External Influences
Unit 2: Managing Business Activities
External Influences
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An external influence is a change outside the business that the business cannot stop and has to answer. 2.3.5 asks for both halves: the effect, and the response.
The stem of 2.3.5 · 1a is worth reading twice: "the effect on businesses of, and how they can best respond to, changes in". Half the marks in this topic are in the second clause. A change nobody can prevent is not the end of an answer; it is the start of one.
Every influence in this topic reaches a business through one of four lines: what it can charge, how many it sells, what its inputs cost, or what it pays to borrow. Naming the line is what turns a general worry into an analysis, and it is the difference between "inflation is bad for business" and an answer worth marks.
Marang Seating makes office and café chairs, buys its timber and fabric abroad, and sells at home and for export. It sells 20,000 chairs at $200, each costing $120 to make, and everything else costs $1,200,000 a year. That leaves $400,000 of operating profit — 10% of revenue, and the cushion every shock in this topic has to fit inside.
Real Example: A furniture maker in Malaysia and a software firm in Kenya meet the same fall in their currency and answer it differently, because one of them buys its inputs abroad and the other does not.
Exam Matters: Appendix 6 defines Analyse as a brief chain of reasoning with interpretation where data is given. The chain in this topic always has the same shape: the change, the line of the business it lands on, the size of the effect, and what the firm does next.
Inflation is a sustained rise in the general level of prices. For a business it is two things at once: its own costs rising, and what its customers can afford falling.
The first bullet of 2.3.5 · 1a is the rate of inflation — not the level of prices, the rate at which they rise. A business does not feel a price level; it feels its suppliers' invoices getting bigger faster than it expected, and it feels customers pushing back.
The arithmetic is why it hurts more than the headline number looks. Inflation of 8% on Marang Seating's $2,400,000 of cost of sales is $192,000. If it holds its price, operating profit falls from $400,000 to $208,000 — a fall of 48%.
A cost rise is multiplied by the margin it lands on. 8% on the costs became 48% on the profit because the profit is only 10% of revenue. The thinner the margin, the larger the multiple — which is why the same inflation closes one firm and irritates another.
And wages are a price too. A claim of 8% on a wage bill of $700,000 adds $56,000, taking the same year to $152,000. Staff who accept no rise take a pay cut in what their money buys, which is why the claim comes.
Real Example: A café that reprints its menu twice a year spends more on printing and more on the staff hours to reprice everything — small costs that only exist because prices are moving.
Exam Matters: Appendix 6 defines Calculate as a calculation based on given data with workings shown. An inflation question usually gives a cost line and a rate: apply the rate to the line, then carry the figure down to the profit the data supports.
There are four answers to rising input prices: raise the price, absorb it, buy differently, or take cost out. Each one costs the business something different.
Pass it on. Marang Seating needs $192,000 more revenue to stand still, which on $4,000,000 is a price rise of 4.8%. That works when customers have nowhere cheaper to go and fails when they have.
Absorb it. Holding the price protects the customer list and costs $192,000 of profit. It is a decision to buy market share with money, and it can only be afforded for as long as the cushion lasts.
Buy differently. Fixing a supply contract for a year, ordering earlier, switching to a cheaper grade of material, or finding a second supplier. Each one trades flexibility for certainty, and a contract fixed just before prices fall is a loss rather than a saving.
Take cost out. Redesigning the chair to use less material, cutting waste, or raising output an hour. This is the only response that leaves the business permanently better off, and the only one that takes months rather than a morning.
Real Example: A bakery in Lagos that fixed its flour price for twelve months protected a year of margin, and then watched a competitor buy at the lower price that arrived in month four.
Exam Matters: Appendix 6 defines Discuss as chains of reasoning in context with a brief assessment showing awareness of competing arguments. Two responses weighed against each other, in this firm's circumstances, is what the command word is built around.
An exchange rate is the price of one currency in another. An appreciation makes imports cheaper and exports dearer abroad; a depreciation does the opposite.
The specification's own bracket at :1014 names the two directions: appreciation (the home currency buys more) and depreciation (it buys less). Marang Seating's timber and fabric are invoiced abroad at 6,400,000 units a year. At $1 = 4.00 units that is $1,600,000.
