3.7 - Analysing External Environment (opportunities&threats) Flashcards
What’s the acronym for external factors impacting business?
P olitical (policies, government & regulations) E conomy (policies, inflation & unemployment) S ocial (demographics, wealth, education, lifestyles & trends) T echnology (speed, rates & new platforms) L egal (laws & safety) E nvironment (protection legislation)
What is SWOT analysis and its value?
4 factor model detailing strengths, weaknesses, opportunities & threats facing a business, helping managers make strategic decisions
Strengths & weaknesses=current & internal (business can influence them)
Opportunities & threats=often in future & external (out of business’ control)
Businesses has to understand them to react appropriately
What is political and legal change in relation to PESTLE?
Political=gov REGULATIONS that influence business operations positively&negatively
Mangers must keep birds eye view of them, may be current&impending legislation, political stability, freedom of speech, protection&discrimination laws etc all affecting business operations & activities
Legal=ways business operates controlled by LEGISLATION (acts as constraint)
Laws can be imposed by UK/EU courts & government
Main areas of legislation affecting business=employment law, consumer protection&competition law
What’s meant by changes in the economic environment within PESTLE? What are the 5 economic factors?
Refers to fluctuations in national & international macroeconomic variables eg/GDP impacting business’ strategic & functional decisions (impact inc. opportunities & threats)
1 economic growth (total of all goods & services economy/country can produce) 2 unemployment 3 inflation 4 exchange rates 5 government economic policy
What is ECONOMIC GROWTH as 1/5 of the economic factors (PESTLE)?
How is it measured?
Total of all goods & services country can produce
-measured using GDP (total output of economy over period)
1 Increase in living standards&facilitates easing of poverty (GDP used to judge, however not all equally improved, more jobs, more working, higher wages=move out of poverty)
2 Avoid problems of periods of recession (social breakdown)
What’s a recession? Generally what impact does it have on a business and what does it depend on?
Need 2/more consecutive negative quarters
- decrease in living standards, less goods & services produced & demanded, less spent, sales fall
Generally BAD
- businesses produce less, need fewer workers (unemployment increase) so spending falls (saving instead), consumer & business confidence falls, less likely to expand & invest
DEPENDS ON type of business-if business sells inferior goods/takeaway, demand & sales increase
In relation to PESTLE and economic growth, what is an economic cycle? What’s 4 stages are included and what does this mean for business? What do the 2 types of output gap show?
GDP fluctuates around its underlying trend, following a regular pattern (rises & falls overtime to follow pattern)
1 RECESSION (rate of economic growth becomes negative & real GDP falls in 2 consecutive quarters) Gov reduces interest, production reduce as demand falls, capacity increased, business confidence falls, profits fall-weak businesses may decide to stop trading/look overseas, stockpile products 2 RECOVERY (economic growth becomes positive after recession) Increasing consumer expenditure, existing spare capacity used, production rises, business confidence strengthens- new business may open, existing firms increase capacity 3 BOOM (rate of economic growth exceeds potential growth of GDP-output gap narrowed) Rate of inflation usually increases, some unable to satisfy demand, profits high but hit by rising costs-enter new markets, sub contract, increase prices to dampen demand 4 SLOWDOWN (economic growth begins to fall & approach 0) Increased bankruptcy & insolvencies, government further lowers interest, high unemployed, low business&consumer confidence-large scale redundancies, reduce capacity, promotion focused on price & easy payment terms/intro basic product range)
Output gap
Positive=actual output exceeds potential growth, indicates little/no spare capacity
Negative=actual output is below potential output, country has spare capacity
What is government economic policy as 1/5 of the economic factors (PESTLE)-what’s 2 parts are involved and what do they each include?
