External Environment
Unit 1.5
Internal Factors
 Definition: the constraints and opportunities
within a firm’s own control. These limitations
are usually dominated by the rules, policies
and culture of the business.
E.g.:
1. Finance: may not have enough money
2. People: poor working relations harms goals
3. Marketing: bad marketing campaigns
4. Production: techniques and stock control systems can
be improved
PEST Analysis
Acronym for:
Political- government legislation defines the
boundaries in which business can operate
Economic- Inflation, unemployment,
economic growth and international trade can
affect operation
Social- Changes (social, cultural,
demographic) may be opportunities or threats
to a business
Threats and Opportunities
Threats: external factors that can harm a
business
Opportunities: external factors that can
improve a business
Variations of the PEST analysis are:
PESTLE: add legal and environmental
STEEPLE: add ethical
3 Steps to a PEST analysis
Brainstorm. What will most likely affect the
business?
Discuss. Which factors will have the most
significant impact on the business?
Summarize: What to do with the business?
Strategies?
Advantages & Disadvantages
The PEST analysis is useful for identifying
advantages and disadvantages. If opportunities
outweigh threats, the business should pursue
the option.
But some factors are unpredictable.
KEY advantage of PEST: it’s simple to use.
Promotes forward thinking instead of instinct.
Social and Cultural Opportunities and
Threats
The attitude of society will affect what
goods/services are provided.
Demographic changes can affect recruitment
practices, marketing strategies, and products.
The acceptance and awareness of
multiculturalism leads to more business
opportunities.
Technological Opportunities and
Threats
 Technology has deeply affected business functions.
Many tasks are completed online instead of on paper.
The internet can provide opportunities and present
threats:
It is easy to access information, there are less language
barriers, and costs of production are reduced.
However, there is price transparency (customers can compare
prices without leaving home), online crime, and higher costs
of having to train employees in being tech-competent.
Important Factors about Technology
Managers should consider the following:
Costs (of purchase, installation, maintenance, etc.)
Benefits (efficiency improves)
Human relations (more flexible working patterns)
Recruitment and training (need to hire computerliterate people)
Economic Opportunities and Threats
Governments try to achieve 4 key
macroeconomic objectives:
Controlled inflation
Economic growth
Reduced unemployment
Acceptable International trade balance
Controlled Rate of Inflation
The two main causes of inflation are:
Demand pull inflation- Excessive aggregate demand
in the economy (People want to spend money and
buy things)
Cost push inflation- Higher costs of production
leading to rise in prices (E.g. It costs more to make
item A, so to make a profit, the company will charge
more for A)
Level of Employment
If aggregate supply is high, more national
output is being produced= Higher level of
employment
If aggregate demand is high, there is a higher
level of derived demand for labor, and there
will be low unemployment
Economic and social costs
Economic costs- refer to the opportunity costs
of unemployment (What could have been
produced if unemployment was not a problem)
Social costs- the effects on the unemployed
themselves (stress, low self-esteem)
Demand-side and supply-side
policies
 Demand-side policies: directly target the
increasing level of aggregate demand in the
economy
E.g. government may se expansionary fiscal policy
(reduce taxes, increase gov't spending) to reduce
unemployment
E.g. expansionary monetary policy (reduce interest rate
levels to encourage borrowing and spending)
E.g. protectionist measures (protect domestic
