Business Notes: Unit 4 Topic 2: The Relationship Between Businesses and the Economic Environment

Business and its External Environment

All business take place within a much wider context than the business itself:

The business takes place in the competitive environment which takes place in the general business environment.

The Competitive Environment:

-Varies from industry to industry

EXAMPLE:

The number of competitors dictates to what extent a business can raise or lower its prices and the advertising it is likely to undertake.

PESTLE Analysis

Using PESTLE analysis means all the different influences in the general business environemt to be classified into 6 categories. Below you can see a list illustrating the PESTLE categories and examples of issues in each category that might affect business:

Political Factors:

  • Government economic policies
  • Government Social Policies
  • The extent of government intervention

Economic Factors:

  • The business cycle
  • Interest rates
  • Exchange rates
  • The level of inflation
  • The level of unemployment
  • Membership of the EU

Social Factors:

  • Ethical issues
  • The impact of pressure groups
  • The influence of different stakeholders
  • Changing lifestyles

Technological Factors:

  • New products
  • New processes
  • The impact of change
  • The costs of change

Legal Factors:

  • Legislation

Environmental Factors:

  • Environmental Issues

The Business Cycle (also known as ‘The Trade Cycle’)

The business cycle  is the regular pattern of ups and downs in deomand and output within an economy, or of gross domestic product (GDP) growth over time. It is characterised by 4 main phases: boom, recession (or downturn), slump and recovery (or upturn).

In periods of boom the economy will see high price increases, with high inflation, very high growth rates and high levels of employment. Where as in periods of recession the economy will see price decreases, high deflation, low employment levels, very low growth rates (sometimes negative) and low consumer spending/ confidence.

The length and magnitude of each stageof the business cycle varies. Some are short-lived, lasting only a few months, while others are as long as 3-4 years.

Impact of a Boom Upon a Business

Strategies/ Approaches:

  • Increasing price
  • Make sure the business has sufficient capacity
  • Workforce planning – recruitment & training
  • Riskier strategies

Problems:

  • Higher wage costs
  • May not last very long (Is it going to be a short or long run?)
  • The business may not be able to meet demand
  • The business may grow to fast
  • Over trading
  • Insufficient working capital/ cashflow
  • More competition

Impact of Recession Upon a Business

Strategies/ Approaches:

  • Redundancies
  • Scale back production
  • Safer strategies
  • Higher supply of labour, lower wages
  • Lower prices
  • Wholesalers more willing to supply

Problems

  • Lower profit
  • Too many employees/ wage costs too high
  • Costs too high

Cut back capacity -> maintain high capacity utilisation -> low unit costs

Safer strategies -> market penetration

Examples of ‘Recession Proof Businesses’

  • Those which supply necessities
  • Utility companies

Merges & Takeover

Increase due to failure and being short of cash. Business are cheap to buy.

Unemployment

You are defined as unemplyed if you are without a job but are willing and able to work.

Two main problems in the UK: high level of long term unemployes, high levels of youth unemployment (16-20 year olds)

Types of Unemployment

  • Frinctional unemployment: short term unemployment between jobs (not really a problem)
  • Seasonal unemployment: linked to seasons (hotels & leisure)
  • Cyclical unemployment: linked to the business cycle:
  1. booms -> high employment/low unemployment
  2. recession -> high unemploymen/ low employment
  • Structural unemployment: linked to the structure of the economy. Deindustrialisation (coal mining, steel, ship building)

Affect Upon Businesses:

Negatives: consumer demands falls -> consumers have lower desposable income. Difficult to acquire employees with the right skills (known as skills shortages)

2 other negatives – low tax revenue & high benefit payments for the government. People become demotivates, out of touch and demorilised

Postives: large pool of labour to choose from. Cheaper/ lower wages

Interest Rates & Economic Growth

Interest rates are the cost of borrowing eg 10% and or the reward for saving eg 4%.

Economic growth is the % change in GDP (Gross Domestic Product) which is the total output in the economy eg. 0.2%

Rise in Interest Rates

Bank of England interest rate = 0.5%

Affect upon business:

Consumers: Feel poorer, lower discretionary income, save/spend less, particularly luxuries, income elastic
Investment: Falls, more expensive to borrow money to purchase capital goods
Exchange rate: Rise, exports become more expensive, less demand, imports become cheaper, more demand.

Decrease of Interest Rates

Affect upon business:

Consumers: Feel richer, higher discretionary income, save/ spend more, particularly luxuries, income inelastic
Investment: Increase, less expensive to borrow money to purchase capital goods
Exchange rate: Falls, exports become less expensive – more demand, Imports become more expensive – less demand

Globalisation

What is it?

Locating in other countries.
Trading in other countries/ across the world (world wide markets)
Source resources from around the world

Advantages

  • Cheaper labour & raw materials (outsourcing)
  • Closer to markets
  • Avoid risks of operating in a single market
  • Less health and safety regulations
  • Access to bigger markets
  • Opportunities for growth – as yet some markets haven’t matured
  • Economies of scale
  • Increase brand awareness
  • Cheaper location
  • Labour flexibility
  • Avoid trade barriers
  • Benefit from market development
  • Global marketing strategy

Disadvantages

  • May distance them from the market
  • Communication issues
  • Language barriers
  • Time differences
  • Ethical issues (exploiting cheap labour, loss of jobs in the UK)
  • Increase competition
  • Products may need to be adapted
  • Lack of training and skills available
  • Government intervention/ stability

Emerging Markets

Definition: Slightly less mature economies less developed economies. Now experiencing high levels of economic growth.

UK – is a developed economy, mature economy

Advantages

  • New markets
  • Chances for growth
  • First mover advantage (brand loyalty)
  • More disposable income (purchase luxuries)

EXAMPLE:
Vodafone’s UK market is saturated so they expanded to India and China and achieve growth.

  • Boston Matrix – stars (high market growth, high market share)
  • Natural resources
  • Lower production costs in eastern Europe

Disadvantages

  • Markets may not be vey profitable
  • Political systems may not be stable
  • Maybe problems raising finance (especially in countries where the banking system needs developing)
  • May have poor infrastructure (travel links & communication)
  • Market may not be very developed
  • Competition may move quicker & get first mover advantage
  • May not have the right skills available

These are my personal notes from my A Level Business Studies class.

– Esjae x

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