1 FISCAL POLICY
use of taxation&public (gov) spending to achieve macro (whole country) economic targets-helps control economy
- EXPANSIONARY FISCAL (expand&boost economy, decrease tax, increase gov spending-may have to borrow)
- CONTRACTIONARY FISCAL (reduce level of economic activity, increase tax, decrease gov spending)
2 MONETARY POLICY
aims to influence GDP&unemployment
Primarily concerned with inflation-preserve at 2%-base rate of interest set by bank of England’s MPC
inv altering interest rate/supply of money in economy&includes manipulating exchange rates (are affected by changes in interest)
since 2009 quantitative easing also used to increase money supply (created digital money to get us out of recession but not printed bc would cause inflation)
What are the 5 types of tax in relation to economic policy and how can this impact business?
1 INCOME (direct tax taken out of person’s income, UK=income progressive (those earning more pay higher proportion) - if increased, less to spend on goods & services, businesses expect to sell less so will reduce level of investment vice versa
2 NATIONAL INSURANCE (compulsory payments by employees&employers to cover healthcare, pensions, benefits etc)
- if increased=process of hiring becomes expensive, result in job cuts/elsewhere in business/if decreased=money left to invest eg/training/recruitment/elsewhere
3 VAT (charge on sales of goods&services based on value of item sold-collected by business, passed onto gov)
- consumers pay higher prices (business can raise price without big loss of sales) but some choose to keep prices lower in attempt to gain market share (but cuts into profits)
- could mean fall in costs for suppliers (may choose to pass this on in reduced retail prices, if prices of goods&services fall, real income of consumers will increase so more to spend)
4 EXCISE DUTIES (indirect taxes applied to sale/use of goods like alcohol, tobacco etc-varies depending on product)
-if increased=price increases, making it less attractive so quantity&demand falls depending on elasticity, businesses could counteract by reducing prices, increasing demand but not necessarily profits as=smaller profit margin (affects gambling, fuel businesses etc)
5 CORPORATION TAX (tax on company profits)
- if increased=companies keep less of profits=less company investment&possible lower wages/job loss
- if decreased=business has more profit to save, invest & recruit, helping to expand&grow business
- affects shareholders/owners, partnerships etc
In relation to PESTLE and economic change, what are exchange rates?
In general for the UK, what would a fall (depreciation) and a rise (appreciation) in the exchange rate mean?
Price of 1 currency expressed in terms of another (affecting imports&exports-affecting amount spent/received)
-determined by its supply&demand rate in the country for which currencys being exchanged
depends what type of exchange rate system a country’s using=free floating exchange rate system OR fixed exchange rate system
Free floating-value of currency allowed to find its own way to equilibrium without gov intervention so will be determined by market forces of supply&demand
Appreciation=increase in value of a currency compared to others, that currency can now buy more foreign money
Depreciation=decrease in value of that currency, so it can buy less
What does appreciation and depreciation mean for imprters and exporters in relation to exchange rates? What’s the acronym to remember the impact of appreciatio and depreciation?
How do they impact businesses?
Appreciation= -increase price of exports (demand will fall as buy from other country instead of Britain), +decrease price of imports
Depreciation= +reduce price of exports (more people buy our products bc cheaper for them), -increased price of imports (costs go up-pound lost value)
SPICED (stronger pound imports cheaper exports dearer)
How important impact=depends on how big change in exchange rate is & how big proportion of business’ costs is spent on imports/sales from exports (if mainly from abroad=bad)
In relation to PESTLE and economic change, what is inflation and hows it measured?
What are the 2 types of inflation?
Increase in avg. price of goods&services in economy
Reduces power of money in economy&erodes value (£10 worth 2% less)
- UK=consumer price index (CPI) measures inflation,(rate=measured by annual % change in level of prices)
- Bank of England’s main aim to keep it at 2% target set by gov (allows businesses to plan)
1 DEMAND PULL INFLATION (demand increases, pulling up price, business=more confident but may have to increase prices bc cant supply quick enough=increased pay&decreased unemployed)
2 COST PUSH INFLATION (inflation rises due to rising costs pushing up prices eg/wage rise but productivity doesnt)
What’s stagflation?
