Ramesh Naoickyer

BUSINESS MANAGEMENT (IBDP)

Unit 1: BUSINESS ORGANISATION AND ENVIRONMENT
Chapter 1.5 External environment [HL/SL]

http://textbook.stpauls.br/Business_Organization/page_58.htm
https://www.businessmadeeasy.xyz/business-basics/1-5-external-environment/
https://ibnotesbyellie.weebly.com/external-environment.html
https://blog.prepscholar.com/the-best-ib-business-and-management-notes-study-guide
https://www.khairul-syahir.com/topics/education/2008/ib-business-management-sl-
notes.html

Learning objectives:
A02, A04 - STEEPLE analysis of a given organization
A03 - Consequences of a change in any of the STEEPLE factors for a business's objectives
and strategy

 STEEPLE /PESTLE Analysis.

 Business tool for understanding a business’ external environment
 Looks at the market potential and situation
 Stands for Social, Technological, Economic, Environmental, Political, Legal,
and Ethical analysis (of the industry)
 External environmental factors are analyzed in decision making and strategy
development because they can heavily influence the business

Q. Explain the STEEPLE ANALYSIS with opportunity and threats for businesses.

Ans) Social:

 Attitude of society towards wide range of issues

 Population demographics (more young/old, more women/men, etc.)
 Roles and attitudes of people
 Cultural and religious beliefs
 Security and education

Social - Opportunities Social - Threats

1. With a more liberal and modern social
attitude towards women in most
societies, businesses have benefited
from having a more flexible labour
force.
1. The growing support for environmental
protection has altered business
behaviour immensely, with many
organizations now reporting the non-
financial aspects of their operations,
such as recycling and waste

1

2. Migration and the increased
awareness and acceptance of
multiculturalism has created more
choice for consumers,
e.g. the most consumed take-out food
in the UK is Indian curry.
 Technological
 Use of tools and machines
 Information technology
 Innovations in technology
Technological - Opportunities
1. New working practices - Many more
people are working from home by
using information communication
Technology and video conferencing.
2. Increased productivity and efficiency
gains - Robots and machines are much
faster and more accurate than humans.
3. Quicker product development time –
use of CAD /CAM
4. Job creation – For maintenance and
technological support.
6. New products and new markets -
Technology is a source of innovation
and brings about new products in the
marketplace
 Economic
 State of the economy
 Interest and tax rates
 Exchange rates and foreign relations
Ramesh Naoickyer
management.
2. Societal pressures for businesses to act
more ethically and socially responsibly
can often result in higher costs.
Technological - Threats
1. Technology is not always reliable or
secure – Computer failure or hacked
files can present serious problems for
businesses.
3. Shorter product life cycles - Equipment
and software may become obsolete
increasingly quicker, and therefore
need upgrading. This can make it
increasingly difficult for smaller firms
to compete.
4. It can be costly - As products such as
smartphones have shorter life cycles,
businesses need to devote more
resources to new product development.
5. Job losses - Automation has led to
unemployment in the primary and
secondary sectors
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 Inflation rates, unemployment rates, etc.

Economic - Opportunities Economic - Threats

1. Controlled inflation: Inflation is the
continual rise in the general level of
prices in an economy. Most
economists regard low and stable
inflation as a prerequisite to
achieving the other three
government economic objectives,
so it is an absolute priority for
economic prosperity.
2. Economic growth: Economic growth is
the increase in a country's economic
activity overtime. It is measured by the
change in the value of the economy's
total output (known as the gross
domestic product or GDP) per year.
1. Reduced unemployment: The
unemployment rate measures the
proportion of a country's workforce not
in official employment. Governments
aim to deal with the problems of
unemployment because there are social
costs of high unemployment (which
present threats to businesses)
2 .A healthy international trade balance:
In broad terms, the internal trade balance
records the value of a country's export earnings
and its import expenditure. Governments strive
to avoid a deficit on their international trade
balance (i.e. try to avoid import expenditure
exceeding export earnings)

 Environmental
 Abundance of natural resources or raw materials
 Threats from nature (or natural disasters)
 Waste disposal/recycling

Environmental - Opportunities Environmental - Threats

Positive impacts of business activity on the
natural environment.
The weather and seasonal changes can also
present opportunities. - Beach resorts and
tourism development based on weather.
Outbreak of SARS (2003) and bird flu
(2006)
The weather and seasonal changes can
also present threats.- Flood, earthquake
and tsunami

 Political
 Laws (employment, consumer, business) & policies (fiscal and monetary)
 Changes brought about by new government
 Possible effects of political unrest

Political - Opportunities Political - Threats

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Fiscal policy is the use of taxation and Monetary policy is the use of interest rate
government expenditure policies to influence policy to affect the money supply and
business activity. The government spends the exchange rates in order to influence business
activity.
tax revenue that it raises, in addition to other
sources of government revenue, on a number
of areas including social security, health care,
education, transport and infrastructure.

