Significance of External Factors in Business Economics
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Published: Mon, 12 Mar 2018
Maintaining the current market share, or being capable of growing in terms of market share, in this continuously changing world means that businesses cannot afford to stand still. In order to keep ahead in the face of increasing global competition, companies must closely follow developments in their external environment, which consists of: society, legal systems, economic factors, These factors are interrelated and are capable of significant change.
The industry chosen in order to analyze these factors and to which extent firms should take these factors into account is the airline industry. The external environment in which airlines operate is particularly volatile and difficult. All the factors mentioned above have a great impact on the airline industry in particular. Therefore the airlines industry is deemed to be an adequate proxy for the analysis.
In an attempt to analyze the external factors in order to evaluate how and to which extent companies should assess these external factors the SLEPT method will be used, i.e. an investigation of the Social, Legal, Economic, Political, and Technological influences on a business. Furthermore the reactive and anticipatory approaches will be discussed to evaluate which is more useful. In this report the following airlines will be used to explain the theory supplied: United Airlines and Virgin Atlantic. These were chosen, because of the differences in size and ways of operating.
By Rink Sikkes
Social factors consist mainly out of cultural factors and social trends, namely health consciousness or consumer lifestyle. They also consist out of demographic factors, for example age distribution and population growth.
Every culture has different wants and needs, so when a business just focusses on only one culture or group of people, other cultures might feel left out and they will be less attracted to the company its service or product. For this reason a business needs to modify its business strategy to a large variety of cultures. To achieve superior customer service Virgin Airlines has done research into cultural diversity and they offer their staff training in cultural awareness. This way they are able to identify every cultural nuance affecting customer satisfaction. This suggests that businesses have to put a substantial amount of effort into focusing on cultural diversity as they can increase customer satisfaction when they do that.
It is crucial that businesses make their customers feel save when they use their products or services. Businesses can lay emphasis on their safety in order to attract more customers. When businesses are struggling to guarantee safety they attract fewer customers; the 9/11 attacks had a sizable impact on Virgin airlines and United Airlines, as the public was frightened to travel by airplane as there was a serious terrorism threat. Especially US domestic flight revenue decreased enormously right after these attacks, but when the threat decreased the revenues increased again. This shows that security has a significant effect on business economics.
When a lifestyle of a substantial amount of consumers shifts into a new phase, a company might suffer a severe drop or a sudden surge in market share depending on how the company focusses its product or service. For instance; Virgin Airlines offers the option to hire an extra seat for extra personal space. This is a great opportunity for couples who want some privacy during a flight, or families who demand extra space for their children. There are also certain shifts that cannot be influenced, but have a large influence on business-economics, For example the increased popularity of traveling abroad has been very beneficial for British Airways and Virgin Airlines, but they have not had any influence on this sudden shift in lifestyle, so lifestyles of consumers have a large impact on business economics
A business can focus its services and products on people that have a certain amount of health consciousness, but it can also alter its products so they are attractive for any customer regardless of their health consciousness. For example; Virgin airlines and British airways have to account for obese customers that might take more room and more fuel. To remain profitable, they are obliged to either induce a so called fat tax, where customers have to pay more when their weight is above a certain level, or sell the customer a second seat because they do not fit in a single seat.
As we have demonstrated, every single one of these factors has a major of impact on business-economics. They are also essential for the success of businesses since the lives of customers revolve around these factors. A business should adapt its strategy proactively to these factors in order to increase its profit and market share.
By Catello Alvino
Political and Legal factors
Political and legal factors (which are closely related to each other) heavily affect businesses, profoundly influencing their modus operandi. When new laws and regulations are approved, companies and corporations are forced to change their business strategies, sometimes with considerable effects, sometimes with almost any consequence. In the following paragraphs, some example of laws and regulations affecting businesses are being analyzed.
