Unit 1.

External Environment
 Introduction
► Businesses depend for their survival
on understanding and responding to
external factors that are beyond their
control.
► Many of the factors are ‘constraints’
because they may limit the nature of
decisions that business managers can
take.
 Introduction
► The legal requirements imposed by
governments, on environmental
pollution for example, are one of the
most obvious constraining influences
on business activity. However, external
influences can also create
opportunities and enable a business to
become even more successful –
introducing new technology in
advance of rival firms is one example.
 Internal Factors

►Arethe constraints and

opportunities (facing a
business in the attempt to
achieve its aims and
objectives) within a firm’s
own control
Internal Factors (Constraints)
► Example:
 Finance – most firms lack sufficient
sources of finance
 People – poor working relations, poor
communications can harm a firm’s ability
to achieve its objectives
 Marketing – firms might not have
attractive marketing campaigns as their
rivals
 Production – firm may lack the resources
or expertise
External Factors (Constraints)

►Are those issues which

either restrict or aid the
performance of a business
but are beyond its control.
External Factors (Constraints)
► Example:
 Tax rates
 Interest rates
 Recession
 Natural disasters
 Oil crisis
 War
 STEEPLE ANALYSIS
► Is an analytical framework used to
examine the opportunities and threats
of the external environment
► Is an acronym for the Social,
Technological, Economic,
Environmental, Political, Legal and
Ethical
► STEEPLE analysis is central to business
strategy, such as assessing the
feasibility of an overseas investment
 Key advantages of
STEEPLE analysis
► It is quite simple to use
► It helps managers to be thorough and
logical in their analysis of the external
opportunities and threats faced by the
business
► Useful brainstorming and discussion tools
► It promotes proactive and forward
thinking rather than static views based
on gut feelings
► Managers will be better informed and
► It helps you to spot business or personal
opportunities, and it gives you advanced
warning of significant threats.
► It reveals the direction of change within your
business environment. This helps you shape
what you're doing, so that you work with
change, rather than against it.
► It helps you avoid starting projects that are
likely to fail, for reasons beyond your
control.
► It can help you break free of unconscious
assumptions when you enter a new country,
region, or market; because it helps you
 PEST ANALYSIS
► PEST = Political, Economic, Social and
Technological opportunities and
threats of the external environment
within which businesses operate
► These factors affect all businesses in
the economy and are beyond the
control of any individual organization
► Mainly used at the start of a strategy
review process
 Variations of PEST
►STEP – more optimistic name

►PESTLE analysis
 Legal and Environmental

►STEEPLE
 Ethical opportunities and threats
 STEEPLE analysis issues
► SOCIAL
 Social, cultural and demographic changes
can also present opportunities and threats
 The values and attitudes of society toward
a wide range of different issues (such as
business ethics, social welfare, women,
religion or animal rights)
► TECHNOLOGICAL
 Advances in technology and work
processes (such as the microchip
revolution or the introduction of just-in-
time stock control system) have improved
the efficiency of businesses
 STEEPLE analysis issues
► ECONOMIC
 Inflation, unemployment, economic
growth and international trade
 Consumer and business confidence also
affect the level of economic activity

► ENVIRONMENTAL
 Impacts of business activities on the
natural environment
 External costs of business activity –
passive smoking, air and noise pollution,
packaging waste etc.
 STEEPLE analysis issues
► POLITICAL
 Government legislation (employment law,
consumer protection rights, copyright,
trademark regulations) define the
boundaries within which businesses can
operate

► LEGAL
 The government imposes rules,
regulations and laws to ensure that the
general public is protected from adverse
business activity
 STEEPLE analysis issues
► ETHICAL
 Ethical firms act in a socially responsible
way toward their stakeholders (especially
their customers, employees and local
community)
Steps to carry out a the analysis
►Brainstorm external factors likely
to affect the business
►Discuss these factors to decide
which ones are most likely to have
a significant impact on the
business and hence its strategy
►Summarize the information in a
PEST analysis template to further
the development of business
strategy
 SOCIAL
OPPORTUNITIES AND
THREATS
 Social
Opportunities and Threats
► The attitude of society towards a wide
range of different issues (business ethics,
social welfare, women, religion or animals)
will affect what good and services are
provided in the economy.

