3. Osborne - The external and internal environment

Question 2

The Internal and External Environment (CH3)

What does Internal Environment mean?

Answer 2

Internal Environment: refers to all the inlying forces and conditions within the company, which can affect the company’s operations.

Question 3

The Internal and External Environment (CH3)

What does External Environment mean?

Answer 3

External Environment: Major forces outside the organization with that have the potential to affect the organization’s performance, profitability, and functionality.

Question 4

The Internal and External Environment (CH3)

What is PESTLE?

Answer 4

An analysis technique used to understand the impact of external factors on a businesses operations.

Question 5

The Internal and External Environment (CH3)

What does PESTLE stand for?

Answer 5

Political
Economic
Social
Technological
Environmental
Legal

Question 6

The Internal and External Environment (CH3)

What are Political factors? (PESTLE)

Answer 6

Political factors relate to the extent to which the government influences the economy.

For example:
- Government Policies.
- Taxation.
- Imports and Exports.
- Public spending - expenditure in the public sector by the government.

Question 7

The Internal and External Environment (CH3)

What are Economic factors? (PESTLE)

Answer 7

Economic factors refer to the financial state of the economy

Question 8

The Internal and External Environment (CH3)

What are Economic factors affected by? (PESTLE)

Answer 8

• Interest Rates
• Exchange Rates
• Changes in Disposable Income
• Business Cycle (boom,doom,recession,recovery)
• Inflation

Question 9

The Internal and External Environment (CH3)

Explain the two types of Inflation

Answer 9

1. Demand-pull inflation - when demand for products and services increases, and businesses cannot meet this demand, this drives the price up.

2. Cost-push inflation - when the supply of goods and services decreases because of an increase in production costs.

Question 10

The Internal and External Environment (CH3)

What are Social factors? (PESTLE)

Answer 10

Social factors relate to demographic, cultural and trend changes in society.

These can include:
* Income levels
* Language and culture
* Religion
* Education
* Family structure
* Age occupations

Question 11

The Internal and External Environment (CH3)

What are the positive effects of changes in Technology? (PESTLE)

Answer 11

• Easier access to market through website sales and internet marketing.
• Computer aided design (CAD) reducing the time it takes between the idea for a new product and its production.
• Automated production lines which reduce labour costs and increase productivity.
• Improved safety due to automation of processes.

Question 12

The Internal and External Environment (CH3)

What are the negative effects of changes in Technology? (PESTLE)

Answer 12

• Products becoming obsolete more quickly meaning inventory of older versions need to be sold more cheaply or written off.
• More choice for consumers and information on products via the internet mean they can easily switch from one supplier to another.

Question 13

The Internal and External Environment (CH3)

How can Technology impact the structure of a business? (PESTLE)

Answer 13

• Global communication has meant that many businesses have decided to locate their support departments, such as customer services and even finance, overseas. By locating these department overseas, businesses can see a significant reduction in costs.

• Business may also decide to outsource elements of their production process to other businesses in the UK or
Overseas. Tech will allow them o remotely monitor production which reduces the risk of quality issues and or delays in supply.

Question 14

The Internal and External Environment (CH3)

What are Legal factors? (PESTLE)

Answer 14

Businesses are required to comply with the laws and regulations of the countries in which they operate and/or sell their goods and services.

1. Health and Safety Law.
2. Employment Law.
3. Discrimination Law.
4. National Minimum Wage Regulations.
5. Consumer Protection.
6. Import / Export Law.

Question 15

The Internal and External Environment (CH3)

What are Environmental factors? (PESTLE)

Answer 15

• Climate change, weather conditions, pollution, availability of resources etc.

Question 16

The Internal and External Environment (CH3)

What is the Micro-Economic Environment?

Answer 16

• The micro-economic environment looks at the factors that affect how prices are set between buyers and sellers for good and services. The key factors are supply and demand.

Question 17

The Internal and External Environment (CH3)

What is the Macro-Economic Environment?

Answer 17

The macro-economy refers to the economy as a whole and will have a direct impact on the way in which a business operates.

Question 18

The Internal and External Environment (CH3)

Define “Demand”.