A depreciation to $1 = 3.20 units — 20% down — leaves the invoice the same and the bill at $2,000,000. That is 25% dearer, not 20%, and the asymmetry is arithmetic rather than bad luck: a fall of a fifth in what the money buys is a rise of a quarter in what the same goods cost.
The export side moves the other way. Marang Seating sells 4,000,000 units abroad, worth $1,000,000 at the old rate and $1,250,000 at the new one, without changing the price its foreign customers pay. Net, the depreciation takes operating profit from $400,000 to $250,000.
An appreciation to $1 = 5.00 units reverses both: imports 20% cheaper at $1,280,000, exports worth $800,000, and operating profit $520,000. The same movement is good news and bad news inside one firm.
Real Example: An exporter in Vietnam and an importer in the Gulf read the same overnight currency move on opposite pages of the same newspaper, and both are right.
Exam Matters: Appendix 6 defines Calculate as working from given data. Two rates and one invoice are enough for the whole question: divide the foreign invoice by each rate and the difference between the answers is the effect.
A firm answers a currency movement by changing where it buys, where it sells, or what it agrees in advance. Nothing it does changes the rate.
Source at home. Replacing imported material with a domestic supplier removes the exposure completely. It usually costs more per unit at today's rate, which is exactly why it was not done before, and it takes time to qualify a new supplier.
Agree the rate in advance. A firm can fix the rate for a future payment with its bank. It knows its cost with certainty and gives up the gain if the rate moves its way — the same trade as a fixed supply contract, made with a different counterparty.
Reprice abroad, or do not. After a depreciation Marang Seating can keep its foreign price and take $250,000 more revenue, or cut the foreign price to win volume. The first is margin, the second is share, and a firm with spare capacity has a reason to prefer the second.
Sell in more than one place. A business earning in several currencies is hurt by some movements and helped by others in the same year. That is not cleverness, it is arithmetic, and it is the most durable answer available.
Real Example: A manufacturer in Indonesia that buys abroad and sells only at home carries the whole movement; one that also exports a third of its output nets most of it off without doing anything.
Exam Matters: Appendix 6 defines Assess as a well-contextualised chain leading to a supported judgement. A judgement about a currency response has to say which exposure this firm actually has before recommending anything.
An interest rate is the price of borrowing. It reaches a business twice: through what its own debt costs, and through what its customers can afford to borrow.
The channel every student names is the firm's own borrowing. Marang Seating owes $1,500,000. At 6% the interest is $90,000; 3 percentage points more takes it to $135,000. Operating profit does not move at all, because interest is taken off below it — what is left for the owners falls from $310,000 to $265,000.
The channel almost nobody names is demand, and it is the larger one. Offices and cafés buy furniture out of budgets that are themselves borrowed. A 10% fall in orders takes revenue to $3,600,000 and operating profit to $240,000.
Compare the two. The borrowing channel costs $45,000; the demand channel costs $160,000, more than three times as much. Both together leave $105,000.
A third effect is slower and matters more over years: a higher rate raises the return a project must clear before it is worth doing, so machines are not replaced and extensions are not built. Nothing appears on this year's statement, and the firm is smaller in five years than it would have been.
Real Example: A builder's order book empties months before its own loan repayment changes, because its customers decide first and its bank reprices later.
Exam Matters: Appendix 6 defines Analyse as a brief chain of reasoning. Two chains exist here and they are not the same length: say which one this business is exposed to, and why, before following it.
A business answers a rate rise by changing what it owes, what it charges for credit, or what it plans to build. The demand it loses is the part it cannot answer directly.
Change the debt. Repaying early, refinancing at a fixed rate, or moving from an overdraft to a term loan all reduce the exposure. Fixing the rate buys certainty and costs the saving if rates fall, which is the same trade as every other kind of insurance in this topic.
Fund from profit instead. Money that is not borrowed costs no interest, and a firm with a strong year can buy the machine outright. What it gives up is the cash cushion, and running a business on a thin cushion is how a survivable shock becomes a fatal one.
Help the customer borrow. Offering instalments, a trade-in, or a longer payment period moves the financing problem from the buyer to the seller. It wins orders a rival will lose and it lengthens the wait to be paid.
Postpone what can be postponed. A higher rate genuinely does make some investments not worth doing, and stopping one is a decision rather than a failure. The judgement is whether the project is being postponed or quietly abandoned.
