The dynamic business environment
Definition
Dynamic business environment: the constantly changing conditions a business operates in, which it must respond to but largely cannot control.
- A business does not choose the conditions it trades in, because they are set by customers, rivals, governments and technology.
- A business that does not adapt loses customers gradually to a rival that did.
The four sources of change
- Technology: new products replace old ones and new ways of selling appear, so demand can fall away from a business that has done nothing wrong.
- Streaming removed the reason to buy CDs and DVDs, and HMV went into administration twice.
- New equipment can also cut the cost of making each unit, though it has to be paid for and staff have to be retrained to use it.
- The economic situation: interest rates, the level of employment and consumer incomes decide how much customers can afford to spend.
- When UK incomes were squeezed, Aldi and Greggs gained customers trading down while casual dining chains closed sites.
- Legislation: governments change the law on wages, health and safety and consumer rights, and businesses have to comply whether it suits them or not.
- A rise in the national living wage raises the wage bill directly, which hits retailers and care homes hardest.
- Environmental expectations: customers now judge a business on how it produces, not only on what it charges.
- UK supermarkets cut plastic packaging and introduced refill stations partly because shoppers expected it.
- Acting on this usually costs money in the short term, and the return comes as reputation and customer loyalty.
Note
Each of these four forces is examined in its own right in Influences on business, so leave the detail of interest rates, exchange rates, employment law and sustainability to those articles.
How a business responds to change
- Monitor the environment, by watching competitors, customer feedback and rules that are coming, so the change is seen before it arrives rather than after sales have fallen.
- Adapt the product or the way it is sold, such as Greggs adding app ordering and delivery so customers could skip the lunchtime queue.
Common Mistake
- Do not treat change as automatically bad news.
- The same force that destroyed HMV's market created Spotify's, so a change is a threat to one firm and an opportunity to another.
Exam technique
- Questions here are worded as explain one economic change that can affect a business or explain one way a rise in unemployment might affect a business.
- Name the change, then finish the chain with an effect on sales, costs or profit, because naming it alone leaves the answer hanging.
- A rise in unemployment means fewer people have an income to spend, so the business sells less.
Self review
- Name the four sources of change AQA expects you to know.
- Give one way technology can threaten a business and one way it can help.
- Explain one way a rise in unemployment affects a business.
- Give one example of a changing environmental expectation.
- State two things a business can do to respond to change.
