6. External Environment Influences

Economic Growth

- An economy is said to grow when the level of output of goods and services in the country increases. - When a country is experiencing economic growth, the SOL is likely to increase. - The boost in consumption can benefit firms with higher sales and possibly higher profits.

Advantages of Technological Change

- Enhancement of communication between suppliers and customers - Positive impacts on areas of design and manufacturing.

Disadavantages of Technological Change (Business)

- Expensive to research and develop new products, not guaranteed to succeed. Small businesses may not be able to afford the investment required. - Businesses that do not develop new products will lose sales and market share. They may go out of business, causing workers to lose employment. - New production methods with robots and computers are expensive. Small business may continue to use conventional methods.

Social Influences

- Focuses on the forces within the society - E.g. Demographics of population, consumer tastes and preference. - Impact sales of products and revenues earned. - Shape consumers and affect behaviour and purchasing decisions. - E.g. Organic Food, The Nintendo Wii - Population Change: affect supply and demand, change the structure of the population. - E.g. Declining birth rate --> no. of consumers fall. - Not reacting to changes in the society can be a costly mistake, businesz may lose market share.

The Law and Business Competition

- Free and fair competition between businesses has benefitted consumers through wider choices of goods and services, improved quality and performance, low and competitive prices. - The govt. attempts to encourage and promote competition between firms by passing laws which 1. Control monopolies and make it possible to prevent mergers. 2. Limit or outlaw uncompetitive practices between firms

Legal Influences

- Govt. would usually enact and enforce laws to control undesirable business activities, while providing support to businesses engaging in beneficial activities.

Ethical and Environment Influences

- Include all those that are influenced or are determined by the surrounding environment. Not limited to climate, weather, geographical locagion, global changes in climate, environmental offsets etc. - More businesses focus on CSR activities which can have both negative and positive impacts.

Political Stability

- Lack of political stability in a country affects business operations. - Esp true for companies which operate internationally. E.g. an aggressive takeover could overthrow a ruling government and cause riots, looting and general disorder in the environment which disrupt business operations and destroy business assets invested there. - E.g. Civil War in Sri Lanka and in Syria. - Reduce Investors confidence, less FDI, govt's objectives such as employment and economic growth can also be adversely affected.

Ways to Become Competitive

- Place: Proximity or Centrality - Price: Value for Money - Product: Differentiated or Wider - Promotion: Additional Perks

Disadvantages of Technological Change (workforce)

- Redundancies in firms as capital intensive production methods replace labour. - Increazed Employment opportunities in other industries for workers with technology related skills. E.g. Deskilling (craft skills replaced by machines), Multi-skilling (flexibility in response to having to work with technology)

Balance of Payments

- The difference between a country's imports and exports is recorded in the BOP as a sub account called current account. - Govts will want to avoid BOP or current account deficit. - Persistent deficit in the current account or BOP may indicate poor economic prospects that can deter foreign investors and MNCs to operate in the country.

Competitive Influences

- the need to have a good understandng of the competition in the environment - provide high quality products that meet customer requirements - value its people - uses modern tech - ploughs back funds into new investment, r&d - experiment with new ideas and set out to lead rather than follow the field - makes sure that it has outstanding customer and community relationships as well as respects the environment

Disadvantages of Law and Employment Practices

1. Adds on to business costs including: Supervisory cksts and equipping workplace with safety equipment to meet health and safety laws. 2. Higher wage or labour costs (above min. wags, fair compensation package, employing more staff to avoid exceeding max. working hours)

Economic Cycle

1. Boom 2. Recession 3. Slump 4. Recovery and Growth

Implications of High Inflation to business

1. Business face high labour cost. 2. Local Businesses would lose their competitiveness to foreign firms. 3. Businesses may expect lower sales and hence delay any possuble expansion and hiring plans.

Impacts of Fiscal Policies (Businesses)

1. Govt. Spending - creates business opportunies - provide basic infrastructure - improve firms' efficiency and competitiveness 2. Personal Income Tax - affect businesses which produce luxury goods - consumers have a choice not to buy them if the income tax affects their disposable income. 3. Corporate Tax - businesses have to lower after tex profits - less profits, difficult to expand - less dividends paid to shareholders 4. Indirect Taxes - make goods and services more expensive - consumers buy fewer items - businesses pressured to increase wages as real income declines

Implications of Unemployment

1. If the unemployed lack relevant skills, firms would till face the problem of finding suitable labour to carry on operations. 2. If high unemployment is associated with poor outlook for the future consumers would tighten their expenditure, businesses face poor sales which reduces profit. 3. If the government provides welfare state to the unemployed, the high govt. spending and limited tax revenue collected may restrict govt's ability to provide infrastructure and assistance needed by the business.

Reasons for having Law and Consumer Rights

1. Individual consumers have less resources to confront large businesses. 2. Businesses use pressurizing selling technique to mislead consumers. 3. Products become too technical for consumers to adequately assess the accuracy of the claims made by producers. 4. Imported products may not be of quality and safety standards expected in the domestic country.

