Transcript External Environment Analysis

EXTERNAL ENVIRONMENT
What is the external environment composed of?
Why is the external environment important?
Why do companies find it necessary to analysis the
external environment?
WHEN TO USE THE PEST ANALYSIS
When your are considering any of the following
options:
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Entering a new market
Launching a new product or service
Investigating a potential partnership
Examining an investment opportunity
Considering a potential acquisition
PEST ANALYSIS
Political
Economical
Social
Technological
This tool is used to identify opportunities or
threats that the company has little or no
control over in the external environment
POLITICAL
Government Legislation
Employment law
Consumer protection rights
Health and Safety factors
Ex: Taxation and interest rate policies can affect the
political and economic stability of the country
Government incentives/spending
POLITICAL
Trading agreements
Government stability
Funding (Grants available for investment)
https://www.youtube.com/watch?v=iZRBE
pHOHLQ
ECONOMIC
• Interest rates
• Exchange rates
• Rate of inflation
• Employment levels
• GDP
• Consumer spending power
• Trade tariffs
• Seasonal issues (eg. Weather)
https://www.youtube.com/watch?v=WGqcSTtS26k
SOCIAL
Cultural beliefs
 Multiculturalism
Demographic changes
 Population numbers
 Number of children vs over 60 year olds
 Women and men
 Single parent homes/Educated population
Values and morals of population (ethical beliefs)
Perceptions/Attitudes of population
Languages /living standards/Education standards /consumer
leisure time/Ethnic and religion issues / Roles of men and
women
https://www.youtube.com/watch?v=YwcVU3RiwbU
TECHNOLOGICAL
Development of technology in general
Examples:
Product developments (innovation)
Internet
Process developments
Infrastructure
PEST
External factors can harm business
(Threats)
Economic recession
Oil crisis
High inflation
PEST
External factors can become
opportunities
Lower taxes and interest rates
PEST ANALYSIS FOR MULTINATIONALS
OPERATING IN INDIA
POLITICAL
• Political reforms to encourage better trade
relations
• Still regarded as less politically stable
compared to many other countries
• Less protection for patents and copyrights
discourages technology transfer to India.
PEST ANALYSIS FOR MULTINATIONALS
OPERATING IN INDIA
ECONOMIC
• Improved infrastructure and market opportunities,
especially in cities such as Mumbai and Delhi.
• Low cost of production (Average rates are still very low)
• Vast majority of the Indian population is still very poor.
• Infrastructure and economic stability are less attractive
than in other countries
• It suggests to improve disposable incomes (spending
power) in India.
PEST ANALYSIS FOR MULTINATIONALS
OPERATING IN INDIA
SOCIAL
• Potential market of over 1.1 billion people (the
second largest population in the world and
expected to overtake China at the most
populated nation by 2050)
• Well-educated workforce with English
proficiency.
• Discrepancies in income and wealth distribution
PEST ANALYSIS FOR MULTINATIONALS
OPERATING IN INDIA
TECHNOLOGICAL
• Growing number of technologically aware
population (Huge opportunities for firms
providing technological products such as
mobile phones, personal computers and
internet services.
• Technologies easily copied due to a lack of
appropiate legislation.
OTHER EXAMPLES
Social and cultural factors
Women in modern societies are opting to
have children at a later age as they give
their careers priority.
QUESTION 1.5.1
SOCIAL AND CULTURAL
(OPPORTUNITIES AND THREATS)
COMMENT ON HOW THE DEMOGRAPHIC CHANGES MAY
PRESENT BOTH OPPORTUNITIES AND THREATS TO A
BUSINESS:
A) Growing number of self-employed people
B) Increasing number of single parent families
C) Parents choosing to have fewer children at later stage
in their lives
D) More people graduating with university degrees
TECHNOLOGICAL OPPORTUNITIES AND
THREATS
For example:
Internet= Human Resource Management (in the
recruitment process)
Marketing= Marketing (Such as e-commerce)
Finance= Annual reports are low published
online
Operation Management (Such as Benchmarking
data)
TECHNOLOGICAL OPPORTUNITIES AND
THREATS
The internet presents opportunities for businesses:
• Speed of access to information
• Reducing language and cultural barriers
• Reduce cost of production (E-commerce)= You don´t
need to have a physical outlet.
TECHNOLOGICAL OPPORTUNITIES AND
THREATS
The internet also present potential threats for businesses:
• Price transparency= Customers can easily compare
prices
• Online crime= Hackers have cost businesses a huge
amount of money
• Higher cost of production= Maintenance costs and
training costs to ensure that employees are competent
to the use of internet technology.
• Shorter product life cycles= Fierce competition
TECHNOLOGICAL OPPORTUNITIES AND
THREATS
Other examples of opportunities that technology brings
• New working practices (People working from home)
• Increased productivity and efficiency gains ( Robots
and machines are much faster than humans)
https://www.youtube.com/watch?v=wl-fhcfSVfU
TECHNOLOGICAL OPPORTUNITIES AND
THREATS
• New products
innovation)
and
new
markets.