Stagflation=prices rising but unemployment is high so limit spending further
In relation to PESTLE and economic change, what is deflation?
Fall in avg price level measured by CPI
- low demand=redundancies&rationalisation (close things down not making money)
- low demand so companies reduce price
Causes fall in productivity bc companies wont keep supplying market with goods nobody wants=dont need as many workers=rise in employment so demand drops further causing firms to lower prices more
In relation to PESTLE and economic change, what is unemployment and how do you calacute the rate of unemployment rate?
What are the 4 main types of unemployment and which is the worst?
No. people able, available&willing to find work&actively seeking work but not employed
Unemployed/(employed+unemployed) x100
Rate=% of labour force (employed&unemployed) out of work (BE AWARE rise in unemployment=likely to be result of earlier economic downturn, GDP=lagging indicator so business may respond before it rises sharply)
1 SEASONAL (regular seasonal changes-not too bad, what areas used to) 2 STRUCTURAL=WORST (arises from mismatch of skill&opp as pattern of labour demand in economy changes eg/type changes from primary-secondary-tertiary=may have been very skilled in mining but tech improvements mean don’t have skills needed) 3 FRICTIONAL (transitional unemployment due to people moving between jobs=not too bad, may be moving to better job) 4 CYCLICAL (caused by fall in aggregate demand=decline in GDP&unemployment-caused by going in recession)
In relation to PESTLE and economic change, unemployment is the no. people able, available and willing to find work and actively seeking work, but not employed.
How could rising/high unemployment affect business (6)?
HIGH
+ greater supply of labour (potentially lower wages as more available to work&easily replaced)
+ lower staff turnover (employees less likely to find find other jobs/want to move in uncertain economic climates, so less spend in recruitment, training=less costs&time wasted in production)
+/- recruitment=easier (should be more applicants for roles, but are they the right people?)
+/- demand for interior goods may increase
- creates insecurity in workforce=lower morale&motivation
- danger=loss of skills if out of work for years=lower consumer spending&social problems associated with unemployment eg/crime like shoplifting
In relation to PESTLE and economic change, under government policy there’s fiscal policy and monetary policy
What is fiscal policy?
1 FISCAL POLICY (use of taxation&public (gov) spending to achieve macro (whole country) economic targets-helps control economy)
Gov top 3 spending=social protection, health&ed
Top 3 funding for this=income tax, VAT&NI
Fiscal deficit=gov spends more than its tax income=have to borrow, each years additional borrowing added to national debt
Includes
- EXPANSIONARY FISCAL (expand&boost economy, decrease tax, increase gov spending-may have to borrow)
- CONTRACTIONARY FISCAL (reduce level of economic activity, increase tax, decrease gov spending)
In relation to PESTLE and economic change, under government policy there’s fiscal policy & monetary policy, what is monetary policy?
Aims to influence GDP&unemployment
Primarily concerned with inflation (preserve at 2%=base rate of interest set by bank of England’s MPC
inv altering interest rate/supply of money in economy&includes manipulating exchange rates (are affected by changes in interest)
Since 2009 quantitative easing also used to increase money supply (created digital money to get us out of recession but not printed bc would cause inflation)
Monetary Policy Committee (9 members all vote)
- businesses trust int. rates more bc asked about their change in demand
- people trust promise of money&its face value (notes made difficult to counterfeit=vital to keep value)
In relation to monetary policy, what are interest rates and what are some examples operating within the external environment?
How will an increasing&decreasng interest rate in UK impact strategic decisions of business (directly&indirectly)?
Reward for saving&cost of borrowing expressed as % of money saved/borrowed
Inflation increase=INCREASED bank rate=highstreet banks increase rates making it more expensive (so saving rates, mortgages, credit cards&loans increase)
INDIRECTLY EFFECTS=consumers with debts=less income to spend bc paying for interest=sales fall (saving, if borrowers eg/mortgage=have less to spending on variable rate, inflation slows)
DIRECTLY EFFECTS=business with existing loan/wanting to borrow/have overdraft with variable rates have higher costs=business less likely to invest&grow bc too expensive)
VICE VERSA FOR DECREASE
DEPENDS ON amount business has borrowed&on what terms, & cash balances business holds
If consumers&households see rise as ST, may spend as before so little effect in change of demand
In relation to monetary policy, what is the impact of interest rates on the exchange rate (4 steps)?
