Understanding that Businesses Operate within an External Environment

Question 1

Why do all businesses operate in the external environment?

Answer 1

All businesses operate in the external environment. This comprises those external forces that can affect a business’s activities. These forces can arise from a number of possible sources e.g. economic factors.
These may include consumer incomes, interest rates (reward for saving and the cost of borrowing money)

Question 2

What does PESTLE stand for?

Answer 2

Political
Economic
Social
Technological
Legal
Environmental

Question 3

Political Factors

Answer 3

1. Government Policies: Regulations, trade restrictions, and tariffs that can affect business operations.
2. Political Stability: The stability of the political environment can impact business confidence and investment.
3. Tax Policies: Changes in tax laws and rates can influence business profitability.
4. Trade Agreements: International trade agreements and relations can open up or restrict markets.

Question 4

Economic Factors

Answer 4

1. Economic Growth: The overall economic growth rate affects consumer spending and business investment.
2. Inflation Rates: High inflation can erode purchasing power and increase costs.
3. Interest Rates: Changes in interest rates can affect borrowing costs and investment decisions.
4. Exchange Rates: Fluctuations in currency exchange rates can impact international trade and profitability.

Question 5

Social Factors

Answer 5

1. Demographics: Age, gender, and population growth trends can influence market demand.
2. Cultural Trends: Social attitudes, lifestyle changes, and cultural norms can affect consumer behavior.
3. Education Levels: The level of education in a population can impact the labor market and consumer preferences.
4. Health Consciousness: Increasing awareness of health and wellness can drive demand for certain products and services.

Question 6

Technological Factors

Answer 6

1. Innovation: Advances in technology can create new opportunities and disrupt existing markets.
2. Automation: The adoption of automation and Al can improve efficiency but may also lead to job displacement.
3. Research and Development: Investment in R&D can lead to new products and competitive advantages.
4. Cybersecurity: The need for robust cybersecurity measures to protect data and maintain consumer trust.

Question 7

Legal Factors

Answer 7

1. Regulations: Compliance with laws and regulations, such as labour laws, consumer protection laws, and environmental regulations.
2. Intellectual Property: Protection of patents, trademarks, and copyrights to safeguard innovations.
   3.Employment Laws: Regulations governing employment practices, including minimum wage, working conditions, and discrimination laws.
3. Health and Safety: Legal requirements to ensure workplace safety and product safety.

Question 8

Environmental Factors

Answer 8

1. Sustainability: Increasing focus on sustainable practices and reducing environmental impact.
2. Climate Change: The impact of climate change on business operations and supply chains.
3. Resource Availability: Access to natural resources and the impact of resource scarcity.
   4.Environmental Regulations: Compliance with environmental laws and regulations to minimize ecological footprint.

Question 9

Advantages of PESTLE analysis

Answer 9

• simple, easy, cost-effective and straightforward
• offers a deeper understanding of the business
• raises alertness
• showcases opportunities
• makes the business compliant*
• helps in future strategic planning

Question 10

Disadvantages of PESTLE analysis

Answer 10

• cannot offer the full picture
• is time-consuming
• is data-hungry
• needs regular updates
• risks mishandling information
• isn’t necessarily the best tool because of its simplicity.

Question 11

What does competition influence that affects costs and demand?

Answer 11

• Pricing strategies - businesses may lower prices to stay competitive.
• Product innovation - companies must innovate to stand out.
• Marketing costs - increased competition leads to higher marketing expenses.
• Example: Smartphone industry where Apple and Samsung compete for market share.

Question 12

What are market conditions?

Answer 12

Market conditions refer to the overall state of the market and influence costs and demand.

Question 13

What is the economic boom and economic downturn?

Answer 13

Economic boom: Higher demand, increased costs (wages, materials).
Economic downturn: Lower demand, reduced costs due to lower wage pressure.
Example: Housing market fluctuations based on the economy.

Question 14

What do incomes affect and lead to?

Answer 14

Incomes affect consumer purchasing power and, consequently, demand.
Higher incomes lead to increased demand for luxury goods and services.
Lower incomes reduce demand, especially for non-essential goods.
Example: The luxury car market sees higher demand during periods of rising incomes.

Question 15

What do interest rates affect and increase?

Answer 15

Interest rates affect the cost of borrowing and consumer spending:
High interest rates increase borrowing costs, reducing investment and demand.
Low interest rates encourage borrowing and consumer spending.
Example: The housing market is heavily influenced by changes in interest rates.

Question 16

What can fair trade practices increase but also boost demand for?

Answer 16

Fair trade practices can increase costs but also boost demand among ethical consumers:
• Higher costs from ensuring fair wages and working conditions.
• Demand increases as consumers seek out ethically sourced products.
• Example: Fair trade coffee gaining popularity due to consumer awareness of ethical sourcing.

Question 17

Why is price important and how does price alter?

Answer 17

Price is the factor most people think of first and it is an important one. As the price rises demand for the good will usually fall. This is partly due to the customer thinking carefully and partly due to the fact that alternatives now appear to be more attractive in comparison.
For products that are necessities and have no close alternatives (substitutes), an increase in the price will make little difference to the quantity demanded.

Question 18

Price of other goods

Answer 18

Substitutes - these are alternatives to the original e.g. Coke and Pepsi. If the price of Coca Cola increased then Pepsi may appear to be better value and this will lead to a fall in demand for Coca Cola.

Complements - Complementary products are ones used alongside each other e.g. Fish and Chips or Shampoo and Conditioner.

Question 19

What can successful marketing and promotion increase demand for?

Answer 19

Successful marketing and promotion can increase demand for a good or service. This can mean a strong brand is created which leads to consumers being prepared to pay a higher price — as well as buying more of it!

Question 20

How does the government have a big impact on demand?

Answer 20

The government can have a big impact on demand. They may introduce taxes and legislation (laws) to reduce the consumption (and therefore demand) of a product such as tobacco and plastic carrier bags. In addition they may subsidise a product to reduce the a price the consumer pays to encourage an increase in consumption (and therefore demand) for example school meals for children up to Year 2, to encourage better nutrition and healthy eating.

Question 21

Interest rate equation

Answer 21

(total repayment - borrowed amount)/ borrowed amount X 100