 Legal
 Employment or contract laws
 Trade unions
 Environmental protection regulations

Legal - Opportunities Legal - Threats

Competition legislation Laws ensure
that anti-competitive practices are
prohibited to protect customers
and smaller businesses from firms with
monopoly power
Social and environmental protection
legislation Laws exist to prevent or
reduce the consumption of demerit
goods, e.g. tobacco, petrol, alcohol,
gambling and illegal drugs.
Consumer protection legislation -
Laws exist that make it illegal for
businesses to provide false or is leading
descriptions of their products and
services
Employee protection legislation
-These laws protect the interests and
safety of worker

 Ethical
 Client confidentiality
 Bribery and other forms unethical (and possibly illegal) business transactions
 Fair competition

Meaning of Ethics: Business ethics are the moral principles that are, or should be, considered in
business decision-making, i.e. what is judged to be right or wrong. Ethical firms act in a socially
responsible way towards their stakeholders (especially their customers, employees and the local
community),

Ethical - Opportunities Ethical - Threats

They attract and retain good quality To remain competitive, businesses need
workers. Google, for example, has a to consider the impact of their

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very loyal and dedicated workforce, operations on society and the

largely because of the astonishing
working environment,
Social responsibility generates good
publicity and public relations.
environment because customers are
increasingly concerned about
environmental protection and ethical
business behaviour.
Choosing to be ethical and socially
responsible can bring benefits, but there
are also compliance costs involved with
such decisions.

 REVIEW QUESTIONS:
1. What does the acronym STEEPLE analysis stand for?
Ans) STEEPLE analysis is an analytical framework used to examine the opportunities and
threats of the external environment (social, technological, economic, environmental, political,
legal, and ethical environments) on business activity.

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2. Distinguish between opportunities and threats.

Ans) External factors that present chances for businesses are called opportunities, such as lower
tax rates and lower interest rates.
External factors that can harm a business are called threats, such as a recession, oil crisis or
major road works.

3. Outline the purpose of a STEEPLE analysis.

Ans) STEEPLE

 Business tool for understanding a business’ external environment

 Looks at the market potential and situation
 Stands for Social, Technological, Economic, Environmental, Political, Legal,
and Ethical analysis (of the industry)
 External environmental factors are analyzed in decision making and strategy
development because they can heavily influence the business

4. Why are inflation and unemployment threats for businesses?

Ans) Inflation is the continual rise in the general level of prices in an economy. Most
economists regard low and stable inflation as a prerequisite to achieving the other three
government economic objectives, so it is an absolute priority for economic prosperity.

The unemployment rate measures the proportion of a country's workforce not in official
employment. Governments aim to deal with the problems of unemployment because
there are social costs of high unemployment (which present threats to businesses).

5. What are the various stages of the business cycle?

Business cycle refers to the fluctuation in the level of business activity overtime. Countries tend
to move through the cycle of booms, recessions, slumps, recovery and growth.

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6. How does the legal environment provide both opportunities and threats to businesses?

Environmental - Opportunities Environmental - Threats

Positive impacts of business activity on the
natural environment.
The weather and seasonal changes can also
present opportunities. - Beach resorts and
tourism development based on weather.
Outbreak of SARS (2003) and bird flu
(2006)
The weather and seasonal changes can
also present threats.- Flood, earthquake
and tsunami

7. How does the legal system present both opportunities and threats for businesses?
Legal - Opportunities
Competition legislation Laws ensure
that anti-competitive practices are
prohibited to protect customers
and smaller businesses from firms with
monopoly power
Social and environmental protection
legislation Laws exist to prevent or
reduce the consumption of demerit
goods, e.g. tobacco, petrol, alcohol,
gambling and illegal drugs.
Legal - Threats
Consumer protection legislation -
Laws exist that make it illegal for
businesses to provide false or is leading
descriptions of their products and
services
Employee protection legislation
-These laws protect the interests and
safety of worker

8. State three ways in which ethical considerations affect business activity.

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Ethical - Opportunities Ethical - Threats

They attract and retain good quality
workers. Google, for example, has a
very loyal and dedicated workforce,
largely because of the astonishing
working environment,
Social responsibility generates good
publicity and public relations.
To remain competitive, businesses need
to consider the impact of their
operations on society and the
environment because customers are
increasingly concerned about
environmental protection and ethical
business behaviour.
Choosing to be ethical and socially
responsible can bring benefits, but there
are also compliance costs involved with
such decisions.

