External Environment

Introduction
► This chapter assesses the importance of
external influences on business performance
and decision-making.
► 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.
 Business Environment

► According to Stephen
P. Robbins & Mary
Coulter, “Environment
refers to institutions
and forces that affect
organizational
performance.
 Internal Factors

►Are the 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 Environment
► Business environment may be defined as all
those conditions and forces which are
external to the business and are beyond the
individual business unit, but it operates
within it.
► External environment refers to the
environment that has an indirect influence
on the business.
► The factors are uncontrollable by the
business.
 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 project
 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 prepared
to deal with external shocks
► 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 develop an
objective view of this new environment.
 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 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
 A simplified example of a PEST
analysis which examines some of
the opportunities and threats of
foreign businesses operating in
India
 PEST analysis of multinationals
operating in India
► POLITICAL
 Political reform in India will encourage better
trade relations with other nations.
 Legislation is less stringent than in developed
nations, thereby placing fewer constraints on
business activity.
 Regarded as less politically stable compared
with many other countries in the region.
 Poor enforcement of patents and copyrights
might discourage technology transfer to India.
 PEST analysis of multinationals
operating in India
► ECONOMIC
 Huge growth potential in financial markets.
 Significant economic growth and rising disposable
incomes (spending power) in India.
 Improved infrastructures and market opportunities in
Mumbai and New Delhi.
 Relatively low costs of production (average wage rates
are still very low).
 Infrastructure and economic stability are less attractive
than in other countries such as China.
 The vast majority of the Indian population is still very
poor.
 PEST analysis of multinationals
operating in India
► Social
 Potential market of over 1.2 billion people (the
second most populous country in the world and
expected to overtake China as the most
populated nation by 2050).
 Well-educated English-speaking workforce.
 Large yet increasing discrepancies in income
and wealth distribution.
 Language barriers in rural cities and/or a clash
of national cultures.
 PEST analysis of multinationals
operating in India
► Technological
 Growing number of technologically aware
population (huge opportunities for firms
providing products such as mobile
phones, personal computers and internet
services).
 Technologies are easily copied due to a
lack of appropriate legislation.
 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.
 Examples of social
opportunities & threats
► The growing support for environmental
protection has altered business behavior
immensely, with many organizations now
reporting the non-financial aspects of their
operations, such as recycling and waste
management.
► With a more liberal and modern social
attitude toward women in most societies,
businesses have benefited from having a
more flexible labor force.
 Examples of social
opportunities & threats
► Migration and the increased awareness and
acceptance of multiculturalism has created
more choice for consumers, e.g. the most
consumed take-out food in the UK is Indian
curry, while the largest non-Asian importer
of Malaysian Laksa (spicy noodle soup) is
Finland.
► Societal pressure for businesses to act more
ethically and socially responsibly can often
result in higher costs.
 Examples of social
opportunities & threats
► Demographic changes in society, such as an
aging population in economically developed
countries, have affected recruitment
practices, marketing strategies and the
products supplied by businesses. Women in
modern societies are opting to have children
at a later age as they give their careers
priority, thereby providing further
opportunities for businesses.
 Examples of social
opportunities & threats
► Language can create opportunities and
threats too. The largest multinational
companies are aware that the most
commonly spoken languages around the
world are Mandarin, English, Spanish and
Hindi. However, it is not always possible to
translate marketing messages and other
communications across different languages
and cultures.
 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 university
degrees.
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
► Technology has 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
► Otheropportunities 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
► Public concerns 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 this stimulate
innovation and improving firm’s competitiveness
 Legal Opportunity & Threats
► Socialand 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)
 Legal Opportunity & Threats

• Sample case studies:

– Businesses can get into all sorts of
trouble if they do not comply with
employment legislation. In November
2000, Coca-Cola was made to pay out
$192.5 million (worth around 300 million
cans of Coke) in lawsuit allegations that
they treated black workers unfairly.
Legal Opportunity & Threats

• Sample case studies:

– In 2013, the Turkish government
introduced a series of strict trading
laws of the sale of alcoholic products:
alcohol cannot be sold within 100
meters of a place of worship or a
school, all forms of alcohol advertising
are banned, and alcohol cannot be
bought or sold between 10 pm and 6
am
Legal Opportunity & Threats

• Sample case studies:

– The US state of Colorado legalized
the sale of marijuana (cannabis) in
2014 at regulated retailers. The
psychoactive drug became legally
available for personal and recreational
use for those aged 21 and above.
Entrepreneurs in Colorado cashed in
by attracting tourists to the area.
Critics argued that legalization sends
the wrong message to youth around
the world.
 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 relations
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
 Reduced unemployment
 Healthy international trade balance
 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
 Definitions
► INFLATION is a sustained increase in the
AVERAGE PRICE LEVEL of goods and services in a
nation.
► DEFLATION occurs when the AVERAGE PRICE
LEVEL of goods and services decreases over time.

