Transcript 1.5 External Environment

Factors from outside the firm may present
opportunities or pose threats.
These include:
 Political, legal
 Economic,
environmental, ethical
 Social, demographic
 Technological
 External
factors influencing businesses can
be summarized in the acronym PEST.
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Businesses can carry out an external and internal audit
and synthesize these factors under the four groupings:
Strengths
Weaknesses
Opportunities
Threats
Adaptable, flexible businesses
can turn weaknesses into
strengths and threats into
opportunities.
These factors may mean political stability,
safety and security or the lack thereof. OR
A host of areas where legislation and
government policy directly control how
businesses operate such as:
 Environmental protections and location
decisions.
This includes such laws as:
 Weights and measures act
 Faulty goods act
 Etc..
 Minimum
wage
legislation
 Health and safety
laws
 Equal pay legislation
 Etc…
Taxation laws affect businesses through:
 Corporation tax rates
 Tariffs imposed on imports
 Property tax
 Other??
This refers to legislation that restricts
imports such as:
 Tariffs
 Quotas
 Embargoes
 Bans
 Currency
value (devaluation or
revaluation)
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Tariff-tax imposed on imports
Quota-physical limit on the amount imported
Embargo-prohibition of all or partial trade with a
country
Ban-complete prohibition of trade with a country
Devaluation-purposely reducing the currency value
Revaluation-purposely increasing the currency value
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If the country is a member of
a trading bloc (section 4.7 International marketing), then
it may gain from liberalized trade within. For instance
the EU
Closer Economic Partnership Agreement-CEPA
 It is a WTO-World Trade Organization free trade
agreement giving preferential access to markets for
businesses within the member countries or bloc.
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Where member nations trade freely with one another and have
separate trade regulations with non members. An example would
be NAFTA-North American Free Trade Agreement. NAFTA
members are USA, Mexico, and Canada
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This arrangement not only includes the free movement of goods
and services but also includes the free movement of the factors of
production. Member countries do not have a separate policy with
non members but all impose a common external tariff on non
members. The European Union is an example of a common
market.
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It was established in 1967 and has become the world’s largest RTB with
nearly 2 billion people within its members.
It enjoys close ties with the EU as well.
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World Trade Organization (WTO) is
an organization that intends to supervise
and liberalize international trade. The
organization officially commenced on 1
January 1995 under the Marrakech Treaty,
replacing the General Agreement on Trade
and Tariffs (GATT).
 Source: Wikipedia
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Laws protecting small businesses from unfair
or monopolistic practices by larger businesses.
Mergers are subject to government approval
for the protection of smaller businesses.
These refer to the state of the economy in which the
business operates in terms of:
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Inflation: the rise in the general price level
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Unemployment: the percentage of those unable to find work of the
total working population
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Economic growth: the increase in a country’s national income (Gross
Domestic Product)
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Balance of Payments-the difference between the value of imports and
exports
Inflation is caused by one of two reasons:
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Demand pull-excessive aggregate (total) demand in the
economy.
This may result from:
increased consumption as people demand more goods
and services due to high income and prosperous
economic times. AND/OR
Increased government spending. AND/OR
Increased investment by businesses. AND/OR
Increased international trade (specifically exports).
 Higher
costs of production due to the rise
in the price of factors of production lead to
businesses reducing their output and
increasing their prices.
Land prices, fuel, etc.
machinery prices
Costs of production
Labor wages
Uncertainty increases
 Difficulty in planning
 Rising costs of production
 Falling profitability
 Loss of competitiveness especially against
cheaper imports
 Falling demand as price is the main
determinant of demand
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The severity of the consequences of inflation depends on its cause and
rate.
For instance, if the cause of the inflation is demand pull, its consequences
are less severe due to the fact that consumers are well-off and can afford
to buy. Moreover, an inflation rate of 5% is much less severe than that of
20%.
If the cause is cost push, the consequences are likely to be worse as
business costs are rising and in light of foreign competition, the harm
may become permanent.
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An inflation rate of nearly 1000% rendered money
worthless. It is considered one of the worst in history
When unemployment rises, the consequences to
businesses are both positive and negative
presenting opportunities and threats.
 THREAT-If more people become unemployed, demand falls especially
for luxury goods and durables.
 OPPORTUNITY-if more people become unemployed, businesses
can recruit more easily and cheaply as the supply of labor rises and
becomes more willing to accept lower wages.
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Unemployment rises during difficult economic times such as recessions
and depressions or slumps.
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Frictional -between jobs.
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Seasonal -unemployed during certain seasons and back to work when
the season returns.
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Technological -unemployed as businesses switch to capital intensive
(using relatively more capital than labor) methods of production.
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Regional-certain areas in a country have higher rates of
unemployment.
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Cyclical-unemployment rising and falling with the country’s economic
situation (economic cycle).
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Structural -unemployment through the permanent collapse of an
industry.
 Economic
growth refers to the increase in
the country’s national output.
 It is measured by a figure known as the
Gross Domestic Product ( G D P ).
 Real
GDP refers to the value of GDP after
accounting for inflation.
 Formula:
Real GDP (real output)=
Nominal GDP – Inflation rate
 Refers
to the rise and fall of GDP through four
phases: Boom, Recession, Slump or Depression,
and Recovery.
 Boom-peaking GDP,
Rising inflation, falling
unemployment, rising investment, rising demand,
and overall consumer and business confidence is
high.
 OPPORTUNITY?
INDEED!!!!
 Especially for luxury
and durable goods
 A time of falling economic activity ( falling GDP) for two
consecutive quarters (six months).
