External Factors (environment) – It is the external forces that are beyond the control of the individual business A number of external factors can affect business (STEEPLE analysis) – economy – These are factors outside the business – political/government policy that may affect its – social decisions. – External factors that – technological may present opportunities – ecological or threats to – legal a business – ethics
Economy – business need to observe the economic indicators constantly because eco. indicators is the external factors that determines the demand for their product and therefore their profitability. Eco indicators : – eco growth – Inflation – unemployment – balance of payment
What effect do they each have on business and why does business need to watch them carefully?
Eco growth – rate of growth of output and income The level of employment or unemployment The rate of inflation The exchange rate The balance of payment The impact of government policy on business organisation: – policies relating to interest rate – taxation – government expenditure – the exchange rate.
Economic growth is defined as an increase in the productive capacity of the economy or a rise in real national income per head. As it provides the means achieving higher living standards
Economic growth is obviously beneficial to private sector firms – new market opportunities will be created – birth of new firms – the expansion of existing ones
Growth can be measured by changes in national income. National income is the total amount of income, output/ spending in the economy. It can be measured in a number of ways :- GDP – GNP
The importance of GDP • shows how much has been earned within a country over a year • Shows how much money is flowing around the economy • A rise from 1 year to the next is usually an indication of growth By studying changes in national income, it is possible to understand what is happening in the economy.
If economy growth is taking place : • favorable trading conditions for business, many new business set up and continue to grow. • Business may find a healthy demand for their product.
Negative growth maybe an indication of recession in an economy. This will have the opposite effect to the business.
The business cycle Economies tend to grow over a period of time Growth in the economy is unlikely to be continuous over a long period.
Output does not grow smoothly. – It tends to fluctuate, going through ‘up and down’. This short term fluctuations are know as business cycle.
Trade cycle recovery
A traditional business cycle There are 4 parts to the business cycle • Boom phase • Recession • Slump • Recovery
1) Boom/ high growth/ peak – employment is high – unemployment is low – consumer spending & investment will be high – high levels of demand from people with increasing incomes – profits should be high for most firms –
wages might be rising – output will be high – the economy will be growing steadily – business and consumer confidence is also likely to be high
2) Recession/down turn/ economy slowdown
Income and output start to fall Fall in demand A decline in profit Some start to lay off workers Rise in unemployment
3) Slump/ depression
• Unemployment is likely to be high • Confidence, spending, investment and profits are low • Many firms may be forced out of business • Sometimes when growth is taking place but only very slow.
4) Recovery/ expansion/ upswing
Income starts to rise again Output will begin to increase as well as spending Confidence increase Business will start to employ more workers as a result.
Different stages of the cycle have many different types of effect on business.
Factors that can lead to economic growth
Land – includes all natural resources such as forests, oil, coal deposits – some countries have experience economic growth through exploitation of their natural resources. e.g. saudi arabia – oil
– Increasing the quantity of the population can contribute to economic growth – Increasing the quantity because of: – Immigration – The increasing participation of women in work – Changes in demography (more young people) e.g. UK : an increase in an ageing of its population resulting in declining in the number of ppl who are working.
Investment and technology – Economic growth requires an increase in the capital stock of the economy – The development of new technology and investment in new technology and the updating of capital equipment, new product can be created – But the investment need to be directed into growth industries (where products to be in high demand in the future)
Stimulate growth through a) Combination of fiscal policy, monetary policy, exchange rate to stimulate growth b) The choice of policy is important, even if an economy have natural resources, labor forces and high level of investment, it may be drawn back by inappropriate government policy.
Competitive advantage – Countries must have strategies to built up the competitive advantage of particular sector of the economy, rather than attempting to compete in all sectors. e.g. Singapore achieve competitive advantages in trading policy even through weak agricultural sector
The effect of economics growth on business :
1) Sales revenue – consumers spending will be high due to increased wages among consumers. – increase the demand for many firm’s products. – This will lead to increase in sales revenue and also profit (if cost under control)
2) Expansion – An increase in the demand for a firm’s products may lead to expansion in :- recruiting new staff – raising finance – increasing the size of premises – moving to new premises – purchasing more assets – taking over competitors
3) Security – as economic growth, a businesses feel more secure in its decisions. e.g: – greater confidence to order from suppliers lead to a better relationship. – to hire employees without concern about being forced to lay them off within a short period of time. – firm committing more to the workforce e.g. investing in training programs
4) Planning for the future
more confidence in planning for the future. Higher profit levels will provide investment fund for new projects However, confidence in planning for the future will depend upon how long the business expects the growth to last.
5) Increasing costs – high economic growth rates will accompanied by rising cost – land cost rise during such period – labor cost may increase as employees and trade union seek to benefit from the success of their business.
The effects of lack of growth on business :
1) Changes in consumer demand – the income of consumers tend to fall, cutting back on spending. – fall in the demand – producers of consumer good tend to suffer less in a recession than producers of goods for industrial markets.
2) Confidence – lack of confidence amongst business during a recession – lead to investment project being cancelled – lead to a loss of profitability and competitiveness
3) Effect on small firms – do not have the finance to withstand periods of negative cash flow – tend to rely upon banks. They may suffer as banks are reluctant to lend during recessions – Bank also tend to call in loans at short notice.
4) Possible benefits – benefit from a reduction in competitions, as their rivals go out of business, position to gain a greater share of market. – Government policies designed (interest rate reduced) to bring an economy out of recession can be an advantage to many firms