Unit 4

1. Unit 4 Time to start taking notes; I will test you at the end (without notes/books) – result goes on the database

2. BUSS4 Introduction to External Influences A2 Business

3. An external influence is a factor beyond a firm’s control that can affect its performance e.g. changes in consumer tastes, laws and regulations, and economic factors such as the level of spending in the economy as a whole Introduction to external influences • Some external influences will have beneficial effects on firms and others have adverse effects • Saga holidays targets the older generation so the rising life expectancy is a benefit • An ageing population will enlarge their target market so there is a good chance of increasing revenue and profit • In 2008 Transport for London announced an increase in the congestion charge for 4x4 cars to £25 per day. Less polluting vehicles with smaller engines pay only £8 per day • This probably wouldn’t affect the demand for new 4x4’s because the buyer is unlikely to worry about the charge and so companies such as BMW may not be affect • Second hand car dealers may see a reduction in revenue and profit because it will affect the demand for 2nd hand 4x4’s to more price sensitive customers Insert fig 37.1 P253

4. Introduction to external influences – changes in law • Changes in law can have a dramatic effect on a business • In September 2006 new regulations came in regarding child car seats • Every motorist had to have a restraint • Every child under 12 had to wear a seat belt but also had to sit on a booster seat • Younger children and babies had to have their own car seat • This created a huge boost for businesses such as Britax and Halfords • The government gave warning of the change in 2005 so that companies could build production capacity and stock levels

5. Demography – changes to the size, growth and age distribution of the population Introduction to external influences – demography • Changes will be a threat to some firms and an opportunity to others • One of the most important changes to the UK’s demography recently has been immigration • Europe expanded giving these EU citizens the right to live and work in Britain • More than 800,000 Eastern Europeans registered to work in the UK • JD Wetherspoon • Could not have expanded so successfully without this source of labour • Typically eastern Europeans are hard working and have the skills to work behind a bar • If the migrants had not been available they may have had to attract new staff by increasing wages • They have also started stocking a large amount of Polish beer Insert JD Wetherspoon

6. Demography – changes to the size, growth and age distribution of the population Introduction to external influences – demography • Property developers • Most European migrants cannot afford to purchase property • This increased the numbers looking for rented property • Property developers bought houses to rent out • The boom in buy to let property has helped house prices in the UK double since 2000 • Not all firms have gained • Many UK plumbing firms had to cut their prices • Good news for consumers • Bad news for British plumbers who had previously enjoyed high incomes and now have to deal with a lot more competition

7. Technological factors • These can also bring opportunity or threats • Before digital technology ITV had only 2 competitors • They now have to compete against hundreds of channels provided by Sky and Cable TV providers such as Virgin and Telewest • Internet technology has opened up new entertainment possibilities (such as YouTube and Bebo) that compete head on with conventional TV • These technological advances threaten ITV’s ability to generate revenue from selling advertising slots in between its free-to-air programmes • For entrepreneurs like Larry Page and Sergey Brin (the founders of Google) these technological advances have meant massive opportunities • For BT this is an opportunity to move into a new market • The boundaries between the telecommunications and TV market are blurring

8. Commodity prices • Commodities are internationally traded goods such as oil, copper, wheat and cocoa • These are bought by firms as raw materials and so if their prices rise then the firm’s costs will also rise • The price of oil is important to most companies as oil is used during transportation and an ingredient of plastic is oil (packaging) • Even companies such as Apple will be affected by rising oil prices • It will cost more to buy plastic pellets needed to produce the casings for its laptop computers, ipods and mobile telephones • The price of oil is determined by the strength of supply and the world demand • The price is beyond the control of any firm

9. What can firms do about external influences • Make the most of favourable external influences while they last • Luck can play an important role in determining whether a business flourishes or not, especially in the short run • Over time good luck and bad luck tend to level out • The key to success is to make the most of favourable external influences • For example interest rates were relatively low between 1993 and 2007 • This encouraged a debt-fuelled consumer spending boom that helped luxury goods/services companies • These companies should have made the most but also asked themselves ‘what if’ questions e.g. ‘what if the interest rates were suddenly increased?’ and how would we respond to the drop in demand

10. What can firms do about external influences • Minimise the impact of unfavourable external influences • When faced with adverse external influences successful firms make quick changes to their business to offset the external constraint • Ryanair could do nothing about rising oil prices but it could attempt to cut other costs within the business to compensate • If Ryanair can improve its internal efficiency the impact of the adverse external influence can be minimised Insert Ryanair P255

11. Evaluation of external influences • An important aspect of any evaluation of external factors is to distinguish between external change that was predictable and change that was not • The UK ban on smoking in pubs in 2007 was know abut for more than a year before it happened • Every pub had an opportunity to think about a new strategy • Contrast this with the complete unpredictability of events such as the collapse of transatlantic travel that followed the terrorist attack on the World Trade Centre in September 2001 • Managers that fail to deal with predictable events are weak • Those that succeed are impressive