External Influences on Business Activity Case Study Solutions

Operations “A” 8 marks

(a) Explain four reasons why globalisation may impact a business

Reason 1:      Increased competition

Explanation:       as products and services can be offered internationally.

Reason 2:            Lower costs

Explanation:       As businesses can find raw materials and components from cheaper sources in other countries.

Reason 3:            Larger pool of potential applicants for jobs

Explanation:       as increased movement of people.

Reason 4:            Increased export opportunities

Explanation:       As businesses can sell their products in new markets.

Operations “B” 12 marks

(b) Explain how the following two changes are likely to affect McGregor’s Gym (MCGG):

  • increased income tax in country Y
  • lower interest rates in country Y

Which change is likely to have the most effect on profit? Justify your answer.

Increased income tax in country Y: This will reduce consumers disposable income for luxury activities, so MCGG may have less customers at the Gym, or it may reduce demand for more expensive services like the ice bath or sports massage. Consumers will become more price conscious so if Conor has competitive prices it may attract customers away from other gyms.

However, for many customers keeping fit may not be seen as a luxury so they will continue to spend, so it might not have so much impact.

Lower interest rates in country Y : Lower interest rates will reduce the costs of borrowing for Conor so it may influence the source of finance he chooses for the new equipment in his gym. It may also mean customers will high levels of debt have more money to spend on gym services. However, as normally customers don’t pay for gym memberships by taking loans the interest rates it may have a low impact on his sales and or memberships and services.

Conclusion:        Income tax increased will have more impact on profit, as customers will have to reduce their spending. Although some customers will continue to spend the same amount at MCGG some customers may cancel memberships or reduce personal training sessions which will result in lower sales and profits.

Although lower interest rates may mean more disposable income for customers with high debts, this will not compensate for the sales lost to higher income tax.

However, the impact on profits will depend on how much income tax is raised, a small income tax raise will only have a small effect.

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