Impact of external influences

Question 1

Define PESTLE ANALYSIS

Answer 1

PESTLE analysis is a framework for assessing factors within the external environment that influence business behaviours, decision making and performance.

Question 2

Define the FIVE FORCES MODEL

Answer 2

The five forces model is a framework for analysing the nature of competition within an industry. Components are the degree of rivalry, threat of new entrants, threat of alternative products, bargaining power of suppliers and bargaining power of consumers.

Question 3

Outline the features of PESTLE analysis.

Answer 3

P - political environment e.g. tax policies and government spending
E - economic environment e.g. the business cycle, interest rates, consumer spending
S - social environment e.g. changes in trends or demographics
T - technological environment e.g. mobile technology, new production processes
L - legal environment e.g employment laws, minimum wages
E - environmental/ethical environment e.g. sustainability, ethical sourcing, pollution, tax avoidance

Question 4

Define THE COMPETITIVE ENVIRONMENT

Answer 4

The competitive environment relates to the degree of competition in the market and the buying and selling power of customers and suppliers within it.

Question 5

What are possible features of markets and how can they change?

Answer 5

Markets can be:
- Competitive, with a large number of businesses competing (e.g. the coffee shop industry)
- Noncompetitive, with very few businesses competing (e.g. the soft drinks industry)
Change can be:
- Incremental, taking place over a long period of time.
- Disruptive, where change is rapid and unexpected and has a large impact on the businesses in the market and how they operate.

Question 6

Outline the features of Porter’s Five Forces model.

Answer 6

Developed by Michael Porter to help businesses analyse the attractiveness of a market in terms of profit and the potential to achieve and sustain a competitive advantage.

1. Intensity of competition amongst existing competitors - the extent to which the businesses in a market pout pressure on one another.
2. Threat of new entrants - the likelihood of new businesses joining. Profitable industries and those with low barriers to entry will be more likely to attract new entrants.
3. Threat of alternative products - when businesses in one industry are faced with the likelihood of customers switching to products from another industry. Lots of alternatives restricts the ability to charge high prices.
4. Bargaining power of suppliers - the pressure suppliers can put on businesses, e.g. by raising prices.
5. Bargaining power of customers - the pressure customers can put on businesses so they provide high quality products, customer service and low prices.

Question 7

Define EXTERNAL SHOCKS

Answer 7

External shocks are unexpected changes that are outside the business’ control but have a direct impact on the level of demand or ability to supply.