To look at external and internal factors that effect the operation of a business.

Learning Intentions:

You should be able to:

Describe external factors that affect businesses (PESTEC)

Describe internal factors that affect businesses

Give current detailed examples of both external and internal factors

Any system is made up of four key parts:inputsprocessesoutputsFeedback.

In turn, each of the above are affected by external and internal pressures.

Political factors Economic factors Social factors Technological factorsand: Environmental factors Competitive factors

Tax Government legislation Environmental regulations Trade restrictions Political stability

Tax - corporation tax, VAT. Laws - Hasawa (1974), minimum wage etc. Environment - Kyoto Agreement, carbon

footprint issues. Trade – tariffs and trade embargos. Stability - changes in government (from

Labour to Conservative or Republican to Democrat) or even more severe with revolutions or coups (can affect tax rates and investment if governments have different political views).

Economic growth Interest rates Exchange rates Inflation Unemployment

Economic growth – are new jobs being created and is spending increasing?

Interest rates – high interest rates affect borrowing from banks – this will affect not only companies but also consumers and suppliers, therefore spending may be less if interest rates are high.

Exchange rates – if there is a favourable return between dollar and pound, for example, then it would be cheaper for US firms to settle in the UK than in, say, Europe (euro).

Inflation rate – is inflation high and crippling new businesses or is it stable?

Unemployment – if high then inflation will be low and vice versa; cheap workforce could be available if there is high unemployment.

Demographics Lifestyles Structure of the labour market Trends and fashions Attitudes Education levels Ethnic markets

Demographics – change in the nature of the population (the grey pound – old folk on the increase, SAGA Holidays etc).

Lifestyles – by sport, hobby etc. Structure of labour market – increase in women in

labour force; decline in manual labour jobs; increase in service sector jobs; increase in part-time, temporary employment.

Trends and fashions – changes in taste (denims trendy or not?).

Attitudes – change in people’s opinions. Education – Guardian reader different from the Sun

(tabloid vs broadsheet?). Ethnic – different cultures and regional trends (pork, cows

etc sacred or forbidden by certain religious groups).

ICT Research and development (R&D)

activity Automation E-commerce

ICT – changes in software, hardware and telecommunications can impact on how a business performs locally, nationally and globally.

R&D activity – investment and spending are factors in a firm staying competitive and innovative.

Automation – the introduction of machines has set-up costs and human costs.

E-commerce – buying and selling online has revolutionised 21st century retailing.

Global warming Recycling Pollution and industrial waste Organic foods

Global warming – the impact of humans may have caused significant long-term damage to the Earth; firms must look to reduce their carbon footprint

Recycling – saving the planet’s resources and re-using items are considered good, ethical business practice.

Pollution and industrial waste – disposing of waste has to be conducted safely and not impact on the local environment or negative publicity will occur.

Organic foods – people are moving towards more natural foods.

Product differentiation Price wars Profit margins Imitators

Product differentiation – a firm’s product has to stand out from the rest.

Price wars – firms may become embroiled in costly price competition.

Profit margins – competitors impact on profits as firms have to compete and match in terms of price, market research and advertising.

Imitators – patent protection is needed to reduce the impact of copycats.

New personnel in the organisation (settling in time, training etc, especially in senior positions!)

New technology being used (training, errors, set-up and maintenance costs)

Change in firm’s financial position (loss of contracts, customers, market share etc)

The European Union was formed in 1992 by the Maastrict Treaty.

It has 25 member states. It is a single market. The euro is the currency adopted by

most of the member states. Major institutions: EU Parliament

(Brussels), European Central Bank (Frankfurt).

Converting from Imperial measurements to metric (1994 Units of Measurements Legislation); Steven Thorburn, the metric martyr.

Mobile phone firms have been warned they face EU legislation after failing to cut ‘unjustifiably high’ charges for calls made and received when abroad.

As the environment becomes more important as a result of global warming and ozone depletion, firms have to act accordingly (as part of being socially responsible).

What is the Kyoto Agreement?¹ Friends of the Earth and Greenpeace are

environmental pressure groups.

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

Read the question carefully. Make sure you know what it is asking about specifically.

Any questions? 10 minutes to answer.

Task time

Political – legislation and regulations will affect an organisation in that it will need to comply with the laws of the country it operates in.

Economic – factors such as inflation, recession/boom periods and 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 what new products are desired.

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.