(Source
of
TECHNOLOGICAL OPPORTUNITIES AND
THREATS
• Creation of jobs
MANAGERS NEED TO CONSIDER
• COSTS.- (cost of purchase, installation, maintenance,
replacement and insurance of new technologies)
• BENEFITS .- Expected gains
• HUMAN RELATIONS.- (Resistance to change or threatening of
job security)
ECONOMIC OPPORTUNITIES AND THREATS
Economic environment refers to the large scale economic factors
affecting the economy:
• Government policies
• Attitudes and actions of foreign countries
• Levels of business
• Consumer confidence in the economy
https://www.youtube.com/watch?v=9nJw19ueM68
FOUR KEY MACROECONOMIC OBJECTIVES
• Controlled inflation
http://www.eluniverso.com/2013/04/17/1/1356/carne-polloleche-fuera-lista-oficial-precios.html
• Economic growth
• Reduce unemployment
• Acceptable international Balance
“If the Government doesn’t implement good policies,
they can affect business activities”
CONTROLLED RATE OF INFLATION
INFLATION.- It can be defined as the continual rise in the
general level of prices in the economy.
Control of inflation is a prerequisite to achieve the other three
macroeconomics objectives in the long run.
TWO MAIN CAUSES OF INFLATION
Demand Pull Inflation
• It is caused by an excessive aggregate demand in the
economy
Ex: New video games
• Increase in the supply of money
Ex: Federal Reserve prints money
https://www.youtube.com/watch?v=R_Jni0BBhpI
TWO MAIN CAUSES OF INFLATION
COST PUSH INFLATION
It is caused by higher cost of production leading to a rise in prices to
that firms can maintain their profit margin
Ex:
1) Increase wages caused by trade union action
2) Soaring raw material prices caused by an oil crisis
3) Higher rents demanded by landlords
INFLATION (THREATS)
• It makes business planning and decision-making more
complicated
• Contracts of employment
• Changing cost of living
• Raw material costs are affected
• It also affects to the international competitiveness of a
country. “A nation that has a higher inflation rate than
its rivals will tend to be less price-competitive when
trading overseas”
HOW INFLATION COULD BE CONTROLLED?
It can be controlled by limiting demand-pull and
cost-push factors
For example:
1)Domestic government might raise taxes to
control the amount of consumption in the
economy.
2)It could subsidise production of local
businesses to reduce their costs of production
RATE OF UNEMPLOYMENT
It measures the proportion of a country´s workforce not
in employment
Unemployment rate is caused by the interaction of the
levels of aggregate demand and aggregate supply in
the economy
RATE OF UNEMPLOYMENT
AGGREGATE DEMAND IS HIGH = HIGHER LEVEL OF
DEMAND FOR LABOUR = LOW UNEMPLOYMENT
RATE OF UNEMPLOYMENT
IF AGGREGATE SUPPLY IS HIGH = MORE NATIONAL
OUTPUT IS BEING PRODUCED = HIGHER LEVEL
OF EMPLOYMENT AS A RESULT
UNEMPLOYMENT PROBLEMS
• STRESS
• DEPRESSION
• LOW SELF ESTEEM
• NETWORK OF FAMILY AND FRIENDS
• NEGATIVE EFFECTS SUCH AS SEPARATION AND DIVORCE
• SOCIAL COST = POVERTY = INCREASE THE LEVEL OF CRIME
GOVERNMENTS CAN USE A COMBINATION OF DEMAND
AND SUPPLY SIDE POLICIES TO TACKLE THE PROBLEMS
OF UNEMPLOYMENT
1) DEMAND SIDE POLICIES
It helps to increase the level of aggregate demand in
the economy.
For example:
Expansionary fiscal policy = The applies to reduce
unemployment. This entails to reduce taxes and/or
increasing government spending.
“This helps to expand the level of spending in the
economy”
Expansionary monetary policy= This entails
reducing the level of interest rates in the
economy to encourage consumer and business
borrowing and spending.
Protectionist measures: To protect domestic
businesses (and jobs) from international
competition. This might involve placing tariffs (a
tax on foreign goods) to give domestic producer
a price advantage
2) SUPPLY-SIDE POLICIES
These policies aim to increase the level of aggregate
supply (or output) in the economy.
For example:
1) Lowering the level of corporation tax or interest rates
should stimulate business activity and investments
2) Government spending on education and training should
help to make future generation of workers more skilled.
“Supply–side policies tend to have more permanent effects
on the economy than demand side policies, but the goals
tend longer to accomplish
https://www.youtube.com/watch?v=OEGKdPtB6m8
ECONOMY GROWTH
• It refers to an increase in a country’s economic
activity over time
• This is measured by the change in total output of
the economy per year, known as GROSS
DOMESTIC PRODUCT (GDP)
ECONOMIC GROWTH
Trade cycle: It refers to the fluctuation in the level of economic
activity over time.
• Peak or boom: Economic activity is at its highest level.
Consumer expenditure, investment and export earnings will be
high. Unemployment will be low
• A recession: Dip in the level of economy (half a year). Aggregate
demand, lower investment expenditure, falling export sales and
rising unemployment.
