Demographic and environmental factors 1.3 Understanding that businesses operate within an external environment Demographic and environmental factors

Learning outcomes Understanding the nature and purpose of business What you need to know: How the external environment can affect costs and demand.

Demographic factors There are a number of major demographic changes which have created new opportunities and threats for firms. They include: The UK population is increasing - In 2008 there were 61.4 million people living in the UK. This is expected to grow to 71 million people by 2031. The population is ageing - By 2031, 22 per cent of the population will be aged 65 and over compared to 18 per cent aged 16 or younger. The older generation are a major marketing opportunity for all industries, with those aged 50 and over making up 34 per cent of the population and being responsible for 80 per cent of disposable income. Ethnic diversity - Increased migration into the UK over recent decades has resulted in a much more diverse population. This has led to different attitudes, demand for different foods and restaurants and different shopping habits providing opportunities but more complex consumer attitudes and demands.

Demographic factors Smaller households – It is projected that the number of one-person households in England will increase by 60 per cent to nearly 11 million households in 2031 (Source: Office for National Statistics). This has also created business opportunities, such as smaller convenience products, smaller pack sizes, ready-made meals, and greater demand for eating out. Higher proportion of women working - There has also been a growth in the number of women in employment (Source: Office for National Statistics). The proportion of women aged 16-64 in employment grew to 69 per cent in 2009, compared to less than 60 per cent in 1971. This has resulted in busier households with many people now cash rich but time poor. This has presented opportunities including the growth in café culture, convenience products and eating out.

Benefits of demographic changes The UK population is increasing The population is ageing Ethnic diversity Smaller households Higher proportion of women working Discuss in groups: How can businesses seek to take advantage of these demographic changes to reduce costs and increase demand?

Environmental issues Smaller households – It is projected that the number of one-person households in England will increase by 60 per cent to nearly 11 million households by 2031. One of the major externalities that businesses contribute is environmental damage including factory emissions, pollution in distribution networks, congestion and destruction of natural environments including deforestation in growing crops and logging for paper, furniture and other products. The UK and EU government have introduced a wide range of legislation to improve companies’ treatment of the environment (for example, the Environmental Protection Act, 1991) which will influence what firms are able to do. This legislation ensures firms must act more responsibly to avoid fines although these do not always stop companies causing environmental damage.

Environmental issues The UK government also provides grants for firms investing in green technology, for example through the Carbon Trust. Being more environmentally responsible can often be more expensive but many firms, such as Marks & Spencer with their Plan A strategy, have found major cost savings from becoming more environmentally responsible. General Electric has even found new major sources of revenue by developing environmentally responsible green technology products with their Ecomagination programme

Fair trade Fairtrade® is about better prices, decent working conditions and fair terms of trade for farmers and workers. (www.fairtrade.org.uk) This is ethical and helps a firm to be socially responsible. It can help to add value to products, but will push unit costs up often meaning higher prices must be charged. This may be acceptable for some consumers but difficult for many others to afford, reducing demand. Fair trade ensures that reliable suppliers are able to afford to continue trading making the supply chain sustainable and beneficial.

Example business Marks & Spencer BP ‘M&S Plan A Sustainability Savings Reach £135m Retailer records 29 per cent year-on-year increase in net benefit of pioneering green strategy and edges closer to 2015 goals’ http://www.businessgreen.com/bg/news/2273234/m-s-plan-a-sustainability-savings-reach-gbp135m BP ‘BP Is Found Grossly Negligent in Deepwater Horizon Disaster Federal Court Decision Could Mean Fine of Up to $18 Billion’ http://online.wsj.com/articles/u-s-judge-finds-bp-grossly-negligent-in-2010-deepwater-horizon-disaster-1409842182 Task: Look at the two examples online and write a paragraph explaining the impacts that being environmentally responsible can have on demand and business costs.

Arguments for being environmentally responsible Improved financial performance of the firm and reduced operating costs, for example reduced waste disposal costs, income from selling recycled materials, etc. Enhanced brand image and reputation resulting in improved sales and customer loyalty Will avoid pressure group actions impacting demand Growth of ethical investing means more potential capital It will be attractive to some investors and easier to raise finance Improved share prices It is necessary in order to avoid excessive regulation and legislation Socially responsible actions can be profitable

Arguments against being environmentally responsible Companies’ ultimate aim is to make a profit and the only social responsibility of business is to create shareholder wealth. Extra costs will be incurred which will be passed on to consumers. Businesses may not be able to use their resources as efficiently if there are restrictions on how they may produce and where they may locate. It may reduce firms international competitiveness if others are not doing it. As long as the company complies with legislation they should be able to do what they want. Is it just a cynical way of marketing products to increase sales? Is it just good PR?

Activity Complete a PESTLE analysis for Marks & Spencer Use their website and Plan A report http://corporate.marksandspencer.com/plan-a PESTLE Environmental Legal Technological Social Economic Political

Exam-style question Exam tip: Companies’ ultimate aim is to make a profit and the only social responsibility of business is to create shareholder wealth. Analyse two external factors that may cause a firm’s costs to increase. (9 marks) Analyse two benefits of interest rates falling for a UK car manufacturer (9 marks) With reference to BP, to what extent do you think that the minimisation of costs and maximisation of profit will always be more important than being environmental responsible for a multinational business? (25 marks) Exam tip: Plan your answers before starting to write them. Decide what points are the strongest you can make and how you will apply and analyse them to answer the actual question asked. This will ensure you maximise your marks and not waste time writing weak points or losing your focus on the question.

Summary There are many external factors that can cause a firm’s costs and demand to change both positively and negatively. Firms must regularly complete PESTLE analysis to fully understand their market conditions and the impacts it will have on all their stakeholders.