3.1.4 impact on external influences

Question 1

what does pestle stand for

Answer 1

political, economic, social, technological, legal and environmental)

Question 2

what is the external environment

Answer 2

The external environment is all of those factors outside of the control of a business that will impact on its day to day operations, decision making and strategies

Question 3

define political environment

Answer 3

The political environment is the government actions that impact on the strategic and functional decisions made by businesses
These actions can be by local, national or international authorities
They will impact heavily on the competitive environment and the infrastructure that allows businesses to operate effectively

Question 4

The government can provide training to start up businesses in a variety of areas:

Answer 4

Financial e.g. small business accounts
Marketing e.g. how to target market segments
Operations management e.g. advice on location
People e.g. how to recruit a suitable workforce

Question 5

Entrepreneurs and SMEs impact on businesses in a number of ways:

Answer 5

Create competition
Supply goods and services
Offer specialisms and expertise
Buy goods and services

Question 6

Entrepreneurs and SMEs impact on the economy in a number of ways:

Answer 6

Provide employment
Pay taxes
Social benefits

Question 7

define regulation

Answer 7

is undertaken by government to create competitive markets

Regulation is the creation of rules and sanctions within an industry in order to modify the economic behaviour of firms

Question 8

describe regulation

Answer 8

The government believes that this will protect the interests of consumers so that they are not exploited by businesses
Effective regulation will lead to greater choice and lower prices
Regulation takes place in a number of industries such as telecoms, water and energy
A key reason for regulation is to create conditions for continued investment in infrastructure in important areas of the economy

Question 9

define privatisation

Answer 9

Privatisation leads to monopoly power as most firms privatised operate in markets with barriers to entry such as economies of large scale

Question 10

Arguments for regulation include:

Answer 10

Protecting consumers against the abuse of monopoly power that would lead to higher prices, supernormal profits and inefficiency
To create an environment that will encourage businesses to strive for efficiency through reduced costs
This has been achieved through capping prices, forcing businesses to cut costs in order to increase profit
To ensure quality and choice are maintained

Question 11

define deregulation

Answer 11

De-regulation is the opening up of markets to new competition through the removal of rules and regulations that created barriers to entry

Question 12

Arguments for de-regulation include

Answer 12

The creation of competitive markets will lead to greater efficiency
Businesses strive to reduce costs in order to compete effectively
Businesses strive to meet consumer demand by reducing price and providing a greater range of products
Less government intervention allows firms to produce to the needs of the market

Question 13

Governments will look to improve the infrastructure to help businesses operate more effectively.

This will include the:

Answer 13

Transport network
Improves ease and speed of connections e.g. rail, road and air

Provision of utilities
Ensuring electricity, gas, water etc. are adequately supplied

Provision of information
Ensuring access to fast information e.g. broadband

Question 14

the effects of economic changes in businesses

Answer 14

inflation (the rate of inflation, the Consumer Prices Index)
exchange rates (appreciation, depreciation)
interest rates
taxation and government spending
the business cycle

Question 15

define social environment

Answer 15

The social environment is influenced by the make up of humans within a specific area or business
This influences the behaviour of businesses and customers
Social change can occur as a result of demographic change

Question 16

define demographics

Answer 16

Demographics is the statistical study of human populations e.g. the make up of society

Question 17

demographics include

Answer 17

Gender
Age
Ethnic background
Education

Question 18

describe urbanisation

Answer 18

A general movement of people towards cities and away from rural areas
This has occurred as people move towards jobs and is being seen on a global basis
It puts pressure on infrastructure with increased traffic congestion, demand for housing and other services such as education and health
Cities have responded by redesigning housing and traffic systems e.g. encouraging more use of cycling and public transport

Question 19

describe migration

Answer 19

The movement of people between countries
Net migration = relationship between migration and immigration
Increases the supply of labour as more people come into a country seeking employment
Often willing to work for the minimum wage
The EU offers free movement of labour between member states

Question 20

The impact of demographic changes. How a business might respond:

Answer 20

An increase in the global population size – an opportunity for UK businesses to move into new markets with new or existing products
An increase in the average age of UK society – businesses will have to change their product range to satisfy the needs of older people
Falling EU birth rates – as EU market size falls but the population gets richer UK businesses might move into premium product markets
Health care has also been transformed with people living longer and healthier lives
Health and fitness and healthy eating have led to increased demand for related businesses such as gyms and health foods
This has led to a whole industry developing around health
This has allowed for highly differentiated niche markets with specialist businesses developing new products e.g. protein products for bodybuilding

Question 21

define the technological environment

Answer 21

Technological environment describes the ongoing development of invention, innovation and sharing of technology or processes.

