PEST factors Flashcards
What is a PEST analysis
It examines political, economic, social and technological environments that effect markets and business
For a business to survive managers must be aware o the ever changing external environment and adapt to it
List and describe 5 political factors
1 instabiltiy - the government must provide a stable economic and legal framework for businesses to operate and grow, businesses that move into politically unstable countries take great risks
2 national security - terrorist attacks are more common and a government protects their citizens by introducing measures that restrict movement of goods people and capital - this can have a negative impact on a business
3 major trading partners - UK has removed itself from EU the 27 remaining countries are vital markets nor uk business
4 changes in government - new governments may have a more or less positive attitude towards business decisions
5 pressure groups - their activity can have huge impact on political decisions and business need to be fully aware of their activities
What economic factors effect a business positively or negatively
1 taxation
2 subsidies
3 expenditure
What are the 2 groups of taxation
Direct taxation - taxation on income
Indirect taxation - taxation on spending
Give 5 examples of direct taxation
1 income tax
2 national insurance
3 corporation tax
4 capital gains tax
5 inheritance tax
Give4 5 examples of indirect tax
1 VAT
2 excise duty
3 customs duty
4 council tax
5 business rates
What are likely effects on businesses of changes in taxation
Effects consumer spending which impacts on business- low tax stimulates consumer demand
How are prices effected by tax changes
Rise in VAT or excise duties - businesses try to pass increases onto their customers
How does national insurance effect businesses
As it increases the cost of employing workers increases
What are subsidies
Payments to producers-they reduce cost and increase output . The main source recently has been payment from EUto farmers to ensure production of food and to green power generators to guarantee the price of their electricity
What is the governments role as apurchaser
Government buys form UK businesses and spends over £1 billion a year
For some government is the only or main purchaser eg defence, ship building
How has the governments purchasing changed
Was seen as an easy way to make profit but has changed as all government departments are looking to cut costs
What is inflation
The general rate of which prices are rising
How does the government measure inflation
Though use of regular pricing of nominal basket goods - supposed to reflect spending habits of average person in uk
Includes petrol, cars, holidays. Food electronics, housing
They measure the difference in price of these items monthly to obtain inflation figures
What is the name for the target rate of inflation
The consumer Prive Index CPI
Why does the government think achievement of target rate of inflation as being good for the economy
Low inflation encourages investment by business and spending by consumers and increases competitiveness in overseas producers so should limit imports and increase exports
Who has the government put in charge off setting interest rates
Monetary policy committee of the bank of england
What is the job of the monetary policy committee
Government sets inflation bands between 2 and -1% they must keep inflation between the bands by using interest rate policy
What causes inflation
Cost push factors or demand pull factors
What are cost push factors
Related to cost of production and cause these costs of production to increase
What are demand pull factors
Factors that enable businesses to increase prices because demand is increasing. Higher demand = higher price
What happens when these 2 factors come together
We have a wage/price spiral
Explain the wage price spiral
1 increased inflation can lead to demand for higher wages- often seen during a period of recovery in the economy when there is a shortage of labour
2 higher wages increase he cost of production and levels of demand
3 businesses pass on the increased costs to consumers and prices increase
4 increase prices lead to another round of wage increases as workers try to protect their spending power (real income)
5 the cycle continues
6 inflation becomes self perpetuating
List 5 effects of inflation on a business
1 to discourage investment because of the uncertainty created. Inflation brings less predictable returns and the expectation demand will fall.
2 increase menu costs - businesses will have to continually reprice goods - this repricing brings costs such as reprinting brochures
3 increases management time spent negotiating wage increases with employees and increase threat of industrial action
4 international competitiveness- if inflation is higher in the UK cost for uk there will be reduced competitiveness of exports and encourage imports
5 reduces the real cost of repaying loans
Why can the governments desired 2% deflation target be a problem
Some level of inflation in the economy is desirable. Deflation can lead to fakes in wages and increasing real debt burden
What other issues does deflation bring
1 demand falls
2 consumers defer spending waiting for prices to fall further therefore reducing demand
3 businesses will be nervous to invest as the return is uncertain
4 real debt of the business increases pushing up the risk of failure
5 all of the above limit the growth of the economy
What is interest rate
The price of borrowing or saving money
What is it called when government use interest rates to help control UK economy
A monetary policy
Give ann example of how the government use monetary policy
If they wish to discourage people from borrowing money to purchase goods they rais interest rates
What are the effects on business when interest rates increase
1 people spend more on paying the mortgage so less money is left for spending on other goods
2 people are less likely to borrow as the cost of borrowing has gone up , so they spend less
3 businesses borrow less for investment\
4 the value of the £ may increase compared to other currencies
What are the effects on business when interest rates ae decreased
1 people spend less on mortgage repayment and have more money for overspending
2 people are more likely to borrow so more spending
3 business borrow for investment increasing their chance of success
4 the value of £ may fall against other currencies
What is GDP
The measure of economic out put in UK - gross domestic product
Why is growth important
Without it peoples standards of living will not increase
What is the trend for growth in the UK economy
Around 2.25% a year - if sustained doubles GDP every 25 years 9since 2008 growth has averaged half of this
What is the rise and fall of GDP over time called
The business cycle or economic or trade cycle
What happens in a rise and fall
1 rise people buy holidays, feel well off, take out credit, extend houses buy cars , unemployment is low, there are lots of jobs
2 when economy is not doing well - unemployment is high, real wages are falling, people don’t like to spend, businesses struggle
What are the element of the business cycle
1 boom - this period benefits most businesses and consumers, unemployment is low, consumer demand strong, can be a budget surplus for government caused by high tax revenue and low expenditure on social security, Businesses look to invest confidence is high and lots of new businesses are set up.
