3.1.3 - The External Environment

A summary of 3.1.3 - Understanding that businesses operate within an external environment

  • Created by: Lydz1573
  • Created on: 24-02-17 10:02

Political and Environmental

Political - government economic policies

             - government social policies

             - extent of government intervention

Economic - business cycle

              - income levels

              - interest rates

              - exchange rates

              - level of inflation

              - level of unemployment

              - membership of the EU

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Social and Technological

Social - demographic factors

          - ethical issues

          - impact of pressure groups

          - influence of different stakeholders

          - changing lifestyles

Technological - new products

                    - new processes

                    - impact of change

                    - costs of change

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Legal and Environmental

Legal - legislation (law)

Environmental - environmental issues

                     - fairtrade

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Factors Affecting Demand

  • Price - higher prices usually lead to a fall in demand, depending on elasticity.
  • Tastes and fashion - trends change, busy lifestyles increase demand for convenience goods.
  • Price of other goods - if there are a lot of substitutes people will shop somewhere else if prices go up, complementary products e.g, shampoo and conditioner increase demand for the other product.
  • Marketing and advertising - strong brand image - increases demand.
  • Seasonal factors - time of year impacts demand.
  • Government action - can introduce taxation to decrease demand, introduces campaigns e.g. 5 a day.
  • Competition
  • Income
  • Interest rates
  • Demographic factors
  • Environmental issues and fairtrade
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To be more competitive a business needs to be more efficient, cost-effective and improve quality.

Competition is good for customers as it leads to wider choice, lower prices and better quality.


  • Price focused competition can lead to worse quality and unethical decisions.
  • More money is allocated to marketing rather than research and development.
  • Takeovers/merges leads to fewer firms but larger more dominant firms so there is less competition.
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Determinants of competitiveness and their impacts

  • Investment in new equipment - reduces costs.
  • Improvements to operational procedures - reduces costs.
  • Effectiveness of marketing mix - increases demand.
  • Innovation through research and development - changes can be rapid so need to stay ahead.
  • Financial planning and control - improving efficiency and reducing costs.
  • Incentives schemes for staff - motivates them, better quality products - increasing demand.
  • Quality procedures - improving quality, better reputation, increased demand.
  • Staff skills - more productive, innovative ideas
  • Enterprise - entrepreneurial skills of owners, better culture.
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