Real Example: A machinery dealer that offers twelve monthly payments wins the order from a rival quoting cash on delivery, and waits a year to be paid for it.
Exam Matters: Appendix 6 defines Evaluate as fully developed chains leading to a perceptive conclusion proposing a solution or recommendation. A recommendation here has to survive the case where rates fall again next year.
Taxes reach a business in three different places: on its profits, on its payroll, and on the price its customers pay. Only one of them is the one students think of.
On profit. A profits tax is charged after the last line of the statement, so it changes what the owners keep and not how the business trades. Marang Seating keeps $248,000 of its $310,000 at 20% and $232,500 at 25%.
On employing people. An employer payroll charge is a cost of having staff, so it sits inside the operating expenses. Moving from 12% to 15% of a $700,000 wage bill adds $21,000 and takes operating profit to $379,000 before any customer has noticed anything.
On the sale. An indirect tax is added to the price the buyer pays. Raising it from 6% to 10% moves a $200 chair from $212 to $220 — 3.8% dearer to the customer while the firm still receives $200. The firm can hold the shelf price instead, and pay for the difference out of its own margin.
The three land in three different places, and an answer that treats "a tax rise" as one thing cannot say which. Taxes also fund what the next subsection is about, which is why the specification names them in the same bullet.
Real Example: A restaurant facing a higher sales tax either reprints the menu at a higher price or keeps the price and earns less on every cover. Both are visible to the customer; only one is visible on the menu.
Exam Matters: Appendix 6 defines Explain as a brief explanation of cause or effect supported by details. Naming which of the three taxes has changed is the detail: the cause is the same word and the effects are in three different places.
Government spending reaches businesses as orders, as infrastructure, as subsidies and as the incomes of the people who are paid by it.
The same bullet at :1016 names taxation and government spending together, and the spending half is the one the live section never taught. It arrives in four ways, and the first is the most direct: the state is a customer.
Public orders. Marang Seating sells $600,000 a year of chairs into government offices and schools. A 30% cut to that budget removes $180,000 of revenue and takes operating profit to $328,000; the same rise the other way gives $472,000.
Infrastructure. Roads, ports, power and broadband change what it costs every business to trade, and they create years of orders for the firms that build them. A workshop two hours from a new port is a different business the day it opens.
Subsidies and grants. A $40,000 training grant lowers the cost of taking on apprentices; an export grant lowers the cost of reaching a new market. Incomes. Public salaries and pensions are spent in shops, so a spending programme reaches firms that never sell to the state at all.
Real Example: A new highway in Kenya raises the value of every workshop along it and lowers it for the town the traffic now bypasses.
Exam Matters: Appendix 6 defines Assess as a well-contextualised chain leading to a supported judgement. The judgement in a spending question is usually about dependence: how much of this firm's revenue is one decision away from disappearing.
The business cycle is the repeated swing of an economy's output around its long-run path: boom, downturn, slump and recovery, in that order and without a timetable.
The last bullet of 2.3.5 · 1a is the business cycle. Output does not grow smoothly. It runs ahead of its long-run path, falls back below it, and climbs again, and the four phases have names a business can act on.
In a boom, output is above the path: order books are full, staff are hard to hire and wages and input prices rise. In a downturn, growth slows and orders thin. In a slump, output is below the path, unemployment rises and firms fail. In a recovery, orders return before confidence does.
What matters commercially is that the phases are recognised late and never scheduled. A business finds out it was in a downturn from its own order book, months before anybody publishes a number, and no phase announces how long it will last.
The cycle is not a fifth influence sitting beside the other four — it is the thing that moves them together. Inflation, interest rates, tax revenue and government spending all shift with the phase, which is why a whole-economy question is rarely about only one of them.
Real Example: A recruitment agency sees a downturn first, because hiring is the first spending a nervous employer stops and the last it restarts.
Exam Matters: Appendix 6 defines Explain as cause or effect supported by details. Naming the phase and then the mechanism — orders, prices, hiring — is the detail that separates an explanation from a description of the picture.
A swing in the whole economy becomes a much bigger swing for firms selling things that can be postponed, and a much smaller one for firms selling things that cannot.
The economy's output moves by a few per cent. Individual firms move by far more, and the difference is what they sell. Anything a customer can put off for a year — furniture, machinery, a new car, a holiday — swings hardest. Anything bought weekly whatever happens barely moves.
