Post on 03-Jun-2018
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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
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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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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.
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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:
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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.
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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?
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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
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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?
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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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Unit 1 Exploring business activity [51]
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
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BTEC National Business Book 1 |2nd edition[54]
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
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Unit 1 Exploring business activity [55]
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?
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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