Welcome to A Level Business! Understanding the World Around You

Hello! This chapter, External Influences on Business Activity, is one of the most exciting parts of the A Level syllabus because it shows you that a business doesn't operate in a vacuum.

Imagine your business is a ship. You control the crew, the cargo, and the sails (internal factors), but you cannot control the wind, the waves, or the reefs (external factors). These external forces constantly push, pull, and sometimes sink businesses.

By studying these influences, you will develop the critical analysis skills needed for Papers 3 and 4. We often use the mnemonic PESTLE to structure these factors:

  • P: Political
  • E: Economic
  • S: Social
  • T: Technological
  • L: Legal (often combined with Political)
  • E: Environmental

Let’s dive into how each of these external forces impacts every decision a business makes.


6.1.1 Political and Legal Influences

The government (political factors) and the rules they enforce (legal factors) create the structure within which all businesses must operate.

A. Government Ownership Decisions: Privatisation and Nationalisation

These terms relate to who owns and runs key industries and services in the economy.

1. Privatisation

Privatisation is when government-owned assets or industries (public sector) are sold to private individuals or companies (private sector).

• Advantages:
i. Increased efficiency: Private firms are driven by profit, leading to better cost control and service.
ii. Increased competition: The market opens up, benefiting consumers.
iii. Revenue for government: The sale generates a large one-off payment for the state.

• Disadvantages:
i. Focus on profit over service: Essential services (like water or rail) might neglect poorer areas if they aren't profitable.
ii. Job losses: Efficiency often means cutting staff.
iii. Monopoly potential: A private company might gain too much market power.

2. Nationalisation

Nationalisation is the opposite: when private-sector businesses or assets are taken into government ownership (public sector).

• Advantages:
i. Public service focus: Services are provided based on need, not just profit (e.g., ensuring electricity reaches remote areas).
ii. Economies of scale: Large, nationalised industries can operate very efficiently.
iii. Strategic control: Government retains control over key sectors (e.g., defence, energy).

• Disadvantages:
i. Inefficiency and bureaucracy: Lack of competition can lead to poor decision-making and high costs.
ii. Political interference: Decisions may be made for political gain rather than economic sense.
iii. High cost: Compensation must be paid to previous owners.

B. Using the Law to Control Business Activity

Governments use laws to ensure businesses behave responsibly and fairly. Businesses must constantly adapt their decisions to comply with these rules.

  • Employment Practices & Wage Levels: Laws regarding minimum wage, unfair dismissal, and working hours (e.g., ensuring all workers receive equal pay for equal work).
  • Conditions of Work (Health & Safety): Strict rules on workplace environment, protective equipment, and risk assessment. A construction company must invest heavily in safety gear due to legal requirements.
  • Marketing Behaviour: Laws prevent false or misleading advertising and protect consumer data (consumer protection laws).
  • Competition: Laws prevent monopolies and cartels to ensure fair market competition (e.g., preventing two large supermarkets from secretly agreeing to fix prices).
  • Location Decisions: Planning laws and zoning regulations restrict where a factory or retail store can be built.
  • Particular Goods and Services: Licensing for specific products (like alcohol or medicine) or regulations on product quality (e.g., car safety standards).

Quick Takeaway: Political factors determine ownership (public/private), while legal factors define the boundaries of acceptable business practice. Non-compliance results in heavy fines or closure.


6.1.2 Economic Influences

Economic factors relate to the state of the overall economy (macroeconomics). These factors directly affect consumer purchasing power, business costs, and profitability.

A. Government Economic Intervention and Market Failure

Governments aim for a healthy economy, intervening either to help/encourage enterprise (e.g., offering subsidies or tax breaks for startups) or to constrain activity (e.g., introducing environmental taxes or restrictions on monopolies).

Market Failure occurs when the free market fails to allocate resources efficiently. This usually happens due to:

• Externalities: When a business activity affects a third party not directly involved (e.g., a factory polluting a river). Government intervenes with taxes or pollution permits.
• Public Goods: Goods that are non-excludable and non-rivalrous (e.g., street lighting). Private firms won't provide them, so the government must.

B. Key Macroeconomic Objectives

These are the goals governments try to achieve for the entire economy. A business must anticipate how the government will try to meet these targets.

  • Low Unemployment: High unemployment means lower consumer demand for businesses.
  • Low Inflation: Businesses prefer stable prices, as high inflation leads to uncertainty and rising costs.
  • Economic Growth (GDP): Strong growth means higher consumer incomes, boosting sales for most firms.

C. Government Policies and their Impact

Governments use three main tools to manage the economy:

1. Fiscal Policy (Taxes and Spending)

This involves the government adjusting its spending and taxation levels.