Tax policies can seriously change the amount of profits that a firm is able to make. It is well known that each country applies a different tax policy, thus offering endless possibilities for a firm to choose its headquarters location, considering the pros and cons of each single situation. Firms having strong relationships with their national government, might be able to get tax exemptions and improve their competitiveness towards their international rival; In fact, in the Russian Federation, in 1997, the flag carrier Aeroflot enjoyed a tax exemption by their government on the purchase of four Boeing aircrafts. This for sure reduced the operating costs for Aeroflot and increased their competitiveness towards the other Eurasian companies who may not have enjoyed the same privilege. Another example of tax policies affecting the businesses is the tax increase on the airlines industry that occurred through the years, especially in the US. It is shown in table 1 that taxes have considerably gone up, thus increasing the ticket price and losing some customers who cannot afford a flight ticket to certain destinations anymore, often deciding to switch to train travel.
Trade Unions are a great achievement conquered by the working class in the last two centuries but a sometimes, unpredictable danger for companies. If not handled carefully, working class leaders, especially in western countries where concepts of democracy hold, can seriously damage a company performance. Companies need to engage into a stable relationship with them in order to avoid sudden stoppages of their services, which can lead to serious profit losses. For example in 1985, United Airlines experienced a 29 days long strike which resulted in huge losses in revenues. The company negotiators were able to restore the firm normal functioning only after multiple discussions and trade-offs with the workers’ representatives. This of course could have been avoided with a proactive behaviour, making sure that working conditions were optimal, or moving the company to a country where trade unions are easier to manipulate. Wars and changes in international relationships
For companies operating outside their national borders, good and stable relationships between countries are crucial. A war or a diplomatic misunderstanding can turn into a forced exit from some markets or in a loss of revenue. Before deciding to operate in a certain foreign country, a firm should deeply analyze the on-going relationship with its government. Moreover, once they decide to be in business with this hypothetical country, they should be ready to react to any possible event modifying the national political situation. This can turn extremely necessary for companies operating in unstable countries like Southern American, or Eastern European countries. For example, with the recent outbreak of a serious protest in Venezuela, potential airlines passengers may think twice before deciding to travel there. This change in public opinion has for sure reduced the revenue of many companies, including United Airlines, which provides flights from the US to the capital city, Caracas.
By Sybren Dijkstra
The economic factors constitute a highly important phase of strategy development for business economics, since economic factors have direct impact on the potential attractiveness of various business ventures. It is highly likely that the economic factor will have a substantial effect on business economics, however it is very hard to take all the variables into account. A direct reactive approach is considered wise when it comes to the economy. Multiple variables, which cover a large part of the economy will be discussed in this section in order to test the hypothesis: personal wealth, competition and governments.
The effects of changes in personal wealth can have a substantial effect on business economics globally. Personal wealth is a combination of multiple variables, such as GDP per capita growth,interest rates, inflation rate, unemployment rates, fiscal policy, and monetary policy. Personal wealth can therefore be used as a proxy for the economy. For example, when the interest rates rise people are more likely to safe their money and that affects to which extent people are willing to consume. When comparing the amount of passengers carried (figure 1) and the world GDP per capita (figure 2) they seem to be correlated. The image is confirmed by the revenue stream in figure 3.The hypothesis that a decrease in personal wealth directly affects revenue, hence business economics
An equally important part of the economic assessment is identifying potential competitors and ascertaining strengths, weaknesses, opportunities, threats, and possible strategies. Knowing your competitors, remains to be one of the key factors to success. Weaknesses of competitors can signify external opportunities, while major competitive strengths can pose key external threats. The more competitive information is collected, the easier it becomes to outsmart the competition. Virgin Atlantic proved this point. It had a marketing budget less than a third of what British Airways had for marketing, due to focused advertising and outsmarting the competition Virgin Atlantic was able to publish a profit of 68 million pounds, while British Airways had to report a 401 pound operating loss in 2009.
Governments form the last, but equally, important part of the analysis, since they have the power to implement and alter economic policy. Governments create the legislation and frameworks in which businesses compete with one another. From time to time the government will change these rules and frameworks forcing businesses to change the way they operate. Business is thus keenly affected by government policy. The airline industry for example had to cope with higher landing charges as well as additional taxes imposed on the air—travelling public directly affecting the revenue and profit.
Combining these three factors in the economic assessment in the SLEPT analysis suggest a confirmation of the hypothesis stated at the beginning of this section. Personal wealth, used a proxy for state of the economy, might be directly affecting business economics. Competitors and governments are also capable of directly affecting business economics. This suggests that the economic factors require a pro-active attitude, since it’s crucial to stay ahead of competition and that this can only be done by staying up to date on the new policies and the state of the economy.
