1.6 - External Environment

Question 1

What model is used to analyse the overview of the External Environment?

Answer 1

PESTLE

Question 2

What does PESTLE stand for?

Answer 2

Political
Economic
Social
Technological
Legal
Ethical/Environmental

Question 3

Give 2 examples for each element of PESTLE

Answer 3

Political:
Competition Policy
Government Spending and Tax Policies

Economic:
Interest Rates
Exchange Rates

Social:
Demographic Change
Changing Lifestyles

Technological:
Disruptive Technologies
Adoption of Mobile Tech

Legal:
Employment Law
Minimum/Living Wage

Ethical/Environmental:
Sustainability
Tax Practices

Question 4

What are the aspects of the External Environment?

Answer 4

Market Conditions
Competition
Household Names
Interest Rates
Demographic Factors
Environmental Issues
Fairtrade

Question 5

What are the two key indicators of market conditions?

Answer 5

Economic Growth (GDP)
Market Demand

Question 6

What does Economic Growth do?

Answer 6

Measures the value of output (activity) in the Economy)

The value is used to assess changes in economic growth

Question 7

What is Market Demand and what does it do?

Answer 7

How much of a good or service a consumer wants and is able to pay for
For a business, demand turns into revenues (sales)

Question 8

Describe the Competition aspect in the external environment

Answer 8

Competitors with significant market share or faster growth than the market
Influence of disruptive technologies - increasing risk pf new competitors
Consolidation of a market that creates more powerful competitors
Spare or surplus capacity in the market/industry which reduces industry profits and makes price wars more likely
Investment in innovation and new product development by close competitors

Question 9

What does Real Incomes measure?

Answer 9

Real Incomes measure the amount of disposable income available to consumers

Question 10

What are the factors that impact Real Income?

Answer 10

Price Inflation
Wage Growth
Employment Levels
Interest Rates
Government Tax Policy

Question 11

What is Real Income closely linked to and why?

Answer 11

Real Incomes are closely linked to market demand (market incomes) since they are an important factor that affects demand

Question 12

What are the factors that affect demand with Real Incomes?

Answer 12

Real Disposable Income 
Employment and job security
Household Wealth
Expectations and Sentiment
Market Interest Rates

Question 13

What are Interest Rates?

Answer 13

An interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed

Question 14

What are the variety of different interest rates operating within the external environment?

Answer 14

Interest rates on savings in bank and other accounts
Borrowing interest rates
Mortgage interest rates (housing loans)
Credit card interest rates and pay day loans
Interest rates on government and corporate bonds

Question 15

What could happen if interest rates start to rise?

Answer 15

Cost of servicing loans/debt is reduced - boosting spending power
Consumer confidence should increase leading to more spending
Effective disposable income rises - lower mortgage costs
Business investment should be boosted
Housing market effects - more demand and higher property prices
Exchange rates and exports - cheaper currency will increase exports

Question 16

What is Demographic Factors?

Answer 16

Demography is concern with the size and composition of a population (Changes in population dynamics occur slowly but can be significant for businesses)

Question 17

What are the two key demographic changes in the UK that impact on many businesses

Answer 17

Ageing Population

Continued high net immigration

Question 18

Give Implication examples for the two key demographic factors

Answer 18

Ageing Population:
Greater demand for services to support older people (e.g healthcare)
Increasing disposable incomes of older people reflected in higher demand for goods and services (e.g holidays)

Continued high net immigration:
Higher costs of (but greater demand for) public services (e.g education, health, housing)
Increase in size of labour force - potentially keeping wage rates low

Question 19

Describe the Environmental Issues aspect

Answer 19

Concern for the impact of business on the environment is now a significant issue that goes well beyond the potential reputational damage from issues such as pollution and noise

Question 20

What are the key environmental issues that need to be addressed?

Answer 20

Use of raw materials, water and other resources (inputs)
Energy use and its impact on climate change
Waste and pollution produced by the business
The impact the business has on employees and the local, wider and international community

Question 21

What does addressing environmental issues lead to?

Answer 21

Addressing environmental issues can also be a source of opportunity for many businesses

Question 22

Give examples of what addressing environmental issues results in

Answer 22

Lower raw material costs and waste disposal charges
Longer life of assets that are recycled or repaired
Trading opportunities with organisations that will only use environmentally-friendly suppliers
Improved customer goodwill

Question 23

Define External Environment

Answer 23

Features of the business environment that are outside of the control of a business

Question 24

What is Economic Growth?

Answer 24

Increase in the amount of products and services produced in a country over time

Question 25

What is Economic Growth measured using

Answer 25

GDP (Gross Domestic Product)

Question 26

What does it mean if the GDP increases?

Answer 26

More wealth

Question 27

What does it mean if the GDP decreases

Answer 27

Less wealth

Question 28

What are Disruptive Technologies?

Answer 28

Innovation that creates a new market and disrupts an existing one

Question 29

What are Disposable Incomes?

Answer 29

The amount of money a household has to spend after tax have been deducted