The External Environment and Its Effect on Business
The External Environment and Its Effect on Business
The external environment in which businesses operate can have a significant effect on their success. To what extent do you think that the external environment in the UK is favourable for businesses at the moment? Justify your answer with reference to external factors and/or businesses that you know. (40 marks) You must include a plan. 3 ½ pages handwritten.
Can argue against in evaluation – favourable for some industries but not others Make a point, explain and evaluate (3-4 main points)
The external environment for a business is equally as important to its success (or otherwise) as it’s internal environment. This is because external factors will directly impact on the business. These factors are complex and wide ranging so many businesses analyse them in a similar way to a SWOT analysis. A common tool that is used to analyse and document the external environment is the PESTLE analysis. (There are other similar models) PESTLE involves identifying the political, economic, social, technological, legal and environmental factors in the external environment that could impact on the business. This information can then used to assess the company’s current position within the market.
I plan to look at each of these areas in turn. Since these 6 factors will be impacting different businesses in different ways at the moment, for the purpose of this essay I will consider them from the point of view of Cadbury in the UK
The current Political environment is one of the most important factors that a business needs to be aware of. Considerations include issues such as government stability and likely changes, tax policy, trade control, import/export restrictions, competition regulation, discrimination law, copyright, patents and IP law, laws regarding employment, health and safety and data protection and, increasingly, laws regulating environmental pollution. In recent years the high company tax regime in the UK has led to Companies like Cadbury moving parts of their business to other countries where the taxes are lower. EG Cadbury set up a European HQ in Switzerland a few years ago.
There have been many discussions in recent Government Budgets around reducing Business rates, which could encourage businesses like Cadbury to base more of its operations in the UK. Another factor that is very current at the moment is the Scotlish referendum on independence. There are many different views as to whether this would or would not be beneficial to UK businesses. However, a key consideration would be that if Scotland were to become an independent country with its own currency, then there would be increased complexity for trading as it would become an export market. This would bring with it the nuances of currency exchange rates and more ‘red tape’ and documentation.
Economic influences include growth, inflation, interest and exchange rates. Also unemployment trends and labour costs, stage of business cycle, credit availability, trade flows and patterns, level of consumers’ disposable income, monetary and fiscal policies, price fluctuations, stock market trends weather and climate change. Labour costs in the UK have historically been much greater than in many other European countries. This is one of the main reasons that Cadbury built a number of factories in Poland a few years ago. However, as the numbers of immigrants continue to increase in the UK, there is a greater availability of semi skilled labour for whom lower wage rates still offer significant benefits and incentive for them to come here to earn. The growth of the 0 hour type employment contracts offer companies like Cadbury the opportunity to offer work on a flexible basis, using labour hours much more cost effectively.
Socio-Cultural influences are all about how people live, think and behave and cover areas such as health consciousness, education level, attitudes toward imported goods and services, attitudes toward work, leisure, career and retirement, attitudes toward product quality and customer service, attitudes toward saving and investing, emphasis on safety, lifestyles, buying habits, religion and beliefs, attitudes toward “green” or ecological products, Attitudes toward and support for renewable energy, population growth rate, immigration and emigration rates, age distribution and life expectancy rates, sex distribution, average disposable income level, social classes, family size and structure, minorities. For a manufacturing company like Cadbury, a growing UK population is leading to more sales opportunities.
Changes in eating habits, with fewer families sitting to eat regular meals together has continued to fuel the ‘on the go’ eating trend, which has lead to the launch of more snacking type product offers, increasing Cadbury’s portfolio of products. Finally, the current and ongoing concern around healthy eating, obesity, sugar and fat intake has necessitated reviews of product recipes, formats and consumer communications. EG there have been a lot more restrictions on advertising to children, which has recently been banned for certain product types.
The Technological landscape has seen massive change over recent years and an understanding of this is vital for business owners. This covers areas such as basic infrastructure level, rate of technological change, spending on research & development, technology incentives, legislation regarding technology, technology level in your industry, communication infrastructure, access to newest technology, Internet infrastructure and penetration. For a Company like Cadbury, technological innovations over the last 10 years have led to many new product opportunities. However, a key area that has continued to benefit from technological advances is manufacturing, where more and more manufacturing lines are becoming automated. Innovative new machines such as robots are able to do the job of the human more cost effectively and to a higher, more consistent standard.
Social media is one of the hottest topics and Cadbury has grasped the opportunity of integrating its marketing campaigns across both traditional and new media. Consumer generated content is an ongoing challenge and has to be managed as this can generate negative as well as positive PR. Cadbury is also taking advantage of technology to link its supply chain communications right through to the retailer, where till transactions can order stock directly through to the supplier. This speeds up the time it takes to get product to store, leading to less ‘put of stock’ situations.
Legal aspects are incredibly important, both in terms of being able to leverage any opportunities but equally important, businesses need to ensure that they keep up to speed in order to remain within the law. This area includes anti-trust law, discrimination law, copyright, patents / IP law, consumer protection and e-commerce, employment law, health and safety law and data protection An area of particular interest here is Trademarks where companies ‘own’ aspects of their branding, for example. Very recently the High Court rejected an opposition brought by Nestlé against Cadbury’s application to register a particular shade of purple as a UK trademark for chocolate.
The judgment affirms the decision of the Court of Justice of the European Union that a single colour can be registered as trademarks. This was an important win for Cadbury as Cadbury’s particular shade of purple is synonymous with the brand. From an employment law perspective, there is now a lot more potential for personal liability against company directors if a company doesn’t have the correct control procedures in place.
Last but by no means least is Environmental. There has been a great focus on this area for some considerable time now and it covers weather, climate change, laws regulating environment pollution, air and water pollution, recycling, waste management, attitudes toward “green” or ecological products, endangered species and attitudes toward and support for renewable energy. Climate change, particularly in the countries from where Cadbury source their raw ingredients has a massive impact. For example, increases in rainfall leading to flooding of the sugar cane fields or decreases in rain leading to droughts where cocoa beans are harvested can result in increased ingredients costs.
These considerations are ongoing as they affect the profitability of the Business. E.g. increases in materials costs cannot always be passed on to the retailer and end consumer. Increasingly stringent rules around air and water pollution, recycling and waste management mean that production sites need to continue to invest in these areas to keep up with legislation. However, these investments can lead to lower manufacturing costs as well as environmental compliance. Another positive spin can be put on these incremental tasks and costs by the communication of these’ environmentally friendly’ practices, leading to a ‘feel good’ factor amongst consumers who may then decide to buy Cadbury products instead of less ‘green’ alternatives.