Chapter 3 - The External And Internal Environment Flashcards
PESTLE analysis
PESTLE is an analysis technique that is often used to help a business to understand the impact of external factors on its operations. External factors can have a positive or a negative effect on the business. PESTLE is made up of six different types of factors listed below:
Political
Economic
Social
Technological
Legal
Environmental
Political factors
Political factors relate to the extent to which the government influences the economy.
These are some specific political factors that affect the environment in which businesses operate:
Government policy - governments will be keen to encourage overseas investment by businesses that locate their operations in their country and will offer them tax breaks, ie reduced taxation, to encourage them.
Taxation - Government can increase or decrease rates of taxation
Imports and exports - tariffs may be imposed by governments on imports and exports. Tariffs are a form of tax and are a common feature for a business that trades internationally. Governments often impose tariffs on imports to reduce the amount of goods that are imported into the country. They do this to protect domestic producers against being undercut by cheaper imports.
Public spending - expenditure in the public sector by the government is known as public spending. The government decides how much of the money collected in taxation should be allocated to the various areas of the public sector and therefore how much money they have to spend.
Economic factors
The macro economy refers to the economy as a whole and will have a direct impact on the way in which a business operates. Below are the key economic factors and they may be relevant to a PESTLE analysis carried out by a business.
Interest rates - Price of borrowing or the return you will get on money that you save. If interest rates increase businesses will borrow and invest less and customers will save more. If interest rates decrease businesses will borrow and invest more and customers will save less meaning they are more likely to spend more.
Exchange rates - A fall in the exchange rate means the amount of the other currency that £1 is worth is falling. For example £1 : $1.5 to £1 : $1.35. This means anything sold abroad will be cheaper for the buyer however the uk business will have to pay more for raw materials which can pass on higher costs to the customer. A strong pound will have the opposite effect.
Changes in disposable income - money that people have to spend after taxes and essential living costs have been deducted.
Business cycles - the amount of goods and services that are produced in the economy does not rise at a constant rate over time.
Inflation - inflation is the percentage rise in prices over time. Where there is inflation it means money does not buy as much as it did previously. There are two types of inflation.
Demand pull inflation - demand for products and services drives price up
Cost push inflation - supply of goods and services decreases because of an increase in production costs, this will result in cost push inflation as costs will be passed on to consumers.
Social factors
Social factors that affect the operation of a business relate to the society in which the business operates. This will include cultural and demographic aspects such as:
Income levels
Language and culture
Religion
Education
Family structure
Age
Occupations
These factors will affect the businesses on a local level as well as a national and international level. For example a business might locate itself in an area with high levels of education if it is looking for high skilled labour. A business with multiple stores might adjust the items it sells in specific branches to reflect the local community.
Businesses must carefully monitor demographic changes so that they continue to meet its wants and needs.
Another social factor is the shift in trends. Businesses must be aware of trends and monitor them to ensure that they adapt their business to remain competitive.
Unemployment can be a consequence of a reduction in economic growth. This can also be a social factor. If a business is located in an area with high unemployment there will be a larger population to draw its workforce from. But if a business relies on the local population to buy its goods or services this means the business will have to adapt.
Technological factors
Changes in technology can have both positive and negative effects on a business.
Examples of positive impacts:
Easier access to market through website sales and internet marketing
Automated production lines which reduce labour costs and increase productivity
Negative impacts:
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
Redundancies from automated processes will cost the business money and cause staff unrest
Technology can also have an impact on the structure of a business. Global communication has meant businesses can locate their support department such as finance overseas to reduce costs. Businesses can also outsource production and monitor it which reduces the risk of quality issues or delays in supply.
Legal factors
Businesses are required to comply with the laws and regulations of the countries in which they operate and sell their goods and services. The relevant laws and regulations that affect a business will depend on what the business actually does. The different laws are:
Heath and safety law - businesses must comply with this legislation in order to keep their workforce safe.
Employment law - businesses cannot simply hire and fire employees. They must treat employees fairly which may include working conditions, flexible working.
National minimum wage regulations - businesses must ensure that they pay all employees in accordance with the national minimum wage regulations in the uk or if they employ overseas they must also ensure they pay a fair wage.
Consumer protection- producing detailed information about their products and services so that consumers are clear what they are buying.
Import/ export law - any businesses that imports into the uk will need to comply with its import laws and tariffs. Any Uk businesses that exports will be required to comply with the import laws of the countries where it is selling its goods or services.
Environment factors
Environmental factors create two types of issue for businesses:
The direct impacts of environmental change including climate change, changes in the weather, increased pollution and availability of non renewable resources such as oil and gas and pollution may all affect the way in which certain businesses operate.
The need for the business to act sustainably. This may be because the business is motivated to protect the environment or customer expectations to act sustainably.
Micro economic environment
This 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
Demand
Demand is the quantity of a good or service which consumers want and are willing and able to pay for. Normal goods are where demand increases as income rises. Inferior goods are where demand decreases as income rises, these tend to be cheaper goods. A necessity good is a type of normal good that consumers will buy regardless of whether their income changes.
Substitute products is where two or more products carry out the same purpose for the consumer. If the price of one of the two products rises this will increase demand for the other.
Complements are goods that must be used together. Eg vehicles and fuel. A rise in the price of one will cause a fall in the demand for the other.
Demand curve
For most products demand will increase or expand as the price falls and decrease or contract as the price rises.
Supply
Supply is the quantity of a good or service which suppliers are willing and able to produce in a given period. Price is one of the most important factors affecting the decision about how much to supply.
Supply curve
As the price increases supply also increases. Suppliers will be keen to sell more of a product if the price goes up.
The price mechanism
The point in which the demand and supply curves meet will determine the price. This is called the equilibrium price.
A price higher that the equilibrium will cause excess supply and a price lower than the equilibrium will cause excess demand
The price mechanism
The point in which the demand and supply curves meet will determine the price. This is called the equilibrium price.
A price higher that the equilibrium will cause excess supply and a price lower than the equilibrium will cause excess demand
Shift along the demand curve and shift in the demand curve
A change in price will cause a movement along the demand curve. A change in anything else will cause the demand curve to shift.
If there is an increase in demand for a good or service this will result in the demand curve shifting to the right. If the demand for the product decreases this will cause a shift to the left.
