CHAPTER 3

The Business Environment

A. Analysing the Environment

B. The Political Environment
C. The Economic Environment
D. The Social Environment
E. The Technological Environment
F. The Ecological Environment
G. The Legal Environment
INTRODUCTION

Organisations do not exist in

isolation
Environment is always changing
turbulent environment presents
both threats and opportunities
key factors operating on
organisations
what firms can do to face the
threats and opportunities inherent
A. ANALYSING THE ENVIRONMENT
Classifying the Environment
Internal Environment: The Organisation
External: Specific Environment
External: General Environment

Nature of Environments
Its dynamics:
stable/unstable/uncertainty/rapid change
Its complexity:
Amount of knowledge necessary
The way in which environmental factors
interrelate
The variety of influences faced by an
organization
A Framework for Analysis
Making sense of a complex and
turbulent environment
PEST or PESTEL
P = Political
E = Economic
S = Social
T = Technological
E = Environmental or Ecological
L = Legal
B. THE POLITICAL ENVIRONMENT
Free Market Economy: property-owing,
democratic system
Command Economy: State ownership
and control

In UK, a Labour government will favour

intervention in industry than a
Conservative one
Central government and local
authorities are often major employers
Britain opted out of a single European
Political Change and its Impact on Business
it dictates legal framework & imposes
regulations
eg. health & safety issues, consumer
protection, advertising standards,
employment conditions and
environmental factors
However, some changes in regulations
might provide new market opportunities
Governments influence business
through taxes
Government the largest spender in the
economy.
C. THE ECONOMIC ENVIRONMENT
economy is one of the most important
influences
a trade cycle of growth and perhaps
boom followed by a slow down and
possibly recession
Interest Rates
defined as both the cost of borrowing
money and the reward for saving it

How do interest rates work?

Rates set by Monetary Policy Committee
(MPC)
To achieve rate of inflation at 2%
To avoid political issues & interference
By changing the interest rate, growth
can be controlled
How does the business respond to changes in interest rates?
When economy overheat, rate will go up
Business will invest less
Consumers will spend less
Consumption & demand in the economy
will fall

When economy is in recession/depression

Rate will go down to stimulate demand
Business will borrow to invest
Consumers will borrow to consume
Economy will rebound, grow & expand
Exchange Rates
is the price of one countrys currency
expressed in terms of another, eg.
US$1=RM4.40; S$1=RM3.10
Say, 1=$1.20
If Exchange Rates are stable,
international trade can be quite certain
about the future
It is when exchange rates change that it
has an effect on business
 So, if the rate change to 1=S1.10, we
call this a fall in the exchange rate
So a UK consumer pays
1.20/1.10=1.09 for an item that costs
$1.20
Or if it rise to say 1=$1.30, then a UK
consumer now pay 0.92 for an item
that costs $1.20
 Exchange rate variations are based
upon a number of factors
all of which are beyond the control of
the individual business:
Long Term: International flows of trade
Short Term:
(1) Changes in interest rates in different
countries
(2) Speculations on interest rate
changes
(3) Political uncertainty
(4) Loss of confidence
 smallest change can lead to significant
problems
If it falls, import will be more expensive;
hence less import
Businesses need to become more
efficient and to minimise waste:
(1) Use labour saving technology to cut
wages
(2) Setting up overseas subsidiary
companies
Inflation
a rise in the general price level of an
economy over a period of time and is
expressed as a %
represents a loss in the purchasing power of
money
inflation is usually associated with excessive
growth in demand within an economy
2 Types:
(1) Cost Push Inflation
(2) Demand Pull Inflation
 Cost Push Inflation:
caused by businesses needing to pay
higher prices for factors of production
which are increasingly scarce
Demand Pull Inflation:
caused where there is excess demand
for the available goods and services in
the economy and firms are unable to
satisfy the current level of demand
 when workers seek higher wages to
maintain their purchasing power in the
face of rising prices, a wage-price
inflationary spiral results

Inflation creates instability in an economy

and monetary authorities often respond to
it by increasing interest rates

It creates uncertainty and makes it more

difficult to make predictions about costs,
revenues and therefore, profits
Unemployment
Unemployment occurs when someone
seeking work is unable to find any
which can be damaging if it reaches
towards 10% and beyond
It is accepted that there will always be a
certain level of unemployment in any
economy.
There are 3 main reasons for this:
(a) Structural
This type of unemployment is present
when the economy changes in a
fundamental way
eg. Changing from manufacturing to
service. This results in many workers
losing their jobs
Changes in technology; when
businesses replace labour with
machines
also when employers look for a different
range of skills.
(b) Cyclical
when businesses make staff redundant
at times of recession when the demand
for goods and services falls and there is
less need for staff