9. When adopting certain technologies, managers need to consider several factors?

Ans) While adopting certain technologies, managers need to consider several factors
• Costs - such as the cost of purchase, installation, maintenance, depreciation, replacement and
insurance of new technologies.
• Benefits - such as the expected gains in efficiency (as measured by productivity, flexibility and
communications) and profits.
• Human relations - such as the impact of resistance to change, and the impacts on morale,
flexible working patterns and workforce planning.
• Recruitment and training - such as the costs of training workers to adopt the new
technologies, the number of people who need training and where to find the time to train people.

10. How does the Technologies present both opportunities and threats for businesses?
Ans

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11. How changes in STEEPLE factors affect a business’s objective and strategy?

 Changes in trends, social norms, public opinion, views on ethics can affect the
company’s products, business activities, and the way they market their products
 Changes to legal or political factors may force businesses to change the way they
operate to comply with new laws or regulations
 Changes to technological factors could result to the company adopting newer
technology or machinery to increase efficiency or keep up with industry standards
 Changes to environmental factors could force companies to adapt to scarce raw
materials, frequent natural disasters, etc.
 Changes to economic factors (economic growth, interest rates, etc.) could affect the
costs of operations of the business, spending attitude of consumers, etc.

12. How do business coping with a recession?

Ans)
• Cost reduction to improve cash flow, e.g. efforts to cut lighting and energy bills, finding
alternative suppliers who can offer better prices, relocating to cheaper premises or making some
staff redundant.
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• Price reductions to sustain or increase sales. People become more price sensitive during a
recession, so lower prices will be very welcome by potential customers.
• Non-pricing strategies (such as repackaging, special offers or special after-sales care) to sustain
or revitalize the volume of sales.
• Branding to maintain sales as customers become or remain loyal to a brand irrespective of
changes in price or their incomes.
• Outsourcing production overseas where costs are lower to help the business to gain a
competitive price advantage, thereby reducing the impact of a recession in the domestic
economy.

13. Explain the types of unemployment.

Ans) Unemployment refers to the number of people in the workforce who are willing and able
to work but cannot find employment.
Types of unemployment
• Frictional unemployment occurs when people change jobs as there is usually a time lag
between leaving a job and finding or starting another.
 Seasonal unemployment is caused by periodic and reoccurring changes in demand for a
product, e.g. beach resorts tend to suffer from a lack of tourists during the winter months.
• Technological unemployment results from the introduction of labour-saving (capital
intensive) technologies, which can cause mass-scale unemployment.
• Regional unemployment refers to the different unemployment rates in different areas of a
country. Remote rural areas tend to have higher levels of unemployment than busy urban
districts.
• Structural unemployment occurs when the demand for products produced in a particular
industry continually falls, resulting in structural and long term changes in demand.
• Cyclical unemployment (or demand deficient unemployment) is caused by a lack of
demand in the economy. It is the most severe type of unemployment as it tends to affect all
industries.

14. Explain the protectionist measures taken by Government which influence the
businesses.

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Examples of protectionist measures:

• Tariffs (customs duties) are taxes on imported products, thereby raising their price to give
domestic firms a price advantage, e.g. Japan imposes up to 778% import taxes on rice (the
highest rate in the world) to protect its agricultural industry.
• Quotas are quantitative limits on the volume or value of imports, e.g. Hong Kong, India, China
and the UK place quotas on the number of Hollywood movies released in their countries (to
protect their respective film industries).
• Subsidies are payments made by a government to domestic businesses as a form of financial
aid to reduce their costs of production, thereby giving them a competitive advantage.
• Embargos are physical bans on international trade with a certain country, usually due to
strategic reasons, severe health and safety concerns, or political conflicts. For example, Coca-
Cola was able to open its bottling plant in Rangoon in June 2013 after the Burmese government
lifted its embargo after more than 60 years.
• Technological and safety standards are strict administration and compliance costs in meeting
industrial and health and safety regulations imposed on imported products. Compliance therefore
raises production costs (and prices) of foreign producers.

