47 Impact of external influences Flashcards
PESTLE analysis
analysis of the external political, economic, social, technological, legal and environmental factor affecting a business
political factors
members joining or leaving the EU. This could disrupt financial markets and create a great deal of uncertainty in the Eurozone
the issue of national security has become a priority for many governments. If measures designed to improve national security restrict the movement of goods, people can capital, this could have a negative impact on businesses
changes in government e.g. a new government might be elected which is very pro-business
economic factors
falling unemployment might help to increase demand for many businesses
stable prices would create more certainty, which should encourage businesses to invest for the future
lower interest rates would make borrowing cheaper and encourage more investment
social factors
in the UK, greater numbers of people are going to university. This could increase the quality of human resources, which would benefit businesses
the population in many countries is ageing. This could affect demand patterns and create new opportunities for some businesses
increasing migration might increase the size of the potential workforcce, making recruitment easier. It might also provide a boost to demand
technological factors
changes in technology can shorten product life cycle. This is because new products are quickly developed to replace ones that use older technology
developments in technology often mean that businesses can replace labour with capital. This is welcomed because human resources are often said to be the most expensive and difficult to manage. New technology also lowers unit costs
the development of social media has helped to improve communication between businesses and customers. This allows businesses to keep abreast of changing consumer needs
legal factors
EU legislation can affect tax laws. In 2015, for example, rules changed so that EU VAT would be charged in the country where products were bought as opposed to the country where they were sold
there have been calls to ban the advertising of alcohol on television. If introduced, such legislation might have a negative impact on the beverages industry
businesses in the food industry are currently under pressure to reduce the amount of sugar and salt they add to products
environmental factors
people are more inclined to buy ‘green’ goods. This provides opportunities for businesses that specialise in such products
new ways of generating power using renewable sources rather than by burning hydrocarbons are providing new opportunities
the trend towards recycling is gathering pace in the UK. By using recycled resources, businesses can cut their costs
competitive markets
there is likely to be a large number of buyers and sellers, and the products sold by each business are close substitutes for each other
uncompetitive markets
markets dominated by a single producer or just a few large businesses
monopoly
a market dominated by a single business
oligopoly
a market dominated by a few large businesses
the impact on businesses of a changing competitive environment
many markets are dynamic and businesses need to be aware of the changes that are taking place. They may have to react to certain changes when they occur. Failure to respond effectively to the changing competitive environment could adversely affect the performance of a business.
new entrants:
when new businesses enter the market, existing businesses have to consider their position. For example, the growth in online shopping has forced many retailers to offer their own online shopping services
new products:
when a new product appears in the market, businesses may be forced to make changes of their own. They might adapt their own products, lower the price of existing products or invest in an aggressive marketing campaign
consolidation:
when consolidation occurs in markets the number of businesses in the market falls, but some of the existing businesses get bigger. Other businesses in the market might respond by organising mergers or takeovers of their own
Porter’s five forces
this strategy involves five forces or factors that determine the profitability of an industry
the bargaining power of suppliers: a business can grow vertically (backward vertical integration), either aqcuiring a supplier or setting up its own business by growing organically upwards. This is to limit the power of its supplier, therefore improve the competitive position of the business
bargaining power of buyers: one way a business can improve its competitive position viz-a-viz buyers is to extend into the buyers’ market through froward vertical integration
threat of new entrants: businesses can prevent threat from new entrants by erecting barriers to entry to the industry. For example, creating strong brands which will attract customer loyalty and make customers less price sensitive
substitutes: a business can reduce the number of potential substitutes through research and development, and then patenting the substitutes itself. Businesses can also use marketing tactics to stop the spread of substitute products
rivalry among existing firms: if rivalry is fierce, businesses can reduce that rivalry by forming cartels or engaging in a broad range of anti-competitive practices. This allows them to maintain high profitability