By Ewan Tauran
Technological factors affect business economics in a wide variety of ways. They play a strong role in the external environment of a firm and should be carefully assessed. Technological progress can reduce costs, improve quality and lead to innovation. These developments generally benefit both firms and consumers. However, the effects of technological progress can be very diverse. Failing to keep up with technological trends can cause serious economic damage. The assessment of technological factors is crucial for high-tech industries such as the airline industry.
The constant development of technology caters to the growing need of firms to meet issues of sustainability and safety. As mentioned earlier, there are increasingly strict legal rules regarding the materials that need to go into aircraft construction in order to make them safer and more resistant to fire hazards. The rules regarding emission and climate effects are also becoming increasingly strict. Due to technological progress, airline industries can adopt newly developed technologies and conform to these new laws and regulations. As mentioned before, airline industries also encounter another issue; that of increased safety needs and wants by consumers resulting from the terrorist attacks of 9/11.[ET1] In this specific case, adopting new air transportation security technology can help airline industries address these safety issues.
Though[ET2] it is the case that the airline industry employs technology extensively in its operations, they rely on aircraft producers such as Boeing and Airbus for their aircraft. With respect to aircraft technology, airline industries are limited to these aircraft producers. Therefore it is important for firms to take advantage of technological advancement in other elements of their operations. An example could be to employ more advanced technology in the front office of an airline industry. This can improve customer service which can result in an increase in ticket sales and consequently overall revenue. Another factor that should be taken into account by firms is technological advancement with respect to social media. Currently, social media is becoming increasingly important to firms all over the world as an effective marketing tool. Airline industries should realize this and adapt to the changing circumstances regarding this global trend.
Technological advancements do not always have positive effects on business economics. For example, technological progress with respect to communication and the exchange of information can have serious effects on the demand for air transportation. Technological innovations such as videoconferencing limits the need for face-to-face meetings in business, consequently making the need for air travel obsolete. Individuals who live far apart geographically no longer have to visit each other physically when the opportunity to communicate digitally presents itself as a decent low-cost alternative.
Due to the rapid development of technology, firms should stay focused and adapt quickly in order to survive in an increasingly competitive economic climate. At the moment, technology progresses so fast that it is becoming increasingly hard for firms to promptly adapt. Firms who fail to adapt can miss out on all of the potential positive effects from technological advancement and as a consequence lose market share[ET3].
When taking all the SLEPT analysis factors into account, they seem to suggest that each and every factors should be taken into account and that each factor requires a pro-active approach. Firstly, the social part of the analysis demonstrates that each and every single one of these factors has a major of impact on business-economics. They are also essential for the success of businesses since the lives of customers revolve around these factors. A business should adapt its strategy proactively to these factors in order to increase its profit and market share. Secondly, the research done on political and legal factors also suggests that these factors require a pro-active attitude towards these factors. Thirdly, the economic analysis suggests that the economic factors require a pro-active attitude, since it’s crucial to stay ahead of competition and that this can only be done by staying up to date on the new policies and the state of the economy. And lastly the technological part of the analysis suggests that due to the rapid development of technology, firms should stay focused and adapt quickly in order to survive in an increasingly competitive economic climate. At the moment, technology progresses so fast that it is becoming increasingly hard for firms to promptly adapt. Firms who fail to adapt can miss out on all of the potential positive effects from technological advancement and as a consequence lose market share[ET4].
However the research for this report does not cover all industries, just the airline industry was used as an example, also the cost of keeping up with all these factors would be astronomical. To come up with a more definitive conclusion more research is required.
IATA. (2014).FACT SHEET: Industry Statistics .Available: http://www.iata.org/pressroom/facts_figures/fact_sheets/Documents/industry-facts.pdf. Last accessed 30 April 2014.
Indexmundi. (2011).GDP – per capita (PPP) (US$).Available: http://www.indexmundi.com/g/g.aspx?v=67&c=xx&l=en. Last accessed 30 April 2014.
[ET1]I need to change this sentence.
[ET2]Paragraph is missing a proper topic sentence
[ET3]Conclusion needs more body
[ET4]Conclusion needs more body
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