1. External Environment

2. 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)

3. 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

4. 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)

5. 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

6. 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)

7. 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)

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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.

19. 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

20. 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)

21. 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