Answer 18

Demand is the quantity of a good or service which consumers want and are willing and able to pay for.

Question 19

The Internal and External Environment (CH3)

What are the 5 types of goods?

Answer 19

• Normal goods
• Inferior goods
• Necessity goods
• Substitute products
• Complements

Question 20

The Internal and External Environment (CH3)

What are Normal Goods?

Answer 20

Goods for which demand increases as income increases.

Demand falls as income falls.

Question 21

The Internal and External Environment (CH3)

What are Inferior Goods?

Answer 21

These are good for which demand increases as income falls.

And demand decreases as income increases.

These are usually cheap, “own brand” products.

Question 22

The Internal and External Environment (CH3)

What are Necessity Goods?

Answer 22

This is a type of good people will buy regardless of a change in income.

They are less sensitive to changes in income and price.

(E.g. Power, water, medicine etc.)

Question 23

The Internal and External Environment (CH3)

What are Substitute Goods?

Answer 23

Goods that carry out the same purpose.

• For example, Coca Cola and Pepsi are substitute products. If the price of one rises this will increase demand for the other, and vice versa.
• There are always exceptions to this — some people will be prepared to pay more if they prefer the characteristics of one of the two substitutes.

Question 24

The Internal and External Environment (CH3)

What are Complement Goods?

Answer 24

• Complements are goods that must be used together - think vehicles and fuel, or a games console and games.
• If two goods are complements, a rise in the price of one will cause a fall in the demand for the other, and vice versa.

Question 25

The Internal and External Environment (CH3)

How does the demand curve change with price?

Answer 25

An increase in price is shown by a contraction along the demand curve.

A decrease in price causes an extension along the demand curve.

Question 26

The Internal and External Environment (CH3)

Define “Supply”.

Answer 26

Supply is the quantity of a good or service which suppliers are willing and able to produce in a given period.

Question 27

The Internal and External Environment (CH3)

How does price affect supply?

Answer 27

Although the quantity supplied depends on price, unlike demand, as the price increases supply also increases.

• If we think about this, it is logical as suppliers will be keen to sell more of a product if the price goes up.
Consequently, the supply curve is always sloping upwards.

Question 28

The Internal and External Environment (CH3)

What is the price mechanism?

Answer 28

Consumers generally want to pay as low a price as possible, whilst suppliers want to charge as much as possible.

When demand and supply meet, this creates the Equilibrium Price.

The function of the price mechanism is therefore to create the Equilibrium Price.

Question 29

The Internal and External Environment (CH3)

How does Competition affect a market?

Answer 29

Generally, the more competition there is in the market for a product or service, the better it is for the consumer.

• In a market with lots of suppliers, they will all be attempting to attract customers with competitive pricing and high quality goods / services.

However, if there are few competitors in the market there is a danger of complacency on the part of suppliers leading to higher prices and lower quality.

Question 30

The Internal and External Environment (CH3)

What are the 2 microeconomic factors that affect the level of competition in a market?

Answer 30

1. Product features: Taste, Brand, Customer Service, Price etc. The more that a supplier is able to
differentiate its product, the fewer competitors it will face in the market.

2. Number of sellers and buyers; if there are more sellers this will result in a more competitive market. If there is one major seller then there may be a monopoly.

Question 31

The Internal and External Environment (CH3)

Name the 5 factors that affect Competition in a market.

Answer 31

1. Product features
2. Number of sellers and buyers
3. Barriers to entry
4. Location
5. Availability of information

Question 32

The Internal and External Environment (CH3)

Define the term “Barrier-to-entry”.

Answer 32

The costs, or other obstacles, that prevent, or deter, new competitors from easily entering the market for a product or service.

Question 33

The Internal and External Environment (CH3)

What are the 4 main Barriers to entry?

Answer 33

1. Legal Barriers
2. Set-up costs
3. Brand loyalty
4. Expertise

Question 34

The Internal and External Environment (CH3)

Explain what is meant by “Availability of information”.

Answer 34

This refers to how difficult it is for consumers to find and compare prices.
If it is easy, and the information Is readily avallable, the level of competition increases. However, if the opposite is true, and pricing information is not easily available, competition will decrease.