Unit – 1 Revision Notes

Chapter 6: External Influences on Business Activity

This chapter examines how the non-economic external environment shapes

business strategy and decision-making.

1. Political and Legal Influences

 Privatisation: The transfer of public sector resources (state-owned) to

the private sector.

o Arguments for: The profit motive improves efficiency; decision-

making is faster due to less bureaucracy; selling industries raises
capital for the government.

o Arguments against: Essential services (like water or rail) might

be cut to save costs; private monopolies could exploit consumers
with high prices.

 Nationalisation: The state taking ownership of private sector

businesses.

o Arguments for: Allows for coordinated planning of strategic

industries and prevents private monopolies from abusing power.

o Arguments against: Lack of competition can lead to

inefficiency and political interference in business decisions.

2. Legal Constraints on Business

Governments pass laws to constrain business activity and protect

stakeholders.

 Employment Practices: Laws to prevent the exploitation of workers.

o Recruitment & Contracts: Must be fair and written to clarify

duties and pay.

o Health & Safety: Workplaces must be safe; failure to comply

leads to fines and bad publicity.

o Minimum Wages: Sets a legal baseline for pay to reduce

poverty and exploitation.

 Consumer Rights: Laws protecting consumers from unfair practices.

o Sale of Goods: Products must be fit for purpose and safe.

 o Trade Descriptions: Advertising cannot be misleading (e.g.,
claiming a product is waterproof when it is not).

 Competition Law: Aims to restrict monopolies and prevent

uncompetitive practices like collusion (fixing prices with rivals) to
ensure consumers have choice and fair prices.

3. Social and Demographic Influences

 Corporate Social Responsibility (CSR): When a business accepts

moral obligations to all stakeholders, not just shareholders/investors
(e.g., ethical sourcing).

 Social Audits: An annual report measuring a company’s social impact

(pollution levels, safety records, community contributions).

o Evaluation: Beneficial for public image but can be dismissed as

"greenwashing" (a PR stunt) if not independently verified.

 Pressure Groups: Organizations like Greenpeace use publicity and

consumer boycotts to force businesses to change policies (e.g.,
stopping deforestation).

 Demographic Changes:

o Ageing Population: Increases demand for specific products

(healthcare, cruises) but creates potential labour shortages.

o Changing Employment Patterns: A shift towards part-time,

temporary, and "gig economy" contracts offers flexibility to firms
but less security for workers.

4. Technological Influences

 Information Technology (IT): Has revolutionized operations through

CAD (Computer-Aided Design) and CAM (Computer-Aided
Manufacturing).

 Impact: Lowers unit costs and improves flexibility, but requires high
capital investment and can lead to staff redundancies.

5. International Influences

 Globalisation: The integration of international economies through

freer trade and movement of capital/labour.
  Multinational Corporations (MNCs): Businesses with operations in
more than one country.

o Benefits: Access to cheaper labour, raw materials, and new

markets; avoidance of trade barriers.

o Drawbacks: Can be accused of exploiting local labour,

damaging the environment in host countries, and forcing local
firms out of business.

Chapter 7: External Economic Influences

This chapter focuses on how the economy and government policy impact
business.

1. Government Intervention and Market Failure

 Market Failure: When the free market fails to allocate resources

efficiently. Governments intervene to fix:

o External Costs: Negative impacts like pollution where the

business does not pay for the damage it causes.

o Labour Training: Businesses under-invest in training because

they fear staff will be "poached" by rivals.

o Monopoly: Powerful firms restricting output to raise prices.

2. Macroeconomic Objectives

Governments generally have five major economic targets:

1. Economic Growth: Increasing real Gross Domestic Product (GDP) to

raise living standards.

2. Low Inflation: Keeping price rises steady to aid business planning.

3. Low Unemployment: Ensuring resources are not wasted and

consumer incomes remain high.

4. Balance of Payments: Balancing the value of imports and exports.

5. Exchange Rate Stability: Avoiding wild fluctuations in currency

value.

3. Business Cycle
Economies fluctuate through four stages:

 Boom: High demand, high profits, rising inflation, and labour

shortages.

 Recession: Falling demand and GDP; businesses cut costs and may
switch to "value" products.

 Slump: A serious, prolonged recession.

 Recovery: GDP begins to rise again; confidence returns.

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4. Economic Policies

 Fiscal Policy: The use of taxes and government spending.

o Expansionary: Lower taxes/higher spending to boost demand

(used during a recession).
 o Contractionary: Higher taxes/lower spending to slow down the
economy (used during a boom to control inflation).

