Impact of External Influences (Edexcel A Level Business)

External Factor

Explanation

Examples

Political

• The extent to which local and national government is expected to influence the business including
  • Government stability and relationships with key trading partners
  • Tax regulations
  • Trade restrictions
  • Political Ideology and attitude to Business
  • Fiscal policy
  • National security status
  • Investment in public services

• The UK’s decision to leave the EU in 2016 has led to the reintroduction of trading restrictions for businesses importing goods from suppliers in Europe
  
  
• The reduced level of threat from terrorism in the UK has helped to boost tourism

Economic

• The extent to which economic indicators are expected to directly impact business performance including
  • Inflation
  • Exchange rates
  • Cost of living
  • The stage of the Business Cycle and GDP growth
  • Unemployment levels

• High rates of fuel and food inflation in the UK have reduced the level of disposable income for most households
  
  
• A historically low unemployment level has made recruitment more challenging for UK businesses

Social

• The extent to which personal attitudes and values, culture and demographic change are expected to affect the business including
  • Social mobility
  • Education
  • Ethics & Religion
  • Migration
  • Health profile
  • Population growth and demographic structure

• Greater numbers of people graduating from university have increased the quality of workers available to UK businesses
  
  
• A more health-conscious population provides a lucrative market for businesses selling fitness and lifestyle products

Technological

• The extent to which technological change and innovation are expected to impact the business including 
  • Research & development
  • Production and distribution processes and efficiency
  • Quality and new materials
  • Intellectual property
  • Online presence
  • The technology used in communication

• Developments in communication technology have reduced the need for business travel
  
  
• Rapid developments in technology have reduced the length of product life cycles and increased the need for businesses to carry out ongoing research, development and innovation

Legal

• The extent to which changes in law and regulations are expected to impact the business including 
  • Taxation
  • Employment
  • Advertising
  • Health & Safety
  • Compliance and ‘red tape’ created by regulatory bodies such as the Health and Safety Executive

• Changes to the level of tax levied on high sugar products (sodas) in the UK increased selling prices and prompted some businesses to redevelop their product to reduce the sugar content
  
  
• A rise in the level of the minimum wage increases business staffing costs

Environmental

• The extent to which changes in attitudes and government policy towards environmental protection as well as the impact of global warming expected to impact the business including 
  • Changing infrastructure - for example in favour of green transportation networks
  • Energy availability & cost
  • Disposal of materials
  • Changes in climate and weather patterns
  • Air quality

• Increased interest in environmentally responsible and ethically-produced goods has created new markets for businesses to exploit
  
  
• Strict rules on the disposal of commercial waste have increased costs for businesses

Force

Explanation

Example

1. Industry Rivalry

• When there are many competitors selling similar products, the business will have little power
  • Many rivals are trying to get a more significant share of the market
  • Customers have a lot of choices and can shop around
    
    
• When a business offers products in an industry with little or no competition it has more power, can use premium pricing and dominate the market 

• The UK energy market has experienced a significant reduction in the number of rival firms in recent years as a result of numerous takeovers
• Remaining energy suppliers have been able to charge high prices and make incredible levels of profit

2. Threat of New Entry

• If new competitors can enter an industry quickly and without investing a lot of money, then the barriers to entry is low and the threat of new entrants is high
  • The market is likely to contain a large number of rival businesses
  • Individual businesses are likely to have little power
    
    
• Where the barriers to entry are too high for new businesses to gain a foothold and compete in the market the threat of new entrants is low 

• As a result of deregulation in the 1980s UK consumers can access an increasingly wide selection of television channels, many of which can operate at a very low cost online
   
• Whilst a small number of powerful firms such as the BBC, Netflix and Sky dominate, it is relatively easy for new niche channels to enter the market

3. Buyer Power

• When a business sells to a small number of customers those customers have significant power to negotiate lower prices 
  • The business has few options when it comes to customers
  • It will have to price and sell products according to customer demands
    
    
• Where a business has a high number of customers those customers have less power
  • It is likely to be able to charge a high price for a product that is relatively inexpensive to produce

• Boeing is an aerospace company that sells aeroplanes to airlines and governments
• Airlines that purchase large numbers of planes from Boeing have significant buyer power due to their ability to negotiate lower prices and favourable contract terms

4. Supplier Power

• Where a business has a lot of choices over the suppliers from which it buys components
  • It is likely to be able to shop around for lower price
     
• Where a supplier has significant power over a business as a result of offering a specialised component or where there is a small number of suppliers in the market
  • The business has little choice over the source of its suppliers
  • It is likely to have to pay high prices for its components and accept suppliers’ terms and conditions

• Large UK supermarkets wield significant power over small, local suppliers
   
• On the other hand, in 2022 the giant food manufacturer Heinz refused to supply Tesco with any product unless they increased their payments by 51%, which they were forced to do

5. Threat of Substitution

• Where customers can easily swap a businesses products for those of a rival the business has little power
  • The business is likely to have to compete on price or invest heavily in developing a USP
    
    
• Where substitution is unlikely a business has significant market power
  • It is likely to be able to charge a high price for its products and may be less inclined to innovate

• Smartphones have become the substitute for a wide range of standalone goods including calculators, cameras and even portable computers
• In the case of cameras many manufacturers have moved away from selling low price devices and now focus on high-end, specialist products for serious photography enthusiasts