► KEY WORDS in the definition is the AVERAGE

since inflation does not measure changes in
relative prices of particular goods.
 Inflation
► INFLATION
 Causes the value of money to decrease
 Makes money less valuable
 Reduces purchasing power
 Encourages households and firms to
spend now rather than postponing
spending until the future when prices are
higher
 ECONOMIC GROWTH
 Improved efficiency in the production process (better use of existing
resources)
 Enhancing the quality of factors of production which requires
investment in:
 Capital Goods – developing an economy’s infrastructure to aid
economic activity and competitiveness
 Education and Training – better educated and trained workforce
becomes a more productive and internationally competitive labor
force
 Health Technology – advances helps to ensure workers are healthy
and therefore more productive; also prevents workers having to
take time off work or retire early due to illness
 ECONOMIC GROWTH
 Increased in the quantity of resources
 Discovering new sources of raw materials
 Changes in the labor force
 Changes in demography – a fall in the birth rate in developed
economies has led to an aging population and a smaller workforce.
Conversely, a ‘baby boom’ will lead to a larger workforce in the next
couple of decades.
 Changes in participation rates – gov’t. policies (such as lower rates of
income tax or reduced welfare payments) can boost the participation
rate.
 Changes in net migration – This refers to the difference between
IMMIGRATION (the number of people entering a country for work
purposes) and EMIGRATION (those leaving a country). If the net
migration figure is positive, then the size of the workforce will increase,
thereby helping to raise the productive capacity of the economy.
 BARRIERS TO ECONOMIC GROWTH
 Lack of infrastructure (transport and communications networks)
 Countries without basic electricity, road networks, schools, hospitals
and housing will find it difficult to prosper
 Lack the technical knowledge and skilled labor force
 Essential resources for generating sustainable economic growth
 Rapid population growth
 High net birth rate will tend to find that there are too many
‘mouths’ to feed
 High foreign debt repayments
 Highly indebted poor countries are obliged to repay their huge
interest-bearing loans, with little left for domestic investment and
growth
 Economic
Opportunities and Threats
► Animprovement in the balance of
payments:

 BoP is a record of a country’s money inflows

and outflows, per time period
 It records export earnings and import
expenditures
 BOP
► Components:
►Current account
►Capital account
►Financial account

► To correct an imbalance on the BOP,

governments often attempt to alter their
exchange rates, which will have a direct
effect on businesses.
 Exchange Rate
► The exchange rate measures the value of
one currency in terms of foreign currencies.
► Appreciation – higher exchange rate means
that export prices will be relatively higher,
thereby reducing the exporter’s price
competitiveness.
► Depreciation – lower exchange rate means
that domestic firms that import raw
materials and components will suffer from
having to pay higher prices, thereby raising
their costs.
 Consequences of continual & large
fluctuations in the foreign exchange
► Can create difficulties for businesses
 Business planning and forecasting become very
complex and impractical
►Businesses may not be able to accurately forecast
export sales or costs of imported materials due to
exchange rate volatility
►International trade deals could be postponed until
the business can benefit from more favorable
movements in the exchange rate
► Governments can set up international trade
barriers to correct any disparity in its BOP or
to protect their domestic industries.
 Protectionism
► Gov’t. policy used to safeguard domestic businesses from
foreign competitors.
 TARIFFS – tax placed on imported products, raising
their price
 QUOTAS – quantitative limits on the volume or value of
imports
 SUBSIDIES – payments made by a gov’t. to domestic
firms as a form of financial aid to reduce the cost of
production of domestic firms
 EMBARGOS – physical bans on international trade with
a certain country
 TECHNOLOGICAL & SAFETY STANDARDS – strict
administration and compliance costs in meeting
industrial and health & safety regulations imposed on
imports
 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
 Fiscal Policy
► Uses taxation and government expenditure
► 2 forms:
 Deflationary (contractionary) fiscal policy –
higher taxes and/or decrease in gov’t.
expenditures
 Expansionary fiscal policy – decrease in taxes
and/or increase in gov’t. expenditures
 Monetary Policy
► Designed to control the amount of spending
and investment in an economy by altering
interest rates to affect the money supply and
exchange rates.
► Interest rates refers to the price of money,
both in terms of the price of borrowing money
and the return for saving money in a bank
account.
► If the economy is growing fast (overheating),
the gov’t. or central bank is likely to raise
interest rates to combat the effects of inflation.
4 reasons businesses are charged
varying ‘RATES’ of interest
► RISK – the greater the risk of a business defaulting
on a lone, the higher the interest rate
► ADMINISTRATION COSTS – the higher the admin.
costs involved in lending money to a business, the
higher the interest rate.
► TIME – the longer the period of a loan, the higher the
real interest rate tends to be due to opportunity cost
of money being lent out
► EXPECTATIONS – if the economy is expected to do
well, then it is likely that interest rates will rise to
dampen the effect of inflation.
 Interest Rates and Exchange Rates

