Assessing Changes in the Business Enviroment; Unit 4 - Notes

Notes made from a combination of resources including the Malcolm Surridge text book and Philip Allan revision guide.

Covers the 'assessing change' in the external enviroment third of the course; economic, political, legal, social, technological, competitive, enviromental,

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Economic Environment
Economic Environment and Business Strategy:
Long term plans through which it seeks to obtain its corporate objective.
Plans may be:
Increase innovation
Enter new markets
Takeover or merging
Unemployment varies according to the shape of the business cycle
Inflationary pressures more likely in a boom
Inflation and interest rates rise and fall together
Close links between interest and exchange rates
Strategic decisions taken by a firm in response to opportunities and constraints that appear in the
environment also determine that environment
Circular Flow of Income:
Illustrates the interrelationship between the main parts of the macroeconomy
Firms receive revenue to exchange for their products and services
Revenue is used to pay staff incomes in return for their contribution
Income of household is either spent on products and services that are produced in the UK; or its
withdrawn from the circular flow through importing goods, being saved or tax
Revenue comes from customers in exchange for their products and services; or injected in the circular
flow through exports, government spending or spending by other firms
The Business Cycle:
Major influence of the performance of the economy
Describes the regular fluctuations in economic activity and GDP
GDP: Value of a countries output over a period of time is measured by a nation's gross domestic
product (high economy = high GDP) excluding irregular change
There are four stages of the cycle
Production and unemployment increases
Consumers spend more
High wages
Initial caution in response
No major decisions to meet demand as space capacity is utilised
Investment in non-current assets
High production and expenditure by everyone
Confidence in firms
Investment in fixed assets
Skilled workers become scarce and can demand high wages
Insufficient raw materials (and their prices rise)
Rising prices creates inflation ending a boom

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Income/Output falls
Labour and materials cost more and increase in demand
Costs rise
Government increase interest rates to prevent inflation
Falling profits / High interest
Delayed investment
Space capacity
More firms fail
Some firms skip a slump and start rising
Increase in government spending
Lower interest rates
Low production
High unemployment
Firms suffer insolvency
Effects of Business Cycle:
Charge higher prices
More start ups
Investment in fixed assets
High capacity
Pressure to increase prices
Alternative methods to increase output
Increased wages…read more

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Slump: cut interest rates and taxes
Boom: Increase interest rates and availability of resources
Firms need to take into account the likely effects of the counter-cyclical policies and help avoid the
worse extremes of booms and slumps
Business Strategy:
Firms selling demand sensitive to income goods: rise in boom/fall in slump
Firms selling demand inelastic to income goods: remains unaffected
Business cycles tend to produce short term changes as each stage doesn't last forever
Length periods of:
Recession = permanently reduced capacity
Boom = encourage…read more

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An increase in the supply of £ will lower its price
Exchange Rate:
Price of a currency expressed in terms of another
Varies regularly according to balance of supply and demand of currency
Why Buy Foreign Currencies:
Pay for goods and services bought abroad
Expected to pay using the currency of the country of expenditure
Demand may arise if an industry wishes to invest in overseas enterprise
Rise in value of currency ­ appreciation
Decline in value of currency ­ deprecation
Changes in the…read more

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Requires supplies to price their products in a different currency to minimise fluctuations and
lessen effects and ensure it pays, in some currency it receives
Persistent rise in the price level and the associated fall in the value of money
Major problems when inflation is high
Historically lower over last 15 years (currently 2.…read more

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Demand-Pull Inflation: Demand for goods and services exceed its ability to supply these products
People not in work who are seeking work
Represents a waste of resources as labour is unused
8.…read more

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Assist with the provision of state training schemes
Develop relevant vocational courses
Business Action:
Replace labour with technology ­ boost productivity
Give junior / unskilled employees more skills to carry out more jobs
Economic Growth:
Increase in the value of goods and services produced by a nation's economy
Negative rate for 2 quarters is a recession
Measured by changes in GDP
Governments aim to maintain steady and sustained economic growth over a period of time, but the
business cycle creates fluctuations
High rates of…read more

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Trends towards Globalisation:
Increased free trades between nations
Increase in global food production
Decrease in malnutrion
Less developed countries have access to healthcare
Leaders in major economies and firms protect and promote global trading and its benefits
Increased gales revenue and profit
Cheaper resources
Economies of scale
Downward pressure on prices
New producers / competition
Increased need for investment
Theta of takeover
Large multi-nationals dominating the world in pursuit of even higher profits
Makes the rich richer and impoverishes…read more

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Rapid growth rates
Natural resources
Poor transport infrastructure
Important restrictions (tax)
Lack of appropriate workforce
Vulnerability to responsibility
Retrenchment or cost cutting
Merger or takeover
Joint ventures
Depends upon a range of factors:
Financial position of the firm
Change in economic environment
Extent of change and period over which it lasts
Political and Legal Environment
The UK economy is part of the EU economy, and then part of the global economy
Government establishes economic objectives:
Price stability
Steady and…read more

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Altering interest rates
Controlling money supply
Manipulating exchange rates
Government tends to rely on altering the interest rates to affect the level of economic growth
Increased unemployment as production declines
Falling demand and reduces inflationary pressure
Reduced economic growth as output drops
Increased value of the pound
Improved current account balance as less imports are purchased
Unemployment decreases as economic activity increases
Prices rise due to increased spending
Economic grow stimulated by cheaper loans / more investment
Value of pound decreases
Increased spending…read more



This is a 22 page document which provides excellent notes on the economic aspects of unit 4. It includes the business cycle, economic indicators and a full précis on PEST analysis. It can be adapted for revision purposes in many ways.

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