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External environment

Give 4 examples of external factors

  • Economy
  • Rivals
  • Law
  • Social trends

How can changes to the external environment affect an organisation?

Organisations need to anticipate and be ready to react to changes in external forces beyond their control. Unexpected external events may require a change of tactics, strategy or even objective. 

Why is the external environment dynamic?

  • New firms and products enter markets; customer wants and needs change as society and fashion changes; technological improvements and new processess emerge
  • Economic conditions change e.g interest rates, exchange rates, inflation and recessions
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External environment

What is PEST analysis?

PEST analysis is a management tool for identifying external factors that may affect the operation of the business. A PEST analysis assess the likely impact of political, economic, ethical, environmental, legal, social and technological opportunities and threats

Are external factors a threat or opportunity?

  • Increasing wages to meet consumer concern about expolitation of third world workers may increase costs but offers an opportunity to market new fair trading products
  • A recession threatens sales but it also means cash rich firms can grow by acquisitions

Are all firms equally affected by changes in external factors:

  • Products: effect on specific product ranges
  • Operations: is the workforce flexible
  • Resources:  are finances sufficient to cope with a downturn or fund growth
  • Gearing: firms with large loans are affected by interest rate changes
  • Management: time and expertise required
  • Export dependency: overseas sales are exposed to world demand and exchange rate changes
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External environment

How can firms evaluate a change in external factors?

  • Significant and long term?
  • One-off change or a likely trend
  • A threat or opportunity

How can firms best prepare for changes in external conditions?'

  • Monitor evolving consumer needs and competitor behaviour
  • Create a flexible workforce and business culture willing to embrace change
  • Maintaining sound finances to meet unexpected threats and opportunities
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Technological change

What is technological change?

  • Invention: discovery or creation of a new product
  • Innovation: transforms new ideas into products that can be sold to customers
  • Diffusion: a new idea or new product is taken up by producers and consumers

How does technology affect production methods?

New or improved products and processes allow the firm to change the way it makes products to lower cost and improve features

How does technological change come about?

It is a result of research and development. Innovative firms use current retained profits to internally finance research into improving existing products and processes or inventing new ones

How can firms protect its inventions?

Patents give exclusive legal rights to the inventor to produce a good. Rivals that breach patents can be used. 

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Technological change

Outline the potential impact of new technologies

  • Reduce costs of production raising profit margins creating a competitive advantage
  • Increase the range and quality of products on sale to consumers
  • Cut product development time

List 4 things that technology requires

  • A research and development budget that diverts funds from alternative uses. R and D has an opportunity costs
  • New methods of working. Some workers may need retraining in the use of the new equipment and software, increasing business costs. Computer-aided manufacture may mean machines replace unskilled labour on production lines resulting in unemployment
  • A supportive business culture that embraces change. Implementing new working practices may cause stakeholder conflict between managers and staff without fears for job security
  • Dependency on systems. A loss of data can threaten the survival of the firm
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Technological change

Give 4 examples of how technological changes can affect different stakeholders

  • Customers: are offered new or improved products often at lower prices
  • Firms adopting new technologies can manufacture new or improved prodcuts often at lower unit costs
  • Employeees with out-dated skills no longer required must retrain or find a new job
  • Rivals must match the innovation of competitors or face losing market share

Explain 5 impacts on production processes of changes in technology

  • Increase productivity (output per worker)- reducing unit costs and raising profit margins
  • Computer-aided design (CAD)- to enable quick complex product desing and development
  • Computer-aided manufacture (CAM)- that allows automated production lines
  • Electronic point of sale (EPOS)- records every transaction, automatic reordering to maintain minimal just-in-time levels of stock 
  • The internet offers a new method of marketing and distribution and allows small firms to promote themselves to overseas markets cheaply
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Technological change

Define a business system

Is the way in which a firm organises itself to transform inputs into outputs

How can changes in technology affect business systems?

New technologies, products and processes allow the firm to alter the way it operates usualy by replacing staff with machines

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Social and cultural

What are demographics?

Refer to the size and composition of the population e.g ethnic, age and gender groupings

How does demographic change affect businesses?

  • The level and pattern of demand requiring firms to adjust their product range
  • Employment patterns e.g an ageing population means fewer school leaves so that firms are hiring older workers prepared to work flexible hours

Define social change

Any change in the way people live their lives e.g fashion trends

Define fashion

The latest and most admired style in products, behaviour, dress etc..

What is cultural change?

A shift in the shared attitudes, values and behaviours of groups- as a result of outside influences

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Social and cultural

How do social and cultural factors affect firms?

  • Demographic changes- ageing UK population- sharp increase in the number of single households
  • Changes in work patterns and occupational employment. More working from home, part time, job sharing and early retirement

How can firms identify and anticipate social and cultural change?

Firms can undertake market research to monitor cultural change and fashion trends affecting their customers

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Moral and ethical issues

Define ethics

Ethics refers to principles considered fair, honest and morally correct

What is ethical behaviour?

Ethical behaviour occurs when firms try to the 'right-thing'

Is unethical behaviour illegal?

Laws set out minimum standards of behaviour. An action can meet the requirements of the law but harm others or be considered unfair by those affected

Give 2 disadvantages of ethical behaviour

  • Increases cost of production
  • Can result in a conflict of stakeholder objectives
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Moral and ethical issues

Give 2 benefits of ethical behaviour

  • Firms with a strong 'ethical' image, attract like-minded consumers that are prepared to pay a premium price for an ethical product
  • Principled firms can recrtuit and maintain like-minded staff motivated by the firm's ethical stance. The higher the productivity of motivated staff, lower the unit costs, increasing profit margins and can be used as a competitive advantage

How do stakeholders assess ethical behaviour?

One method is for each stakeholder group to compare the costs and benefits of a given activity on their own interests

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