Business and its environment (A Level)

6.1 External influences on business activity

Businesses cannot control the external environment, but they must respond to it. A PESTLE analysis groups the influences.

Economic influences

• Economic growth raises demand, especially for luxury goods (high income elasticity); a recession cuts demand and profit, hitting cyclical industries hardest.
• Inflation raises costs and may cut real incomes.
• Interest rates: higher rates raise loan costs and reduce consumer spending, but can raise income for savers.
• Exchange rates: a stronger currency makes imports cheaper and exports dearer; a weaker currency does the reverse.
• Unemployment: higher unemployment lowers demand but makes recruitment easier and may cut wage pressure.
• Taxation and government spending: corporation tax affects profit; VAT and income tax affect demand.

Legal and political influences

Laws on contracts, employment, competition (preventing monopolies and cartels), advertising, safety and environment raise compliance costs but protect stakeholders. Political change (new governments, tariffs, sanctions) creates opportunities and uncertainty and may affect foreign operations.

Privatisation, nationalisation and government help

Governments help businesses and encourage enterprise through grants and subsidies, tax breaks, low-interest loans, enterprise zones, advice and training, infrastructure and a stable economy. They constrain business through taxes, regulation, competition law, minimum wages, health and safety rules, planning controls and environmental standards. They also act to correct market failure (public goods, externalities, monopoly).

Government policy and its effect on business

Macroeconomic objectives (low unemployment, low inflation, growth) shape the business climate: growth raises demand, low inflation helps planning, but austerity or recession reduces sales and investment.

Technological, environmental and social influences

Technology lowers costs, opens new markets (online), speeds communication and creates competition from new rivals, but needs investment and retraining. Environmental pressures drive recycling, renewable energy and sustainable sourcing; some firms gain a competitive edge from a green image. Social change (ageing populations, healthier lifestyles) shifts demand.

Competition and market power

Competitive pressures come from rival firms, new entrants and substitutes. Firms compete on price, quality, service and innovation. A highly concentrated market (few firms) allows more price-setting power; many firms means price-taking.

Globalisation and multinationals

Globalisation is the increasing integration of world markets. Multinational companies (MNCs) operate in more than one country.

Impact on host countries includes jobs and investment but also profit leaving the country and effects on local firms. Companies consider cultural differences in marketing and business practices.

CSR, community, trade links and the environment

CSR issues include honest accounting practices, refusing bribes or paying incentives to win contracts, fair treatment of suppliers and workers, and social auditing (an independent review of the firm's social impact and ethical behaviour). Businesses must consider the community and pressure groups (campaigners for environmental or consumer causes) because protests, boycotts and publicity can damage sales and reputation, while good relations bring goodwill.

International trade links give bigger markets, cheaper inputs and economies of scale, but expose firms to exchange-rate risk and foreign competition. Trade agreements (free trade areas, customs unions) reduce tariffs and open markets, helping exporters but increasing import competition; technology (e-commerce, digital payments, tracking) makes international trade easier and cheaper. Multinationals bring jobs, investment and technology to a country, but may take profits abroad, squeeze local firms and cause environmental or labour concerns; governments and multinationals bargain over tax, jobs and regulation.

Physical environment issues (climate change, pollution, resource shortages, floods) can raise costs, disrupt supply and change demand. An environmental audit reviews a business's impact on the environment (waste, energy, emissions); stakeholders use it to judge performance and the business uses it to cut costs and improve its image. Sustainability is growing in importance: consumers and investors favour green firms, and laws are tightening, so decisions on materials, energy and location must account for sustainability.

6.2 Business strategy

A strategy is a long-term plan to achieve objectives, usually in a changing environment. Corporate objectives (the overall aims) lead to corporate strategy, then functional strategies in marketing, operations, HR and finance.

Strategic analysis

SWOT analysis lists internal strengths and weaknesses and external opportunities and threats, helping to build on strengths, fix weaknesses, take opportunities and avoid threats. Its limits: it is descriptive, subjective and static.

Porter's Five Forces assess industry attractiveness: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and rivalry between existing firms.

Porter's generic strategies:

Ansoff's matrix

Decision-making tools

Decision trees map out choices and uncertain outcomes, with probabilities and financial values, to find the expected value of each option.

Limits of decision trees: probabilities are estimates, they ignore non-financial factors and the attitude to risk.

Critical path analysis and other planning tools appear in the operations chapter.

Stakeholder analysis and corporate social responsibility

A stakeholder map (power versus interest) shows which groups to manage closely (high power, high interest), keep satisfied, keep informed or monitor. Corporate social responsibility (CSR) is a business's commitment to act ethically and to consider the social and environmental impact of its decisions. Benefits: reputation, customer loyalty, recruitment, avoiding bad publicity or regulation. Costs: higher costs and possible lower short-term profit. Some CSR is real; some is greenwashing (appearing ethical without substance).

Strategic management

Strategic management has three stages: strategic analysis (where are we now? use SWOT, PEST/PESTLE, Porter's forces, core competences), strategic choice (where do we want to go and how? Ansoff, decision trees, blue ocean) and strategic implementation (putting the plan into action through resources, structure, people and control). Corporate planning turns objectives into strategies and plans with targets, and is reviewed as conditions change. Benefits: direction, co-ordination and focus. Limits: time and cost, a plan can become out of date, and it may reduce flexibility.

More strategy tools

• Blue ocean strategy: instead of fighting rivals in a crowded market (a red ocean), a business creates a new, uncontested market space, making the competition irrelevant by offering new value (for example a new type of product) at a low cost. Risk: the new market may not develop.
• Scenario planning: a business imagines several possible futures (for example best case, worst case and most likely) and plans how it would respond to each, so it is prepared for change.
• Core competence framework (Prahalad and Hamel): a core competence is something a business does especially well that is valuable, hard to copy and can be used across many products or markets. Strategy builds on these strengths (for example a retailer's logistics skill).
• Force field analysis (Lewin): lists the driving forces for a change and the restraining forces against it, with a weight for each. A change is likely to succeed if the driving forces outweigh the restraining ones; managers can strengthen drivers or weaken restrainers.

Corporate culture, leadership and strategic change

• Corporate culture is the shared values, beliefs and ways of working in a firm (for example power, role, task and person cultures). A culture that fits the strategy helps decisions and morale; a mismatch (for example a cautious culture with an innovation strategy) can block success.
• Transformational leadership is inspiring people with a vision and motivating them to go beyond self-interest; it is valuable when leading strategic change (compare transactional leadership, based on rewards and rules).
• Managing strategic change: communicate the vision, involve staff, give training, plan in stages, build early wins and monitor results; use force field analysis to deal with resistance.
• Contingency planning and crisis management: a contingency plan sets out what to do if something goes wrong (supply failure, product recall, IT breakdown), naming responsibilities, communications and back-up resources. In a crisis, a crisis management team acts quickly, communicates honestly with stakeholders and protects the reputation. Planning costs time and money but reduces damage if a crisis happens.

Strategic choices and success

A strategy's success depends on fit with resources, market conditions, competition and the stakeholders' reaction. Strategies are reviewed and changed as the environment changes (emergent versus planned strategy).