Analysing Economic Environment Essay

2542 words - 11 pages

ANALYSING THE ENVIRONMENT

Analysis of the macro-environment may be analysed into six segments using the PESTEL framework. Political Economic Socio-cultural Technological Environmental Legal

THE POLITICAL ENVIRONMENT
Government is responsible for providing a stable framework for economic activity and, in particular, for maintaining and improving the physical, social and market infrastructure. Public policy on competition and consumer protection is particularly relevant to business strategy. GOVERNMENT POLICY Government policy affects the whole economy, and governments are responsible for enforcing and creating a stable framework in which business can be done. A report by the World Bank ...view middle of the document...

b) A monopoly would be detrimental to the public interest if cost efficiencies are not achieved. Oliver Williamson suggested that monopolies might be inefficient if “market power provides the firm with the opportunity to pursue a variety of other than profit objectives. For example, managers might instead try to maximize sales, or to try to maximize their own prestige. Consumer protection policies may be required. a) Control over markets can arise by firms eliminating the opposition, either by merging with or taking over rivals or preventing other firms from entering the market. When a single firm controls a big enough share of the market it can begin to behave as a monopolist even though its market share is below 100%. b) Several firms could behave as monopolists by agreeing with each other not to compete. This could be done in a variety of ways- for example by exchanging information, by setting common prices or by splitting up the market into geographical areas and operating within allocated boundaries. Such a collusive oligopoly is called a cartel and is illegal in most jurisdictions. For example, in 2007, British Airways was fined heavily by the US Department of Justice and the UK’s Office of Fair Trading for colluding with its rival Virgin Atlantic in fixing how much extra to charge on passenger and cargo flights, to cover fuel costs. POLITICAL RISK The political risk in a decision is the risk that political factors will invalidate the strategy and perhaps severely damage the firm. Examples are wars, political chaos, corruption and nationalization. To assess political risk, we may ask these questions: 1. How stable is the host country’s political system? 2. How strong is the host government’s commitment to specific rules of the game, such as ownership or contractual rights, given its ideology and power position? 3. How long is the government likely to stay in power? 4. If the present government is succeeded, how would the specific rules of the game change? 5. What would be the effects of any expected changes in the specific rules of the game? 6. In light of those effects, what decisions and actions should be taken now?

THE ECONOMIC ENVIRONMENT
A wide variety of funding and other economic (market) factors need to be taken into consideration when assessing performance.

Gross Domestic Product a) Has it grown or fallen? b) How has demand for goods or services been affected by the growth of fall?

Local Economic Trends a) b) c) d) Are local businesses rationalizing or expanding? Are office/ factory rents increasing or falling? In what direction are house prices moving? Are labour rates on the increase?

Inflation a) Is a high rate making it difficult to plan, owing to the uncertainty of future financial returns? Inflation and expectations of it helps to explain short-termism. b) Is the rate depressing consumer demand? c) Is the rate encouraging investment in domestic industries? d) Is a high rate leading employees to demand higher...

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