3.1.4: Impact of external influences

external influences

external influences

events and issues out of a business’s control that can impact them unexpectedly

PESTLE analysis

identifying the poltiical, economic, social, technological, legal and environmental factors that might influence business activity:

• political: pressure groups, political instability, trade blocs, natural security, governmental changes

• economic: unemployment, stable pricing, exchange rate, imports and exports, interest rates, recession

  • income elastic goods and services

• social: literacy rates, ageing population, increasing migration, increased health consciousness

• technological: changes in technology affecting PLC, replacing labour, lowered unit cost, improve B2C communication

• legal: legal framework, vulnerable groups, EU regulations

  • tax laws, taxes on food, reducing rules and regulations

• environmental: environmentally friendly goods, using renewable sources, recycling

impact of external influences

• demand:

  • low demand - low revenue, low profit, weaker cash flow

  • sharp rise in exchange rate - negatively affects exporters, benefits importers

• costs:

  • raised costs = reduced profit margins, raised prices

  • producers benefit from price rise

• operations:

  • result of external influence

  • forces a MNC to relocate to a production country with lower wages

  • new technology = new production methods, lost competitive edge

structure of markets

• competitive markets:

  • large number of buyers and sellers

  • products are close substitutes

  • low barriers to entry

  • businesses have little control over price charged

  • free flow of information about nature and availability

• uncompetitive markets:

  • monopoly - just one business supplies the entire market

    • also exists in local markets

    • attempts to exploit consumers by charging high prices and preventing competition

  • oligopoly - market dominated by few very large producers

    • interdependence

    • high barriers to entry

    • large firms exploit economies of scale

    • stable prices for long periods of time

    • firms afraid of price war

    • businesses engage in non-price competition

      • marketing, promotion

changing competitive environment

• the structure of markets changes over time

  • competition intensifies as new businesses enter the market

  • might have a novel product

  • might be established and wants to diversify

• tried to make markets more competitive by reducing regulation

• consolidation in some markets - fewer businesses, takeover/merger activity

changes in the competitive environment

• high competition in retailing due to increase number of consumers using online shopping

• significant consolidation in the global airline industry

• handheld mobile phone market in india is expected to consolidate

changing competitive environment - impact on businesses

• new entrants:

  • increase competition

  • collapse due to failure to adapt online

• new products:

  • adapting products

  • lowering prices

  • investing in an aggressive marketing campaign

  • offer P2PL

• consolidation:

  • number of businesses in the market falls

  • existing businesses get bigger

  • bigger organisations are a threat to others

    • lower costs

    • larger market share

    • as a result

      • other businesses respond by organising mergers and takoevers

      • or diversify, develop and cut costs

      • continue to operate in the same way with lower profit margins:

porter’s 5 forces

5 factors that detemine the probability of an industry

1. suppliers

2. potential entrants

3. industry competitors

4. buyers

5. substitutes

bargaining power of suppliers

• suppliers want to maximise the profit they make

• more power = higher prices + reallocate profits

• limited supplier power = improved competitive position of a business

• strategies:

  • grow vertically and organically upwards

  • seek new suppliers

  • engage in research for substitutes

  • minimise information provided to suppliers

bargaining power of buyers

• suppliers want to charge max prices to customers

• buyers want to obtain lowest prices

• buyers with considerable market power can beat down prices offered by suppliers

• a business can improve competitive position with buyers by:

  • extending into buyers market - vertical integration

  • make it expensive to switch to other suppliers

threat of new entrants

• existing businesses in the industry will find it difficult to charge and make high profits if new busineses can easily exit and enter industries if profits are low

• existing businesses are constantly under threat from new suppliers if profits rise too much

  • new suppliers undercut prices

• erecting barriers to entry can help protect businesses

  • i.e. patents, copyright, strong branding

  • large amounts of advertising - deters new entrants due to large costs

  • large sunk costs (costs that have to be paid at the start but are difficult to get back) - deter new entrants

substitutes

• more substitutes = fiercer competitive pressure on business

• few/no substitutes = charge higher prices, higher profits

• a business can reduce potential substitutes through:

  • R&D and patents

  • marketing tactics

  • predatory pricing

rivalry among existing firms

• determines prices and profits for any single firm

• fierce rivalry can be reduced by forming cartels or anti-competitive practices

  • illegal but not uncommon in many countries

• businesses can reduce competition by:

  • buying up rivals - horizontal integration

• industries with few businesses don’t compete on price

  • maintain high profitability

  • compete by bringing out new products and increased advertising - strong branding

  • higher costs, higher prices, high profits