15. Explain the types of taxes used by the Government.

Ans) Common examples of taxes
• Income tax - a levy on personal incomes from wages, salaries, rent, interest and dividends. It Is
the key source of tax revenue for most governments.
• Corporate tax- a levy on profits. Small businesses tend to be charged a lower tax rate on their
profits than large multinational companies.
'• Sales taxes - taxes on an individual's expenditure, such as Value Added Tax (charged in most
European countries) and the Goods & Services Tax (used in the USA and other parts of the
world).
• Capital gains tax - a tax on the surplus (known as 'capital gains') made from investments such
as shares and property.
• Inheritance tax –a tax on the value of assets (such as cash or property) passed onto a third
party following the death of the owner of the assets.
• Excise duties - levies on demerit goods such as alcohol, tobacco, petrol and gambling.

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• Customs duties - taxes on foreign imports, which help to raise government revenue and give
domestic businesses a relative price advantage.
• Stamp duty - a tax paid when commercial or residential property is bought. It tends to be
progressive, so the higher the property value the greater the tax rate tends to be.

16. Difference between external cost and social cost

Ans)
Private Costs + External Costs = Social Costs

External costs:
An external cost is the cost incurred by an individual, firm or community as a result of an
economic transaction which they are not directly involved in. External costs, also called
'spillovers' and 'third party costs' can arise from both production and consumption.

Examples of External costs are passive smoking, air and noise pollution, packaging waste and
global warming. Climate change has been blamed for the increase in natural disasters such as
tsunamis and hurricanes.

Social costs: Social cost is the total cost to society. It includes private costs plus any external
costs.
Examples of Social costs: Air pollution, littering and risks of passive smoking

Private costs: Private cost is the cost borne by an individual or firm directly involved in a
transaction.

17. Distinguish between Deflationary fiscal policy and expansionary fiscal policy

Deflationary fiscal policy is used when the economy experiences high rates of economic growth
and inflation, so needs to be slowed down via a combination of higher taxes and reduced
government expenditure policies.

Expansionary fiscal policy is used to boost business activity, perhaps to get the economy out of
a recession. This is done by a combination of tax cuts and increased public sector spending,
there by creating business opportunities.

18. What is meant by deregulation?

Ans) Deregulation is the removal of government rules and regulations which constrain an
industry to enhance efficiency and encourage more competition within the industry.

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19. Explain in detail the legal employment rights.

Ans) Legal employment rights
Although countries vary in their use of employment legislation, the laws typically found in most
developed countries include:
• Anti-discrimination laws make it illegal to discriminate (show prejudice) against individuals
because of their gender, race (ethnicity), religion, disability, marital status or age.
• Equal pay legislation makes it unlawful for an employer to reward employees differently if
they are doing work or jobs deemed to be of equal value.
• Health and Safety at Work Acts (HASAWA) cover the provision of safe and adequate
working conditions. Businesses need to offer a secure and hygienic working environment for
their staff.
• Statutory benefits are the legal benefits that all businesses are obliged to offer to their
workers, such as maternity leave, sick pay, holiday pay and retirement pension scheme.
• National minimum wage legislation requires all businesses to pay a legal minimum rate of pay
to their workers, thus creating incentives to work for the poorest paid workers in the country.

20 How different businesses are affected by different external factors and to varying
degrees?
This will largely depend on factors such as:
• The size of the business - Smaller and newer firms tend to be less able to cope with external
shocks to the business environment.
• The ability of management - Experienced and skilled managers are able to predict and
successfully react to changes in the external environment and potential crises.
• The degree of brand loyalty - Businesses with a loyal customer base are less exposed to the
threats of competition, so are less affected by external changes such as fluctuations in the
exchange rate.
• The diversity of the firms operations - Firms that have a diversified product portfolio and
have overseas operations are more able to handle changes in the external environment. By
contrast, firms that specialize in one or two products in a specific market are more vulnerable to
external threats.

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• The level of a firms gearing - Gearing refers to the extent to which a business relies on
external borrowing. Businesses that are highly geared are more defence less if there are adverse
changes in the external business environment, e.g. if interest rates increase.

Definitions:

Economic growth measures changes in the Gross Domestic Product of a country over time. It
occurs if there is an increase in GDP for two consecutive quarters.

Ethics are the moral values and judgements (of what is right) that society believes businesses
ought to consider in their decision-making.

The exchange rate is the value of a country's currency in terms of other currencies.

Inflation occurs when the general price level in an economy continuously rises. It is measured
by changes in the cost of living for the average household in a country.

Interest rate is a measure of the price of money in terms of the amount charged for borrowed
funds or how much is offered on money that is saved.

Protectionist measures are any measure taken by a government to safeguard its industries from
overseas competitors. They are a threat to businesses trying to operate in foreign markets.

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