This product
Is
affected
ECONOMIC GROWTH
• A slump or trough: It is a bottom of a recession. High
level of unemployment. Low levels of consumer
spending, investment and export earnings. Some
businesses will have already closed (poor liquidity)
ECONOMIC GROWTH
Recovery or expansion: GDP starts to rise again, after the
economy has experienced a slump. National income begins to
increase again. Consumption, investment, exports and
employment will all gradually rise.
ECONOMIC GROWTH
IN RECESSION MOMENTS
1) Cost reductions: Efforts to cut lighting and energy bills or
finding alternative suppliers
2) Price reductions
3) Non pricing strategies: Repackaging, or special offers
4) Outsourcing: Production overseas where costs of
production are lower.
ECONOMIC GROWTH
To motivate economic growth is useful to enhance
quantity and quality of factors of production.
Quality requires investment
capital goods, education and training and
health technology
ECONOMIC GROWTH
Economic growth with the help of quantity resources
• Discovering new sources of raw material.
• Changes in the labour force. Ej:
Changes in demography (People decide to work later),
changes in participation rate (increase the number of
self-employed or employed). Lower income taxes or reduce
welfare payments by the government
changes in net migration (Difference between immigration
and emigration people for work purposes)
ECONOMIC GROWTH
A country will find economic growth is more difficult to
achieve if
• There is a lack of infrastructure : (Communications and
transport networks)
Countries without:
Basic electricity
Road networks
Schools, hospitals, housing
Factories and offices
ECONOMIC GROWTH
• Lack of technical knowledge and a skilled labour
force
• Rapid population growth
• High foreign debt repayments
AN IMPROVEMENT IN THE BALANCE PAYMENTS
The balance payments is a record of a country’s money
inflows and outflows, per time period. It is made up of
two component:
1)Current account (export earnings and import
expenditure)
2)Capital Account (flows of money for government
reserves, foreign currencies or investment reasons)
GOVERNMENTS MAY ATTEMPT TO CORRECT DEFICIT ON
THE CURRENT ACCOUNT BY ENCOURAGING HIGHER
CAPITAL ACCOUNT INFLOWS AND/OR DEVALUING ITS
EXCHANGE RATE.
AN IMPROVEMENT IN THE BALANCE PAYMENTS
The exchange rate: It measures the value of one currency in
terms of foreign currencies.
DEPRECIATION OF THE CURRENCY= It motivates exports and
discourages imports. USA purchases from Ecuador at a lower
rate (Lower exchange rate)
Ecuador
USA
2 SUCRE S = $1
4 SUCRE S= $1
For example: Ecuador can export more products because USA
with $1 dollar can buy more products. But Ecuador needs
more money to buy a product that costs $1 in the USA
AN IMPROVEMENT IN THE BALANCE PAYMENTS
APPRECIATION OF THE CURRENCY: It motivates imports and
discourages exports (Higher exchange rate)
Ecuador
USA
4 SUCRE S = $1
2 SUCRES =
$1
For example: Ecuador can export less products because USA
with $1 dollar can buy less products. But Ecuador needs less
money to buy a product that costs $1 in the USA
Protectionism.- It refers to any policy used by a government to
safeguard domestic businesses from foreign competitors
Exercise in class
K&Q sell jeans in the UK. They buy their jeans form an American
supplier and import 10000 pairs of jeans for a cost of $30 each,
per month. K&Q then sell these to their customers at a price of 30
pounds each.
a) Use the various exchange rates to complete the table below for
K&Q.
b) Comment on the relationship between
changes in the exchange rate and the level of
profits
c) By engaging in international trade, explain
two other costs that K&Q might incur.
d) Examine how a high exchange rate can be
both an opportunity and a threat to a business
such as K&Q
POLITICAL OPPORTUNITIES AND THREATS
Government intervention takes places for several reasons and
these can present opportunities and threats. Government policies
can be broken down into two main categories:
Fiscal Policy
It refers to the use of government taxation and government
expenditure It can take 2 forms:
Expansionary fiscal policy: It is used to boost the economy,
perhaps to get it out of recession. It is an attempt to increase
aggregate demand
Combination of tax cuts and increase levels of public sector
spending.
https://www.youtube.com/watch?v=QHqoxNOYIOo
FISCAL POLICY
Deflationary fiscal policy: It is used when the economy is
experiencing high rates of economic growth and inflation. It is an
attempt to reduce aggregate demand and will involve lower
spending and higher taxes.
MONETARY POLICY
Monetary policy : It is designed to control the amount of
spending and investment in an economy by altering interest
rates to affect the money supply and exchange rates.
An increase in interest rates is likely to reduce consumption
and investment expenditure in the economy, therefore being
a threat to businesses, even though this may help to control
inflation
MONETARY POLICY
Interest rates also have direct impact on the exchange
rate
Ex: European and Japanese investors want to put their
money in USA banks because interest rates are higher. It
will increase capital inflow, and possible lead to an
appreciation in dollar