Influences on business

Overview

Businesses do not operate in a vacuum. They are constantly affected by external forces they cannot control—ranging from changes in the Bank of England's interest rates to new government legislation, and from shifts in consumer environmental awareness to the fluctuating value of the pound. This topic, Influences on Business, is crucial because examiners use it to test your ability to think synoptically. They want to see if you can link an external change to a specific internal consequence across the four functional areas: Operations, Human Resources, Marketing, and Finance.

Top candidates don't just state that 'costs rise'; they explain why costs rise and what that means for profit and pricing. This guide will walk you through the key influences, providing the exact chains of reasoning required to access Level 3 marks in extended answers.

1. The Economic Climate

Interest Rates

The cost of borrowing money and the reward for saving. When interest rates change, businesses are hit twice: directly (through their own borrowing costs) and indirectly (through consumer spending).

Impact of a Rise in Interest Rates:

• Direct: Loan and overdraft repayments increase. This raises fixed costs, reducing overall profit margins. Businesses may delay expansion plans.
• Indirect: Consumers face higher mortgage and credit card repayments. Disposable income falls. Demand for non-essential (luxury) goods drops, leading to lower sales revenue.

Exchange Rates

The value of one currency in terms of another (e.g., £1 = $1.25). The impact depends entirely on whether the business is an importer or an exporter.

SPICED Mnemonic: Strong Pound Imports Cheaper, Exports Dearer.

• Strong Pound (Appreciation): Good for importers (raw materials from abroad cost less, lowering variable costs). Bad for exporters (UK goods look more expensive to foreign buyers, reducing international sales).
• Weak Pound (Depreciation): Bad for importers (costs rise). Good for exporters (UK goods become cheaper abroad, boosting international competitiveness).

Employment Levels

The proportion of the working-age population currently in work.

• High Employment: Consumers have higher incomes, boosting demand. However, businesses struggle to recruit staff and must offer higher wages, increasing labour costs.
• High Unemployment: Consumer spending falls. However, businesses find it easier to recruit and can often keep wage costs lower due to the larger pool of available workers.

2. Ethics and the Environment

The Trade-off: Ethics vs Profit

Ethical behaviour involves doing what is morally right, even if it is not legally required (e.g., paying above the minimum wage, using fairtrade suppliers).

The Trade-off: Acting ethically almost always increases costs in the short term, which reduces immediate profit. However, examiners reward candidates who recognize that ethical behaviour can boost long-term profit by building brand loyalty, attracting ethical investors, and motivating staff.

Environmental Considerations

Businesses face pressure from consumers, pressure groups, and the government to reduce their environmental impact (e.g., pollution, traffic congestion, waste, carbon emissions).

• Impact: Implementing green policies (like switching to renewable energy or sustainable packaging) requires investment, raising costs. Failure to do so risks reputational damage and lost sales from eco-conscious consumers.

3. Globalisation

The increasing interconnectedness of global markets.

• Opportunities: Access to larger markets for selling goods; ability to source cheaper raw materials or labour from overseas (offshoring/outsourcing).
• Threats: Increased competition from multinational corporations; vulnerability to global supply chain disruptions.

4. Legislation

Laws passed by the government that businesses must comply with. Examiners want you to focus on the practical impact on operations and costs.

• Employment Law: (e.g., National Minimum Wage, Equality Act). Impact: Increases wage costs; requires HR investment in training and fair recruitment processes.
• Health and Safety Law: Impact: Increases compliance costs (providing PPE, conducting risk assessments); may slow down production processes to ensure safety.
• Consumer Law: (e.g., Consumer Rights Act). Goods must be fit for purpose and as described. Impact: Increases costs related to quality control and managing returns/refunds; restricts misleading marketing claims.

5. The Competitive Environment

Businesses must constantly adapt to the actions of their rivals. This involves managing risk (measurable outcomes, like the chance of a marketing campaign failing) and uncertainty (unpredictable events, like a sudden global pandemic). Businesses respond to competition by lowering prices, increasing advertising, or differentiating their products.