External Influences on Business PDF

INFLUENCES IN THE BUSINESS ENVIRONMENT EXTERNAL INFLUENCES 1. ECONOMIC Economy refers to the system by which goods and services are produced, distributed, and consumed within a society. It encompasses a wide range of activities including production, trade, and consumption of goods and services. Econ...

INFLUENCES IN THE BUSINESS ENVIRONMENT EXTERNAL INFLUENCES 1. ECONOMIC Economy refers to the system by which goods and services are produced, distributed, and consumed within a society. It encompasses a wide range of activities including production, trade, and consumption of goods and services. Economies can vary in size and complexity, from local and regional economies to national and global economies. Key factors that influence an economy include resources, technology, government policies, and consumer behaviour. Inflation 1 Exchange Rates 2 Interest Rates 3 Government Expenditure 4 Economic Cycle 5 INFLATION Inflation is the rise in prices of goods and services, leading to decreased purchasing power. Inflation affects savings, living costs, and economic stability, prompting central banks to manage it within target ranges. HIGH LOW High inflation leads to increased prices, raising the cost of borrowing, hindering significant investments, and decreasing customer spending – all unfavorable outcomes for businesses. Low inflation leads decreased prices, reducing borrowing costs, promoting significant investment and consumer spending, which is beneficial for businesses. EXCHANGE RATES Exchange rates represent the value of one currency compared to another, impacting international trade, investment, and economic activities. Fluctuations are influenced by factors like supply and demand, economic indicators, geopolitical events, and market speculation. Depreciating: Value of Australian dollar compared to other currencies is falling. Cheap exports, expensive imports Appreciating: Value of Australian dollar compared to other currencies is increasing. Cheaper imports, expensive exports INTEREST RATES Interest rates represent the cost of borrowing or return on investments. This influences borrowing and investing decisions. Factors like inflation, central bank policies, and market demand affect interest rates, impacting the economy. Increasing: Reduces customer spending and increases business expenses Decreasing: Increases consumer spending and decreases business expenses GOVERNMENT EXPENDITURE Increased government expenditure may result in higher taxes, potentially reducing consumer spending. Government expenditure covers spending on goods and services like infrastructure, healthcare, education, defence and social welfare programs. On the other hand, it could also boost employment, which in turn stimulates consumer spending. It is vital for economic growth, societal needs and stability, funded through taxes, borrowing, or revenue sources, and is crucial in a government's budget planning. Decreased government expenditure leads to slower growth in income and employment, resulting in decreased consumer spending. ECONOMIC CYCLE The economic cycle refers to the natural fluctuation of economic activity. The economic cycle includes four stages: 1. Expansion 2. Peak 3. Contraction 4. Trough Businesses and policymakers use this pattern to make strategic decisions about employment, production, and overall economic health. 1. Expansion is economic growth with increased investment and employment. 2. Peak marks the end of expansion and start of slowdown. 3. Contraction is an economic decline with falling GDP and rising unemployment. 4. Trough is the lowest point, signaling the end of contraction and the beginning of recovery. FINANCIAL 1. Deregulation: removal of government Financial external influences on the business regulation from environment refer to factors outside of a company industry, with the aim that of increasing efficiency impact its financial performance and operations. Companies need to monitor and adapt to these external financial influences to make informed decisions, manage risks, and remain competitive in the ever-changing business landscape. and competition 2. Global financial markets 3. Managing debt GEOGRAPHIC The effect of physical location on a business. Globalisation connects countries, economies, cultures, and individuals worldwide through the exchange of goods, services, information, and people. Enabled by technology and trade agreements, it fosters economic growth, cultural exchange, and The geographic location will influence: What the business does Where it sources its supplies Where it defines its target markets technological advancements. Australia's location in the Asia-Pacific region affects its business environment, trade, and exports, with a growing reliance on products from Asian countries like China. Demographic shifts, such as urbanisation and an aging population, impact business profitability. SOCIAL Social influence in the business environment refers to the impact that social factors have on the business environment. These include: 1. Changes in taste, fashion and culture impact businesses 2. A growing awareness of the vulnerability of the environment 3. Growing desire to provide family-friendly workplaces 4. Diversity These factors can influence areas such as employee productivity and efficiency, and affect how individuals perceive the business. Social influence has a distinct connection with reputation LEGAL The legal influence on the business environment refers to the laws and regulations applied to businesses which dictate matters from how businesses compete with each other to setting standards for employee treatment and workplace safety. Businesses must comply with these laws and regulations as failure to do so can result in consequences such as fines. Furthermore, the legal influence affect businesses as there are aspects which protect them and their own interests. -Laws on taxation -Industrial relations -Occupational health and safety -Equal employment opportunity -Anti-discrimination and protection of the environment E.g: Competition and Consumer Act (2010), Work Health and Safety At (2011) POLITICAL 1. Labour market reforms, such as decentralisation of wage determination, can impact businesses by potentially increasing flexibility in setting wages based on market conditions. 