3.1.4 Impact of External Influences

PESTLE Analysis

PESTEL Analysis

External influences

🔗Any factor that is outside a business' control that would have an impact on how the business conducts itself

Types of external influences

Political (E.G Government incentives, government stability, Corruption levels, government intervention)

Economic (E.G Interest rates, exchange rates, recession)

Social (E.G Customer service, religion and beliefs, disposable income)

Technology (E.G Engine efficiency, automation, internet connectivity)

Legal (E.G Consumer law, employment law, fraud law)

Environment (E.G Renewability, pollution, weather)

Types of external influences

Real business examples

Political

• Nike benefitted from low interest rates, currency exchange stability and tax arrangements from the government.
• This was part of the Clinton administration's 1997 Apparel Industry partnership.
• This allowed them to increase their growth and profits as a business, due to maintained consumer confidence.

Economic

• Ryanair's profits will be forecasted to be 12% lower than expected.
• They have said this is due to a rise in oil prices and higher costs with EU flight compensation rules.
• Rising oil prices and higher EU flight compensation rules force the prices of Ryanair which is a budget airline, which may decrease the demand for their airlines and therefore decrease their profits.

Social

• Pepsi is a non-alcoholic beverage which is affected greatly by social factors.
• The company has now built a reputation as a global brand to change people's perceptions, with its drink being something that connects the world.
• With Pepsi relating to the market with religious festivals for example, this has allowed them to relate to their market and their customers more, allowing them to seize the opportunity of higher sales.

Technology

• Starbucks have benefitted from technological factors with the growing trend of internet connectivity.
• They teamed up with Apple to use Apple devices as a platform for presenting ads/discounts.
• It has also now provided free Wi-Fi in its coffeehouses, incentivising customers to go to their coffee shop instead of competitors.
• It also portrays Starbucks as a technologically advanced business as well as modern and caring for customers.

Legal

• Tesla shares fell in price after US regulators took legal action against Elon Musk for securities fraud.
• A social media tweet from Musk stating he was taking the company private increased share prices on the market.
• Musk (Tesla's co-founder) and Tesla will have to pay a £15 million fine each, putting financial strain on the business that is already suffering his large amounts of debt.

Environment

• More than 300,000 people have signed a petition calling on Walkers and other snack manufacturers to switch to environmentally friendly packaging.
• The campaign says they want Walkers to act now on the plastic packet war.
• This will have a negative impact on Walkers, as it would force them to change their raw materials that help create the crisp packets.
• This would have a high initial cost for Walkers switching their production and each unit of environmentally friendly packaging may end up costing them more in the future, forcing their prices up.

Porter's Five Forces Model

Competitive structure

🔗 The number and size of firms in a given industry as well as the ease of entry for new firms.

Impact of competitive structure

• The amount of consumer choice
• The level of competition
• Profitability
• The likelihood of collusion
• Non-price competition (E.G discounts)

Five Forces Model of Industry Competition

Five forces model

🔗 A model which analyses the various forces with work together to determine the nature of competition within an industry.

The threat of new entrants

• New firms gain market share and intensify rivalry.
• Low barriers to entry will increase the threat of new entrants.
• Examples of barriers to entry are: Cost of investment, lack of economies of scale, legal restrictions, etc.

Bargaining power of suppliers

• The ability of suppliers to charge higher prices and squeeze industry profits.
• Suppliers have more power when: There are few suppliers in the market, the cost of switching to another supplier is high and the resources supplied are scarce.

Bargaining power of buyers

• The ability of customers to drive down prices or increase the quality of products, reducing industry profits. E.G UK supermarkets have great power over suppliers
• The bargaining power of customers is determined by: The number of customers, the cost of switching, and the size of their orders.

The threat of substitute products

• Products which satisfy the same customer need as other products.
• The extent of the threat is dependent on: Customer loyalty and, the costs of switching.
• A firm is forced to differentiate and lower prices if the threat is high.

The overall degree of competitive rivalry

• Intense rivalries encourage businesses to engage in price wars, innovation, and promotion.
• Competitive rivalry is determined by: Number of competitors, market size and growth prospects, product differentiation, and brand loyalty.

The changing competitive environment

• New entrants -> Forces existing firms to innovate products or become more efficient due to downward pressure on price from more consumer choice -> High financial costs of investment in the short term
• New products -> New products with USPs -> Reduce brand strength of existing businesses -> Forced to respond with innovation or price adjustments -> Financially detrimental in the short term
• Consolidation (mergers and acquisitions) -> Eliminate competition, increase brand strength, gain economies of scale -> Threatens other firms that are less efficient and have less finance available to invest