1. AQA A-level Business © Hodder & Stoughton Limited
1.3 Understanding that businesses operate within an external environment
AQA A-level Business © Hodder & Stoughton Limited

2. AQA A-level Business © Hodder & Stoughton Limited
Learning outcomes
What you need to know:
How the external environment can affect costs and demand.
AQA A-level Business © Hodder & Stoughton Limited

3. The external environment: Starter
The external environment is the factors that can influence a business’s activities and can determine its success or failure. Task: With a partner, try to list as many factors outside of the business’s control that may influence its activities and performance.
External factors ?
AQA A-level Business © Hodder & Stoughton Limited

4. How the external environment can affect cost and demand
The external environment comprises those external forces that can influence a business’s activities.
Factors influencing costs and demand include the effect of:
Market conditions and competition
Incomes
Interest rates
Demographic factors
Environmental issues and fair trade.
AQA A-level Business © Hodder & Stoughton Limited

5. Market conditions and competition
Market conditions are the features of a market, such as the level of sales, sales growth, price levels, the number and strength of rivals, their market position and market share, etc.
Demand is the amount of a particular good or service that consumers or organisations want and are able to afford to purchase. It is a good determinant of how desirable a market is for firms.
Task: What are the ideal market conditions for success? Consider the following features and describe the best situation for a firm to grow and make high profits.
Sales figures and level of demand
Price levels
Level of competition including the number of competitors, size and market share
Barriers to entry – how difficult is it for new entrants to the market?
Consumer incomes
GDP and economic growth – gross domestic product (GDP) is the total value of a country’s total output of all goods and services over time.
AQA A-level Business © Hodder & Stoughton Limited

6. AQA A-level Business © Hodder & Stoughton Limited
Incomes
Income levels in the market will clearly have an impact on the demand for all goods.
Some products such as normal and luxury goods will see sales rise as income levels rise.
However, some goods may see their demand fall as consumers’ incomes rise and these are known as inferior goods.
Rise
Products where demand will rise as consumer income rises
Fall
Products where demand will fall as consumer income rises
Task:
Make a list of at least five product types for which demand will increase as general consumer incomes rise and five for which demand will fall.
Make another list of five product types for which demand is likely to be completely unaffected by consumer income changes.
AQA A-level Business © Hodder & Stoughton Limited

7. AQA A-level Business © Hodder & Stoughton Limited
Interest rates
Interest rates: the cost of borrowing money and the return for lending it.
Interest rates are set by the Monetary Policy Committee of the Bank of England to control inflation and economic growth by impacting consumer and business borrowing and spending.
When interest rates are higher it will impact consumer and business spending in the following ways:
Consumers with mortgages, loans and credit cards have less discretionary income available so will spend less.
Sales of consumer products on credit (cars, electrical goods, furniture, holidays, etc.) may fall as it becomes more expensive to borrow.
Saving becomes more attractive than spending because of the interest earned.
The increased cost of borrowing may encourage businesses to delay any investment in growth as the benefit of saving is greater than that of the project. Therefore, the demand for capital goods (machinery, etc.) will fall.
The cost of borrowing is a fixed cost, therefore a rise will increase unit costs and the break-even point and lower profit margins. 
The fall in demand for consumer and capital goods will slow down economic growth.
When interest rates are lower the opposite will be true.
Discuss: The Bank of England brought rates down to 0.5 per cent after the great recession of 2008/09. What did they hope to achieve?
AQA A-level Business © Hodder & Stoughton Limited

8. AQA A-level Business © Hodder & Stoughton Limited
Demographic factors
There are a number of major demographic changes which have created new opportunities and threats for firms. They include:
The UK population is increasing – In 2008 there were 61.4 million people living in the UK. This is expected to grow to 71 million people by 2031.
The population is ageing – By 2031, 22 per cent of the population will be aged 65 and over compared to 18 per cent aged 16 or younger. The older generation are a major marketing opportunity for all industries, with those aged 50 and over making up 34 per cent of the population and being responsible for 80 per cent of disposable income.
Ethnic diversity – Increased migration into the UK over recent decades has resulted in a much more diverse population. This has led to different attitudes, demand for different foods and restaurants and different shopping habits, providing opportunities but more complex consumer attitudes and demands.
AQA A-level Business © Hodder & Stoughton Limited

9. AQA A-level Business © Hodder & Stoughton Limited
Demographic factors
Smaller households – It is projected that the number of one-person households in England will increase by 60 per cent to nearly 11 million households in 2031 (Source: Office for National Statistics). This has also created business opportunities, such as smaller convenience products, smaller pack sizes, ready-made meals, and greater demand for eating out.
Higher proportion of women working – There has also been a growth in the number of women in employment (Source: Office for National Statistics). The proportion of women aged 16–64 in employment grew to 69 per cent in , compared to less than 60 per cent in This has resulted in busier households with many people now cash rich but time poor. This has presented opportunities including the growth in café culture, convenience products and eating out.
AQA A-level Business © Hodder & Stoughton Limited