► Positive correlation – an increase in interest

rates tends to stimulate demand for its
currency since foreign investors are
attracted by better returns on their saving.
► Increase int. rates and appreciation of
currency cause the price of exports to be
relatively higher and likely to reduce the
demand for exports; can be damaging for
domestic businesses in the long run.
 Intro to Money Market
 Macroeconomics policymakers have 2 general
tools to manage the level of aggregate demand
 Fiscal Policy – changing the levels of taxes and
government spending
 Monetary Policy – changing the supply of money
available in a nation
 Carried out by the central bank of each country

 Note the difference between central bank and commercial

bank
Central bank vs. Commercial bank
 Commercial banks
 are financial institutions whose main functions are
 to hold deposits for their customers (consumers and
firms)
 to make loans to their customers
 to transfer funds by check & electronically from one bank
to another
 to buy government bonds
 Role of Central Banks
 Central bank
 Is the monetary authority of a country, which performs
the functions of issuing currency, managing the money
supply, and controlling interest rates
 2 largest economies
 European Union – The European Central Bank (ECB)

 United States – US Federal Reserve (the Fed)

 Independent from politics

 Head and governors are appointed by politicians to
fixed terms
 Central Bank’s Responsibilities

 Banker to the government

 Banker to commercial banks

 Regulator of commercial banks

 Conduct Monetary Policy
 Central Bank’s Responsibilities
 Banker to the government
 Holds the government’s cash/deposits
 Receives payments for the gov’t and
makes payments for the gov’t
 Manages the government’s borrowing
by selling bonds to commercial banks
and the public
 Acts as an adviser to the gov’t on
financial and banking matters
 Central Bank’s Responsibilities
 Banker to commercial banks
 Holds deposits for commercial
banks
 Loans to commercial banks in
times of need
 Note: central bank does not act as
a banker to consumers and firms
 Central Bank’s Responsibilities
 Regulator of commercial banks
 Central bank regulates and supervises
commercial banks, making sure they
operate with appropriate levels of cash &
according to rules that ensure the safety
of the financial system
 This is a very important function, because
the funds that commercial banks use to
make loans are the savings and other
deposits that consumers and firms deposit
with commercial banks
 Central Bank’s Responsibilities
 Conduct Monetary Policy
 CB is responsible for monetary policy,
based on changes in the supply of
money or the rate of interest
 Usually responsible for the
determination of exchange rates
because of the close relationship
between interest rates and exchange
rates
 The Money Market
 Money Demand
 Includes the desire to hold money as an asset and
the demand for money as a means to purchase
goods and services
 Inversely related to the interest rate
 Increases / decreases with the overall level of
national output

 Money Supply
 Is determined by the action of the central bank
aimed at increasing or decreasing the overall
supply of money available in a nation
 Tools for changing the money supply

 Central banks manage the money supply with

the following monetary policy tools:
 Changing the discount rate
 Buying or selling bonds
 Changing the reserve requirement
 Tools for changing the money supply

(1) Changing the discount rate

 Discount rate is the rate charged by central banks
when they make loans to big commercial banks
 Central bank is typically the “lender of last resort”;
commercial banks would try to borrow first from
other commercial banks
 Lower discount rate, increases money supply and
lowering interest rates across the economy
 Tools for changing the money supply
(2) Buying and selling bonds (Open Market
Operations – OMO)
 Central bank buys bonds from private banks
 Puts cash into banks’ reserves, increasing the funds available
for banks to make loans
 Incentive for banks to lower the interest rates they charge
private borrowers
 Increases the level of consumptions and investment in the
economy – Expansionary monetary policy
 Central bank sells bonds to private banks
 Commercials banks’ reserves are taken out of the private
banking system
 Less money available for loans which increases interest rates
 Decreases the level of consumption and investment in the
economy – contractionary monetary policy
 Tools for changing the money supply
(3) Changing the reserve requirement
 Reserve requirement is the % of deposits that
banks are required to have available at all times
 Amount held beyond the reserve requirement is
called excess reserves
 If the reserve requirement is lowered, bank will
have more money to loan out. This increases
money supply and lowers interest rate.
 Monetary Policy
 Expansionary monetary policy is a policy that increases
the money supply and decreases the interest rate and it
tends to increase both investment and output

M i I Y

 Contractionary monetary policy is a policy that decreases

the money supply and increases the interest rate, and it
tends to decrease both investment and output

M i I Y

14-99