Understanding that businesses operate within an external environment

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Factors influencing costs and demand


  • The tighter the economic and market conditions, the greater the competitive pressures tend to be.

  • 2009 - price cutting was rie with many industries including airline travel, posh hotels and executive cars.

  • Competitive pressures stem from more than price.

  • Customers are looking for special experiences or product uniqueness to make them spend money. → Companies need to invest more in R&D and in the creativity of the workforce. (April-June 2014 Apple spent 36% more on R&D than the previous year).

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Factors influencing costs and demand

Market conditions

  • The recession starting in 2008 lasted until the second quarter of 2014, when the economy returned to its pre-recession peak.
  • For more than 200 years the UK’s economy has been rising at an average of 2.5% per annum i.e. growth is normal. Therefore the underlying market conditions will be positive, with the size of markets expanding on a regular basis.
  • Market conditions bad → some businesses run out of cash and fail (Woolworths, La Senza etc).
  • May also have pressures on company workforces → people choose between redundancies and pay cuts.
  • Gov stats show that between July 2008 and March 2014 earnings rose 8.6% whilst prices rose 16.9%.
  • Customers become price sensitive and products like chocolate and chewing gum see a fall.
  • Customer taste and fashion also influence eg. people became more sceptical about diet food so WeightWatcher’s yoghurt has a fall in sales by 13.7%.
  • Disruptive change, resulting from radical technology or innovation.
  • The competitive structure eg. would be hard for a small firm to enter chocolate market because it’s dominated by three companies.


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Factors influencing costs and demand


  • Changes in the incomes of the household breadwinners. Generally, economies expand and therefore sales of normal goods and services follow suit. Only exceptions are inferior goods.
  • No. of people in the household working. One reason why consumer spending didn’t fall that much during recession is that fewer young people left home → Bills being shared. This offsets some of the spending pressure from falling wages.
  • Government decisions on taxation and benefits.
  • Cutbacks of benefits (especially the disabled) have hit back at the spending power of many. → Trussell trust reports that use of food banks rose from 347,000 in 2012/13 to 913,000 in 2013/14.
  • Index numbers are used to analyse economic and business data. An index means converting a series of data into figures that all relate to a base periods where the data is equal to 100. → allows users of data to look at a glance and see the percentage changes and trends.
  • Index also allows direct comparisons to be made between different data series.
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Factors influencing costs and demand

Interest rates

  • The interest rate is the price charged by a bank per year for lending money or for providing credit.
  • Individual banks decide their own interest rates and and overdrafts however influenced by the Central Bank charges high street banks for money; thebank rate.
  • In Britain the interest rate is usually set once a month by a committee from the Bank of England
  • Standard rate of interest in UK generally around 5-6%
  • March 2009 - Lowest interest rate ever 0.5% to help revive economy from the economy
  • BoE committee asked to set interest rates so that UK prices rise by 2% a year
  • If committee feels that the economy is moving faster than usual they will increase the interest rates higher than 2% → discourages people from taking out loans because of higher repayment cost so they cut their spending
  • Affects customer demand when interest rates high because won’t buy expensive things eg. cars and houses.
  • Interest charges affect the total operating costs → If go into overdraft have to pay back more so lower profit
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Factors influencing costs and demand

Demographic figures

  • Demographics looks at the makeup of the population. With a healthy, rising population, the UN predicts that the UK will catch up to the population of Germany by 2050.

  • Age - The greying population creates opportunities for the companies that can find the relevant products or services.

  • Gender - products such as games consoles tending to be male, while cosmetics dominated by female purchasing.

  • Ethnicity - There may be more opportunities for products targeted at specific ethnicities in the markets for food, soft drinks and confectionary.

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Factors influencing costs and demand

Environmental issues and fair trade

There are four factors to consider:

  • The immediate effect on the environment of actions businesses take, especially the impact on the local community. Some of these represent a straight choice between profit and social responsibility, such as fly tipping.

  • Sustainability, that is making sure that the actions of your business will not rob future generations of the availability of key resources. For example some paper companies will plant 3 trees for every 1 they take.

  • Global warming. The issue is the impact of greenhouse gases such as CO2. Some companies will make an effort to minimise their ‘carbon footprint’; others do not.

  • Fairtrade supplies, that is whether a business chooses to sign an agreement that all its raw materials will be bought through the Fairtrade organisation. This should guarantee that all supplies will be bought on terms that are more favourable to the farmers/ producers than the usual market price.

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