 Recessions are characterized by rising unemployment, falling
aggregate demand, falling investment, and lower confidence.
A business may react in a number of ways:
 Promotional offers and price reductions
 Lower costs through energy saving methods
 Freeze wage increases
 Reducing its staff
 Outsourcing by allowing overseas businesses
to produce a part of or all of a particular
product as they may have a cost advantage.
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Businesses could be proactive instead of reactive.
They could foresee a recession and prepare for it. this is
known as ‘contingency planning’ and will be studied at
a later time.
Some businesses operate in several markets to reduce
the effects of the economic cycle. As one country
experiences a recession, another may be booming.
 Businesses often find themselves stronger and
more efficient and resilient after having survived a
recession.
 “that which doesn’t kill you makes you stronger”
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The worst phase of the economic cycle characterized by
seriously rising unemployment and falling prices (low
inflation or even deflation), critically low consumer and
business confidence. Consumers and businesses have
cash problems.
 The
great depression-the stock market crash
(1929)
 GDP
starts rising following the depression
or slump (trough). Consumption and
investment rise gradually and
unemployment falls.
 Investment
in capital goods such as
infrastructure, factories, universities, hospitals,
etc.
 Education and training
 Health services
 Demographic changes
 Increase in labor participation
 Net migration
Businesses may exploit opportunities in countries
experiencing high rates of growth such as China.
 Lack
of infrastructure
 High birth rate
 Unskilled/uneducated labor force
 High foreign debt
 Political unrest
 Poverty
 corruption
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Refers to a country’s money inflows and outflows resultant from
its foreign trade, investments, and loans.
It is affected by the country’s currency value. A rise in a
currency’s value against other currencies is known as an
appreciation, while the fall is known as a depreciation.
Many nations have protectionist policies to limit the outflow of
money from their economies to preserve the balance of
payments.
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It is also important to remember that government can
influence interest rates and currency value, both of
which influence businesses especially if they have
outstanding loans and import or export.
If the currency of a country rises against its trading
partners, exporters lose their competitive advantage as
their products become relatively expensive. This poses a
‘Threat’.
Meanwhile, if the currency of a country falls against that
of its trading partners, exporters gain an advantage
and this presents an ‘opportunity’
The opposite is true for importers.
Governments manage their economies by
aiming to achieve what is know as
macroeconomic objectives:
 Low and stable inflation
 Low rates of unemployment
 Steady economic growth
 Balance of payments
 Supply-side
policies: measures that
assist businesses in reducing their
costs, increasing their outputs and
raising their confidence.
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Reduce bureaucracy
Give grants- lump sums of money to help businesses with
a particular issue such as relocation.
Give subsidies-a subsidy is an amount of money given to
an industry’s businesses per unit of production to reduce
cost and increase output.
Deregulation-reduction of severe laws and regulations to
ease business operations.
Privatization-sell public owned corporations to the
private sector.
Provide training-to help business recruitment.
Provide information
government
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Using taxation policy and government spending to control
the economy.
Taxes can be categorized into:
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Direct taxes-taxes imposed on income and wealth. E.g. individual income
tax, profit tax, property tax.
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Indirect taxes-taxes imposed on expenditure. E.g. sales tax, excise duty
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During a boom, the government may use
Deflationary fiscal policy, while during a
recession or slump, it may use Expansionary
fiscal policy.
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Used during boom and possibly recovery to decrease
inflationary pressure.
Increasing income tax to decrease disposable income.
Disposable income = Nominal income – income tax
The lower the disposable income, the lower the demand
for goods and services.
This decreases inflationary pressure.
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Used during a recession and slump to vitalize the
economy and encourage growth.
Decrease individual income tax to increase disposable
income and consumption.
Decrease corporation tax to encourage businesses to
reinvest.
Increase government spending on macro projects to
increase employment and spending.
The usage of interest rates and the money supply to
control the economy.
 Interest rate-the percentage awarded to savers and
charged to borrowers.
 The borrowing rate is higher than the savings rate.
 The difference is the banks’ profit.
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During a boom or recovery, the government is likely to
raise the base interest rate announced by the country’s
central bank and tighten credit and loan regulation to
decrease the circulation of money and reduce
inflationary pressure.
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During a recession or slump, the government
may reduce the base interest rate to
encourage borrowing and loosen credit and
loan regulation to increase the circulation of
money and encourage economic growth.
 Banks
abide by the base rate announced
by a country’s central bank and then
determine their interest rate to be charged
to borrowers based on:
 The amount of the loan
 Amount of time the loan is required for
 Risk involved
 The administration and handling cost
Trends are relevant to businesses as they may
present opportunities to exploit or threats to
avert if the trend in question reduces the
demand for its product or eliminates it.
 For instance the trend toward healthy products
and habits has presented opportunities to
health clubs and food manufacturers but also
posed threats to producers of fatty foods and
demerit goods (harmful products such as
alcohol).
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Society views business differently and it is an
increasingly popular stance that business must
demonstrate ethical behavior.
This presents an opportunity especially during good
times when business can show philanthropy and gain
community support.
In fact, disasters are times of opportunity to behave in a
manner that is transparent and responsible.
 Sanlu
and BP will be compared to Tylenol
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The improvement in technology in all domains
especially the wide use of the Internet has affected
businesses often positively.
If businesses cannot afford new technology at a time
when their competitors invested in it, this can pose a
threat to their competitive ability.
 Technological
problems can pose issues as
well especially in highly automated
factories.
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must be remembered that technology
often requires more training and
installation cost as well higher
investment.
 It also may cause workers to feel
uneasy about their job security. This is
especially true of labor-saving
technology.