3.1.3

• • Business must consider the external environment in which they operate, in order to make effective decisions
  • most businesses are unlikely to have much control over this environment
  • businesses need to monitor their environment constantly, in order to react to only changes that occur
  • the most competitive businesses will anticipate change, rather than react to it
• Competition:

  • competitors with a significant market share or faster growth can reduce demand for a business' products
  • competitors' investments in innovation and new product development can attract customers away from other firms in the market reducing their demand
  • a business may need to invest to keep pace with competition, increasing their costs
• Market Conditions:

  • relate to the attractiveness of the overall market in which a business operates
  • they tend to affect all businesses in an industry, although their ability to take advantage of or respond to market conditions change will vary
• Market Conditions - Economic Growth (GDP)

  • measures the value of output/ activity in the economy
  • the level of demand in most markets is influence by the rate of economic growth
  • economies vary in terms of their 'normal' long-term rate of growth
  • for example, a mature economy such as the UK has a long-term growth rate of around 2-3%
  • GDP will vary depending on the state of the economic cycle
• Market Conditions - Market Demand

  • how much of a good or service a consumer wants and can pay for
  • the size and growth of a market is a key indicator of market conditions
  • a market that is fast-growing may encourage new entrants as well as benefit existing competitors
  • a slow-growing or declining market makes market conditions much tougher
• Incomes:

  • real incomes measure the amount of disposable income available to consumers
  • a range of factors impact on incomes -
  • price inflation
  • wage growth
  • employment levels
  • interest rates
  • government tax policy
  • incomes are closely linked to market demand. a rise in incomes will give individuals more money to spend
  • consequently, demand for normal goods should increase
• Interest Rates:

  • an interest rate is the reward for saving, and the cost of borrowing expressed as a percentage of the money saved or borrowed
  • there are a variety of different interest rates operating within the external environment
  • for example;
  • interest rates on borrowed money
  • mortgage interest rates
  • credit card interest rates and pay day loans
  • interest rates on government and corporate bonds
• Interest Rates (Part 2):

  • The Bank of England sets interest rates to help regulate the economy and meet economic policy objectives
  • interest rates affect both costs and demand
  • variable rate loans may increase for a business if there is an increase in interest rates, which may lead to an increase in costs
  • an increase in interest rates may also lead to a decrease in the demand for certain goods and services as consumers may have less disposable income
• Demographic Factors:

  • demography is concerned with the size and comparison of a population
  • changes in population dynamic occur slowly but can be significant for businesses
  • two key demographic changes in the UK that impact on many businesses are on ageing population and sustained high net immigration
• Environmental issues and Fair Trade:

  • concern for the impact of business on the environment is how a significant issue that goes well beyond the potential reputation damage from issues such as pollution and noise
  • businesses with a clear focus on the environment may attract customers away from competitors, experiences increased demand and/or experience lower costs from, for example reduced waste
• Environmental issues and Fair Trade (Part 2):

  • addressing environmental issues can also be a source of opportunity for many businesses in relation to costs and demand
  • it may result in -
  • lower raw material costs and waste disposal charges
  • longer life of assets that are recycled or repaired
  • improved customer goodwill
  • trading opportunities with organisations that will only use environmentally friendly suppliers