SHAFIQ FAKIR

EDEXCEL 9-1 BUSINESS GCSE

1.5 UNDERSTANDING EXTERNAL INFLUENCES ON BUSINESS

1.5.1

Business Stakeholders

 A stakeholder of a business is anyone who is interested in or affected by the activities of the

business

 Stakeholders of business include:

1. Employees
2. Customers
3. Managers
4. Suppliers
5. Government
6. Local community
7. Pressure groups

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 Each stakeholder group has its own interests and wants from the business and from other
stakeholders

 Employees generally want a secure income and chances of increasing that income through
promotions and bonuses

 Customers want value for money products which are convenient to buy and consume as well
as a wide choice of products in every product category e.g. ice cream

 Managers want to meet the targets set for them by their bosses and also want to earn bonuses
and promotions

 Suppliers want regular orders from the business and they also want to be paid promptly

 The government wants the business to be run according to the law and also wants to collect
taxes every year on time

 The local community may want the business to provide jobs and minimise pollution

 A pressure group is the name given to an organisation which focusses on one issue only. An
example of a pressure group is Greenpeace which is concerned only with protecting the natural
environment. Pressure groups examine the activities of a business with respect to their
particular area of concern and try to persuade the business to change its practices e.g.
Greenpeace may put pressure on a car manufacturer like BMW to change its manufacturing
process to reduce air pollution

 Stakeholders affect and are affected by business activity

 Sometimes the interests of the stakeholders may come into conflict and business managers
should be aware of this

 For example, shareholders of a business may want maximum profits from it but the managers
of the business may not wish to take the risks to achieve maximum profits in case they are
blamed if the risks do not work out and they lose their jobs

 Employees may want maximum reward in the form of a high salary for minimum effort
whereas their managers may want the opposite

 Pressure groups may want the business to minimise pollution while the business may want to
use more polluting methods of production which leads to a lower cost of production

 Overall, stakeholder conflicts may lead to wasted resources and slower decisions

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1.5.2

Technology and Business

 Technology has changed the face of business

 The most dramatic change is the advent of e-commerce which has led businesses to sell their
goods online from their own websites or from platforms like Amazon and Ebay

 Social media platforms like Facebook and Instagram have given businesses a new channel of
communication between businesses and their customers

 Social media gives businesses the chance to hear the reactions of customers to new product
launches as well as to the actions of their competitors

 Social media is also a channel of market research as businesses can conduct surveys on social
media platforms

 E-commerce and social media are both examples of the use of digital communication

 Technology has also changed payment systems and systems like PayPal have made it much
easier for customers to pay for purchases online and so have increased sales for online
businesses

 Digital technologies have not only increased sales but also reduced costs for businesses

 For example, it is far less costly for businesses to take payments digitally through systems like
Paypal than by using cash in a face-to-face transaction (cash has to be counted, transported to
the bank etc.)

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 The marketing mix has also been changed with the move to e-commerce --- prices has been
reduced and promotional methods have changed to use more online advertising

1.5.3

Legislation and Business

 Every economy has laws which regulate the way businesses operate

CONSUMER PROTECTION LAWS

 Some of these laws exist to protect consumers from unfair treatment by businesses

 There are laws to ensure that businesses describe their products accurately and do not
mislead customers e.g. a coat should not be described as ‘waterproof’ when it is only
‘water resistant’ and will not keep out heavy rain

 Also, customers who buy online must be allowed a certain period of time to change
their mind about the purchase and obtain a refund

 Customers must also be given all information required by law about the risks of the
product e.g. possible side effects of medicines like aspirin which can be bought from
shops without a prescription from a doctor

 Consumer laws are different between economies and in some countries, they are not
strictly enforced by governments. When customers buy online such as from platforms
like Amazon, they often have the benefits of guarantees given by the operator of the
platform to back up consumer laws of the country from which the product is being
shipped

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EMPLOYMENT LAWS

 Another important body of law is designed to protect employees and ensure that they
are fairly treated

 Most economies have laws about employment contracts and all employees must be
given employment contracts from their employers. These contracts specify the rate of
pay, the hours of work, the location of the work and employees’ rights with respect to
holiday pay, sick pay etc.

 In some countries, employment contracts are not strictly enforced. In China, for
example, many employees, especially in higher paying industries like IT, are required to
work much longer hours than their contracts state and they have little power to protest

 In the UK, ‘zero hours’ contracts’ have appeared and apply to some employees.
According to these contracts, the employees must be available for work for a certain
number of hours per week even though the employer does not guarantee any work at
all. The employees are only paid according to the number of hours they actually work

 The rights of employees in the UK include the right to take the employer to an industrial
tribunal for ‘unfair dismissal’ but changes to the laws governing trade unions in the UK
have led to falling trade union membership and a weakening of the power of
employees in their relationship with employers

 A trade union is an organisation which employees may join which negotiates pay and
conditions on behalf of their members with employers

 Recently in the UK, there have been issues about equal pay between male and female
workers doing the same jobs. It has been said that female workers are paid less than
their male colleagues in a wide range of industries. This is despite the fact that, in the
UK, the EQUAL PAY ACT states that paying some workers less than others for the same
work is illegal

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HEALTH and SAFETY LAW

 One very important body of law concerns health and safety in the workplace

 Employers must provide a working environment which is safe for their employees

 Health and safety laws also apply to customers visiting the working premises

 Examples of health and safety laws include the safety of machines used in factories and
the fact that kitchens in restaurants must be adequately ventilated

 Clearly, it makes sense to have adequate health and safety laws because healthy
employees are more productive than unhealthy ones and do not miss time off work
for illness

THE IMPACT OF LEGISLATION ON BUSINESSES

 Clearly, legislation is intended to benefit both businesses and their stakeholders