Bank of England increases bank rate (perhaps concerned of inflation)
Interest begins to increase in UK high street banks
Investors holding foreign currency want UK sterling so can put money in UK banks with high interest rates (get more back on money invested)
Demand for UK sterling increases, increasing rice of UK sterling, UK £ exchange rate appreciates
In relation to economic change, what is globalisation? What is the trend over recent years and what are the 6 reasons for how has this happened?
Processes have resulted in ever closer links between world’s economies=more intergrated&interdependent Made through trade, investment, production, migration of people, transfer of tech & blurring of cultural divides
TREND=rapidly increased
1 INTERNET
(businesses communicate between countries quickly&cheaply, allows jobs to be outsourced around world=decrease costs)
2 SHIFT FROM SEARATE NATIONAL FINANCE MARKETS TO GLOBAL FINANCE MARKET
(easy to move money securely around world)
3 CARGO SHIPS
(cheaper to transport goods around world)
4 CHEAP FAST AIR TRAVEL
(goods&people can move round world easily for work)
5 EU LIFTING RETIRCTIONS OF WORK
(citizens can work in any other EU country without restrictions)
6 INCREASED FREE TRADE
(bc of reduced tariffs=few/no trade barriers)
Why has globalisation and number of global brands increased? (2 of each)
Globalisation:
1 SUPPORT OF MANY GOVS&MAJOR BUSINESSES
(believe freer trade will offer prosperity&growth for all eg/global food production risen&malnutrition rates fallen)
2 FALLING COST IF INT TRANSPORT&COMMUNICATIONS
(made practical processes of producing&selling in global markets easier&more cost effective, developments in tech made it quicker, simpler&cheaper to send info around world&provide services eg/UK business establish customer service facilities in countries where wages=lower)
Global brands:
1 INT BROADCASTING (watch TV programmes from diff countries creating int. demand)
2 INTERNET
(companies market&sell int. but avoid expense of setting up in foreign countries by advertising on foreign websites&offering overseas shipping=create global brand but avoid risks of setting up abroad)
In relation to globalisation, what are emerging economies? What opportunities (2) & threats (5) do they pose for business?
Developing countries with fast growing but not yet fully developed economies (result of freeing up trade by reducing politcal&legal barriers&impriving international communications&transport links)
+ offer good returns due to rapid growth&labours usually cheaper
+ large market (as jobs created, move out of poverty&new MC formed=people eager to spend on luxuries never been able to before creating lots of economic activity CA=emerging&improving standards of living but people still below poverty line=no. potential customers for any product=reduced)
- language&cultural barriers (difficult to overcome) can prevent UK business from trading with others
- emerging economies use diff. currencies to UK so UK vulnerable to changes in currency values (strong £ makes British exports more expensive abroad, reducing demand for products from UK companies in diff. countries
- inflation (pressing problem due to rapid rates of growth&high growth isnt always guaranteed)
- difficult to import (gov may impose taxes/ restrictions/limit business ability to operate there)
- political risks (not all emergings have stable political systems-country may perform poorly as other economies oppose their actions&may impose economic sanctions-if unstable, may make decisions which=very damaging to business activities of multinational enterprises)
Globalisation is the increased integration and interdependence of national economies
What is the importance of globalisation for businesses? (5 opp, 1 threat for small businesses) and how could they potentially impact society/consumers?
