1. Level 1 Business Studies 1.2 - AS90838 Demonstrate an understanding of external factors influencing a small business BS 12/2/1

2. Competition and the local business environment Students will develop an awareness of the local marketplace and identify competition arising from this environment. Define the local business environment Discuss examples of local competition Discuss advantages and disadvantages for businesses and consumers of local competition

3. Business Environment Business Environment may be defined as a set of conditions – Social, Legal, Economical, Political or Institutional that are often uncontrollable in nature and affect the functioning of a business. Business Environment has two components: 1. Internal Environment 2. External Environment

4. Local Business Environment Local business is driven by specific local conditions and market characteristics. It operates in a larger economic context too. At the local level, a business must compete for : a) employees, b) resources from suppliers at a competitive price, c) local advertising and d) marketing channels.

5. Internal Environment Includes 5 Ms i.e. Usually within the control of business. Business can make changes in these factors according to how it functions. Man (human)MaterialMoneyMachinery (capital)Management

6. External Environment Those factors which are beyond the control of business enterprise are included in external environment. These factors are: a) Government, legal and political factors, b) Geo-Physical Factors, c) Socio-Cultural Factors, d) Demographical factors e) Technological factors etc. There are two Types: 1. Micro or Operating Environment 2. Macro or General Environment

7. Micro or Operating Environment The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of: 1. Suppliers, 2. Customers, 3. Market Intermediaries, 4. Competitors and 5. Public.

8. (1) Suppliers: They are the people / businesses who supply raw material and required components to the company. Suppliers must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier.

10. (2) Customers: Customers are regarded as the king of the market. Success of every business depends upon the level of their customer’s satisfaction. Types of Customers: (i) Wholesalers (ii) Retailers (iii) Industries (iv) Government and Other Institutions (v) Foreigners / Tourists

11. (3) Market Intermediaries: These work as a link between business and final consumers. Such as: (i) Middleman (ii) Marketing Agencies (iii) Financial Intermediaries (iv) Physical Intermediaries

12. (4) Competitors: Every move of the competitors affects other local businesses. Businesses have to adjust themselves according to the strategies of their competitors.

13. (5) Public: Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product.

14. Macro or General Environment: It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment:

15. (1) Economic Environment: It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements: (i) Economic conditions of the general public (ii) Economic policies of the country (iii) Economic systems (iv) Other economic factors: Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc.

16. (2) Non-Economic Environment: Following are included in non-economic environment:- (i) Political Environment: - It affects different business units extensively. Components: 1. Political Belief of Government 2. Political Strength of the Country 3. Relation with other countries

17. (ii) Socio-Cultural Environment: Influence exercised by social and cultural factors, not within the control of business, is known as the Socio-Cultural Environment. These factors include: 1. attitude of people to work, 2. family system, 3. religion, 4. education, 5. marriage etc.

18. (iii) Technological Environment: Technological factors represent major opportunities and threats that must be taken into account while formulating strategies. Technological breakthroughs can dramatically influence the organisation’s products, services, markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices, and a competitive position. Technological advancements open up new markets, result in proliferation of new and improved product change, the relative cost position in an industry and render existing products and services obsolete. http://www.citeman.com/12881-technological- environment.html#ixzz1se5GD4PN

19. (iii) Technological Environment: Key characteristics 1) Technology is changing fast. 2) Technology is getting cheaper. 3) Technology is becoming easily available 4) Technology is touching lives in more and more areas Effects 1) Customers will expect and accept new ideas 2) Competition will come from unexpected quarters. 3) Product life cycles will be shorter. 4) New things will make old product skill knowledge obsolete necessitating continuous change.

20. (iv) Natural Environment: It includes: 1. natural resources, 2. weather, 3. climatic conditions, 4. port facilities, 5. topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business.

21. (v) Demographic Environment : It is a study of perspective of population i.e. 1. its size, 2. standard of living, 3. growth rate, 4. age-sex composition, 5. family size, income level 6. education level etc. Every business unit must see these features of population and recognise their various needs and produce accordingly.

22. Characteristics: 1. The local business environment is constantly changing process. 2. Local business environment is different for different business units. 3. It has both long term and short term impact. 4. It includes both internal and external environment. 5. Unlimited influence of external environment factors. 6. It is very uncertain. 7. Inter-related components. http://groups.google.com/group/mbaregular2010- 12/browse_thread/thread/355e8c5b7702af58/2fa8e6044241fa1c ?pli=1

24. A local business operates in a larger economic context. The mood and sentiment of the overall economy influences local businesses dramatically. Many of these forces are beyond the control of local businesses, yet, often determine success and failure. E.g. 1. Access to capital, 2. levels of consumer spending, 3. the overall health of the economy, 4. ability to lease space and equipment, 5. unusual weather, all present challenges to local businesses.

25. Dynamic Nature Business environment is dynamic in that it keeps on changing whether in terms of: 1. technological improvement, 2. shifts in consumer preferences or 3. entry of new competition in the market.

26. Uncertainty Business environment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries.

27. Local Competition Examples 1. Restaurants / takeaways 2. Kitchen designers and producers 3. Website developers 4. Mechanics / garages 5. Supermarkets 6. Builders / electricians / plumbers 7. Electrical goods retailers

29. Business and Competition Though a business does not want competition from other businesses, inevitably most will face a degree of competition. The amount and type of competition depends on the market the business operates in: Many small rival businesses – e.g. a shopping mall or city centre arcade – close rivalry. A few large rival firms – e.g. washing powder or Coke and Pepsi. A rapidly changing market – e.g. where the technology is being developed very quickly – the mobile phone market. http://tutor2u.net/business/gcse/external_environment_i ntroduction.htm

30. Business and Competition A business could react to an increase in competition (e.g. a launch of a rival product) in the following ways: Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money) Cut costs, e.g. use cheaper materials, make some workers redundant http://tutor2u.net/business/gcse/external_environment_introduction.htm

31. Advantages for businesses of local competition 1. A greater discipline on producers/suppliers to keep their costs down 2. Improvements in technology – with positive effects on production methods and costs 3. A faster pace of invention and innovation 4. Improvements to the quality of service for consumers

32. Advantages for consumers of local competition 1. Lower prices 2. A greater variety of products (giving more choice) 3. Improvements to the quality of service for consumers 4. Better information for consumers allowing people to make more informed choices http://tutor2u.net/economics/content/topics/ competition/competition_importance.htm

33. Advantages for consumers of local competition 5. Competitive markets often have to differentiate their products from those of their competitors. 6. Differentiated products ensure that consumers can choose a product from a company, for example, for its unique qualities such as the colour of the packaging, size or price

34. Disadvantages for businesses of local competition 1. Reduced final price which may only just cover costs, and reduce profit 2. Possible staff redundancies in order to cut costs 3. Businesses have to attract the customers in other ways, since the price may not grab the customer's interest.

35. Disadvantages for businesses of local competition 4. Need to engage in advertising to make businesses presence known in order to differentiate themselves from other local businesses offering the same products. 5. Businesses can incur high expenses in marketing and advertising; advertising is expensive

36. Disadvantages for consumers of local competition 1. Possible lack of product variety 2. Competition requires consumers to become more informed about the products and services available in the market.