Marang Seating is in the first group. A 2% movement in the economy shows up as roughly 18% in its order book, about 9 times as much. In a boom that is $688,000 of operating profit; in a bad year it is $112,000.
Fixed costs are the second multiplier. $1,200,000 a year is owed whether Marang Seating sells 20,000 chairs or none, so the swing in profit is far wider than the swing in revenue. A fall of 30% in orders leaves −$80,000 — a loss.
The firm's revenue only has to fall to $3,000,000 for the profit to reach zero, which is a quarter of the way down. Knowing that number is what tells a business how much of the cycle it can survive.
Real Example: A noodle stall and a kitchen-fitting company in the same city meet the same downturn. One loses a few customers; the other loses its year.
Exam Matters: Appendix 6 defines Analyse as a brief chain with interpretation where data is given. The chain is the phase, then what kind of purchase this firm sells, then what its fixed costs do to the result.
A business cannot forecast the cycle, so it prepares for it instead: flexible costs, a cash reserve, and a spread of customers who do not all stop at once.
This is the response half of the cycle bullet, and it starts from an admission: nobody in the firm knows when the turn comes. The question is never what the economy will do — it is what this business can survive if it does the worst thing.
Make the costs bend. Agency staff, overtime instead of headcount, rented rather than bought equipment, and subcontracting all cost more per unit in a good year and less in a bad one. That premium is the price of the option to shrink.
Hold a reserve. Cash held through a boom earns very little and is what pays the wages in the quarter when orders stop. A firm that invested the last of it at the top of the cycle is the one that fails at the bottom.
Spread the customers. Marang Seating earns $1,000,000 abroad and $600,000 from public orders, and those three markets do not turn on the same day. Prepare in the boom. Everything above is cheap to arrange when trading is good and impossible to arrange when it is not.
Real Example: A factory that kept a quarter's wages in reserve through three good years spent it in one bad one and stayed open; the rival that bought a second site did not.
Exam Matters: Appendix 6 defines Evaluate as fully developed chains leading to a perceptive conclusion proposing a solution. A conclusion here has to name what the preparation costs in the good years, not only what it saves in the bad one.
Consumer protection sets a floor under what a buyer can expect: goods that work, descriptions that are true, and a remedy when they are not.
Every market this specification's students sit in has consumer protection rules, and they are built on the same three ideas: goods must be of satisfactory quality, must match how they were described, and must be fit for the purpose they were sold for. When they are not, the buyer has a remedy — repair, replacement or refund.
What matters for 2.3.5 is the effect on the business, not the name of the rule. It sets a cost floor: inspection before despatch, a returns process, and money set aside for claims. Marang Seating spends $45,000 a year on exactly that.
It also constrains the marketing. A claim on a label or in an advertisement becomes a promise the firm can be held to, so "lasts a lifetime" is a legal commitment rather than a phrase. Rules on unfair terms make the small print enforceable only if it is fair.
And it is not only a cost. A floor that every seller has to meet takes the advantage away from the firm that was cutting corners, which is worth most to the business that was already honest.
Real Example: An online seller that lists a desk as solid wood and ships veneer has to take it back at its own cost, and the return freight is larger than the margin on the sale.
Exam Matters: Appendix 6 defines Explain as cause or effect supported by details. The detail is a specific business consequence — an inspection step, a returns budget, a claim that had to be withdrawn — not the title of a statute.
Employee protection sets minimum terms for the people a business employs: a wage floor, a written contract, limits on hours, notice, and freedom from discrimination.
The second area at :1022 is employee protection, and across the markets these students sit in it covers the same ground: a minimum wage, a written statement of terms, limits on working hours, notice and fair dismissal, leave, and protection from discrimination in hiring, pay and promotion.
The first-order effect is cost. Marang Seating spends $50,000 a year on contracts, record-keeping, training and the administration of leave, and a wage floor raises the bill directly for any firm paying near it.
The second-order effects go both ways. Dismissal rules make hiring a slower decision, so a firm uses overtime or agency staff before it adds a contract. Against that, protected and better-paid staff leave less often, and the cost of replacing a trained worker is months of output.
The constraint that surprises students is on flexibility: a business cannot simply shorten hours in a downturn, so employment law is part of why the cycle is expensive for firms with large permanent workforces.
