P5 - Describe the influence of two contrasting economic environments on

business activities within a selected organisation

M2 Compare the challenges to selected business activities within a selected
organisation in two different economic environments
The two contrasting environments I am going to look at are:
1) Economy in Growth Economic growth is the increase in the market value
of the goods and services produced by an economy over time. Economic
growth can be measured by changes in inflation. Gross Domestic Product
is used to measure population differences between countries.
Tesco
Stability - Stable economic conditions for Tesco means that they can make
better informed decisions because there is more stability within the economy. If
the economy in the UK is stable, Tescos are likely to have a higher turnover and
be profitable therefore at a time like this Tesco may wish to introduce new lines,
perhaps expand or find a city or town where they may wish to introduce new
stores. Tesco suppliers will also benefit from this as they are supplying Tesco with
more products and it will give them an idea if they need to increase their rates of
production. If the economy is more stable then there will be steady growth in
GDP, steady levels of employment and exchange rates. This means that Tesco
will be more profitable as customers have more money to spend, they will need
to employ for staff and it is better for the economy as Tesco can exports mass
amount of home grown products cheaply.
Cost of Borrowing Money When the economy is stable Tesco will be able to
borrow more finance if they wish to expand or move into a new country. This also
would increase the potential for employment in Tesco and so will have a positive
effect on the state of the economy. Tesco tend to borrow finance when the banks
interest rate is lower. In recent years, the interest rate has been at an all time
low. This is beneficial for Tesco as their repayment of interest on finance
borrowed would be quite small. The bank of England Base Rate is 0.5% currently.
This shows that borrowing money is very cheap at the moment. This would be
good for Tesco if they wish to expand at present. If interest rates are low then
Tesco will be willing to borrow as they feel that they can afford their repayments.
This will increase demand for goods and services within their business and help
economic growth.
Government support The Government provides us with new road networks,
rail and air structures may mean that if Tesco stores develops and locates in new
areas it would be important that accessibility for consumers would be made
more convenient. Tesco is helped by the Government in the area of planning
policy. This has allowed them to dominate the retail landscape in many areas but
is due to its long term policy of adding to its land bank and its capital
programme. Tesco is subject to the same planning laws and constraints as any
other supermarket chain. Apart from this, the Government doesnt really help
Tesco at all. Tesco are successful because of its long term commercial strategies
and operational excellence.
Unemployment Rate - A low rate of unemployment means that there are less
people unemployed and therefore demand for goods and services increases. This
will have a positive effect for Tesco as they are able to employ more staff
because of their increase in demand for their products. Tesco can offer more

P5 - Describe the influence of two contrasting economic environments on

business activities within a selected organisation
training programmes and staff can promote themselves within the Tesco
business.

2) Economy in Recession - Economic recession is a period of economic

decline and is typically accompanied by a drop in the stock market, an
increase in unemployment, and a decline in the housing market. A
recession is less severe than a depression. The blame for a recession
generally falls on the federal leadership, often either the President himself,
the head of the Federal Reserve, or the entire administration.

Tesco

Rate of Inflation Inflation in the economy means that there is a rise in the price
of goods and services. Currently the rate of inflation is 0.3% and the Government
had predicted the target to be 2%. This shows that the prices of products we buy
are still higher, but have not increased by as much. For Tesco this means ...
Recently in the news, there has been a 5% increase in the price of alcohol. The
reasons for this being are an increase in the price of alcohol will stop binge drinking
and it will bring in more revenue for the Government. This impacts Tesco as less
people are buying alcohol in store which means less revenue coming into the
business.
Deflation means that there is a decrease in the price of goods and services. The
UK economy is heading towards a time of deflation as figures are expected to
show that inflation dropped to 0.1%. This may sound good as it allows one to buy
more goods with the same amount of money over time. In reality it may not be
good for the economy as it may be the result of very little demand in the
economy. In the news a few months back, deflation had struck in the E.U which
meant prices of products and services where falling due to lack of demand. The
reason was because most of Britains trade is with the EU and therefore British
firms will find it harder to sell goods to the EU market. This means that
businesses like Tesco....

Unemployment Rate - A high rate of unemployment means that there are

more people unemployed in the economy and therefore demand for goods and
services decreases. This has a negative effect for Tesco as there are fewer
employees to carry on the various job roles. However, it may make it is easier for
them to recruit people and they may be able to employ them at a lower rate of
pay.

P5 - Describe the influence of two contrasting economic environments on

business activities within a selected organisation

Other Economic Factors

Governmental Policies The Government uses two main tools to control the
economy which are the fiscal and monetary policy.
The Fiscal policy deals with Government spending and taxation. The Fiscal policy
is introduced through The Budget which is announced each year in March. In
the Budget the government announces changes in government spending and
changes in taxation. If the government makes changes to the tax rate this will
affect Tescos activities from different perspectives. If the tax rate is reduced
then Tesco will be benefited and they would have more capital resource. Tesco
can increase more expenses on the advertisement or other sector as reduction in
the tax rate has made the company more profitable. Also, if the Government
increases the government spending in different sectors then Tesco will face
reduction in the sales volume. On the other hand, reduction in Government

P5 - Describe the influence of two contrasting economic environments on

business activities within a selected organisation
spending will increase the demand for the businesses like Tesco which are in the
private sector.
The Monetary policy is controlling the economy by changing the interest rate. If
the interest rate is lower it is better for borrowing and therefore the economy. If it
is high it isnt good for Tesco because if they decide to borrow money,
repayments will be larger. In the UK, interest rates are set by the central bank
which is called The Monetary Policy Committee at the Bank of England. The base
rate currently is at an all time low of - 0.5%. This is good for Tesco as interest
paid back on borrowing money will not be as high therefore saves them money
where they can reinvest that into different areas within the business. Another
benefit is that consumers will be encouraged to buy from Tesco and demand for
products will increase due to lower interest rates. This will help them increase
sales and make more profit.
If the interest rate is higher the outcome is
lower growth of businesses as customers
are not willing to spend as the pound is
worth less. Demand for products and
services will fall. Tesco would have to sell
their products for cheaper which means
there is not as much money coming in.
If the interest rate is lower businesses will
keep growing as consumers are more
willing to borrow and less willing to save.
Demand for products and services will
increase as a result. This means that the
pound is worth more and consumers will
want to buy more products and services from Tesco.
Lately in the UK, the pound has risen in value against the euro (1 = Euro 1.28).
This has a negative effect on export from the country. This therefore may mean
that we have a stock pile of goods produced in this country which we cannot sell.
It may also mean that manufacturing firms may have to reduce their workforce
therefore employees could be made redundant.