  • Increased corporation tax: Reduces a business's retained profits, limiting funds for expansion.
  • Decreased income tax: Boosts consumer spending power (demand increases).
  • Increased government spending on infrastructure: Benefits construction firms and reduces transport costs for all businesses.
2. Monetary Policy (Interest Rates)

Managed by the Central Bank, this involves changing the cost of borrowing money.

  • Increased interest rates: Businesses find loans more expensive (discouraging investment). Consumers save more and borrow less (reducing consumer spending).
  • Decreased interest rates: Encourages both business investment and consumer purchases.
3. Supply-Side Policies

Aimed at increasing the efficiency and capacity of the economy over the long term.

  • Examples: Investment in education/training (improving labour skills), deregulation (reducing red tape), or privatisation.
  • Impact: Lowers production costs for businesses and improves productivity.
4. Exchange Rate Policies

This relates to the value of the national currency against others.

  • A strong currency (Appreciation): Makes imports cheaper (good for firms that import raw materials) but exports more expensive (bad for export businesses).
  • A weak currency (Depreciation): Makes exports cheaper (boosting sales abroad) but imports more expensive (increasing raw material costs).

Quick Takeaway: Economic policies fundamentally alter the cost structure (via taxes, interest rates) and the sales environment (via consumer demand, exchange rates) for all businesses.


6.1.3 Social and Demographic Influences

Social influences relate to the lifestyle, culture, and attitudes of the society. Demographic influences concern the size, structure, and movement of the population.

A. Corporate Social Responsibility (CSR) and Ethics

Modern consumers and employees expect businesses to be responsible members of society.

  • CSR Impact: Businesses adopt CSR to maintain a good reputation and attract ethical consumers. This might involve changing accounting practices (to be more transparent) or socially auditing their supply chain.
  • Social Auditing: A report on the social and environmental performance of the business. It shows stakeholders that the company is taking its ethical duties seriously.

B. Community Needs and Pressure Groups

Businesses must consider the needs of the local community, especially regarding noise, traffic, and local employment.

  • Pressure Groups: Organisations formed to influence business activity or government policy (e.g., Greenpeace pushing for sustainable packaging).
  • Impact: Pressure groups can severely damage a business's reputation or force costly changes in production methods if their concerns are ignored.

C. Demographic Change

Changes in population structure affect both the labour supply and customer demand.

  • Aging Population: In many developed nations, the population is getting older.
    • Impact on Labour: Potential skill shortages; increased need for flexible retirement plans.
    • Impact on Demand: Increased market for healthcare, accessible travel, and retirement services.
  • Changing Family Structure: More single-person households or delayed marriages increase demand for convenience food and smaller homes.
  • Global Level Changes: Migration affects labour availability (e.g., highly skilled migration creating global centres of expertise).

Did you know? Ignoring social trends can be fatal. Businesses that were slow to embrace flexible working patterns missed out on top talent who prioritised work-life balance.

Quick Takeaway: Social trends shape what products consumers want (ethical focus) and how they want to work (flexible demands), while demographics determine the size and composition of the available market and workforce.


6.1.4 Technological Influences

Technological change refers to innovations in production methods, communication, and information handling. This is perhaps the fastest-changing external influence.

Impact on Business Decisions:

  • Production/Operations: Automation and robotics (improving efficiency, reducing labour costs). Businesses must decide whether to invest heavily in capital-intensive processes.
  • Communication: The shift to digital communication (email, video calls, cloud computing) speeds up decision-making and reduces travel costs.
  • Marketing: Digital platforms (social media, targeted ads) change how products are promoted and sold (e-commerce).
  • Product Design: Technology creates opportunities for new, innovative products (e.g., smart devices).

Example: The rise of Artificial Intelligence (AI) means businesses must decide whether to integrate AI for customer service or data analysis, requiring investment and staff retraining. If they don't adopt, they risk being less efficient than competitors.

Quick Takeaway: Technology forces businesses to constantly invest and innovate to remain competitive, fundamentally altering how products are made, marketed, and sold.


6.1.5 Competitors and Suppliers

While these are often viewed as part of the immediate market environment, they are external forces that directly dictate pricing, quality, and supply reliability.

A. Competitors

Rival firms constantly challenge a business's market position. The severity of competition dictates strategy.

  • Pricing Decisions: If a key competitor reduces prices, the business may be forced to follow suit, risking profitability.
  • Product Decisions: If a competitor introduces a superior product feature, the business must quickly invest in R&D to match or exceed it.
  • Market Share: Intense competition can erode market share, threatening long-term survival.

Analogy: Competition is a constant tug-of-war. If you stop pulling, you lose ground.