► Demographic changes in developed

nations, such as a more educated and
flexible workforce alongside an aging
population, have affected recruitment
practices, marketing strategies and the
products provided by businesses.
 Comment on how the
demographic changes below
may present both
opportunities and threats to
a business:
1. Growing number of self-employed
people.
2. Increasing number of single parent
families.
3. Parents choosing to have fewer
children and at a later stage in their
lives.
4. More people graduating with
Growing number of
self-employed people
Increasing number of single
parent families
Parents choosing to have
fewer children and at a
later stage
in their lives
More people graduating with
university degrees
TECHNOLOGICAL

OPPORTUNITIES AND
THREATS
 Technological
Opportunities and Threats
► Technologyhas affected all aspects of
business functions

► Internet affected:
 Human resources in recruitment process
 Marketing (e-commerce – trading in
internet)
 Finance – annual reports online
 Operations Management – access to
benchmarking data
 Technological
Opportunities and Threats
►Internetpresents opportunities for
businesses:
 Speed of access to information
 Reducing language and cultural barriers
 Reduced cost of production
 Overcome geographical limitations
 Technological
Opportunities and Threats
► Other opportunities that technology
bring to businesses include:
 New working practices – working from
home, video conferencing, e-commerce,
advertising in the internet
 Increased productivity and efficiency
gains – use of robots / machines,
automation
 Quicker product development time –
CAD/CAM allowed businesses to produce
prototypes quickly and cost-efficiently
 Technological
Opportunities and Threats
► Other opportunities:
 New products and new markets –
technology is a source of innovation and
brings about new products in the market

 The creation of jobs – increased need for

maintenance and technical support
 Technological
Opportunities and Threats
►Internetpresents threats for
businesses:
 Price transparency – customers can easily
compare the prices of different businesses
without leaving their home or office
 Online crime – hackers, online banking
and credit card fraud
 Higher cost of production – maintenance
and training costs
 Reduced productivity – access personal
email and social networking during
working hours
 Technological
Opportunities and Threats
► Other Threats:
 Technology is not always reliable or secure

 It can be costly

 Shorter product life cycle

 Automation has led to job losses in

primary and secondary sector industries
 Technological
Opportunities and Threats
► Factors
to consider when adopting or
implementing technology in the
workplace:

 Costs
 Benefits
 Human relations
 Recruitment and training
ENVIRONMENTAL
OPPORTUNITIES AND
THREATS
 Environmental
Opportunities and Threats
► External cost of production or negative
externalities – costs incurred by a third
party in a business transaction (cost borne
by society or the environment rather than
by the buyer or seller)
 Samples of external costs:
►Passive smoking
►Air pollution
►Noise pollution
►Packaging waste
►Global warming
 Environmental
Opportunities and Threats
► Publicconcerns and changes in social
attitudes about the environment have
meant that businesses are increasingly
reviewing their operations
 Firms that do not respect the environment face
ruining their reputation and long-term
profitability
 If compliance cost are too high, then firms may
choose not to become more environmentally
friendly
 Environmental
Opportunities and Threats
► Changes in weather
 Torrential rain or flooding will affect large number
of businesses
 Indian Ocean Tsunami (SE Asia 2004); Hurricane
Katrina (USA 2005); snow & icy conditions across
Europe (12/2010); floods in Australia (2011)
caused major havoc to businesses
 Extreme weather condition in Russia reduced its
GDP by over 1 percent in 2010
 Japan’s 9.0 earthquake (2011) cost the nation
over $15bn
 Some business might be able to exploit changes
in the season
 Environmental
Opportunities and Threats
► Health scares and epidemics
 SARS 2003 and bird flu (2006) in SE Asia caused
turmoil in the region with many businesses
collapsing
 Mad cow disease (late 1990s), foot and mouth
disease (2001) and swine flu (2009) had similar
effects in Europe
 LEGAL
OPPORTUNITIES AND
THREATS
 Legal Opportunity & Threats
► The gov’t. imposes rules, regulations
and laws to ensure that the general
public is protected from the negative
aspects of business activity.
► Common legislation affecting
businesses include:
 Consumer protection legislation
 Employee protection legislation
 Competition legislation
 Social and environmental protection
Legal Opportunity & Threats
► Consumer protection legislation
 Laws exist that make it illegal for
businesses to provide false or misleading
descriptions of their products and
services.
 Products must meet certain quality
standards.
 Businesses are held liable for any damage
or injury caused by their defective
products.
Legal Opportunity & Threats
► Employee protection legislation
 Laws that protect the interests and safety
of workers.
 For example: anti-discrimination
legislation helps to ensure that businesses
act fairly toward their employees,
irrespective of their age, gender, religion
or ethnicity.
Legal Opportunity & Threats
► Competition legislation
 Laws ensure that anti-competitive
practices are prohibited to protect
customers and smaller businesses from
firms with monopoly power.
 The gov’t. takes action against businesses
deemed to be acting against the public
interest, such as large firms engaging in
fixing or charging unjustifiably high prices.
 Competition laws ie. copyright,
trademark, patent laws give businesses
legal protection against competitors; thus
Legal Opportunity & Threats
► Social
and environmental
protection legislation
 Laws to prevent or reduce the
consumption of demerit goods (ie.
tobacco, petrol, alcohol, gambling and
illegal drugs).
 Without government legislation, the
consumption of these products would be
higher and therefore the costs to society
would be greater (ie. passive smoking,
pollution and crime)
 ETHICAL
OPPORTUNITIES AND
THREATS
 Ethical Opportunities and
Threats
► Business ethics are the moral
principles that are, or should be,
considered in business decision
making.
► Benefits of being socially responsible:
 They attract and retain good quality
workers
 They attract new customers and retain
existing ones
 It generates good publicity and public
 Ethical Opportunities and
Threats
► Samples of ethical business behavior:
 Protecting natural environment by using
resources efficiently and minimizing waste
 Firms pay their workers on time
 Firms don’t employ workers below the
legal minimum age or allow their
employees to operate in poor working
conditions
 Firms don’t use misleading marketing or
deal with corrupt suppliers, sponsors or
governments
 Ethical Opportunities and
Threats
► Businesses use external social audits
(external agency who examine and
generates reports) – they report on the
ethical and social stance of a business;
 its external matters (involvement in the
community, levels of pollution) and
 internal issues (efficiency of its waste
management and ability to provide safe
working environments)
 ECONOMIC
OPPORTUNITIES AND
THREATS
 Economic
Opportunities and Threats
► Economic environment refers to the
large-scale economic factors affecting
a nation as a whole, such as the
condition of foreign trade and the
levels of business and consumer
confidence.
► Government’s 4 key macro-economic
goals:
 Controlled inflation
 Economic growth
 Economic
Opportunities and Threats
► Controlled rate of inflation
 Inflation is the continual rise in the
general level of prices in the economy

 Causes of inflation:
►Demand Pull Inflation – caused by
excessive aggregate demand in the economy
►Cost Push Inflation – caused by higher cost
production leading to a rise in prices so that
firms can maintain their profit margins
UNEMPLOYMEN
T
 Economic
Opportunities and Threats
►A high level of employment / reducing
the rate of unemployment:
 Types of unemployment
 Policies to tackle the problems of
unemployment:
►Demand Side Policies - increase the level of
AD
►Expansionary Fiscal Policies - reduce
taxes/increase government spending
►Expansionary Monetary Policies - reduce level
of interest rates
►Supply-side Policies - increase the level of AS
 TYPES OF UNEMPLOYMENT