10. Benefits of demographic changes
The UK population is increasing
The population is ageing
Ethnic diversity
Smaller households
Higher proportion of women working
Discuss in groups: How can businesses seek to take advantage of these demographic changes to reduce costs and increase demand?
AQA A-level Business © Hodder & Stoughton Limited

11. AQA A-level Business © Hodder & Stoughton Limited
Environmental issues
Smaller households – It is projected that the number of one-person households in England will increase by 60 per cent to nearly 11 million households by 2031.
One of the major externalities that businesses contribute to is environmental damage including factory emissions, pollution in distribution networks, congestion and destruction of natural environments including deforestation in growing crops and logging for paper, furniture and other products.
The UK and EU government have introduced a wide range of legislation to improve companies’ treatment of the environment (for example, the Environmental Protection Act, 1991) which will influence what firms are able to do. This legislation ensures firms must act more responsibly to avoid fines although these do not always stop companies causing environmental damage.
AQA A-level Business © Hodder & Stoughton Limited

12. AQA A-level Business © Hodder & Stoughton Limited
Environmental issues
The UK government also provides grants for firms investing in green technology, for example through the Carbon Trust.
Being more environmentally responsible can often be more expensive but many firms, such as Marks & Spencer with their Plan A strategy, have found major cost savings from becoming more environmentally responsible.
General Electric has even found new major sources of revenue by developing environmentally responsible green technology products with their Ecomagination programme.
AQA A-level Business © Hodder & Stoughton Limited

13. AQA A-level Business © Hodder & Stoughton Limited
Fair trade
Fairtrade® is about better prices, decent working conditions and fair terms of trade for farmers and workers. (
This is ethical and helps a firm to be socially responsible.
It can help to add value to products, but will push unit costs up often meaning higher prices must be charged.
This may be acceptable for some consumers but difficult for many others to afford, reducing demand.
Fair trade ensures that reliable suppliers are able to afford to continue trading making the supply chain sustainable and beneficial.
AQA A-level Business © Hodder & Stoughton Limited

14. AQA A-level Business © Hodder & Stoughton Limited
Example business
Marks & Spencer
‘M&S Plan A Sustainability Savings Reach £135m
Retailer records 29 per cent year-on-year increase in net benefit of pioneering green strategy and edges closer to 2015 goals’ BP
‘BP Is Found Grossly Negligent in Deepwater Horizon Disaster
Federal Court Decision Could Mean Fine of Up to $18 Billion’
Task: Look at the two examples online and write a paragraph explaining the impacts that being environmentally responsible can have on demand and business costs.
AQA A-level Business © Hodder & Stoughton Limited

15. Arguments for being environmentally responsible
Improved financial performance of the firm and reduced operating costs, for example reduced waste disposal costs, income from selling recycled materials, etc.
Enhanced brand image and reputation resulting in improved sales and customer loyalty.
Will avoid pressure group actions impacting demand.
Growth of ethical investing means more potential capital.
It will be attractive to some investors and easier to raise finance.
Improved share prices.
It is necessary in order to avoid excessive regulation and legislation.
Socially responsible actions can be profitable.
AQA A-level Business © Hodder & Stoughton Limited

16. Arguments against being environmentally responsible
Companies’ ultimate aim is to make a profit and the only social responsibility of business is to create shareholder wealth.
Extra costs will be incurred which will be passed on to consumers.
Businesses may not be able to use their resources as efficiently if there are restrictions on how they may produce and where they may locate.
It may reduce firms’ international competitiveness if others are not doing it.
As long as the company complies with legislation they should be able to do what they want.
Is it just a cynical way of marketing products to increase sales? Is it just good PR?
AQA A-level Business © Hodder & Stoughton Limited

17. AQA A-level Business © Hodder & Stoughton Limited
Activity
Complete a PESTLE analysis for Marks & Spencer.
Use their website and Plan A report
PESTLE
Environmental
Legal
Technological
Social
Economic
Political
AQA A-level Business © Hodder & Stoughton Limited

18. AQA A-level Business © Hodder & Stoughton Limited
Exam-style questions
Companies’ ultimate aim is to make a profit and the only social responsibility of business is to create shareholder wealth.
Analyse two external factors that may cause a firm’s costs to increase. (9 marks)
Analyse two benefits of interest rates falling for a UK car manufacturer. (9 marks)
With reference to BP, to what extent do you think that the minimisation of costs and maximisation of profit will always be more important than being environmental responsible for a multinational business? (25 marks)
Exam tips:
Plan your answers before starting to write them.
Decide what points are the strongest you can make and how you will apply and analyse them to answer the actual question asked.
This will ensure you maximise your marks and not waste time writing weak points or losing your focus on the question.
AQA A-level Business © Hodder & Stoughton Limited

19. AQA A-level Business © Hodder & Stoughton Limited
Summary
There are many external factors that can cause a firm’s costs and demand to change both positively and negatively.
Firms must regularly complete PESTLE analysis to fully understand their market conditions and the impacts it will have on all their stakeholders.
AQA A-level Business © Hodder & Stoughton Limited