3.1.4 impact of external influences

PESTLE analysis

Reflects the ever-changing external environmentSupports risk reduction through better awarenessInforms strategic decisions and long-term planning

• Political: Government policies, trade regulations, stability

• Economic: Inflation, interest rates, exchange rates, economic growth

• Social: Demographics, lifestyle trends, consumer attitudes

• Technological: Innovation, automation, R&D, digital disruption

• Legal: Employment law, health and safety, competition law

• Environmental: Sustainability, climate change, ethical sourcing

main external factors

• economic conditions

• environmental factors

• social factors

• ethical factors

• technological factors

• political factors

• legal factors

political factors

• Governments play a key role in shaping conditions for business success

• Policies can have direct or indirect impacts on business decisions

• Political factors are external and part of the PESTLE analysis

• Common examples of political influences include:

• New legislation to encourage competition

• Fiscal and monetary policy (e.g. taxation, interest rates)

• Trade deals affecting imports/exports

• Labour laws regulating employment practices

economic factors 

Economic growth affects consumer income and demand

Businesses must adapt to changing macroeconomic conditions

Key influences include:

• Inflation rates

• Interest rate fluctuations

• Exchange rate changes

• Unemployment levels

economic impacts

• Inflation ↑: Raises costs, reduces demand, may lead to job losses

• Value of £ ↓: Benefits importers, lowers consumer prices, harms UK exports

• Job Losses ↑: Cuts disposable income, increases government spending, lowers demand but reduces labour costs

• Interest Rates ↓: Makes borrowing cheaper, boosts investment and consumer credit demand

social factor - key point

Businesses must adapt to changing social attitudes to stay competitive

Influential trends include:

• Ageing population

• Immigration and migration patterns

• Rise in veganism and eco-conscious consumerism

• Shifting views on smoking

Social Trends — Business Impacts

• Ageing population: Shrinks labour supply but creates demand for age-specific products/services (e.g. senior yoga)

• Lifestyle changes: Boosts demand for vegan, health-focused goods; more leisure time due to work-life balance focus

• Migration: Expands workforce and introduces new skills into the labour market

technologial factos

• Technology evolves rapidly — businesses must adapt or risk falling behind

• Drives innovation like online platforms and e-commerce

• Slow adopters may decline (e.g. Blockbuster vs Netflix)

• Staying current boosts competitiveness and strategic advantage

legal factors

• New or removed laws can significantly affect business operations

• Extra regulations increase costs, reducing competitiveness (especially vs overseas firms)

• Legal compliance is essential but can be burdensome

technology factors

• Rapid tech change means businesses must adapt quickly to stay competitive

• Innovation drives growth in online platforms and e-commerce

• Slow adopters risk decline (e.g. Blockbuster vs Netflix)

• Monitoring tech trends is essential for strategic survival

environmental factors

• Environmental awareness can boost competitiveness

• Businesses benefit from sustainable practices like:

• Recycling and re-use

• Eliminating single-use plastics

• Offering free-range and natural products

• Supporting sustainable farming

Strategic Responses to Increased Competition

• Diversification: Enter new markets or launch new products to spread risk

• Innovation: Invest in new technologies to gain competitive advantage

• Consolidation: Strengthen market position through mergers or takeovers to reduce competition

porter’s five forces - competitive analysis

• Competitive Rivalry: Intensity of competition among existing firms

• Threat of New Entrants: Ease with which new competitors can enter the market

• Threat of Substitutes: Risk of customers switching to alternative products/services

• Bargaining Power of Customers: Influence buyers have over pricing and quality

• Bargaining Power of Suppliers: Control suppliers have over input costs and availability