 However, it is also possible that too much legislation will involve business managers in
spending so much time in ensuring that the business is following the law that they do
not spend enough time making long-term decisions about the future of the business or
managing the business day by day

 Legislation, should be strong enough to discourage businesses from taking advantage

of customers and employees or polluting the environment and yet there should not be
so much legislation that business managers are prevented from spending their time in
growing the business

 The time that business managers spend in ensuring that businesses are obeying the law
imposes a cost on businesses because the managers’ time is an expense for the
business

 However, not meeting legal obligations can involve a business in even higher costs, for
example, if an employee is injured operating an unsafe machine and sues the business

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1.5.4

The Economy and Business

 All businesses operate in an ECONOMIC ENVIRONMENT

 The economic environment affects many aspects of a business’s performance by

determining:

1. How much consumers are willing to spend

2. The cost to the business of borrowing money
3. The costs of buying supplies for the business
4. The level of wages that the business must pay its workers
5. The cost of buying imported goods and the amounts the business will earn from
exporting its goods
6. The tax burden of the business and how much profit the business has available
after tax

 The economic environment consists of several aspects such as:

1. The rate of growth of the economy which influences the rate of growth of income
of the potential customers of a business
2. The level of the interest rate in the economy
3. The rate at which prices are rising in the economy which is called the rate of
inflation
4. The percentage of workers in the workforce which are unemployed which is called
the unemployment rate
5. The exchange rate is the value of one unit of a country’s currency as measured in
another currency e.g. if the exchange rate of the UK pound to the US $ is 1 pound =
$1.10, this means that the price of 1 pound in US dollars is $1.10

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ECONOMIC GROWTH

 A high rate of economic growth means that the incomes of potential customers is rising
quickly and it is easier to persuade customers to buy goods. Businesses may also be able to
increase the prices of their goods when the economy is growing relatively quickly

 The size of an economy is measured by a statistic called GDP which stands for Gross Domestic
Product. GDP is defined as total income, total spending or total value of goods produced in an
economy in one year. All three ways of measuring GDP give roughly the same answer and so all
three are definitions of GDP

INTEREST RATE

 The interest rate is defined as the cost of borrowing and the reward for saving

 When interest rates are high, borrowing is expensive and businesses borrow less and invest
less in non-current assets. Therefore, they grow less quickly

 Also, customers also find it more expensive to borrow and borrow less. So, customers spend
less and the sales and profits of businesses are reduced

 The opposite happens when interest rates fall --- businesses and customers borrow more and
so the sales and profits of businesses grow and businesses grow faster as they borrow more and
buy non-current assets like machines

INFLATION RATE

 The inflation rate at which the GENERAL PRICE LEVEL in the economy is rising

 The general price level is not the price of a particular good but it is the general price of all
goods in the economy

 There is a way of tracking the price of goods in general in an economy through the CONSUMER
PRICE INDEX (CPI) which is a number that represents the general price level of consumer goods
in an economy.

 If the CPI stands at 475 at the start of a year and 493 at the end of that year, it has risen by:

(493-475)/475 x 100 = 3.8% over the year and this means that prices of consumer goods in
general have risen by 3.8% (the rate of inflation is 3.8%)

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 When the rate of inflation is very high (above 3% a year in the UK for example), the incomes of
consumers may not be rising as fast as prices and so the REAL INCOME of consumers may be
falling and consumer spending may also be falling

 Also, businesses are not so likely to invest in long-term projects like building new factories
because inflation may also be affecting not just consumer goods but also the prices of raw
materials like steel and, by the time the factory is finished, it may end up costing much more
than the business predicted

 Therefore, periods of high inflation may lead to lower real consumer spending and lower
investment by firms which translates to lower profits and slower growth for businesses

UNEMPLOYMENT RATE

 High levels of unemployment are unlikely to be favorable to businesses because:

1. Unemployed workers have lower income and so can afford to buy fewer goods
2. There may be a large number of unemployed workers because they may not have the
skills needed by businesses and so businesses may find it more difficult to recruit
workers and may have to rely on migrant workers who may be more costly to recruit
because of their need for visas, work permits etc.

 It is sometimes thought that high unemployment can benefit businesses because unemployed
workers are more likely to accept lower wages but this made less likely by the existence of
minimum wages in many economies

EXCHANGE RATE

 The exchange rate of a currency with another currency may go up and down over time

 An upward movement is called an appreciation and a downward movement is called a

depreciation of the currency

e.g. if the UK pound appreciates against the US$ then it may go from 1UK Pound = $1.10 to
$1.20

A depreciation of the UK pound would be represented by the opposite movement

e.g. from $1.20 to $1.10

 Appreciation of a currency makes exported goods more expensive for foreigners and imported
goods less expensive for domestic consumers. Therefore, exporting businesses are worse off
after an appreciation of a currency and importing businesses are better off. The opposite applies

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after a depreciation. The position of a business after a currency appreciation or depreciation

therefore depends on whether it is an exporter or an importer of goods or raw material

TAX RATE

 Governments set tax rates and businesses try to use the tax laws to minimise the amount of
taxes they have to pay each year

 The more tax a business has to pay, the less profit after tax it has left over to pay dividends to
shareholders or reinvest in buying non-current assets

 If the tax rate rises above a certain level, businesses will do their best to avoid taxes legally

 So governments have to judge the rate of corporation tax to maximise its tax revenue

1.5.5

External Influences

 Overall, elements of the economic environment affect the behaviour of customers and
businesses and affect business performance

 However, at the same time as the economic environment is changing, businesses are also having
to cope with changes in technology and legislation

 The larger the business, the greater the financial impact which changes in legislation, technology
and the economic environment have on its financial performance

 Therefore, large businesses spend time and use resources to try and predict the future changes
in each of these three elements

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