularly important:

customer service because of the recognition of the

importance of customers

marketing to find out what customers want human resources people that work for

organisations need to feel that they are valued if they

are to be motivated. Human resource management

has thus grown in importance information and communications technology

because of the growth of the Internet, broadband

and associated technologies

call centres as a means of outsourcing work.

You can therefore see that modern organisations are

vastly different from the organisations of the past.

[53]Unit 1 Exploring business activity

1.4


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Pass

It is important that you focus on factors which

specifically affect your organisations. Examinechanges in laws and regulations; examine changes in

the economy, such as interest rates, pay, and energy

costs; examine social trends and how technology

specifically affects your organisation.

Carry out Internet searches using search terms such as

UK interest rates and the year you are investigating.

You may speculate about wage rates, for example

putting in terms such as UK wage rates rising, etc.This will provide you with a wealth of information about

the business environment. Additionally a company or

organisational report will give a good overview of what is

happening in the environment.

Grading tips

Merit

Instead of just saying that wages have risen and by

how much, you will need to look at how these wageincreases have increased costs what have been the

implications for prices and the competitiveness of the

organisation whether it has led to job cuts, etc.

Distinction

The key word here is evaluate you will need to

analyse the various impacts in relation to activities,

strategy, internal structures, functional activities andstakeholders, and then make a judgement, supported

by reasons, about how important these are likely to

be to the organisations concerned.

m3

d1

The final part of your outcome activity requiresyou to show how external factors in the business

environment impact on the business. You will

explore a range of political, social, economic and

technological factors that affect business. Remember

that while some of these factors apply to all

businesses, some may be specific to your business.

For example, the ageing population affects all

businesses. However, it affects some organisationsmore than others. Although demographics may have

little effect on a modern hairstyling company like Toni

and Guy, it may have a big effect on a charity for the

elderly such as Age Concern.

Outcome activity 1.4

PassDescribe how three external factors are

impacting upon the business activities of your

selected organisations and their stakeholders.

Merit

Analyse how these external factors have

impacted on the two contrasting organisations.

Distinction

Evaluate how external factors, over a specified

future period (e.g. the coming year) may impact

on the business activities, strategy, internal

structures, functional activities and stakeholders

of a specified organisation.

m3

d1

p5

p5


16/18


End of unit test

1. Classify the following according to whether they arein (a) the public sector, (b) the voluntary sector, or

(c) the private sector:

Manchester United PLC The BBC

Oxfam Amnesty International Mars (confectionery) Dr Martens gaydar.co.uk

ChildLine

Bank of England local councils McDonalds the armed forces Orange

2. What is meant by the term supply? Why does

supply need to be market led?

3. Who owns public sector businesses? Who owns

private sector businesses?

4. List three groups of important stakeholders in a

PLC, and explain what their stake is in the company.

Explain how the interests of these stakeholder

groups might conflict in some situations.

5. What does the term service level agreement mean?

6. One of the objectives of private sector businesses

is to maximise sales. Describe two other objectives

that they might have.

7. If a business has fixed costs of 100,000, sells itsproducts at 10 each and has variable costs of 5,

what is:

a. contribution per unit?

b. the break-even level of sales?

8. What are the advantages to business structure of

having narrow rather than wider spans of control?

9. Identify three major functions of a business that

involve communicating with customers. Describe

the role of each function. Explain any links between

these functions.

10. How might a matrix structure help the smooth

running of project work in a business?

11. Explain how the purpose of a private sector

business might be different from that of a public

sector business. Use examples.12. Describe three ways of measuring the growth of a

business. Which of these methods of growth do you

think is most helpful in measuring the growth of a

new business?

13. Describe the key differences between procurement

and logistics as business functions.

14. How do changes in interest rates affect

businesses? Illustrate your answer by reference to

a specific business.

15. How could a new technological development be

seen as both a threat and an opportunity to an

existing business?


17/18

ResourcesIf you want to find out about the origins of some

of the UKs most exciting enterprises try starting an

Internet search with the name of one of the UKs most

enterprising people of recent years, such as:

Lakshmi Mittal

Anita Roddick

Richard Branson

Martha Lane Fox

Reuben Singh

Toni Mascolo

To find out more about a specific organisation try one

of the following:

www.innocentdrinks.co.uk Innocent smoothies

brand

www.marksandspencer.com M&S

www.gaydar.co.uk an alternative gay enterprisewww.toniguy.com Toni and Guy chain of

hairstylists

www.easyjet.com Easyjet low-cost airline

www.amazon.com Amazon

www.lastminute.com last-minute travel and

entertainment

www.tesco.com Tesco online

www.iron-directory.com a new UK-based site

selling iron products tipped to be a giant of the

future

www.thomaspink.co.uk selling a range of shirts

from central London

Another useful resource is:

www.tt100.biz a specialist site providing business

case studies about well-known UK and overseas

businesses. Search the website index to find cases

about stakeholders, business ownership, business

organisation and environmental influences.

BooksDransfield R. and Needham, D. 2006 Applied Business,

Harcourt Education

These texts look at popular businesses:

Bevan, J. 2002 The Rise and Fall of Marks and Spencer,

Profile Books

Creaton, S. 2005 Ryanair: How a Small Irish Airline

Conquered Europe, Aurum Press

Jones, L. 2005 easyJet: The Story of Englands Biggest

Low-Cost Airline, Aurum Press

Roddick, A. 2005 Business as Unusual: MyEntrepreneurial Journey, Anita Roddick Books



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Grading criteriaOutcome

activity

Page

number

To achieve a pass grade the evidence must show that the learner is able to:

p1

Describe the type of business, purpose and ownership of two contrasting

organisations1.1 16

p2

Describe the different stakeholders who influence the purpose of two

contrasting organisations1.1 16

p3

Outline the rationale of the strategic aims and objectives of two

contrasting organisations1.2 28

p4

Describe the functional activities and their interdependencies in two

contrasting organisations

1.3 39

p5

Describe how three external factors are impacting upon the business

activities of the selected organisations and their stakeholders1.4 54

To achieve a merit grade the evidence must show that, in addition to the pass

criteria, the learner is able to:

m1

Explain the points of view from different stakeholders seeking to influence

the strategic aims and objectives of two contrasting organisations1.2 28

m2 Compare the factors which influence the development of the internalstructures and functional activities of two contrasting organisations1.3 39

m3

Analyse how external factors have impacted on the two contrasting

organisations1.4 54

To achieve a distinction grade the evidence must show that, in addition to the

pass and merit criteria, the learner is able to:

d1

Evaluate how external factors, over a specified future period, may impact

on the business activities, strategy, internal structures, functional activities

and stakeholders of a specified organisation

1.4 54

[57]Unit 1 Exploring business activity

impact of external factors

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