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 Types of unemployment
Frictionalunemployment
Seasonal unemployment
Technological
unemployment
Regional unemployment
Structural unemployment
Cyclical unemployment
Frictional
Unemployment:
Occurs when people change jobs
as there is usually a time lag
between leaving a job and
finding or starting another. As
this is temporary, there is
relatively little social hardship. It
is always present in the economy.
Seasonal
Unemployment:
Iscaused by seasonal
changes in demand for a
product
e.g. beach resorts tend to
suffer from a lack of tourists
during the winter months.
Technological
Unemployment:
Results in people losing their
jobs due to the introduction
of labor-saving (capital
intensive) technologies,
which can cause mass-scale
unemployment.
Regional
Unemployment:
Refers to the different
unemployment rates that
exist in different areas of a
country.
Remote rural areas tend to
have higher levels of
unemployment than busy
urban business districts.
Structural
Unemployment:
Occurs when the demand
for products produced in a
particular industry
continually falls.
The industry therefore
suffers from structural and
long-term changes.
Cyclical (demand-
deficient) Unemployment:

Is caused by a lack of

aggregate demand in the
economy.
It is the most severe type of
unemployment as it tends to
affect each and every
industry (caused by a
recession).
 Economic consequences of
unemployment
1. Lower level of AD
 Unemployment lowers household’s
disposable income
 Reduces consumption
 Reduces level of demand and output
in the nation as a whole
 Leads to more unemployment
 Can pull the economy into a
recession
 Economic consequences of
unemployment
2. Under-utilization of the nation’s
resource

 Unemployment means a nation is not

fully utilizing its productive resources

 Nationwith high unemployment is

producing within its PPC at a level below
that which is most beneficial to an
economy
 Economic consequences of
unemployment
3. Brain-drain

 Skilled
workers choosing to leave the
country with high unemployment if
job opportunities are abundant
elsewhere
 Thisfurther leads to a fall in the
production possibilities of the nation
with high unemployment
 Economic consequences of
unemployment
5. Increased budget deficits
 High unemployment reduces tax revenues
flowing to a government while increasing
public expenditures on financial support
for the unemployed
 Result in decrease government spending
on public goods (infrastructures,
education, defense, healthcare) or an
increase in government borrowing to
finance its budget deficit
 POLITICAL
OPPORTUNITIES AND
THREATS
 Political
Opportunities and Threats
►A government is said to adopt a
laissez-faire (don’t interfere) approach
to managing the economy if it does
not intervene significantly in business
activity; this should stimulate healthy
competition and efficiency and likely
to attract FDI (foreign direct
investment)
 Political
Opportunities and Threats

► Most countries adopt an

interventionist approach to managing
the economy by using legislation and
policies to oversee business behavior
and to influence the level of business
activity.
► Government policies such as Fiscal and
Monetary Policies
Types of Taxation Systems
 Proportional Tax

 Regressive Tax

 Progressive Tax
 Proportional Tax
 A tax for which the percentage remains constant as
income increases
 Many countries are now promoting the idea of
proportional direct taxes or flat taxes
 The same percentage tax is paid at all levels of
income
 Regressive Tax
 Tax that decreases in percentage as income increases
 Such a tax places a larger burden on lower income household than
it does on higher income earners since a greater percentage of a
poor household’s income is used to pay the tax than a rich
household’s
 Most indirect taxes are regressive
 Progressive Tax
 This is a tax for which the percentage paid in
tax increases as income increases
 Is the most equitable of the 3 types of taxes
a government collects
 Lower income households not only pay less
tax, but they pay a smaller percentage of
their income in tax as well
 This is a hypothetical example where there
are 4 tax brackets
Taxable Income ($) % to be paid as tax
0 – 10,000 0
10,001 – 25,000 30%
25,001 – 50,000 40%
50,001 and higher 50%