Assessing changes in the business environment


The relationship between businesses and the economic environment

PESTLE analysis 

Political factors - Government economic and social policies, extent of government intervention

Economic factors - Business cycle, Interest rates, Exchange rates, Level of inflation, Level of unemployment, Membership of the EU

Social factors - Ethical issues, Impact of pressure groups, Influence of different stakeholders, Changing lifestyles

Technological factors - New products, New processes, Impact of change, Costs of change

Legal factors - Legislation

Environmental factors - Environmental issues

The Business Cycle

Regular pattern of increasing and decreasing demand and output within an economy or of growth in GDP over time. 

Four main phases:

Boom - high levels of consumer demand, business confidence, profits, investment, growth, rising costs, increasing prices and full capacity.

Recession - falling levels of consumer demand, output, profit and business confidence, little investment, spare capacity, business closures and rising levels of unemployment.

Slump - very low levels of consumer demand, investment and business confidence, an increasing number of businesses failing and high unemployment.

Recovery - slowly rising levels of consumer demand, rising investment, increasing business confidence, higher profits, more business start-ups, and falling levels of unemployment. 

Strategies. The strategies a business might use will depend on which phase of the cycle the economy is in. During a recession, many businesses will suffer decline in demand. As a result they will wish to reduce production and improve efficiency. This may mean laying off workers, closing down factories or refocusing the business on its core activities - all of which will reduce costs and thus help the business to survive. However, although these strategies may be appropriate in the short term, they ay be self-defeating in the longer term when demand begins to improve and a business finds it has insufficient trained staff or production capacity. 

Effects of Economic Growth. Economic growth - Increase in the level of  economic activity or GDP. Provides favourable trading conditions and new business opportunities. Offers more security to firms and provides them with more confidence in planning for the future. However, economic growth can result in negative externalities such as pollution, congestion and harm to the environment. 

  • Impact on sales. Higher levels of GDP means incomes are likely to be higher, leading to higher retail sales.
  • Impact of profits. Higher income leads to greater demands for goods and services, provide opportunities for firms to create higher profits.
  • Impact on investment. Higher demand for goods and services means that firms are more likely to invest in expanding their operations.
  • Impact on employment. Once business are convinced that the increase in demand is sustainable, they are more likely to recruit more workers. 
  • Impact on business strategy. The following businesses are better suited to an environment of economic growth: expansion, new products


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