Real Example: A workshop in Pakistan that raised its lowest wage above the floor lost fewer trained sewers, and stopped paying to retrain replacements twice a year.
Exam Matters: Appendix 6 defines Discuss as chains of reasoning in context with a brief assessment of competing arguments. The competing argument here is almost always cost against retention, and both sides have to be applied to the firm in the source.
Health and safety law makes a business responsible for the risks its own work creates: assess them, remove what can be removed, and guard what cannot.
The fifth area at :1024 is health and safety, and it is the one the live section mentioned once inside a sentence about something else. It is a duty to the people doing the work: assess the risk, remove it where possible, guard and train where it is not, supply protective equipment, and record what happened when something goes wrong.
For Marang Seating that is $80,000 of guards and extraction on the saws, then $30,000 a year of training, inspection and equipment. It is the smallest of its four compliance budgets and the one with the largest thing behind it.
An accident is far more expensive than the prevention. A serious one stops the cutting line for 12 trading days. At $16,000 of revenue a day that is $192,000 of output — 6.4 times the entire annual safety budget — before any fine, insurance increase or claim.
The effects reach beyond cost: the layout of the workshop, the speed a line can run, who may operate what, and the time it takes to bring a new worker to full output.
Real Example: A factory that fitted guards to its presses lost a week of output installing them, and has not lost a week to an injury since.
Exam Matters: Appendix 6 defines Calculate as working from given data. A safety question often gives a daily revenue and a number of days lost: the comparison the answer needs is that figure against the annual cost of prevention.
Environmental rules make a business pay for effects it used to pass on: emissions, waste, packaging and the materials it takes out of the ground.
The third area at :1023 is environmental protection. A firm's production has effects that land on people who are not its customers — smoke, effluent, noise, waste, packaging — and the rules move the cost of those effects back onto the firm that creates them.
They arrive as limits (what may be emitted or dumped), permits (an operation that needs approval before it starts), charges (on waste, packaging or emissions), standards (what a product must meet to be sold) and responsibility for disposal at the end of a product's life.
Marang Seating fitted $120,000 of dust extraction and waste separation and spends $25,000 a year on certified timber and disposal. Certified timber costs more per cubic metre and is the only kind several of its export customers will now accept.
That last sentence is the whole evaluation. The same rule is a cost to a firm selling on price and a qualification to a firm selling on reputation, and which one it is depends on the market the business has chosen to be in.
Real Example: A tannery required to treat its effluent spent a year's profit on the plant, and then won a contract from a European buyer that had refused to deal with it before.
Exam Matters: Appendix 6 defines Assess as a contextualised chain leading to a supported judgement. The judgement is rarely "costly" or "beneficial" on its own: it turns on whether this firm's customers are the kind that will pay for the standard.
Competition policy stops firms replacing competition with agreement: no price fixing, no abuse of a dominant position, and mergers that must be approved.
The fourth area at :1024 is competition policy. Every market these students sit in has one, and the names of the bodies differ while the four prohibitions do not.
Agreements between rivals — fixing a price, dividing a market, rigging a tender, agreeing to hold back output — are the core prohibition, because they give the customer the appearance of choice and none of the substance. Abuse of a dominant position catches a large firm using its size to shut rivals out: pricing below cost to drive one under, or tying a product nobody wanted to one they did.
Mergers above a size threshold need approval, which can be refused or made conditional on selling part of the business. Protection for smaller firms covers the terms a large buyer may impose on its suppliers.
For Marang Seating the effect is practical: it may not agree a price with the 40 workshops it competes with, and it may complain if a larger rival prices below cost to remove it. Policy is a protection as well as a restriction.
Real Example: Three suppliers bidding for the same school contract who agree in advance who will win are rigging the tender, whatever they call the conversation.
Exam Matters: Appendix 6 defines Explain as cause or effect supported by details. Naming which of the four prohibitions the conduct falls under is the detail; "it is against competition law" is the claim it was meant to support.
Intellectual property rights let a business stop others copying what it created. The three the specification names protect different things and last for very different times.
The sixth area at :1025 brackets three rights, and they are not interchangeable. A patent protects a new invention or process. It has to be applied for, is examined before it is granted, and lasts up to 20 years from filing. In exchange the invention is published, so everyone can read how it works and nobody may use it.
