3.7.5 Analysing the external environment to assess opportunities and threats: economic change

GDP
Taxation
Exchange rates
Inflation
Fiscal + monetary policy
More open trade vs protectionism

Annual % increase in GDP. Econ growth important to country b/c improves standard of living. Important to firms b/c creates more opps as consumers' tastes change. Easier to set up in country w/ rapidly growing economy - new gaps in market.

Growing rapidly - boom. Grinds to a halt - recession. Recession usually comes after boom.

Recession - 2 successive quarters of falling output. If no improvement -> slump - sustained period of negative econ growth.

Affects firms in diff ways according to types of goods/services they sell - usually, luxury goods businesses benefit most from booms, but inferior goods businesses eg Aldi/Lidl benefit from recession.

Managers appreciate that b/c no one knows what future course of econ will be, have to set up businesses to be able to survive good times and bad - diversification.

Business objs + strategy: Key to survival in recession - minimise losses, but could damage competitiveness.

Marketing: Emphasise value for money to hold up revenue when market shrinking eg cut prices to boost sales.

Production: Sales of luxury goods fall in recession - luxury goods businesses should aim to cut production, but long process, so should do this sooner rather than later.

HR management: During recession, luxury goods business might not need as many staff - can do compulsory redundancy, but redundancies expensive. Better option - reduce wage bill via natural wastage - suspending recruitment. Don't replace those who leave/retire.

Finance: During recessions, producers of luxury goods leak cash b/c of low demand - should start recession w/ healthy balance sheets, low borrowing levels + high liquidity. To conserve cash: - zero-budgeting, restrict credit to customers + chase up debtors, + rationalise - sell off under-used fixed assets eg machinery.

Govs collect taxes to pay for old age pensions + public services eg NHS + ed. Fiscal policy - gov's tax + spending plans for year ahead.

British gov normally runs fiscal deficit - gov spends more than its tax income. Gov finances its fiscal deficit by borrowing.

Tax paid by households on incomes. Basic rate - 20% paid on any income above £10,000 per year. Progressive - rises as income rises. High rates income tax reduce consumption b/c lower household disposable incomes. Businesses normally prefer low rates income tax.

Tax on employment paid by firms + households.

Tax on goods + services paid by firms. Businesses pass VAT on to customers by raising prices. Firms prefer lower rates of VAT, b/c -> lower prices + higher sales. 20%.

Tax imposed on some products eg petrol + alcohol. Usually demand for products not v price sensitive, allows gov to collect more in tax.

Tax on company profits. Businesses prefer lower rates corp tax b/c increases amount of post-tax profit available to reinvest or pay to shareholders as dividends. Main rate 20%.

Involves Bank of England changing interest rates or money supply in order to influence level of spending in econ. During recessions, monetary policy loosened to try to create recovery by increasing demand - done by cutting interest rates + by creating more money. 

If interest rates cut, cost of borrowing falls. 

Measures quantity of foreign currency that can be bought w/ one unit of another currency. Movements in exchange rate can dramatically affect probability b/c exchange rate affects both price of imported + exported goods. Firms can't influence exchange rate.

Firms w/ large exports: Exporters hate when currency rises in value; like it to fall.

Firms that import most of raw materials/stock: High exchange rate reduces cost of buying goods from abroad. High exchange rate benefits importers b/c goods they import become cheaper in £.

Reverse from high exchange rate. Weak £ makes luxury exports seem cheaper to foreign customers.

Other retailers damaged by low exchange rate as will now cost more in £ to buy-in its imported stock. If reacts to falling exchange rate by raising prices, company would lose customers. If leaves retail prices as the same, will make less profit per imported item.

Measures % annual rise in average price level. Reduces purchasing power w/in econ.

Real assets become worth more.

Real value of money owed is eroded.

Damage to profitability.

Damage to industrial relations.

International trade can create opps for companies. Can help firm to lower costs. More open international trade can help firm expand + grow via expoerting. Especially important for firms operating in countries w/ small populations.

Protectionism opp of open international trade. Eg of protectionist trade barries:
 - tariffs: taxes on imported goods. Designed to increase price of improrted goods.
 - quotas: annual physical limits on quantity of specific goods that can be imported into country. Once quotas filled, consumers will have no choice but to buy domestically produced subsitutes.

Govs that use protectionist trade policies do so to try give a helping hand to inefficient domestic producers who wouldn't otherwise be able to compete + survive.

Reduction in protectionism.

Increased comp forces local producers to be efficient - cutting prices + increasing standards of living.

Providing opp for best ideas spread across globe.

If multinational companies open up w/in country, may provide opps for employment + training, + allow local entrepreneurs to learn from exp of more established businesses.

Providing outlets for exports, can allow country to boost standards of living by reducing dependence on subsistence farming.

Has provided opp for series of countries to break away from poverty to an extent.

Globalisation important to British companies b/c:
 - have natural adv, especially in luxury sector
 - as econ activity faltered in Europe it's invaluable to find fast-growing developing countries
 - having a substantial export market spreads costs + therefore helps keep down the prices UK consumers have to pay

Govs + charities rarely do enough to make impact throughout country. China, India + Mexico, key factors:
 - greater willingness to accept inward investment from multinational or other big, wealthy companies from West/Japan
 - greater enterprise on part of local business population
 - more stable gov than before
 - easier access for exports to countries eg Britain, partly thanks to World Trade Organization