External Business Environment Factors affecting the operation of business and Business as a dynamic activity Also known as P.E.S.T.E.C.

P.E.S.T.E.C FACTORS Political Factors Economic Factors Social Factors Technological Factors Environmental Factors Competitive Factors

Why do these effect the business? Businesses receive INPUTS in the form of raw materials and other resources (combine Factors of Production) then they - PROCESS them by transforming them into goods and services and then - sell the resulting OUTPUT to the market

Why do these effect the business? The market (external consumers) will react to the products either positively or negatively. This is called FEEDBACK. This will then affect how the business will operate. Therefore the external environment will affect a business as they will constantly need to change.

Political Pressures Government/Legislation (National, Local, European) Any changes in the government will affect organisations. Government provides services as well as buying goods and services from the private sector. Affects firms by changes in Taxation, Public Spending and introduction of Government Policies (e.g. Environmental Policies)

National: Tobacco Industry Increase in prices charged, fall in demand due to government media, change in production practices of packaging with Gov. Health Warnings. Advertising Health Warnings Duty Free reduced when travelling in E.U. Increase in Taxation Reduction in Advertising

Local: Location of Industry Decline in small town centres as small businesses are put out of business Proposal for out of town shopping through incentives/grants Effect

Economic Pressures Changes in Inflation (rise in the general level of prices) Exchange Rates Interest Rates Unemployment Recession

Effect of Inflation on Business Consumers standard of living drops as their income may not rise as much as inflation. Therefore their income cannot have the same purchasing power. Thus companies will see a fall in sales. Businesses may also find it difficult to compete with foreign companies who are not experiencing an increase in inflation. Prices are increased. Redundancy may increase as a firm will see a fall in demand and thus production.

Effect of the European Community on Businesses As the European Community increases with power, Companies have to conform with rules and regulations for buying and selling within the European Community. The Euro has also resulted in some companies in Britain accepting the Euro as currency e.g. Marks & Spencers.

Social Pressures Changes in either the make up of society (Demographic) Or Tastes and lifestyle changes of society.

Demographic Changes The demographic makeup of Britain has changed dramatically over the last 50 years. Family size has decreased dramatically. (It was normal to have 5 and above children). Women are leaving parenthood to later on in life (average 29 years). People live longer. As people are having less children, the demographic makeup is top heavy (more old people than young)

Businesses have responded by Having and accepting an older workforce (plans to increase retirement age). More training to ensure that younger workers remain with the business. Producing more goods focussed at older people (SAGA, Savings Plans, Life Insurance for over 50’s) Producing goods for Dinky’s or affluent career couples.

SOCIO-CULTURAL CHANGES Changes in lifestyle and attitudes. More women in wanting to work. More home owners Concern about environment Changing social attitudes – homosexuality, divorce, children out of wedlock, childless couples are now more “socially acceptable”

SOCIO-CULTURAL CHANGES Smaller families Greater life expectancy More car owners More time available for leisure More sensitive attitudes towards public events and disasters.

TECHNOLOGICAL FACTORS Technology advances in the last 25 years has led to businesses becoming more up-to-date in order to compete. E-mail has increased communication Internet has increased markets (e-commerce) Software (databases, spreadsheets) allow businesses to analyse performance and sales easily.

Effects of Technology on Businesses If Companies don’t keep up, they will be unable to compete. Resulting in globalisation – connected to the world through computers and networks. Move from Labour Intensive to Capital Intensive (machines doing the work) resulting in fewer jobs.

Environmental Factors More businesses are having to become more environmentally conscious due to changes in People’s attitudes and legislation brought in by Government or European Law. Body Shop – uses recycled goods in production (bottles, packaging etc) Car manufacturers had to change the production of cars to come in line with new legislation with car emissions from exhausts.

Competitive Factors Can act as both a positive or negative influence. Good competition (companies need to compete in order to survive) will result in the production of new products which will benefit the consumer. However new companies breaking into an existing market can cause the existing companies to struggle. Example Camelot (Lottery) competing with Littlewoods Pools has resulted in redundancies and closures.

Competitive Factors contd. Companies particularly in the UK are also under threat from competition from other European Countries which will affect how they survive and develop.

Summary Not all factors which affect business are negative. Many factors are positive. Business must be dynamic (i.e. be able to react to changes in the environment) if they are to survive and develop. Pressure to change may come from within or outwith the business.

Question Explain the effects that 3 political factors could have on an organisation. (A different effect should be explained each time.) (3)

Answer Legislation − any appropriate law with an appropriate effect, ie, new laws on sale of alcohol have to be complied with or face a fine from the government. Taxation rates may change which will affect the profitability of an organisation. Level of NHS funding may affect the number of or the prices charged by private hospitals. Government initiatives in education have meant that private public partnerships have allowed companies to bid to build new schools.

Answer Credit any relevant government policy with an appropriate explanation of the affect on the organisation, ie, giving loans to banks to help with credit crunch in 2009.

Question Describe 4 external factors (other than political) that could have an impact on an organisation. (4)

Answer Economic factors such as a recession, interest rates, inflation. Social factors such as changes in trends and fashion/changes in patterns of employment. The introduction of new technology which is continually changing. Competitive factors such as the prices charged by a similar organisation. Environmental factors such as the weather/flooding.

Question Explain how external factors may affect an organisation. (6)

Answer Political – legislation and regulations will affect an organisation in that they need to comply with the laws of the country they operate in. Economic – factors such as inflation, recession/boom periods, interest rates will affect organisations in a number of ways. Social – changes in trends and fashions mean that organisations must continually carry out market research to see what products will sell or new products are desired.

Answer Technological – as technology changes organisations must keep up-to date and this will involve a large financial cost. Environmental – organisations now need to attempt to be socially responsible and environmentally friendly both to comply with legislation and satisfy consumer groups. Competitive – organisations must continually monitor their competitors prices and alter theirs accordingly.

Hint When the command word explain is used then there must be a development to explain the reason. No marks are credited for merely identification.

Internal Pressures to change: Pressures can come within the organisations as well: New personnel in the organisation, especially in management positions New technology being used in the firm A change in the firm’s financial position