Copyright protects a created work — drawings, photographs, catalogues, text, software. It arises automatically the moment the work is made, needs no registration and no fee, and lasts for decades. It protects the expression, never the idea: a rival may build a similar chair and may not copy the drawings of this one.
A trademark protects a brand identifier — a name, a logo, a slogan. It is registered in each market where it is used and can be renewed without limit for as long as it is used, which makes it the only one of the three that need never expire.
For a business they do three jobs: exclude a copier, licence the right to someone else for a fee, and carry value on the balance sheet. Marang Seating's folding mechanism is patented, and a rival pays $25,000 a year to use it.
Real Example: A drinks maker can protect its bottle shape and its name indefinitely by registration, and loses exclusivity over the recipe the day its patent expires.
Exam Matters: Appendix 6 defines Define as requiring a term or phrase to be defined. Two marks means two things — what the right protects, and how it is obtained or how long it lasts — rather than the same statement twice.
Compliance is a cost with a return. A business decides how much to spend on it by comparing the spend with what breaking the rule would cost.
Add up what Marang Seating spends on the six areas: $45,000 on consumer protection, $50,000 on employment, $30,000 on safety and $25,000 on the environment. That is $150,000 a year, 3.8% of revenue and 37.5% of the operating profit.
Set against that, what non-compliance costs: fines, claims, the output lost while a line is stopped, insurance that reprices, contracts that are withdrawn, and the customers who read about it. Those costs are larger, arrive without warning, and land in one year rather than being spread across ten.
The responses that work are the dull ones: design compliance in rather than bolting it on, train the people who do the work, document what was done, and treat a rule with a lead time as a project with a deadline. A firm that redesigns once spends less than one that inspects for ever.
And the strategic answer is to notice who else the rule applies to. A standard that every seller in the market must meet, including importers, removes the advantage of the cheapest corner-cutter — so the firm that was already meeting it has just been handed something.
Real Example: A food producer that rebuilt its packaging line to meet a new labelling rule spent once; the rival that kept relabelling by hand is still paying for it every week.
Exam Matters: Appendix 6 defines Evaluate as fully developed chains leading to a perceptive conclusion proposing a solution or recommendation. A conclusion about compliance has to compare the spend with the cost of the failure it prevents, and say which firms the rule helps.
How many firms a business competes with decides how much of its price it controls and how quickly a good year is copied.
The first of the three dimensions at :1028 is numbers. Marang Seating competes with 40 small workshops and 2 large importers, and sells 20,000 of the 250,000 chairs bought in its market — a share of 8%.
More rivals means less control of the price. A buyer with forty quotes to choose from sets the price; the seller accepts it. Customers also find it easy to switch, so a poor delivery costs the order rather than an apology.
Numbers are not fixed, and what holds them down is how hard the market is to enter. Where the equipment is cheap and no licence is needed, a good year attracts entrants: 6 new workshops opened in Marang Seating's market last year, and all of them are now quoting against it.
Fewer rivals is not automatically comfortable. A firm facing two large competitors rather than forty small ones has fewer quotes against it and much more to lose from each one, because a single lost customer can be a tenth of the year.
Real Example: A city with a dozen delivery apps and one with two are different businesses to be in: the first competes on price every day, the second on whatever the other one is not doing.
Exam Matters: Appendix 6 defines Analyse as a brief chain with interpretation where data is given. Given a number of rivals and a market share, the chain runs from how many quotes a buyer can get to how much price the firm controls.
A larger competitor buys cheaper, spends more on reaching customers, and can lose money for longer. Size is an advantage in cost and in endurance.
The second dimension at :1029 is size — the size of the competitors, which is a different question from how many of them there are. Marang Seating buys timber by the pallet; the large importer buys it by the container, and its cost of sales is $105 a chair against $120, a gap of 12.5%.
That gap is not skill. It comes from buying power, from spreading a fixed cost — a designer, a delivery fleet, a website — over far more units, and from being able to run specialised equipment at full capacity.
Endurance is the second advantage and the more dangerous one. A large rival can sell below cost in one town while the rest of its business pays for it. A small firm losing money in its only market is losing money everywhere it operates.
What size costs is speed. A big firm changes a specification through a process; a small one changes it on the workshop floor on Tuesday. That is the gap a smaller business sells into, and the last subsection of this chapter is about how.
