🌍 Influences on Business

Technology

E-commerce, or trading online, lets a business reach a much wider market at a lower cost than running a shop, since it avoids the expense of high-street premises. The drawback is that it also faces more competition, because customers can compare prices between businesses easily and switch to a cheaper rival in moments.

Automation, using computer-controlled machinery instead of manual labour, can make production faster and more consistent. Setting it up, however, requires a large upfront investment, and it can reduce the number of jobs available on the production line.

Digital communication, such as email and video calls, is faster and cheaper than travelling to meetings in person. It does, however, increase a business's exposure to cyber security threats, such as hacking or the theft of customer data, so businesses must invest in protecting their systems.

Social media lets a business target customers cheaply and get instant feedback on its products. The same speed is also a risk, since a single bad review can spread quickly online and damage a business's reputation before it has a chance to respond.

Ethics & the environment

A legal decision simply obeys the law, while an ethical decision does what is morally right, which can go further than the law actually requires. A business can therefore act entirely legally while still facing criticism for behaving unethically.

Acting ethically, for example by paying suppliers fairly, often raises a business's production costs. In return, it can build stronger customer loyalty and reputation, and ethically-minded customers may be willing to pay a premium price for products they believe are made responsibly. A strong ethical reputation can also improve staff motivation, which helps explain why acting ethically can make financial sense despite the extra cost.

A business found to harm the environment can suffer serious consequences. It risks reputational damage, losing customers to rivals seen as greener, and facing fines for breaching environmental regulations. To reduce its impact, a business can switch to sustainable materials or cut waste, though this often means higher costs, for example paying more for recycled or renewable supplies.

The economic climate

Several economic factors affect how well a business performs, including interest rates, the level of unemployment, and changes in exchange rates, since each affects a business's costs, sales or competitiveness.

During a recession, consumer spending typically falls as households lose confidence and see their income squeezed, so businesses often see falling sales and profit. A rise in interest rates has a similar effect, since it makes borrowing more expensive and saving more rewarding, so consumer spending usually falls too.

Rising unemployment gives businesses a larger pool of workers to choose from, often letting them recruit at lower wages, but it can also reduce overall consumer spending, since more people have less income. Exchange rates matter as well: a stronger pound makes UK exports more expensive in foreign currency, so overseas customers may buy less, reducing the exporter's sales.

Globalisation & legislation

Globalisation is the growing interconnection of countries through trade, the movement of people and money, and the spread of ideas and technology across borders.

Globalisation creates both an opportunity and a threat for a UK business. The opportunity is access to larger overseas markets; the threat is increased competition from foreign businesses selling cheaper imports in the UK. A multinational company is a business that produces or operates in more than one country, which often brings jobs and investment to the countries it operates in, though it can also move its profits abroad.

Governments can influence this competition through a tariff, a tax on imported goods that raises their price. A tariff can protect domestic businesses from foreign competition, but it may also raise costs for firms that rely on imported parts.

UK employment law, such as the minimum wage and health and safety rules, protects employees, but complying with it raises a business's costs, for example through higher wages or safety equipment.

The competitive environment

A business can compete in two different ways. Competing on price means charging less than rivals to win customers. Competing through differentiation means making a product stand out, for example through quality or branding, so that customers are willing to pay a higher price for it.

Competing mainly on price carries a risk: cutting prices to win price-sensitive customers can start a price war, in which rivals keep undercutting each other and every business's profit margins are squeezed.

How much freedom a business has over its prices depends on how much competition it faces. With few competitors, it has more freedom to raise prices, but with many competitors, it must usually keep prices low to retain customers. When a rival launches a new product, a business may need to respond by improving its own product, adjusting its price, or increasing its marketing to defend its market share.