B. Suppliers

Suppliers provide the necessary raw materials, components, and services. Their power can influence a business's costs and quality.

  • Cost Impact: If a supplier raises prices (perhaps due to their own rising costs or lack of competition), the business faces higher Cost of Goods Sold, squeezing profit margins.
  • Reliability: Late delivery or poor quality from suppliers can halt production and damage the business's reputation with its own customers.
  • Decision Impact: Businesses may choose to diversify their supply base (use multiple suppliers) to reduce risk, or engage in backward vertical integration (buying the supplier) to gain control.

Quick Takeaway: Competitors demand strategic responsiveness in pricing and product development, while suppliers affect operational stability and input costs.


6.1.6 International Influences

Globalisation means that businesses are increasingly affected by events, laws, and markets beyond their own borders.

A. Trade Links and Agreements

  • Globalisation: Increased interconnectedness allows businesses to source cheaper raw materials internationally and sell to massive global markets.
  • International Trade Agreements: Treaties between countries (like the WTO or regional blocs) aim to reduce trade barriers (tariffs, quotas).
    • Impact: Businesses benefit from lower costs when importing and easier access to foreign markets when exporting. Changes to these agreements (like Brexit) force businesses to completely redesign supply chains.

B. Multinationals (MNEs) and Host Governments

Multinational Enterprises (MNEs) are large companies operating in several countries. Their presence is a massive external influence on the countries they operate in (host countries).

Advantages MNEs bring to a country:
  • Bringing in significant Foreign Direct Investment (FDI).
  • Creating local jobs and improving skills (through training).
  • Introducing new technology and management expertise.
  • Boosting the country’s export earnings.
Disadvantages MNEs bring to a country:
  • Exploiting local workers or resources (e.g., paying low wages).
  • Driving local, smaller competitors out of business.
  • Repatriating profits (sending profits back to their home country instead of reinvesting locally).

The relationship between MNEs and governments is often complex. Governments want the benefits (jobs, FDI) but must regulate the MNEs to prevent exploitation (e.g., setting minimum wage laws or fighting against MNEs using complex strategies to avoid paying local taxes).

C. Role of Technology in International Trade

Technology (especially the internet and fast global logistics) has fundamentally lowered the barriers to international trade, allowing even small firms to become exporters. This increases competitive pressure globally.

Quick Takeaway: International factors determine market size and regulatory freedom. MNEs bring vital investment but must be managed carefully by host governments.


6.1.7 Environmental Influences

The growing focus on climate change and resource scarcity means environmental responsibility is now a critical external constraint and opportunity for businesses.

A. Physical Environmental Issues

These are the real-world issues affecting operations:

  • Resource depletion: Businesses relying on finite resources (like fossil fuels) face rising costs and pressure to switch to sustainable alternatives.
  • Pollution: Government and consumer pressure require businesses to minimise waste, noise, and carbon emissions.
  • Climate Change: May influence location decisions (e.g., avoiding areas prone to flooding) and requires adaptation in packaging and logistics.

B. Environmental Audit

An environmental audit is a detailed review by a business of its impact on the environment.

  • Purpose: To measure environmental performance (e.g., water usage, carbon footprint) and demonstrate accountability to stakeholders.
  • Usefulness: Helps a business identify areas of waste, reduce costs (e.g., via energy efficiency), and improve its corporate image.

C. The Importance of Sustainability

Sustainability means acting in a way that meets current needs without compromising the ability of future generations to meet their own needs.

This factor is becoming increasingly important because:

  • Consumers are willing to pay a premium for eco-friendly products.
  • Governments are implementing stricter environmental regulations and taxes (e.g., carbon taxes).
  • Staff prefer working for responsible employers.

Therefore, integrating sustainability into operations (e.g., using renewable energy) is now a key business decision.

Quick Takeaway: Environmental pressure is no longer optional; it forces businesses to measure their impact (via audits) and plan for long-term survival by adopting sustainable practices.


Recap: The PESTLE Framework in Action

When analysing a case study, always consider how these factors interact.

Example Scenario: A factory is considering building a new production facility.

  • Political/Legal: Are there relaxed zoning laws or government grants available (P)? What are the minimum wage and pollution regulations (L)?
  • Economic: Is the country experiencing high interest rates (E)? If so, the loan for the factory will be expensive.
  • Social/Demographic: Is there an available skilled workforce nearby (S/D)? Will the community accept the new facility (S)?
  • Technological: Can the factory use the latest automated machinery to reduce labour costs (T)?
  • Environmental: Can the factory sustainably source its raw materials (E)? What will the environmental audit require?

Mastering these external influences will allow you to provide context-specific analysis, a key requirement for success in A Level Business. Keep practicing applying PESTLE to real-world businesses!