Impact of External Influences (Edexcel A Level Business)

Revision Note

Written by: Lisa Eades, Business Content Creator

Reviewed by: Steve Vorster, Economics & Business Subject Lead

Understanding PESTLE Analysis

PESTLE analysis examines the external factors that are likely to impact the activities and outcomes of a business
PESTLE is an acronym for:
- Political
- Economic
- Social
- Technological
- Legal
- Environmental
PESTLE analysis can support effective decision-making by senior managers who will better understand the complex context within which the business operates
Managers can use the information gathered to understand the potential threats to the businesses performance and identify future difficulties so that action can be taken to help avoid and eliminate their effects

PESTLE External Factors

External Factor	Explanation	Examples
Political	The extent to which local and national government is expected to influence the business including Government stability and relationships with key trading partners Tax regulations Trade restrictions Political Ideology and attitude to Business Fiscal policy National security status Investment in public services	The UK’s decision to leave the EU in 2016 has led to the reintroduction of trading restrictions for businesses importing goods from suppliers in Europe The reduced level of threat from terrorism in the UK has helped to boost tourism
Economic	The extent to which economic indicators are expected to directly impact business performance including Inflation Exchange rates Cost of living The stage of the Business Cycle and GDP growth Unemployment levels	High rates of fuel and food inflation in the UK have reduced the level of disposable income for most households A historically low unemployment level has made recruitment more challenging for UK businesses
Social	The extent to which personal attitudes and values, culture and demographic change are expected to affect the business including Social mobility Education Ethics & Religion Migration Health profile Population growth and demographic structure	Greater numbers of people graduating from university have increased the quality of workers available to UK businesses A more health-conscious population provides a lucrative market for businesses selling fitness and lifestyle products
Technological	The extent to which technological change and innovation are expected to impact the business including Research & development Production and distribution processes and efficiency Quality and new materials Intellectual property Online presence The technology used in communication	Developments in communication technology have reduced the need for business travel Rapid developments in technology have reduced the length of product life cycles and increased the need for businesses to carry out ongoing research, development and innovation
Legal	The extent to which changes in law and regulations are expected to impact the business including Taxation Employment Advertising Health & Safety Compliance and ‘red tape’ created by regulatory bodies such as the Health and Safety Executive	Changes to the level of tax levied on high sugar products (sodas) in the UK increased selling prices and prompted some businesses to redevelop their product to reduce the sugar content A rise in the level of the minimum wage increases business staffing costs
Environmental	The extent to which changes in attitudes and government policy towards environmental protection as well as the impact of global warming expected to impact the business including Changing infrastructure - for example in favour of green transportation networks Energy availability & cost Disposal of materials Changes in climate and weather patterns Air quality	Increased interest in environmentally responsible and ethically-produced goods has created new markets for businesses to exploit Strict rules on the disposal of commercial waste have increased costs for businesses

Examiner Tip

When using PESTLE Analysis, you must focus on each factor's impact on business activity rather than its origin. The cause is not so important, but the impact of the factor is what needs to be considered.

The Changing Competitive Environment

The structure of the market in which a business operates is likely to change over time
Businesses have to respond to this changing competitive environment

Diagram of factors affecting market structure: business integration, regulatory changes, globalisation, internet growth, and consumer preferences.

Reasons for changes in the structure of markets over time

New businesses may enter the market and existing businesses may leave or integrate with others
- E.g. Until the early 2000's UK supermarkets were dominated by a small number of giants including Tesco, Sainsburys and ASDA
- The entry of businesses such as ALDI and LIDL has made the market more competitive whilst takeovers involving leading brands such as that of Somerfield by Morrisons in 2004 have had the opposite effect
The legislation (laws) may change likely leading to fewer barriers to entry for new businesses
- E.g. Until the 1980s only local councils were permitted to operate local bus services in the UK and following deregulation, any business with the financial resources to enter the market could run a bus service
The growth of the Internet has increased the number of competitors businesses face in the majority of markets
- E.g. UK booksellers have faced severe price competition largely from the online giant Amazon
  - Many smaller independent retailers have closed down as they were unable to compete
  - Remaining retailers such as Waterstones have needed to change their operations significantly to survive
Consumer tastes and preferences are changing more rapidly leading to short product life cycles and a requirement for businesses to innovate to compete
- E.g. The growth in fast fashion has meant that many clothing retailers must now constantly update their product ranges rather than rely on seasonally focused product selections
- Businesses such as Primark and Zara have been particularly successful in meeting customer demand for fast fashion giving customers the chance to buy the latest fashions in as little as thirteen days
Globalisation has increased competition with rivals from around the world
- E.g. Between 1970 and 2010 trade barriers around the world were reduced and customers were able to buy an increasing number of motor vehicle brands
  - By 2015 more than half of all cars sold in the UK were manufactured by Japanese companies

Porter’s Five Forces

Porter’s Five Forces identify the key pressures on an industry that impact the ability of a business to compete with rivals

Porter’s Five Forces Model

Porter argued that once a business fully understands these pressures in their context, they can take strategic decisions to achieve and sustain a competitive advantage
This will then increase their chances of success

An Explanation of Porter's Five Forces Model

Force	Explanation	Example
Industry Rivalry	When there are many competitors selling similar products, the business will have little power Many rivals are trying to get a more significant share of the market Customers have a lot of choices and can shop around When a business offers products in an industry with little or no competition, it has more power, can use premium pricing and dominates the market	The UK energy market has experienced a significant reduction in the number of rival firms in recent years as a result of numerous takeovers Remaining energy suppliers have been able to charge high prices and make incredible levels of profit
Threat of New Entry	If new competitors can enter an industry quickly and without investing a lot of money, then the barriers to entry is low and the threat of new entrants is high The market is likely to contain a large number of rival businesses Individual businesses are likely to have little power Where the barriers to entry are too high for new businesses to gain a foothold and compete in the market the threat of new entrants is low	As a result of deregulation in the 1980s, UK consumers can access an increasingly wide selection of television channels, many of which can operate at very low cost online Whilst a small number of powerful firms such as the BBC, Netflix and Sky dominate, it is relatively easy for new niche channels to enter the market
Buyer Power	When a business sells to a small number of customers, those customers have significant power to negotiate lower prices The business has few options when it comes to customers It will have to price and sell products according to customer demands Where a business has a high number of customers, those customers have less power It is likely to be able to charge a high price for a product that is relatively inexpensive to produce	Boeing is an aerospace company that sells aeroplanes to airlines and governments Airlines that purchase large numbers of planes from Boeing have significant buyer power due to their ability to negotiate lower prices and favourable contract terms
Supplier Power	Where a business has a lot of choices over the suppliers from which it buys components It is likely to be able to shop around for lower price Where a supplier has significant power over a business as a result of offering a specialised component or where there is a small number of suppliers in the market The business has little choice over the source of its suppliers It is likely to have to pay high prices for its components and accept suppliers’ terms and conditions	Large UK supermarkets wield significant power over small, local suppliers On the other hand, in 2022, the giant food manufacturer Heinz refused to supply Tesco with any product unless they increased their payments by 51%, which they were forced to do
Threat of Substitution	Where customers can easily swap a businesses products for those of a rival, the business has little power The business is likely to have to compete on price or invest heavily in developing a USP Where substitution is unlikely a business has significant market power It is likely to be able to charge a high price for its products and may be less inclined to innovate	Smartphones have become the substitute for a wide range of standalone goods, including calculators, cameras and even portable computers In the case of cameras, many manufacturers have moved away from selling low-priced devices and now focus on high-end, specialist products for serious photography enthusiasts

Last updated: 25 October 2024

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