6.1.3

Competitive Environment

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Understanding the Impact of the External Environment

The external environment covers the range of factors which may affect a business but are outside the business' control. External environmental factors can affect a business’ costs and demands. Businesses must understand the external environment factors so that they can respond to changes:

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Competition

  • Competition can affect a business’ costs and demands as the presence of competitors may reduce demand for a business' product or service.
  • The presence of a competitor can also increase business costs as a business may increase its spending on promotion and advertising or may invest in research and development to improve the products offered for sale.
Illustrative background for Example of the impact of competitionIllustrative background for Example of the impact of competition ?? "content

Example of the impact of competition

  • For example, from 2012, Tesco experienced falling demand as competition from Aldi and Lidl rose in the food retail industry.
  • This competition increased Tesco’s costs as it increased its promotional activity and increases its investment in developing its new range of food items, known as Stockwell & Co, which replaced its Tesco Value range.
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Market conditions

  • Market conditions can affect a business’ costs and demands. If a market is increasing in size, a business must ensure it competes against other competitors to secure its own share of the increasing market, and this increases costs.
  • For example, the market for online food shopping has increased in recent years and Morrisons has had to invest in its website and delivery network to maintain competitiveness otherwise the demand for Morrisons' services may fall.
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Consumer income

  • Consumer income can affect a business’ costs and demands.
  • If consumer incomes are decreasing, demand for luxury items, like watches and cars may decrease as people make decisions to stop purchasing these products.
  • Businesses may also invest more heavily in promotional and advertising campaigns to try and increase demand, and this also increases business costs.
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Example: The impact of consumer income

  • In the 2007-08 recession, consumer incomes fell. The demand for luxury goods and upmarket groceries fell during the time of the recession. This initially impacted food retailers like Waitrose. Many people shifted from supermarkets like Tesco and Asda to Aldi and Lidl too.
  • But, falling consumers incomes can benefit some businesses e.g Aldi.

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1Exploring Business

2Marketing Campaigns

3Business Finance

4International Business

5Principles of Management

6Business Decision Making

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