Research Buster: External Environment

I have been telling my students this year that they essentially need to think of the external environment as being made up of two elements, namely PESTLE factors (Political, Economic, Social, Technological, Legal & Environmental) along with the competitive environment. So this seems a logical structure to follow for this ResearchBuster.

Political :

This is one of the more difficult of the PESTLE factors as it is perhaps less visible, but don’t forget that governments are often big customers of business. So decisions such as those to put the running of prisons out to private tender, or to build new submarines can provide lucrative opportunities for businesses like Serco and BAe Systems respectively.

Economic:

Consider the difference between cyclical goods and services (those purchased or in demand when the economy is doing well and people have high levels of disposable income) and non-cyclical goods and services (like food and utilities like gas and electric which people need all of the time, including during a recession).

Firms who sell cyclical goods and services face tough times during an economic down turn, as demonstrated by the fortunes of the car industry.

Those such as Tesco who sell non-cyclical goods and services should fare better in a recession, but can they keep this level of sales when the economy picks up again?

And finally, note how firms like Whitbread Leisure and Dominos Pizza have won during the recession as a result of people looking for the best value for leisure spending.

Social : Given the focus on CSR as the AQA research theme, students of that specification will have no shortage of examples here. But for the sake of completeness, and for the benefit of non AQA students, how about McDonalds and the way in which it has needed to develop it’s menu to contain healthy items?

Technological:

Firms must anticipate and react to technological developments that impact upon the markets in which they operate. A high profile victim of changing technology right now is HMV, whose CD sales have plummeted with the move to internet downloads. The future doesn’t look much better for subsidiary Waterstones as the Kindle Revolution continues, though HMV are looking to sell off this business in order to repay debts to the banks.
Legal : It’s not just the recession that has hit nightclub operator Luminar. The ban on smoking and change in pub opening hours as a result of licensing laws have started to hit it’s trade further. And of course Unilever are currently reacting to the banning of it’s Marmite brand in Denmark.

Environmental:

Firms that don’t pay sufficient regard for the impact of their operations on the environment will pay the price both in terms of damage to their reputation and the risk of fines. The BP Deepwater Horizon spill and accident is one that most students will be aware of to some extent.

Competitive Environment :

Porter’s Five Forces is an excellent model for assessing the competitive environment. And this excellent previous Tutor2U blog post is what I used to get my students to apply their knowledge to own label foods manufacturer Northern Foods.