EXTERNAL E

NVIRONMENT

ANALYSIS

UNIT 1

.5

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:

• 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 lawConsumer protection rightsHealth and Safety factors

Ex: Taxation and interest rate policies can affect the political and economic stability of the country

Government incentives/spending

POLITICAL

Trading agreementsGovernment stability Funding (Grants available for

investment)

https://www.youtube.com/watch?v=iZRBEpHOHLQ

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

SOCIALCultural 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)InternetProcess developmentsInfrastructure

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 INDIAPOLITICAL • 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 INDIAECONOMIC • 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 INDIASOCIAL

• 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 INDIATECHNOLOGICAL

• 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 THREATSFor 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 THREATSThe 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 THREATSOther 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 and new markets. (Source of

innovation)

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 THREATSEconomic 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-pollo-leche-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 GROWTHTrade 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 GROWTHRecovery 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 investmentcapital goods, education and

training and

health technology

ECONOMIC GROWTHEconomic 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 PAYMENTSThe 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 profitsc) 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 POLICYDeflationary 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 POLICYMonetary 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 POLICYInterest 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