It is the diffusion or spreading of technological change through society that impacts upon business behaviour

Question 22

Technological changes include

Answer 22

Intranet and internet
Social media
CAD/CAM and robotics
Handheld computers
Software packages e.g. DTP, spreadsheets and databases
Online businesses
Integrated software packages
Big data and data mining

Question 23

e commerce involves

Answer 23

E-commerce involves digitally enabled commercial transactions between and among organisations and individuals

Question 24

describe how the technology and ecommerce effects businesses

Answer 24

This has been a key area of growth for a number of businesses such as those in the supermarket industry, Spotify and Apple in the streaming music industry, Uber in the taxi industry and Amazon
Online access has transformed a range of markets, helping to cut costs and provide an enormous range of products
It has also empowered consumers, providing information symmetry and greater buying power as consumers can shop around

Question 25

define legislation

Answer 25

Legislation involves creating and enacting laws in order to protect individuals, businesses and society as a whole

Question 26

define the legal environment

Answer 26

The legal environment describes the collection of legislation that impact on the activities of organisations
Laws are passed through UK Acts of Parliament
The UK is subject to EU laws but this is likely to gradually change after leaving the European Union

Question 27

describe competition laws

Answer 27

Competition law looks to promote fair competition in markets and stop the abuse of consumers by businesses due to monopoly power. This means that anticompetitive practices such as price fixing between businesses are illegal

Question 28

Mergers and takeovers are monitored and will not be allowed if

Answer 28

it is deemed that they significantly reduce competition

Question 29

in the legal environment Firms are not allowed:

Answer 29

to agree prices with competitors
to limit production in order to reduce competition
partition markets or customers between each other e.g. geographically where each firm takes a different region to avoid competition

Question 30

Areas of legislation affecting businesses include

Answer 30

Ability of businesses to issue free carrier bags
Display of cigarettes
Living wage
Trading hours
Labelling and packaging
Advertising

Question 31

Environmental legislation is designed to

Answer 31

Environmental legislation is designed to influence the behaviour of individuals and businesses in order to reduce the negative impacts on the natural environment
Government can inspect businesses and impose fines on those failing to comply
Compliance can often increase costs to a business

Question 32

environmental influences included

Answer 32

Limits to emission levels to sea, rivers and air
Guidelines, limits and bans on waste disposal
Quotas on use of finite resources e.g. fishing quotas

Question 33

define environmental laws

Answer 33

Environmental laws help to ensure that businesses do not have a negative impact on the environment

Question 34

describe Environmental Protection Act

Answer 34

Businesses must improve the control of pollution arising from industrial and other processes

Question 35

describe Environment Act

Answer 35

A business must clean up any contaminated sites that it owns

The Act also established the Environment Agency in order to oversee environmental protection

Question 36

environmental acts have resulted in:

Answer 36

New environmentally friendly production
New products that meet higher environmental standards
Greater use of recycling

Question 37

define the competitive environment

Answer 37

The competitive environment is the degree of rivalry within a market

Question 38

describe and explain the two types of competitive environments

Answer 38

Competitive – large number of businesses competing

Uncompetitive – limited number of businesses competing

Question 39

in competitive environments Changes can be:

Answer 39

Incremental – takes place over time
Disruptive – change that is rapid and unexpected having a dramatic affect on the way in which an industry or businesses operate

Question 40

what are porters Five Forces

Answer 40

entry threat (barriers to entry) 
buyer power 
supplier power 
rivalry 
substitute threat

Question 41

describe Horizontal competition

Answer 41

looks at threats from competitors:

Threat of new entrants – the likelihood of new businesses joining the industry

Threat of substitute products – the likelihood of new products being introduced into the industry. Are there barriers to entry to stop this from happening?

The intensity of competitive rivalry – how aggressive is the competition. This will depend on the concentration of businesses in the industry e.g. duopoly leads to non-price competition

Question 42

describe vertical competition

Answer 42

looks at threats from suppliers and customers:

The bargaining power of suppliers – what power do suppliers have over businesses that they supply to?

The bargaining power of customers – what power do customers have over businesses that they buy from?

Question 43

describe NEW COMPETITORS-Entry threat (barriers to entry

Answer 43

When a new business enters an industry it is a threat to all existing businesses in that market. In a static market the new business will look to gain market share. This will clearly have to come from other businesses.

