Impact of external influences — Edexcel A-Level Business
Test yourself on Impact of external influences with PEARSON EDEXCEL A-Level practice questions.
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Impact of external influences explained
A structured scan of the outside world, used so that a plan is not built on assumptions that have already expired.
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It covers tax, subsidy, trade policy and stability; interest rates, exchange rates, real incomes and the cycle, which is where income elasticity of demand tells a firm whether its product is hit hardest in a downturn; demographics, health awareness and working patterns; automation, payment systems and how customers now discover a brand; employment, competition and consumer law; and emissions rules, packaging taxes and physical climate risk. The output feeds the opportunities and threats half of a wider review. The weakness is that it yields a list with no probabilities and no weights, ignores interactions such as a rate rise arriving with a new levy, and never tells anyone what to do.
b) The changing competitive environment
Markets do not hold still: entrants arrive, technology cuts the cost of reaching customers, mergers concentrate supply, and regulation opens or closes a door. The business question is always what that does to pricing power and margins. When Aldi and Lidl took share of United Kingdom grocery, the established chains lost the ability to hold prices up and answered with price matching, own label ranges and smaller convenience stores, which cut margins well before it cut costs; streaming did the same to cinema and to physical media. The tools to reach for are the forces model, for where the pressure is coming from, and price elasticity of demand, for whether a price response raises or destroys revenue. The trade-off is that responding fast defends share and burns cash, while waiting protects margin and can lose the customer for good.
c) Porter’s Five Forces
A test of how much profit an industry will allow anyone to make, built from rivalry between existing firms, the threat of new entrants, the threat of substitutes and the bargaining power of buyers and of suppliers. Where every force is strong, as in United Kingdom grocery retail, margins stay thin however well a business is run; where entry needs a licence and switching is painful, as in retail banking, profit survives. The decision use is twofold: judge whether a market is worth entering, and choose where to act, for instance building a brand to weaken buyer power or dual sourcing to weaken supplier power. It is blind to partners and complementary firms, to government as a player rather than a rule setter, to how fast digital markets redraw their own boundaries, and to whether this particular firm has the capability to win.
Your focus
- a) PESTLE (political, economic, social, technological, legal and environmental)
- b) The changing competitive environment
- c) Porter’s Five Forces
Impact of external influences exam tips
Marking Points
- Choose the two or three factors that actually bite for this business and develop them, rather than writing a line on each heading in turn.
- Give direction and size of effect: a rise in interest rates raises the cost of servicing the loan and cuts demand for goods bought on credit, which hurts a high income elasticity product most.
- Separate a factor the firm can plan around, such as a packaging levy announced a year ahead, from one it can only absorb, such as a recession.
- Judge which factor dominates and over what time frame, because sequencing the pressures is what lifts an answer from description to evaluation.
- Identify the specific change in the case, such as a low cost entrant, a substitute technology or consolidation among suppliers, rather than writing that competition has increased.
- Explain the mechanism through to the accounts: lost share cuts revenue, price matching cuts the gross margin, and both land in operating profit.
- Bring elasticity in, since price elastic demand means a rival's cut takes volume quickly and justifies matching, while inelastic demand argues for holding price and protecting margin.
- Evaluate over time, because a response funded from reserves may defend share this year and be unaffordable next year.
- Assess each force with evidence from the case, saying strong or weak and why, instead of describing what the model contains.
- Link the forces explicitly to profitability, because the model measures the profit potential of the industry rather than the quality of one rival.
- Offer a managerial response to at least one force, such as long term supply contracts, differentiation to blunt substitutes, or scale that raises the barrier to entry.
- Evaluate the model: it is a static snapshot, ignores complementary businesses and government, and says nothing about internal resources, which is why it is paired with a capability or SWOT review.
Examiner Tips
- 💡Extracts usually plant two external factors, often an interest rate and a piece of legislation, so hunt for them and quote the figures.
- 💡Apply the factor to the specific decision in the question, since papers ask whether to expand or invest rather than asking you to describe the environment.
- 💡Keep one line for the interaction between two factors, because that is an evaluation point few candidates offer.
- 💡This normally supplies the context for a strategy recommendation, so use it to justify the choice rather than treating it as a topic in its own right.
- 💡Quote the market share or growth figures in the extract and show how they moved across the period given.
- 💡Judging whether the shift is structural or merely cyclical, and how long it will last, lifts the answer into the top band.
- 💡The model is most often used to justify or reject a market entry, so end on the entry decision and name the force that settles it.
- 💡List the barriers to entry actually present in the case, such as capital cost, brand, regulation or access to distribution, because that is where the marks cluster.
- 💡State which force is decisive and what would have to change for your recommendation to flip.
Common Mistakes
- Writing the headings out as a set of definitions with no link to the named business, which earns knowledge marks only.
- Confusing legal with political, or filing a rival's price cut here when competitive rivalry belongs in a forces analysis.
- Claiming a recession is bad for every business, which ignores inferior goods, discounters and repair services whose demand rises.
- Describing the change without saying who loses what, so there is no named business and no measurable effect to analyse.
- Assuming more competition always means lower prices, when firms may respond on quality, range, service or loyalty schemes instead.
- Ignoring the firm's own resources, so the recommendation to out invest a much larger rival is simply not affordable.
- Treating it as a checklist and weighting every force equally, when in most markets only one or two decide the outcome.
- Confusing the threat of entrants with existing rivalry, or calling any substitute product a direct competitor.
- Concluding a market is attractive because the business is keen on it, with no reference to barriers to entry or buyer power.