External Influences Unit 4: The Economic Environment Icons key: Flash activity Sound 1 of 40 For more detailed instructions, see the Getting Started presentation Teacher’s notes included in the Notes Page Video Web addresses Extension activities Printable activity Spreadsheet © Boardworks Ltd 2009 Learning objectives How do economic conditions affect the profits of a business? What laws must businesses follow to protect the environment? Inflation, interest & Exchange rates Learning objectives 2 of 40 © Boardworks Ltd 2009 External influences Every business wants to achieve its aims and objectives to make a profit. It will try to do this by organizing what it can influence internally: employees, resources, quality etc. However, a business is also affected by external influences which it cannot control: business competition internal environmental influences constraints economic conditions These external influences change from time to time and a business must be able to adapt to them. 3 of 40 © Boardworks Ltd 2009 The types of competition There are two types of competition: direct and indirect. Direct competition includes businesses that sell similar products, e.g. Ford competes with Peugeot and Toyota. Indirect competition includes businesses that sell slightly different products, e.g. Burger King competes with Starbucks. Businesses that sell totally different products are also in indirect competition, e.g. Rimmel competes with iTunes and Topshop for the money which teenage girls spend. Give an example of two businesses in direct competition and two in indirect competition. 4 of 40 © Boardworks Ltd 2009 Types of competitors The competitors a business competes with are not always the same. There are three types of competitor: local competitors national competitors multinational competitors. A multinational business has operations in more than one country. It adapts its products for each particular market. Can you name any multinational businesses? How has ICT made it easier for businesses to compete for customers around the world? 5 of 40 © Boardworks Ltd 2009 The economy An economy is the system within a country which influences the production, distribution and consumption of products, and the supply of money. Peru’s economy affects every Peruvian business and citizen. It is therefore very important that the government organizes the economy properly. A minister must manage the economy by taking advice from the Central Bank and Economists and Business people. 6 of 40 © Boardworks Ltd 2009 Economic conditions The economy is affected by three areas: interest rates prices exchange rates. Businesses and customers can be affected when changes are made to interest rates, prices or exchange rates. Changes to the economy can make it difficult for a business to plan ahead and for customers to plan when to spend or save. 7 of 40 © Boardworks Ltd 2009 Interest rates The base interest rates of Peru are set by its central bank: the of Banco Central who issue the banknotes. The base interest rate is the fee the Bank charges its customers, usually other banks, for borrowing money. It determines how much extra must be repaid on top of the original sum in a loan. However, customers (including businesses) can be charged higher interest rates than the base interest rate because other banks and credit cards set their own rates. Do businesses prefer high or low interest rates? 8 of 40 © Boardworks Ltd 2009 The effects of interest rates 9 of 40 © Boardworks Ltd 2009 Fluctuating interest rates 10 of 40 © Boardworks Ltd 2009 Inflation Prices can increase or decrease over time. When prices are generally rising, this is called inflation. Inflation can cause major problems for smaller businesses because raw materials (produced in the UK) become more expensive to buy. Businesses will then put up their prices to compensate for inflation, but it can lower their sales. Staff will also demand pay rises which creates even more cost. What would happen if the opposite of inflation: deflation, occurred? 11 of 40 © Boardworks Ltd 2009 Case study: crude oil price increase 12 of 40 © Boardworks Ltd 2009 How inflation can affect businesses 13 of 40 © Boardworks Ltd 2009 Exchange rates The exchange rate is what one currency is worth in another currency. In the UK it is how much one British pound, called sterling, is worth in a different currency. On holidays abroad, it determines how much a tourist’s money is worth. A strong currency is worth a lot – good for tourists; a weak currency is worth little – bad for tourists. For example, if you were going to the USA you would need some US dollars. If the exchange rate was $1.93 to £1 and you exchanged £45, you would receive $86.85 as 1.93 x 45 = 86.85. Would a US tourist visiting the UK want the US dollar to be stronger or weaker than sterling? 14 of 40 © Boardworks Ltd 2009 Exchange rates Businesses are affected by exchange rates all the time as many of them sell to, or are supplied by, businesses abroad. When a business in the UK exports (sells products overseas), it expects to be paid in pounds sterling. If a UK business imports (buys products from abroad), it will have to pay for the products in the currencies of those countries. Would a business that exports prefer a strong or a weak British pound? 15 of 40 © Boardworks Ltd 2009 Exchange rates The exchange rate alters because of international supply and demand. If more people are selling Soles than buying them, the exchange rate will go down, making the pound weaker. If more people are buying pounds than selling them, this creates a demand for sterling and increases their value. 16 of 40 © Boardworks Ltd 2009 Exchange rates: good or bad? 17 of 40 © Boardworks Ltd 2009 Environmental constraints Business activity can damage the environment. The UK government is trying to reduce pollution and wastage by introducing laws to minimize the negative impacts and by setting specific targets that must be met. What kinds of problems can excessive pollution and wastage cause to the environment? 18 of 40 © Boardworks Ltd 2009 Wasting resources Some of the resources that a business uses end up as waste. It makes sense for a business to reduce the amount of waste it produces for financial and environmental reasons by: recycling and composting consuming less energy using fewer resources reducing waste disposing of waste properly. Design a poster to encourage businesses to reduce the amount of wastage they produce. 19 of 40 © Boardworks Ltd 2009 Pollution Unless it is carefully controlled, business activity can cause a variety of environmental problems, such as: air pollution noise pollution water pollution. 20 of 40 © Boardworks Ltd 2009 Environmental laws Now aim for SUSTAINABLE lifestyles and business Why? What is a good definition of Sustainability 21 of 40 © Boardworks Ltd 2009 External influences 22 of 40 © Boardworks Ltd 2009 Question time 1.Give three tactics a business might use to steal customers from its competitors 2.Explain what the difference is between direct and indirect competition and give three examples of each. 3.Why do businesses which are exporters dislike it when the sterling exchange rate is very strong? 4.Who suffers when interest rates increase? 5.Why does inflation create extra costs for a business? 23 of 40 © Boardworks Ltd 2009 Who wants to be an A* student? 24 of 40 © Boardworks Ltd 2009 Glossary 25 of 40 © Boardworks Ltd 2009