 Monetary Policy: The use of interest rates and exchange rates.

o Higher Interest Rates: Increase the cost of borrowing. This

reduces investment and consumer spending, helping to lower
inflation.

o Lower Interest Rates: Encourage borrowing and investment.

 Supply-side Policy: Policies to increase the efficiency and

competitiveness of industries (e.g., improving education, cutting
corporation tax).

 Exchange Rates:

o Appreciation (Strong Currency): Imports become cheaper

(good for raw materials); Exports become expensive (bad for
international sales).

o Depreciation (Weak Currency): Imports become expensive;

Exports become cheaper (more competitive abroad).

Chapter 8: Business Strategy

This chapter deals with long-term planning and strategic choices.

1. Strategic Management

 Strategy: The long-term plan to achieve the business's vision and

objectives.

 Tactics: Short-term, operational decisions made to implement the

strategy.

 The Process: Strategic Analysis (Where are we?) $\rightarrow$

Strategic Choice (Where are we going?) $\rightarrow$ Strategic
Implementation (How do we get there?).
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2. Strategic Analysis Tools

 SWOT Analysis: Identifies internal Strengths and Weaknesses, and

external Opportunities and Threats. Limitation: It is subjective and
does not provide a quantitative solution.

 PEST Analysis: Analyzes the external environment: Political,

Economic, Social, and Technological factors.
 Porter’s Five Forces: A model to analyze the competitive intensity of
an industry:

1. Barriers to entry: How hard is it for new firms to join?

2. Power of buyers: Can customers drive down prices?

3. Power of suppliers: Can suppliers drive up costs?

4. Threat of substitutes: Are there alternatives?

5. Competitive rivalry: How intense is the competition?

 Core Competencies: Unique strengths (e.g., patented technology,

technical expertise) that are difficult for rivals to copy.
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3. Strategic Choice Tools

 Ansoff Matrix: Analyzes risk and growth strategies based on products

and markets.

o Market Penetration: Existing products in existing markets (Low

risk).

o Product Development: New products in existing markets

(Medium risk).
 o Market Development: Existing products in new markets
(Medium risk).

o Diversification: New products in new markets (High risk).

 Force-Field Analysis: Identifies forces driving change versus forces

restraining change. Successful change requires strengthening the
drivers or weakening the restraints.

 Decision Trees: A quantitative diagram showing options, probabilities

of success/failure, and expected financial returns.

o Calculation: Expected Value = (Probability * Return) +

(Probability * Return) - Cost.
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Chapter 9: Corporate Planning and Implementation

This chapter focuses on how strategies are put into action.

1. Corporate Planning

 Corporate Plan: A detailed report mapping out a business's future

aims and strategies. It includes objectives, marketing mix, and
resource requirements.
  Benefits: It provides focus and direction, helps secure external finance
(from banks/investors), and improves coordination between
departments.

 Limitations: Plans can become rigid and outdated quickly in a fast-

changing market; they require significant management time to create.

2. Corporate Culture

 Definition: "The way we do things around here"—the shared values,

attitudes, and beliefs of the people in an organization.

 Types of Culture:

o Power Culture: Power concentrates at the center (e.g., founder-

led, autocratic).

o Role Culture: Bureaucratic, defined by job titles and rules.

o Task Culture: Team-based, focused on solving specific problems

(matrix structure).

o Person Culture: Focuses on individuals (e.g., lawyers or

architects).

o Entrepreneurial Culture: Encourages risk-taking and

innovation.

3. Change Management

 Transformational Leadership: Leaders who inspire employees to

embrace major change through vision and empathy, rather than just
giving orders.

 Project Champions: Individuals appointed to drive a specific project

and overcome resistance within the organization.

 Resistance to Change: Employees often resist change due to fear of

the unknown, fear of failure, or lack of trust. This is best overcome by
communication, participation, and training.

4. Contingency Planning

 Definition: Preparing for unforeseen events or crises (also known as

disaster recovery planning).

 Process: Identify risks $\rightarrow$ Assess likelihood $\rightarrow$

Plan to minimise impact $\rightarrow$ Plan for continued operations.
 Benefits: Minimises the impact of disasters (e.g., fire, IT failure),
reassures staff and customers, and protects public relations.

 Limitations: It is costly and time-consuming to plan for events that

may never happen.