1.5 External Environment Flashcards
STEEPLE
Social Technological Economical Environmental Political Legal Ethical
Social
Size of population
Structure of population
Age groups
Education level
Technological
Technological advancement
Need to invest in R&D
Economical
GDP (Gross Domestic Product) growth
Business Cycle
Fluctuations of the real GDP around the long term trend
Recession g<0 (growth)
Consumers income falling
Related to unemployment increase
Falling demand
Less sales
Unemployment increases
Related to consumers income
Less pressure on wages to rise
Cost of production may fall
Other business cycle
Lower Investments
Firms Failing
V-Shape Recession
Economy falls quickly but recovers quickly
U-Shape Recession
Economy falls, then recovers slowly but steadily
L-Shape Recession
Quick fall then recovery takes very long (sometimes years)
Boom
Lower Unemployment (Increase in wages/higher costs)
Rising inflation
Rising consumers income (high demand/high sales)
High Investments
International Trade
Trade between suppliers and customers who are located in different countries (companies selling abroad/companies buying from abroad)
Reasons for international trade
Some products can only be produced in specific places (better products at a lower cost)
Resource Endowment
Some products are sold at a lower price
Exchange Rates
The price of a currency in relation to another currency
Appreciation of Currency
the increase in its price in terms of another currency
Depreciation of Currency
The fall in the price of a currency in terms of another currency
A strong currency benefits importers of the country and penalises exporters
A weak currency is good for exporters and bad for importers
Economic Policies
Supply Policies
Demand Side Policies
Fiscal Policy
Monetary Policy
Demand Side Policies
Fiscal Policies: Government
Monetary Policy: Central Bank
Fiscal Policy
Fiscal Budget (taxation (T)/ Government spending (G)) If T > G -> Surplus = Contractionary Policy (reduce GDP/reduce inflation) If G > T -> fiscal deficit = Expansionary Policy (increase GDP/reduce unemployment)
Government Spending
Industrial policy (to help industries grow)
Taxation
Corporate taxes: (tax on profits) -> Reduces profits
Indirect Taxes: Eg. Sales taxes or VAT (increase cost of production) -> the impact on the business prices depends on the price of electricity of demand (ie: how sensitive consumers are to price changes)
Payroll taxes: Increase prices ad labour costs are higher
Subsidies (negative tax)
The opposite effect of tax
Monetary Policy
Central Bank
Expansionary: increase GDP - reduce unemployment
Contractionary: reduce GDP - reduce inflation
Interest Rate
Instrument of Monetary Policy
Price of money over time
High interest rate (contractionary mon pol)
More expensive to borrow
Savings are more profitable
Appreciation of currency (bad for exporters) -> lower investment/consumers spend less (demand falls/sales fall) Low interest rate (expansionary mon pol)
Opposite of high interest rate
Inflation
Sustained increase in prices
Cost push inflation
Wages or price of resources increase. So firms may try to increase prices to keep profit margins constant. If they can’t they will try to find new sources of materials/components or dismiss workers.
Demand pull inflation
too much demand relatively to the supply. As firms cannot cope with the high demand they will try to increase prices
Environment
Business can affect the Environment (locally)
Waste materials (non-renewable)
Traffic congestion (traffic delays, accidents)
Pollution (air, waste, water
Leads to Major Global Effects
Resource Depletion
Climate Change
Environmental Issues that affect the business
- Firms must try to be ‘environmentally friendly’ as consumers are changing their business decisions
- Changing packaging
- Energy efficient Eg. cleaner technology
- Reduce carbon footprint
- Changing products Eg. Electric cars - Environmental regulations
- Tax on pollution
- Subsidies to clean energy - Becoming environmentally friendly
- Gives a compatible edge
- Creates a ‘green image’ - Pressure groups
- Harm businesses
Politcal
Political Stability
Good institutions (justice, markets -> property rights)
Form of government
Economic System -> Capitalism ( + or - government intervention) vs Socialism (lots of government intervention
Legal (constraints)
Employment laws (flexible labour markets, rigid labour markets
Ethical
Depends on the values and culture of the place where the company is Moral code (implicit and explicit)
3 ethical dilemmas businesses must confront
Child labour
Shouldn’t bribe government officials
Corruption in business practices