Impacts of Monetary Policies

1. Interest Rate (if high) - Businesses: pay more to bank, reduce profits, lower dividends, less retained earnings for expansion - Managers: slow down consideration on whether to take loans for biz. expansion - Consumers: reduce remaining income to purchase. demand falls. - Businesses: reduced demand, have to reduce output - Country: Currency strengthen 2. Exchange Rates - affect import and exports

Ways to Make Business more Environmental-Friendly

1. Laws passed by government - make dumping waste into sea and rivers, manufacturing unrecyclable products illegal. - increases cost of production - cost passed on to consumers - for this reason, govt. does not pass strict laws - encourage businesses to operate in the country, create jobs 2. Financial Penalties - E.g. pollution 0ermits 3. Consumer action and pressure groups - If the sales of a product fall bc consumers think it is harmful to nature, the business may have to quickly change its products or production method

Causes of Inflation

1. Rising production/operating costs. - Business would need to explore ways ro control rising costs l. 2. Higher demand for goods and services in general. - ST: businesses benefit, LT: govt will intervene with policies.

Advantages of Law and Employment Practices

1. Workers feel more secure, valued and motivated if offered fair employment contract. 2. Safe working conditions reduce risks of accidents and time off work for ill health and injury (maintain productivity) 3. Providing employment conditions beyond legal requirements improves public image of the firm in the eyes of the stakeholders.

Business Environment

Affect the objectives set by a business, and this environment comprises all external conditions which influence business activities.

Indirect Competition

Competing with another firm for consumers to spend their money on their products. E.g. Teenage magazine vs DVD

Direct Competition

Competing with rivals producing identical or almost identical products. E.g. NTUC & Sheng Siong Supermarket

The Law and Consumer Rights

The govt. takes action to protect consumers of goods and services from unfair or unscruplous business activities. (E.g. Lemon Law, Sale of Goods Act).

Recession

During recession, real GDP growth slows or even falls. Incomes and consumer demand fall and profits are much reduces. Some businesses will record losses and some may go out of business.

Conflict of objectives between govt. and the businesses

E.g. 1. A business, in a bid to maximize profits, will look to reduce costs by paying minimal wages and not increasing wages, causing real income to fall over time. This can affect workers' welfare and overall SOL, which goes against the objectives of the govt. 2. A local business may decide to move its operations to another country due to reduce labour costs or to be closer to its overseas consumer markets. This will inevitably contribute to retrenchment *due to the relocation of production planf overseas* and higher unemployment rate in the home country.

Advantages of Law and Consumer Rights

Ensures safety of products and that customers are treated fairly and complaints are responded quickly to reduce legal actions and build goodwill.

Strengthened Currency

Imports cheaper, Export more expensive. Demand for goods produced by local businesses will decrease.

Disadvantages of Law and Consumer Rights

Increase business costs including: - Redesigning products to meet health and safety standards - Improve quality control - Ensuring accuracy of information in advertising

Political Influences

Influences of the ruling party/government on the economy and hence business operations. In decision-making, businesses would need to consider the political stability of the country they are based or wish to invest in, the objectives of the government and its objectives towards businesses and the environment.

Law and Employment Practices

Nearly all govt. pass laws to control: - Recruitment - Employment Contracts - Termination of employment - Health and safety at work - Minimum wages - Trade Union rights

Technological Influences

Refer to the technical expertise in the country as well as the level of technology to compete. E.g. the use of Information Tech and Artificial Intelligence in robotics has created both business opportunities and threats for existing business activities.

Physical Influences

Refers to the environment and natural endowments available and the need to choose between competing uses of resources. - Physical environment places limitation upon business activities, thus the consequent need for international trading agreements. - E.g. lack of natural resources in SG, need to import from other countries. - Constraints may arise due to reliance on other businesses. - Includes sourcing for raw materials, markets for goods, and competition with others within a limited market.

Economic Influence

Refers to the state of the country's ecobony and the economic policies of the govt. - Includes fiscal policies - Govt. implement these economic policies when the economic objectives of the govt. are not met

Boom

The boom stage is a period of very fast economic growth with rising incomes and profits. Inflation rises due to very high demand for goods and services, and shortage of key skilled workers lead to high wages.

Economic Stability

The govt intervenes in the economy in order to achieve the different objectives they have - (i) Low Inflation (ii) High Employment (iii) High and sustained economic growth (iv) Healthy Balance Of Payment

Slump

This is a period of very serious and prolonged downturn where real GDP falls substantially and asset prices fall.

Recovery and Growth

This is where real GDP starts to increase again. This is either because corrective govt. action starts to take effect or the rate of inflation falls so that the country's products become competitive once more and demand for them starts to increase.

The Conclusion.

When making business decisions, firms need to consider both internal and external influences. One must also be mindful that each external influence does not happen in isolation; for instance political, economic and legal influences may have overlapping interactions and influences. Hence, to make sound business decisions can be challenging when all these internal and external influencrs are taken into consideration concurrently..

Inflation

occurs when general price level rises