2. Social reforms like paid parental leave can benefit businesses by promoting employee well-being and reducing turnover costs. 3. Environmental management policies may require businesses to invest in sustainable practices, affecting their operational costs. 4. Changes in taxation policies can influence business decisions on investment and expansion. 5. Privatisation processes can offer new opportunities for businesses to enter sectors previously controlled by the government, potentially leading to increased competition and innovation. INSTITUTIONAL Each level of government imposes regulations 1. Federal Obligations - payment of taxes for employees, provision of employee superannuation and abiding by relevant legislation regulations 2. State Obligations - provision of employee entitlements, payments of payroll taxes, abiding by relevant state legislation, abiding by pollution control 3. Local Obligations approving new development and alterations, fire regulations, and parking regulations Regulatory bodies The NSW Environment Protection Authority Primary environment regulator for NSW Aims to improve environmental performance and waste management for NSW through programs and initiatives NSW Fair Trading NSW consumer protection agency Provides information and assistance to all consumers The Australian Securities and Investments Commission Monitors market integrity and provides consumer protection in payment systems and financial services Trade unions Main aim was to improve working conditions and pay rates Union membership declined substantially in the past 20 years because of: - New legislation that outlaws compulsory unionism - Changes to work patterns (increased part - time and casual work) - Workplace agreements Other institutional influences National bodies that represent larger groups of employers (e.g) lobbying government on certain issues Trade and industry associations Examples include: -Australian Chamber of Commerce and Industry - National Farmers’ Federation - Australian Industry Group TECHNOLOGICAL Revolutionised the way businesses operate by enabling rapid transfer of information, enhancing efficiency and productivity. - Robotics - Telecommunication - Internet and ecommerce This digital transformation not only boosts internal communication and collaboration but also enhances customer interactions, ultimately leading to increased competitiveness and growth in today's fast-paced business environment. COMPETITIVE SITUATION A sustainable competitive advantage refers to the ability of a business to develop strategies that will ensure it has an edge over its competitors for extended periods of time 1. Number of competitors 2. Ease of Entry Monopoly Complete concentration by one firm in the industry Australia Post No competitors can enter -->The one firm has control over all resources that are being sold Oligopoly Small number of larger firms have a greater control over a market Car manufacturers Entry is difficult Large number of buyers and sellers in a particular market Retail shops, clothing Easy entry --> businesses are small and it is more affordable for the business owner to gain a market share Monopolistic competition Perfect competition Large number of small firms that sell similar products --> must use price to differentiation Fruit and vegetable growers / sellers 3. Foreign and local competitors Differentiating factors between local and foreign: - Labour costs - Transport costs - Cost of stoke / raw materials Local = Produce or sell a good or service in the same market. Local competitors must deal with the same variables as each other. Foreign = Located overseas or offshore. They sell their goods and services in Australia and compete with local businesses. 4. Marketing Strategies A business will be influenced by the type of marketing measures taken by a competitor. E.g: Businesses which use social media and TV advertising have greater exposure to consumers than those who rely on word of mouth The type and extent of marketing will depend on: - The size of the market - The size of the business - Number of competitors - The nature of the products MARKET 1. Changes in financial markets can significantly impact the business environment by affecting the cost of capital, availability of funding, and investor confidence. Fluctuations in interest rates, stock prices, and exchange rates can influence investment decisions and the overall financial health of businesses. 2. Changes in labour markets, such as shifts in employment trends, wage levels, and skill shortages, can impact businesses by affecting recruitment, retention, and labor costs. 3. Changes in consumer markets, including shifts in consumer preferences, demographics, and buying behavior, can influence product demand, marketing strategies, and pricing decisions for businesses.