2 downturn - there is less investment by business, managers cut back, interest rates may have been increased during the boom so people are spending less and unemployment creeps up. Economy may still be growing but slower than in the boom, businesses cut back on stockholding worried about falling sales
3 recession - economy starts to shrink, rapid increase in unemployment, falling demand, falling investments, decline in interest rates and inflation, product ranges and pricing strategies change
4 recovery - start to see business opportunities, cost of borrowing is low, investment increases, new jobs are created, unemployment falls, consumers start to spend
WhAt is the strict definition of recession
2 consecutive quarters where GDP growth is negative
What is an exchange rate
The value of one currency expressed in terms of another currency
What is the price of currency determined by
Largely by market forces- supply and demand
When the demand for uk exports rise in china so does the demand for the pound
Because Chinese consumers can only use £ to by UK goods
The value of the pound increases against the yen
What is a fall in the exchange rate known as
A depreciation of the pound
What is the impact of a fall in the value of the £ (depreciation) 1
1 importers find imports more expensive to buy- they can react by either reducing their margins or pass increased costs on to the consumer
2 exports will be cheaper so businesses should find it easy to attract export markets - they can react by increasing the price or keep prices the same and attract new customers
What is the impact of a rise in value of the £ (appreciation)
1 importers find imports less expensive so can increase their margins or pass on reduced costs to customer and increase sales
2 exports will be more expensive - they can react by reducing prices and profits or keep prices the same
How does SPICED help to remember the impact of change in the value of the £
S strong
P pound
I imports
C cheaper
E exports
D dearer
What is the impact of such fluctuations of the £
1 it creates uncertainty as it is difficult to predict demands for exports
2 planning and budgeting can be disrupted and could result in business closure
What is the current rate of natural unemployment in UK
Between 3 and 4%
Why do many economists argue a reasonable level of unemployment is good for the economy
It discourages those in employment seeking a higher wage
What are the different types of unemployment
1 structural - - appear when there have been large changes in patterns of demand or developments in technology causing long term unemployment in regions or industries. The structure of the industry has changed and the jobs are unlikely to return in that form eg coal or steel industries
1B change in technology causes structural unemployment eg textile industries
2 cyclical unemployment - appears as part of business cycle as the economy enters downturn unemployment rises.
2B government has tried to tackle it by introducing profit related pay and trying to reduce the nature of the economic cycle by investing in labour so they can adjust to meeting new demands
3 frictional unemployment - occurs when there is a delay in finding a job after losing previous one. It is less longterm
What is the impact of high levels of unemployment on UK businesses
1 it reduces demand for goods result in a fall in output and possible redundancies
What are the social factors that effect businesses
1 demographic changes - the hanging structure of the population -
1B the overall size of the population, if it increases then size of market increases
1C an aging population drives changes in the market
1D Migration - young immigrants have filled the skills gap
2 Lifestyle changes bring opportunities and threats
2B one of the major changes over last 40 years is women who work so supermarkets focus on convenience, childcare industry has boomed
2C society is becoming more health conscious impacts on demand for gyms, low fat low sugar and organic food
2Dhow young people switch between media means marketing needs to sell to all segments
2E cultural changes in a population impacts on business behaviour and products
2F social changes include fashion changes
2G changes in consumer attitudes to the environment - electrical goods need to be energy efficient, cars fuel and emission efficient
How do technological factors effect business
1 increased levels of automation and use of ICT has impacted on how organisations operate
2 managers have understood the potential of robotics, automation and the ability to communicate cheaply anywhere in the world
What is automation
A robot carries out repetitive tasks
In which industries is automation most common
1 retailers - ordering or self checkouts
2 banks - paying in an withdrawing money
3 warehouses - transport and package
4 online services
5 utilities - smart meters
What are the advantages of automation
1 lower employee costs
2 increased productivity
3 increased quality and repeatability
4 less management time spent on disputes and negotiation
What are the disadvantages of automation
1 greater environmental impact
2 social costs\
3 cost of investment
4 less flexibility
Which ICT applications have impacted on the way a business runs
1 internet marketing - internet sale increase year on year
2 web based customer relations - banking is done on line loans arranged
3 Business to business B2B - involves finding commercial buyers for business output and sourcing raw materials and components via the internet estimated a potential saving of between 5 and 10%
4 manufacturing resource planning MRP2 this system takes forecasts and turns them into objectives and targets for each function or department - it can replace a whole layer of management
5 CAD - assists design engineers solving design problems shortening lead in time and making the marker more competitive . It allows all possibilities to be tested without going back to the drawing board and it can identify design problems early on preventing the need for expensive reworking
6 CAM - mainly used to control machinery producing same quality work day in day out . They can be reprogrammed and so flexible less complex than retraining a person. They carry out a job in the most economical way ensuring waste is minimal
What are the impacts of technology on business
1 product life cycle and speed of technological obselescence - greater technological input into a business there is the greater the impact on product life. Developing and bringing new products to market quicker means life cycles of products is shorter and they become technologically obsolete quicker. Shorter life cycles means products become profitable much quicker and early adopters are willing to pay highly
2 location of business and ICT- increase in quality of global communication and fall in cost of technology have allowed businesses to relocate their back office world wide eg call centres in India cost of these operations is much cheaper than ~UK
3 nout sourcing production - improvements in technology have also led to outsourcing production as quality can be remotely monitored
How do consumers benefit from technological change
1 internet allows easy price comparison
2 more choice
3 lower prices
4 improved quality
5 convince of home shopping and pre arranged delivery
What are the problems of technology for customers
1 online shopping and banking can lead to fraud
2 no one enjoys cold calls
3 rapid technological change puts pressure to have the latest products and could lead to debt
