PESTLE, FIVE FORCES OF COMPETITION AND SWOT The external economic environment for a business

External business environment

Changes to the business environment from external factors and in its competitive strength cause changes in way a business performs (e.g. in terms of sales and profits) and force it to change its business strategy (e.g. alter aspects of its marketing mix).

The term ‘external business environment’ refers to the surroundings or external conditions in which a business operates.

The acronym PESTLE is one way of identifying and evaluating key areas that contribute to the businesses external environment.

These factors overlap with each other (e.g. a free trade agreement is part economic, part political and part legal)
Identify the PESTLE factors suggested by each of these pictures. Explain how the external environment of an Australian clothing firm may be affected in each case.

The potential impact of relevant changes in the external environment can be represented in various graphics, diagrams or PESTLE maps. There is no set format for these, but the maps should:

  • Identify key changes in PESTLE factors
  • Show how different PESTLE factors relate to each other
  • Explain the impact of the changed PESTLE factors on business performance
  • Identify possible changes to the marketing mix in response to the changed PESTLE factors
Search for other examples of PESTLE maps on the web.
COMPETITIVE POSITION

Another key external factor affecting the strategy and performance of a business is its competitive position. A business in a strong competitive position can influence prices, sales and hence profits. It has been suggested (by Porter in 1979) that there are five elements that make up the competitive position of a business.

  1. Farmers face buyer power from supermarkets who can drive their prices down
  2. Coles face direct competition from Woolworths and IGA
  3. The Water Authorities have supplier power could, if unregulated, drive up input prices for businesses and households
  4. New technology creates potential competitors in many industries (e.g. Uber taxis, booking holidays, delivery services)
  5. Apple has indirect competitors that produce electronic products that perform one or more of the iPhone functions (e.g. GPS, watches, cameras)

A business may be able to strengthen its competitive position by, for example:

  • Finding alternative suppliers
  • Increasing the number of clients or buyers to which it sells
  • Creating a 'unique selling proposition' (USP) e.g. through innovation and branding
  • Merging with or buying out direct or potential competitors
  • Raising barriers to entry e.g. cutting unit production costs through generating economies of scale
  • Predatory pricing (undercutting rivals' prices) to drive them from the industry

but there will be costs and other disadvantages associated with each of these strategies.

The forces of competition can also be mapped (or shown graphically) using plus and minus signs to indicate competitive strengths and weaknesses.

SWOT ANALYSIS

SWOT is an acronym for Strenths, Weaknesses, Opportunities and Threats. SWOT analysis brings together and summarises information gathered using other business tools (e.g. PESTLE mapping and Forces of Competition maps).

Stengths and weaknesses focus on the internal operations and position of the business (e.g. its competitive position, skills of workforce, financial platform).

Opportunities and threats focus on external factors affecting the business (e.g. PESTLE factors)

SWOT EVALUATION

  • As with all diagrams, the outcome is only as good as the quality of the information used (GIGO).
  • It encourages the production of lists rather than thought and analysis about of important factors affecting performance.
  • If no priority or weighting is given to individual points several weak opportunities may appear to be more important than a few strong threats.

However, done well, SWOT analysis may help a business design an appropriate strategy to achieve its business objectives by:

  • Matching strengths to opportunities to find competitive advantage.
  • Converting weaknesses or threats into strengths or opportunities
THE TIMING OF CHANGES TO BUSINESS STRATEGY

'Turn left about half a mile before you get to Davy's Bar'

The key to maintaining a healthy business is to adjust business strategy before problems become too serious, i.e. make changes when things are going well, rather than delaying changes until it is clear the business has a problem.

End of presentation

Created By
Andrew Tibbitt
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Created with images by stevepb - "shopping supermarket merchandising"

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