(c) Frictional
occurs when individuals are in
between jobs
people who have left one job and are in
the process of applying for another
The Business Cycle
4 phases to the cycle recession,
recovery, boom and downturn; also
called boom and bust
The Business Cycle: VIDEOS
4 phases to the cycle recession,
recovery, boom and downturn; also
called boom and bust

VIDEO 1

VIDEO 2
 It creates uncertainty for businesses
instability in the economy
Governments therefore use economic
policy to try and smooth out the cycle
and
minimise differences in Gross Domestic
Product (GDP) between the boom and
bust phases
(a) Recession
Fall in demand for goods and services
Reductions in output
Firms start to shed labour
Fewer job vacancies are available
Businesses cut back investment
Reductions in profits which may lead to
losses
Increases in the number of business
failures
(b) Recovery
Government policies to stimulate a
recovery
eg. Cutting interest rates, etc
businesses slowly witness an increase in
demand
Recovery is slow because firms are
apprehensive
Recovery may be temporary or
permanent
Cautious about pumping in investment
So unemployment remains high
(c) Boom
Business sees increased demand
Confidence is up
Investment increases
Sales are increasing; so are profits
New staff are recruited; unemployment
falls
However, problem starts when the level of
growth in the whole economy is too high &
the economy starts to overheat
Excessive demand forces prices up
Inflation kicks in
Authorities increase interest rates again
(d) Downturn
Interest rates rise will slow economic
growth
Consumers spend less as borrowing
cost rises
Higher mortgage repayments and credit
card bills mean less disposable income
Businesses less able to invest as costs
rises
So, once again, will start to make staff
redundant
And the cycle repeats itself
Government Economic Policy
Government intervenes via policies
Raising revenue through taxation
Controlling inflation
Stimulating growth
Redistribution of income
Regional development
Support for declining industries
Support for R&D
Market Volatility

Modern economies are free market economies

i.e. Open competition between businesses

i.e. Consumers are free to make choices

However, competition makes markets volatile

Price war; price sutting policy

D. THE SOCIAL ENVIRONMENT
Demography: study of populations & its change
Changes in population, social structures and
social attitudes can have profound effects
Biggest effect of social change: effect on demand
e.g.
(1) Ageing population in Europe nursing homes
(2) Expanding children childcare & schools
(3) Wealthier societies travel, pastimes, sports
Immigration: Competition for jobs
Woman workforce
Ecological/Environment concerns
CSR: Corporate Social Responsibility
E. THE TECHNOLOGICAL ENVIRONMENT
Positively:
(1) Development of new materials &
processes
(2) Resulting in new markets
(3) Higher quality manufacturing
(4) Lower unit costs
(5) Lower consumer prices
Negatively:
(1) Changes in job skills
(2) Retraining & acquisition of new skills
(3) More works performed individually
(4) Work are more challenging; but less secure
F. THE ECOLOGICAL ENVIRONMENT
Global warming
Sustainability: exhaustion of natural
resources
Threats to the diversity of life
Waste recycling
Carbon emission
Opportunities:
(1) new businesses & processes
(2) winning consumers who are
conscious
G. THE LEGAL ENVIRONMENT
Government Legislation
To protect consumers, employees &
stakeholders
(a) Employment Legislation
(1) Contract of employment
(2) Minimum wage
(3) Anti-discrimination or equality
(4) Unfair dismissal
(5) Trade unions
 (b) Health and Safety Regulation
Health and Safety at Work Act 1974
(1) provide safe working environment
(2) provide health & safety equipment
(3) written safety policy; on display
(4) appoint safety representatives for
inspections
Working Time Directive of 2003
(1) Not more than 48 hrs per week
(2) rest at least 11 hrs in any 24 hours
work
The Criminal and Civil Law
The Criminal Law
(1) Fines as penalties for offences
(2) Imprisonment for more severe
convictions
Civil Law
(1) Settlement of disputes between
individuals..
(2) Mostly disputes over contracts &
negligence
(3) Monetary damages are often
awarded
The End