Real Example: A regional grocer and a national chain pay different prices for the same case of rice, and the difference is decided in the buying office rather than in either shop.
Exam Matters: Appendix 6 defines Assess as a contextualised chain leading to a supported judgement. A judgement about a larger rival has to separate the part of its advantage that comes from size from the part a smaller firm could actually match.
What rivals actually do — cut prices, advertise, launch, lock in distributors — matters more week to week than how many of them there are or how big they are.
The third dimension at :1030 is behaviour, and it is the one a business feels on a Monday morning. Rivals cut prices, launch new models, advertise, extend guarantees, sign exclusive deals with distributors, and undercut on delivery time.
A price war is the behaviour to be able to price. If the large importer cuts to $170 and Marang Seating matches, each chair leaves $50 rather than $80 towards the $1,200,000 of fixed costs. At the same volume that is −$200,000 — a loss.
Holding the price and losing customers is usually the better of two bad options. Losing 20% of its volume at the old price leaves $80,000, which is small and is not a loss. The arithmetic says so: matching needs 24,000 chairs to break even against 15,000 before, 20% more sales in the middle of a price war.
Non-price behaviour is answered differently. An exclusive distribution deal is answered by finding another route to the customer, and a rival's new model by having one of your own ready.
Real Example: A stationery supplier that matched a national chain's discount on every line spent a year working for nothing and finished it with the same customers it started with.
Exam Matters: Appendix 6 defines Calculate as working from given data, with workings shown. A price-war question is answered by working out the profit both ways and comparing them, not by arguing about market share.
Competitive environments change in four ways: new firms enter, existing ones merge, a substitute arrives, or the established firms start behaving differently.
Numbers, size and behaviour are all moving all the time, and 2.3.5 · 3a is about the EFFECTS of that. New entrants add capacity that has to be filled, so prices fall before anybody has decided to cut them. Mergers turn two medium rivals into one large one and change both the numbers and the sizes at once.
A substitute is the change that does the most damage, because it is the one a firm is not watching for. It does not come from a rival in the same trade: it is a different way of getting the same job done, and it can remove a market rather than taking share in it.
Changed behaviour is the fourth. A rival that has been comfortable for years and is suddenly discounting, advertising and hiring has usually been bought, refinanced or given a target, and the change will outlast the campaign.
The responses are the same four every time: differentiate so the comparison is harder, cut cost so a lower price is survivable, move to a segment the change does not reach, or specialise far enough that the entrant is not selling the same thing. What a business must not do is answer a permanent change with a temporary discount.
Real Example: Video rental shops were not beaten by a better video rental shop. Streaming removed the trip to the shop, which was the thing the whole business existed to provide.
Exam Matters: Appendix 6 defines Discuss as chains of reasoning in context with a brief assessment of competing arguments. The competing arguments are usually the four responses, and the assessment turns on whether the change is temporary or permanent.
A small firm competes on the things size makes difficult: a narrow specialism, speed, closeness to the customer, and a reputation it owns.
:1031 asks directly for ways for a small business to compete in a competitive market, and the first rule is negative: not on price. A rival buying 12.5% cheaper wins any contest decided by the number on the quote.
Specialise. A niche is a segment too small to interest a large firm and large enough to fill a workshop. Marang Seating's bespoke café fit-outs sell 2,000 chairs at $260 against a list price of $200, and leave $90,000 more than the same chairs sold as standard stock.
Be quick and flexible. A change agreed on the workshop floor on Tuesday takes a large competitor a month. Be close to the customer. The owner answering the phone knows the last order and can decide on the call, which is a service a process cannot buy.
Own a reputation. Design, quality and after-sales service protected by a registered trademark cannot be bought in volume. Buy together. Small firms in a buying group narrow the cost gap without giving up any of the above.
Real Example: A tailor in Colombo competing with imported suits sells a fitting the importer cannot offer, at a price the importer would not bother with.
Exam Matters: Appendix 6 defines Evaluate as fully developed chains leading to a perceptive conclusion proposing a solution or recommendation. A recommendation for a small firm has to name the segment and say why a larger rival would not follow it there.
An external influence is a change outside the business that the business cannot stop and has to answer. 2.3.5 asks for both halves: the effect, and the response.
Inflation is a sustained rise in the general level of prices. For a business it is two things at once: its own costs rising, and what its customers can afford falling.