Distinction 1 for Business Environment - Level 3 Extended Diploma in Business.
Evaluate how future changes in economic political, legal and social factors, may impact on the strategy of a specified organisation
Task 2 D2
a) In an Informal report, evaluate the impact future changes in these factors will have on
the long-term/strategic activities of one of the organisations. (D2)
This provides evidence for D2
Introduction
This report will evaluate the impact future changes in economic, political, legal and social
factors will have on the long-term/strategic activities of Tesco. I will examine the current
economic, political, legal and social climate.
This report is to be ready for 13 May 2016.
Proceedings
I researched the political, economic and social climate by carrying out my own independent
research such as reading newspapers, watching the news and using the internet.
Findings
Economic factors
Changes to the price of goods and services or an increase in different rates will affect Tesco
directly and non-directly. The two economic factors I researched were;
Inflation rates. Inflation is present when prices are higher than they were previously.
The current inflation rate for the UK currently sits at 0.5% as of April 2016. Currently,
the UKs inflation rate is at a 15-month high. It is the highest inflation rate since
December of 2014 due to rising cost for housing and utilities, restaurants and hotels
and clothing and footwear while transport fell at a slower pace.
This small amount of inflation ensures that the economy is able to grow and that
businesses are profitable enough to maintain and expand workforces. Tesco
accounts for more than 31% of the grocery market meaning they have an impact on
the UKs inflation rate.
An increase in inflation means prices in Tesco are pushed higher by rising consumer
demand. Tesco becomes more profitable and hire more staff to match production
with demand. Due to this, labour markets become tighter and this means Tesco
increase wages. This then leads to a higher cost of living with higher rent rates, home
values, consumer prices and prices of raw materials for Tesco to buy from their
suppleirs. This represents fuerther increase demand for Tescos product and serivces
which increases prices, furthering increasing company profits. However, as company
profits increase, Tesco will have to hire further staff and this continues to put
inflationary pressure on their wages/salries and the prices in which they charge for
their goods and services.
,Conor Cunningham D2
Interest rates. The base rate is the interest rate which the Central Bank lend money
to commercial banks at. UK interest rates have been held at 0.5% by the Bank of
England. All nine members of the Bank's Monetary Policy Committee (MPC) voted to
keep rates at their record low, where they have now been for seven years.
An increase in interest rates can affect Tesco in two ways:
Customers with debts have less income to spend because they are paying
more interest to lenders. Sales fall as a result. This has an effect on Tesco’s
profits and can mean the business will begin to struggle.
Firms with overdrafts will have higher costs because they must now pay more
interest. If Tesco had any large overdrafts or loans to pay, they will have to
pay higher interest on these as interest rates increase. This is a larger
expense for Tesco and can affect overall company profits.
The impact of a change in interest rates varies from business to business. Firms that
make luxury goods are hit hardest when interest rates rise. This is because most
customers cut back on non-essentials when their incomes fall as a result of interest
rate rises. This wouldn’t affect Tesco as much as they offer many lower-luxury items
and essentials and have regular promotions on these items which attract customers
who are affected in times of higher interest rates.
Lower interest rates make it cheaper to borrow. This tends to encourage spending
and investment. This leads to higher] demand for Tesco’s product and services which
can lead to economic growth. This increase in demand may also cause inflationary
pressures on Tesco though and the consequences of this are explained above under
the inflation rates heading.
Political factors
Politicians make very important decisions which affect business. They are led by a prime
minister who leads the ruling cabinet and is in charge of health, education, industry, taxes,
labour laws and the environment.
At international level, Britain is a member of the European Union. This body makes political
decisions about local issues on their behalf.
Periods of political stability favour businesses. A political party is usually elected to office for
up to five years. When they are elected they will seek to put plans into action. These plans
are made to the public and this helps businesses such as Tesco plan ahead. For example,
Tesco are able to see the government plans to identify changes and how these will affect
them. It provides Tesco with some certainty for the next five years, allowing them to make
reasonable strategic plans in accordance with political plans made by the government.
, Conor Cunningham D2
For the private sector, the government tries to create an environment in which businesses
can compete with one another. The government provides various incentives such as grants
to start up new enterprises. The government may offer grants to Tesco to launch a new
healthy eating campaign which may be a plan for the future. This helps Tesco launch new
business platforms and improve their performance and this benefits stakeholders/
shareholders as a result who may receive a higher dividend.
Taxes are levied by national government (for example, income taxes) and local government
(for example, business rates). Taxation helps the government to raise revenue and enables
it to discourage various activities and to encourage others through different rates of tax on
different products and services. For example, high taxes on cigarettes to discourage smoking
and high taxes on high fuel consumption cars to discourage pollution. These different rates
on products will affect the prices in which Tesco charge for some products.
If Tax is increased on cigarettes, Tesco will have to increase their prices so that they can
remain profitable. So, tax rates can affect the business operations of Tesco including the
prices they set for some products and services. If these prices are set too high, it can affect
the number of customers they have.. Corporation tax rate is currently set at 20%. The first
£300,000 of profit is taxed at the small company rate (20%). The next £1,200,000 is taxed at
the marginal rate (variable). Profits over £1,500,000 are taxed at the main rate (24%). It
must be noted that the corporation tax that Tesco have to pay would be extremely high due
to the large amount of profit the company generates.
As can be seen in the diagram below, over the past five years, the corporation tax rate for
Tesco has actually fallen. In 2000, they would’ve been paying 30% corporation tax rate. As
this has fallen to 25% and lower in the past five years, they will have higher net profits as
they are not paying as much tax, which is good for Tesco as they will have more capital to
invest in strategic planning for the future. For example, to build more stores or to invest
capital in to launching a new product in a new market.
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