If the new entrant is a large business this will pose a significant threat.

Big businesses entering the market can have a serious impact on existing businesses.

Question 44

define barriers to entry

Answer 44

Barriers to entry are any factors that stop a firm from entering a market. Some markets will have high barriers to entry e.g. the cost of research and development in hi-tech industries.

Question 45

Barriers to entry exist in monopoly markets. These stop businesses from entering the market
They include:

Answer 45

High costs to enter the market, especially high capital costs
Economies of scale e.g. bulk buying
Intellectual property rights/legal barriers – patents, trademark and copyright
Unfair competition e.g. predatory pricing – attempting to force competitors out of a market e.g. selling products below cost price for a time period
Government regulation – restricting businesses from entering a market e.g. giving sole rights to one supplier

Question 46

describe CHANGES IN THE BUYING POWER OF CUSTOMERS Buyer power

Answer 46

Large businesses not only supply to other businesses and consumers they are also major customers in their own right. It is unusual to find a monopsony (single buyer) in the market but often large businesses are in a dominant position when buying from suppliers.

As they grow they improve their bargaining power – customers become increasingly dependent on large businesses for their sales revenue.

The supermarkets have caused controversy over their policies – driving down costs at the expense of UK farmers and poorer suppliers from developing countries.

Question 47

describe CHANGES IN THE SELLING POWER OF SUPPLIERS

Answer 47

Some suppliers have little or no competition – often they supply a product that they have exclusive access to and where there are no close substitutes.

This makes such suppliers extremely powerful in the market place. The Organisation of Petroleum Exploring Countries (OPEC) is a good example of an organisation that controls supply – in this case, oil. Led by Saudi Arabia, they often restrict supply to keep oil prices high.

Companies such as British Gas and Microsoft have faced an outcry from the public over their anti-competitive practices due to the lack of competition amongst suppliers in their industries

Question 48

define monopoly

Answer 48

one business dominates the market

Question 49

define duopoly

Answer 49

two businesses dominate the market

Question 50

define Oligopoly

Answer 50

– a small number of businesses are in the industry

Question 51

define Monopolistic Competition

Answer 51

many businesses compete in the industry selling differentiated products

Question 52

define Perfect competition

Answer 52

– many businesses in the industry with no influence on market price

Question 53

define dominant businesses

Answer 53

Dominant businesses are those that tend to have a high degree of monopoly power in their markets

Question 54

dominant businesses can …

Answer 54

Reduce choice
Increase prices
Be inefficient without competition
Create barriers to entry to stop new businesses entering the market

Question 55

disadvantages of dominant businesses

Answer 55

Invest heavily in new technology

Gain economies of scale

Question 56

businesses can become dominant by

Answer 56

Businesses can become dominant by growing organically e.g. opening new stores or through external growth e.g. merger. Often, dominant businesses owe their positions to a lack of close substitutes

Question 57

define the threat of substitutes

Answer 57

This occurs when businesses within an industry are faced with the threat of a similar product from another industry.

This will mean that these businesses are less competitive and will affect their ability to charge higher prices and make supernormal profits.

The threat is seen as the level of risk that the business or industry will face due to the substitute product.

Examples of substitutes might include bicycles for cars, healthy foods for drugs or air travel for coach travel.

We can distinguish between the cost of the product and its performance. 

How the substitute performs or works is a key factor in the mind of the consumer. This will include elements such as effectiveness and quality.

The price/performance ratio indicates how much of a threat the substitute is. A low price and high performance will suggest a significant threat.

The ease of switching to the substitute, including the cost, will also have a significant impact.

In London, we have seen a massive switch from the car to the bicycle. It is a significantly cheaper form of transport and is far more effective as a means of getting from A to Z in the busy London roads

Question 58

describe How the forces shape competitive strategy

Answer 58

Five Forces looks at the impact of each force on the profits of an industry and how this is shared out between businesses.

Profit may be competed away due to competitive rivalry, bargained away in negotiations with suppliers and customers and impacted by the threat of new entrants and substitutes.

Strategies used by businesses will need to take into account the forces. Businesses will need to reposition themselves by being proactive after analysing the market or reactive in response to the threats.

A business might use Ansoff’s Matrix in order to strengthen its position in the market e.g. bringing out new products to counter the threat of substitute products or new entrants into the market.

Equally, it might use Porter’s Generic Strategy and aim to be highly differentiated or low cost in response to threats.