External Environment

External factors affecting business Social (E.g. greater numbers of older and retired people in UK population) Legal (E.g. Human Rights Act – customers right to remain private) Economic (E.g. Increase in income tax reduces amount customers have to spend) Political (E.g. decision to spend more on public services such as education and health) Technological (E.g. effect of widespread use of Internet) Ethical (E.g. changing attitudes to employing older people)

Changing External Environment Markets keep changing Customers develop new wants and needs E.g. want DVD’s rather than CD’s New competitors enter a market New technologies emerge E.g. image mobile phones

External factors: threat or opportunity? They can be both! Depends on what business does and how it responds to changing environment. Example: an increase in Minimum Wage A change in a political and economic factor Might increase costs of some businesses (e.g. clothing factories) Allows employees to spend more money on goods or services sold by other businesses (e.g. Bingo Halls)

Main Economic Sectors Primary sector Secondary sector Tertiary sector Extraction and production of raw materials E.g. coal, wood and steel Secondary sector Transformation of raw materials in goods E.g. manufacturing steel into cars Tertiary sector Provision of services to consumers and businesses E.g. cinema and banking

Chain of Production Chain of production Example: piece of wood: Follows construction of a good from its extraction as a raw material through to its final sale to consumer Example: piece of wood: Cut from a felled tree (primary sector) Made into a table by a carpenter (secondary) Sold in a shop (tertiary)

Specialisation Occurs when a producer concentrates on: Examples: Making a small number of products, or Providing a narrowly defined service Examples: A baker baking only bread Machinery that only cuts sheet metal Lawyer dealing only with criminal law Specialisation means that producer becomes more efficient Learns best way to produce at lowest cost Specialisation also allows a producer to get a higher price from a customer Customer is prepared to pay more for expert / specialist knowledge (e.g. a cosmetic surgeon)

Importance of tertiary sector Now the most important economic sector Growing faster than the primary or secondary sector Higher incomes in UK mean that households demand more services such as more holidays and restaurants More leisure time means more time to spend on services Businesses offer more after sales services, e.g. help lines offered through telephone call centres

Public and Private Sectors Private individuals and organisations own business activity Businesses usually run with the objective of making a profit Businesses owned by “shareholders” or “partners” Public sector Organisations are owned and controlled by Government Includes central government, local government and public corporations Objectives usually based on delivering service (e.g. educational standards) rather than making a profit

Objectives of Private Sector Businesses Short term objectives Survival Make a profit Long term objectives: Expand International operations Market leadership Environmentally aware Satisfy investors

Examples from Public Sector National Health Service Patent Office Royal Mail British Tourist Authority BBC Visit web site Visit web site Visit web site Visit web site Visit web site

Objectives of Public Sector Organisations Provision of equitable level of goods and services i.e. low price, affordable and available for those who need good Provision of products not provided by private businesses E.g. free health care and defence

Mixed Economy An economy where goods and services are produced by a combination of: Government controlled corporations, and Private businesses acting on their own behalf, without intervention from government Mixed economy sits between two extremes of centrally planned economies (communism) and free market economies UK is a mixed economy USA has less government intervention France has more intervention

Voluntary Sector Businesses which are operated “not for profit” Usually staffed by volunteers who work without pay E.g. Voluntary Service Organisation Some “not for profit” businesses do try to make money – to help raise money for activities of organisation E.g. charity shops

Economic Environment Businesses are directly and indirectly affected by changes in the economy Key areas that affect businesses: Taxation Interest rates Exchange rates Labour market European economy

Taxation Main taxes affecting businesses: Corporation tax – a tax on profits earned by a business Income Tax – businesses collect this from employees on behalf of the Government National Insurance – contributions are paid by employees and their employers Value added tax (“VAT”): tax charged on sales – which businesses collect for the Government Council tax: local tax charged by local authorities on households and businesses Customs and excise duties: e.g. tax on wines & spirits; petrol

Income Tax The main tax on employees Directly affects how much “take-home” pay households have available to spend Fall in income tax: (i.e. lower rate of tax charged) Leads to an increase in amount of money available for households to spend on products (known as “disposable income) Increased money available may be spent on products of business leading to increased sales and profits Increase in income tax Lowers disposable income May reduce demand for businesses’ products/services

Exchange Rates Exchange rates changes can increase or lower price of a product sold abroad Price of imported raw materials may also change when exchange rates move Price of competitors’ products may change in home market. For example an increase in exchange rate: Means that the selling price for a UK business selling abroad goes up – likely to lower sales Price of imported raw materials falls, either leading to a fall in price and more sales, or an increase in profits Competitors’ prices fall, meaning lower sales.

Interest Rates Represent the cost of borrowing money Set by the Bank of England Effect of an increase in interest rates? Decrease demand for a business’ product as consumer less likely to borrow to fund spending Increase business financial costs as interest charges on existing loans will increase

Labour market Labour shortages Mobility of labour May be more difficult to recruit new people - might prevent business from growing as fast as it wishes Existing workers may demand higher wages because they know that business will be reluctant to release them Competitors may try harder to poach best staff Business may have to invest further in staff training and development rather than rely on “recruiting” new skills into business Mobility of labour Mobility of labour means speed with which a person can move into a different job Geographical mobility (can they physically move to that place of work ) Occupational mobility (do they have skills to do new job)

Labour & Capital Intensive Industries Examples of Labour Intensive Industries Hairdressing House-building Teaching Fashion industry Examples of Capital Intensive Industries Car industry Steel production Rail industry