1 INCREASED SALES, REVENUE&PROFIT (ability to trade freely in int. markets offers substantial increase if business is sufficiently competitive, offers unrivalled opp for growth through global service)
2 CHEAPER RESOURCES (increased volume of trade make more resources available to business&allows them to source raw material&labour cheaper than in past-possible through reduced transportation costs&political&economic changes to locate in such countries)
3 ECONOMY OF SCALE (increased scale of production=benefit from economy of scale, costs can be spread across larger volumes)
4 DOWNWARD PRESSSURE ON PRICES (now have access to cheaper materials&labour enabling them to reduce costs&selling price=sharpened price competition)
5 INCREASED NEED FOR INVESTMENT (by sharpening competitive pressures=increased pressures to invest&compete with firms around globe-investment requiered to produce new products differentiated from already available/increase skills&productivity of business workforce)
1 THREAT OF TAKEOVER (seen development of larger businesses as result&more able to face full force of global competition, many have taken over smaller competitors to give greater economies of scale&brand name familiar in parts of world, smaller businesses=vulnerable&risk of takeover due to globalisation of markets)
Globalisation is the increased integration and interdependence of national economies
What are 2 strategic decisions in response to it?
GLOBAL STRATEGIES
- may adopt global strategies when worldwide patterns of demand are similar&single product/range is likely to meet needs of global consumer
- approach offers enormous scope for benefitting from economies of scale&development of global brand
MULTI-DOMESTIC STRATEGIES
- other businesses make decision to establish production capacity through world&sell differentiated products targeted t meet needs of local consumers in local markets
- they produce diff. products for diff. countries&markets
- decisions taken at local level where possible to allow business to meet needs of diff. customers, approach can encourage entrepreneurial spirit throughout organisation&high levels of innovation
In relation to economic change, what is open/free trade?
What is protectionism, its methods and strategic decisions linked to it?
O/F=Imports&exports aren’t restricted
P=gov protects domestic businesses&jobs from foreign competition by giving subsidies whilst imposing tariffs"as on imported products
METHODS
-limit tax
-import quota (limit on how much is imported)&subsidies
-technical barriers to trade
-state procurement policies
STRATEGIC DECISIONS
-force business to use more expensive domestic suppliers
-may complain to govs&international bodies to persuade counties to lift barriers to trade
Open/free trade is where imports&exports arent restricted, what are 4 advantages and 2 disadvantages of open trade?
Protectionism is where the gov protects domestic businesses and jobs by giving subsidies whilt imposing tariffs and qutoas on imported products, what are 2 advantages and 2 disadvantages of protectionism?
OPEN TRADE
+may allow business to benefit from economies of scale
+for consumers=more choice&lower prices
+developing countries can export goods&increase living standards
- fewer local jobs as multinationals expand abroad
- some countries use sweatshops&child labour to keep costs low to compete internationally
PROTECTIONISM
+ countries can develop new industries, creating jobs&boosting economic growth
+ allows small businesses to grow as don’t have to compete with multinationals
- prices of imported&domestic goods rise (due to restricted supply&lack of competition)
- countries may retaliate, imposing tariffs"as on exports
In relation to demographic changes, what opportunities (3) and threats (3) does an aging population offer?
OPPORTUNITES
+ REFLECTION OF POLICIES (retirement age increase-spend more time working with lots of experience due to age&knowledge)
+ TAILORING GOODS&SERVICES TO OLDER PEOPLE (market size increases eg/leisure events&clubs, care sector&private healthhcare-can receive op sooner/increase in size of travel market=go on more holidays=elderly hotels)
+ MORE FLXIBLE WORKFORCE (when older can do more bc no longer caring for children&can cover more part time hours rather than ending work abruptly)
- PEOPLE WORKING LONGER (so have to cut spending to fund state pensions (have to contribute to pensions)/struggle to support people getting older)
- ABILTY TO WORK AFFECTED (bc of physical&mental health problems due to working at old age)
- LOWER STAFF TURNOVER (less ideas&energy eg/teachers age each year but students/class stay same age meaning bigger age gap-hard to keep up to date&stay relevant, keeping interest)