businesses from international competition)
Types of unemployment
 Frictional or transitional unemployment: when people are changing
jobs, there is a time lag between leaving a job and finding another.
 Seasonal: seasonal changes in demand for a product (e.g. hiring
many employees for pre-Christmas period. Afterwards, they become
unemployed)
 Technological: people lose jobs because there are labor-saving
technologies (can cause mass- scale unemployment)
 Regional: rural areas have less employment than urban areas
 Structural: demand for products produced in a particular industry
continually declines
 Cyclical or demand deficient: (most severe) Affects every industry in
the economy. Caused by lack of aggregate demand in economy (i.e.
recession)
Economic Growth
 GDP (gross domestic product)- change in total
output of the economy per year
 Trade/business cycle phases:
Peak/boom: economic activity at highest level
Recession: dip in level of economic activity for two
consecutive quarters (half a year)
Slump/trough: bottom of recession. High level of
unemployment, poor liquidity
Recovery/expansion: when GDP starts to rise again.
Everything gradually rises.
Coping with a Recession
 Cost reduction: efforts to cut lighting and energy bills
 Price reduction: sustain or increase sales
 Non-pricing strategies: sustain/ revitalize volume of
sales
 Branding: impact on sales and reduce degree of price
and income elasticity of demand
 Outsourcing (production overseas) where costs of
production are lower (Helps business gain price
advantage, and increases profits)
Growth via quality of factors of
production
 Capital Goods: Greater the investment levels,
the higher economic growth will be
 Education and training: A better educated and
trained workforce is more productive and
internationally competitive
 Health technology: helps ensure healthy
workers, makes it more productive
Growth via quantity of resources
 Changes in demography: Fall in birth rate leads to
aging population and smaller workforce (and vice
versa)
 Changes in participation rates: Measures the number
of people who are employed as a percentage of the
total labor force.
 Changes in net migration: the difference between
immigration and emigration. If migration figure is
positive, size of workforce will increase
Possible barriers to economic growth
Lack of infrastructure (communications
and transport networks)
Lack of technical knowledge and skilled
workforce
Rapid population growth
High foreign debt repayments
Balance of payments
 Balance of payments- record of a country’s money
inflows and outflows per time period, made up of:
1. Current account- export earnings and import
expenditure
- a. visible trade balance: tangible goods
international trade
- b. invisible trade balance- foreign trade in
intangible
2. Capital acct- flows of money for gov’t reserves,
foreign currencies or investment reasons
Examples of Protectionism
 Tariffs/customs duties: tax on imported products
 Quotas- quantitative limits preventing too many
foreign products entering a country
 Subsidies- payments made by a gov’t to domestic
firms as a form of financial aid
 Embargos- physical bans on international trade with a
certain country
 Tech and safety standards- imposition of strict
technical or health and safety standards being placed
on the import of foreign products.
Environmental opportunities and
threats
Without gov’t intervention, private sector
businesses are unlikely to consider the
external costs/negative externalities of
production.
Changes in the weather and season can
be both.
Political opportunities and threats
 Laissez-faire approach- if a gov't does not intervene significantly in
business activity.
---Leaving business to their own devices
should stimulate healthy competition and
efficacy.
 Fiscal Policy- the use of gov't taxation and gov't expenditure policies
to influence the economy. Two broad ways of taxation:

1.
Direct - paid straight from income, etc

Indirect - refers to tax paid on trade in good and
services

2.
Progressive- proportion of tax paid increases as
income, wealth or profit of
taxpayer rises

Regressive- proportion falls as income of taxpayer
rises

Proportional- stays same, regardless of income
2 types of fiscal policy:
1. Deflationary- used when the economy is
experiencing high rates of economic growth
and inflation, so needs to be slowed down (I.e.
by combo of higher taxes and reduced gov't
expenditure policies)

2. Expansionary- used to boost economy,
by combo of tax cuts and more public sector
spending
Common examples of taxes:
 Income tax
 Corporation tax
 Sales tax
 Capital gains tax- on surplus
 Inheritance
 Excise- on demerit goods like alcohol
 Customs duties- foreign imports
 Stamp duty- paid when commercial/residential
property is bought
Monetary policy
 Definition- designed to control the amount of spending
and investment in an economy by altering interest rates
to affect the money supply and exchange rates
 Businesses are charged varying levels of interest rates
because:
 1. Risk- greater risk of defaulting, greater interest
 2. Time- longer the loan pd, more interest
 3. Administration costs- higher these are, “”
 4. Expectations- if gov't expects good economy, likely to
announce interest rate hike to dampen effects on inflation in the
economy
Legal Opportunities and Threats
Consumer protection legislation
Employee protection legislation
Competition legislation
Social and environment protection
legislation
Ethical opportunities and threats
 Business ethics- moral principles that should be
considered in business decision-making.
 Although there are compliance costs in ethically
acting, businesses will benefit:
Attract/retain good quality workers
Attract new consumers, retain customers
Generates good publicity and public relations
 Businesses traditionally report only figures for
financial performance, but now also prepare to
have external social audits conducted
Differences between PEST and
SWOT:
 SWOT analysis- strengths, weakness, opportunities,
threats
 PEST is broader, SWOT is narrower
 PEST helpful to produce SWOT (NOT vice versa)
 PEST identifies opportunities and threats in SWOT
 PEST more useful and relevant with larger/ complex
issues
 PEST doesn’t directly consider internal factors of
issue considered.
External environment and
business strategy
PEST gives managers overview of external
business environment, activity-affecting
factors, etc… Used to analyze decisions like:
Potential costs and benefits of a joint venture,
merger, or acquisition
Marketing planning
Business propositions
Investment opportunities
Policies to achieve macroeconomic
objectives:
 Gov’ts will use range of policies that will be bad
or good for some businesses. They will be
affected by factors like:
Size of business
Ability of management
Price elasticity of demand
Degree of diversification
Level of a firm’s gearing
 External factors affect international
competitiveness of business.
Review Questions:
 1. What does the acronym STEEPLE analysis stand
for?
 2. Outline the purpose of a PEST analysis.
 3. What are the three general steps needed to carry
out a PEST analysis?
 4. Explain how each of the PEST components can
represent either opportunities or threats for a
business.
 5. What are the four key macroeconomic objectives
of most gov'ts?
Review (cont.)
 6. What is meant by “trade cycle”?
 7. State 3 ways in which a business may be able to
cope with a recession.
 8. Using examples, distinguish between ‘economic’
and ‘political’ opportunities and threats.
 9. Distinguish between ‘fiscal policy’ and ‘monetary
policy’.
 10. How does the legal system present both
opportunities and threats for businesses?
Key Terms
 Balance of Payments- an annual record of a country's export earnings and its import
expenditure. A surplus exists if the value of exports exceeds that of imports (vice versa for a
deficit on the balance of payments).
 Deregulation- the removal of government rules and regulations which constrain an industry,
thereby enhancing its efficiency. This should also encourage more competition within an
industry.
 Direct tax- a levy that is paid from the income of individuals or businesses, such as personal
income tax and corporation tax.
 Economic Growth- measures the change in the Gross Domestic Product of a nation over time.
Growth is said to occur if there is an increase in GDP for two consecutive quarters.
 Ethics- the moral values and judgments (what is right and just) that society believes
organizations should consider in their decision-making.
 Exchange rate- refers to the value of country's currency in terms of another currency
 External shocks, aka exogenous shocks- are unforeseeable and unexpected changes in the
external business environment that tend to affect all businesses in the economy, such as
natural disasters or wars.
 Fiscal policy- refers to government policies that deal with taxation and government expenditure
in order to affect the level of economic activity
 Gross Domestic Product- the total value of a nation's annual output.
It is used as an indicator of the level of economic activity in a
country.
 Indirect tax- a levy placed on the purchase of goods and services,
such as sales taxes and excise duties.
 Inflation- when the general price level in an economy continuously
rises. It is calculated by measuring changes in the cost of a
representative basket of goods and services purchased by the
average household over a period of time.
 Interest rate- a measure of the price of money. It can be expressed
in terms of the amount charged for money that is borrowed or how
much is offered on money that is saved.
 Monetary policy- government policies concerned with changing
interest rates in order to control the money supply, and the
exchange rate.
 PEST analysis- a framework used to analyze the opportunities and
threats of the political, economic, social, and technological
environments on business activity. It is one of many tools that can
be used in the decision-making process.
 Protectionism- refers to any measure taken by a government to
safeguard its businesses from foreign competitors. This presents a
threat or barrier to trade for businesses trying to operate in overseas
markets.
 Tariffs- a method of protectionism whereby the domestic
government taxes foreign imports, thereby giving domestic
producers a relative price advantage.
 Trade cycle, aka business cycle- the fluctuation in the level of
economic activity over time. Economies tend to move through the
cycle of booms, recessions, slumps, recovery and growth.
 Unemployment- the number of people in the workforce who are
willing and able to work but cannot find employment.