Assess the likely impact on SWF's profitability of the changing external environment.

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. The external environment includes consideration of the economic, social, technological, demographic and legal factors that influence SWF.
2. Profitability; rate of return measured by profit margins
3. Use of data in Table 1
4. Technological changes e.g. automation of milking offer solutions to problems
5. Demographic changes resulting in decreasing sales of milk. This is SWF’s core product accounting for 70% of sales.
6. Consumer price inflation is lower than feed cost inflation
7. Increasing costs may mean that SWF needs to identify methods of increasing efficiency
8. Changes to minimum wage are likely to impact SWF as employees may be paid near MINIMUM WAGE
9. Changes to government policy important as SWF has contract for supplying milk to schools.
10. Exporting products will be subject to the regulatory regimes of other countries as with country P
11. Decreasing sales of milk due to demographics means SWF may need to identify alternative markets for using milk such as frozen desserts.
12. Entering these new markets may require substantial investment.
13. Consumer price inflation is lower than feed cost inflation – this could put pressure on SWF’s profit margins.
14. As MINIMUM WAGE increases SWF production costs may increase and this may reduce profits. This may affect all other farming businesses equally
15. Technological changes offer solutions to problems to cost pressures but require substantial investment and therefore carry risk
16. Increasing costs will mean that SWF needs to identify methods of increasing efficiency.
17. Identification of most important external factor and justification
18. SWF less affected by MINIMUM WAGE changes as they can automate milking
19. Diversification of SWF will have reduced risk
20. Impact of cost increases on profitability depend on price elasticity of demand
21. The external environment is dynamic and may change in the future and affect profitability differently. What if government changes policy?
22. Will government increase subsidies to farms?
23. Data in Table 1 is forecast. Actual changes may be very different
24. Impact of changing environment will depend on the management of SWF and its flexibility in responding to change. Contingency planning may be significant.