Analysis of the External Environment of Business

Organisation and environment

Assessment 1 essay

Analysis of the External Environment of Business

Pest analysis is a useful tool for understanding market growth or decline, a pest analysis is a business measurement tool. Pest analysis is an analysis of the external macro - environment that affect all firms. Pest analysis is an analysis of the political, economic, social and technological factors affecting a business. Such external factors usually are beyond the firms control and sometimes present themselves as threats. I have chosen for my main focus the economical environment.

Economical

All businesses are affected by economical factors nationally and globally. Interest rate policy and fiscal policy will have to be set accordingly. Within the UK the climate of the economy dictates how consumer may behave within society. Whether an economy is in a boom, recession or recovery will also affect consumer confidence and behavior.

An economy which is booming is characterized by certain variables. Unemployment is low, job confidence is high, and because of this confidence spending by consumers is also high. This has an impact on most businesses. Political environment is linked with the economical environment because the government needs to make sure that the economy stays in a boom. By doing this there is more money moving in the economy people are buying more and companies are producing more. Their is a more efficient circular flow of income. Companies by having more money it is not likely that they spend all their revenue on rent and wages. They will also invest some in better and more efficient equipment and machinery. These are used to produce goods and services which increase money in the economy an injection. Government Organizations have to be able to keep up with the increased demand if they are to increase turnover. Government regulates the economic environment. Changes in the law and business need to adapt to it. An economy which is in a recession is characterized by high unemployment, and low confidence. Because of high unemployment spending is low; confidence about job security is also low. Businesses face a tough time, consumers will not spend because of low disposable income. Many businesses start cutting back on costs i.e. labour, introduce shorter weeks and cut back on advertising to save money.

Economies globally also have an impact on UK businesses, cheaper labour abroad affects the competitiveness of UK products nationally and globally. An increase in interest rates in the USA will affect the share price of UK stocks or adverse weather conditions in India may affect the price of tea.

An international business has to be aware of economic conditions across all borders and ensure they employ strategies and tactics that their protects their business.

Economic Factors

Economic Factors affect the purchasing power of potential customers and the firms cost of capital. Marketers need to consider the state of a trading economy in the short and long-terms. Especially when planning for international marketing. For example:

1. Interest rates

The Bank of England froze interest rates at 4.5% keeping the core rate unchanged for a fourth successive month. Members of the Bank's monetary policy committee (MPC) had not been expected to give shoppers an early Christmas present by cutting the cost of borrowing. Lower interest rates not only encourages firms to invest as the cost of borrowing falls, but also encourages consumption as disposable incomes rise and the cost of loans and overdrafts decreases. This means that the political environment is making sure that the economy stays in a boom, more money goes around.

2. Inflation rates

Inflation can be defined as a persistent tendency for prices to rise. It occurs when there is a general increase in the price level. In the uk inflation is measured by changes in the retail price index. Inflation in the u.k. was 2.5% in October, has been above the ECB's 2% target for nine months. In this week's pre-budget report, the chancellor, Gordon Brown, cut his 2005 economic growth forecast to 1.75%, down from the previous target of 3% to 3.5%, blaming inflationary pressures caused by the rise in global oil prices.

3. Exchange rates

The main reason why exchange rates are so important to business is because of their influence on the price of imports and exports. Currently the exchange rate for Friday 12 December 2005 for one pound was roughly $1.71. Some products have a strong brand identity. Even if their prices increase, consumers do not reduce the amount of purchase by a great deal. This is refers to these products as having an inelastic demand. For example if the value of the pound falls from Ј1=$1.71 to Ј1=$1.20. A firm selling 1,000 books to the USA each month for $20 each at an exchange rate of Ј1=$1.71 would receive $17.100 (Ј8,000) in revenue. If the exchange rate fell to Ј1= $1.20 and the demand for books was price inelastic then the business may be able to keep the price at $20. At this new exchange the $17,100 would be worth Ј14.500 (17.100: 1.20) thus, revenue would increase by Ј6.500. Firms with products which are sensitive to price change are likely to feel the impact of even minor exchanges rates change. If exports prices rise the volume of sales will fall by a greater degree, and the overall revenue