External Business Environment Analysis - Example

Business Environment Contents Market Structure and its Price-Output Decisions 3 Market Forces Shaping Organizational Responses 8 External Business Environment Analysis 17 International Trade in United Kingdom 19 European Union Policies 21 Reference List 23 Market Structure and its Price-Output Decisions Market structure is a common jargon used to explain the different characteristic features of a market. Decisions regarding resource allocation, pricing and production related activities of a firm significantly depend on the market structure. Table 1: Characteristic Features of Different Market Structures Type of Market Structure Number of Buyers Number if Sellers Market Share Entry Barriers Nature of Competition Type of Product Advertisement Expenditure Nature of Profit Pricing Perfect Competition Infinite Infinite Negligible Null High Competition Undifferentiated and homogeneous Null Revenue Maximization Price Taker Monopoly Infinite One Owns complete share High barriers No Competition Heterogeneous or Homogeneous Null Profit Maximization Price Maker Oligopoly Infinite Finite (3 to 8) Partial but Big High barriers Cut Throat Competition or collusion Close Substitutes High Profit Maximization Price Maker Duopoly Infinite Two Partial and Big High barriers Stiff Competition or Collusion Close Substitutes High Profit Maximization Price Maker Monopolistic Infinite Finite Partial High Barriers High Competition Differentiated Products High Profit Maximization Price Marker Monopsony One Infinite Negligible Null High Competition Homogeneous Homogeneous Revenue Maximization Price Taker Figure 1: Market Price and Output Decision Perfect Competition (Source: Arnold, 2013) The above graph shows the market equilibrium for perfectly competitive market structure. The portion of the marginal cost curve (MC), which lies above average variable cost curve, is the supply curve for a perfectly competitive business firm. As shown in the above figure, the equilibrium price for a business firm within this industry is p1 and the market clearing level of quantity is q1. Each firm within the industry earns normal profit (total revenue = total cost) and is a revenue maximizer (Arnold, 2013). Figure 2: Market Price and Output Decision Monopoly (Source: Arnold, 2013) The above graph indicates that at market equilibrium, a monopolist might either earn profit or loss. If price is greater than average total cost (ATC) of the firm, then it earns profits. On the other hand, if price is less than ATC, then the firm incurs loss. This is because: Price or Average Revenue = Average Cost (Normal Profit) Price or Average Revenue > Average Cost =>Total Revenue > Total Cost (Profit) Price or Average Revenue < Average Cost =>Total Revenue < Total Cost (Loss) In the above graph, p1 and q1 are the equilibrium price and quantity of output. A monopolist creates several barriers of market entry and hence, sustains his unique position. A monopolist often manipulates decisions of the government and is less regulated by them. For instance, a giant pharmaceutical firm such as, GlaxoSmithKline, is a monopolist in the market because it manufactures rare patented drugs and medicines. The company often bribes government authorities of different countries through campaign funding processes and in turn manipulates their decisions in their favour (Arnold, 2013). Figure 3: Market Price and Output Decision Monopolistic Competition As shown in the above graph, the price and output decision at the market equilibrium for a monopolistic firm is almost similar to that of a monopoly organization. The only difference lies in the slope of the average revenue (D) and marginal revenue (MR) curve. The AR and MR curve in a monopolistically competitive market is more elastic in nature than that of a monopoly market structure. These firms earn supernormal profit on the basis of their competitive advantages. Higher advantages can be enjoyed by producing more differentiated and heterogeneous products. Even so, these firms are regulated by the government policies. Figure 4: Kinked Demand Curve for an Oligopolistic Firm (Source: Tucker, 2012) As shown in the above graph, an oligopolistic firm experiences a kinked demand curve. This is because the firm operates on the basis of strategic behaviour and cut-throat competition. Figure 5: Cartel Price and Output Decision for an Oligopolistic Market (Source: Tucker, 2012) The above figure shows the price output and profit making conditions for an oligopolistic market structure, provided that firms conduct business under cartel. Figure 6: Market Price and Output Decision under Duopoly (Source: Arnold, 2013) The above figure shows the equilibrium price and output levels at the market equilibrium for an oligopolistic market structure. The prices of the two firms are P1 and P2 and its output levels are Q and N. Market Forces Shaping Organizational Responses A contemporary business organization modifies its pricing, output and profit making decisions according to changes in the external business environmental forces. Demand Quantity demanded for the products or services of a firm substantially depends on the price level. According to the law of demand, given the ceteris paribus assumption, quantity demanded and price for a product or service is inversely related. Consequently, if an organization desires to enhance the market demand for its product or service, then it can simply lower the price level in the market and vice versa. However, in the long run, price value of a product is positively related to its level of scarcity in the market. Price worth of free goods such as, air and fire, is zero (Boyle, 2007). For example Apple Inc. is deciding to lower the prices of its products for enhancing its demand in the market (Apple, 2013). Figure 7: Demand Curve Price Demand Curve Quantity (Source: Author’s Creation) Elasticity of Demand The organizations make their pricing and output decisions as per the elasticity of demand faced by its products or services in the market. If a company’s product experiences elastic demand, then it’s pricing values and output thresholds in the market do not fluctuate easily. On the other hand, if a commodity or a service faces inelastic demand, then the organization brings about changes in pricing and output decisions (Arnold, 2013). This is because quantity demanded does not significantly change, if a product’s price (experiencing inelastic demand) rises and vice versa. For instance, the medicine and drug producing companies, such as GlaxiSmithKline can easily increase the prices of its products. Since, the demand for medicines is inelastic in nature, as rise in the price does not lower its quantity demanded. On the other hand, Coca Cola does not substantially enhance its product prices because a slight rise in price can considerably lower its market demand. Figure 8: Relative Elastic and Inelastic Demand Curve Price Price Elastic Demand Inelastic Demand Quantity Quantity (Source: Author’s Creation) Supply According to the law of supply, given the ceteris paribus assumption, quantity of supply for a product or service offered by an organization is positively related to its price level (Arnold, 2013). If the price level of a product is high, then the organization increases its supply in the market for earning higher profit margins and vice versa. The firms often practice the method of hoarding and artificially lower the supply of a particular product for enhancing its market price level. Figure 9: Supply Curve Price Supply Curve Quantity (Source: Author’s creation) For instance, the price of gold and silver is increasing in the global market as its demand is soaring over time. Elasticity of Supply The supply elasticity value for a particular product or service produced by a firm depends on time period of supply. In the long run, when both fixed and variable factors can be changed, the product faces relatively elastic supply (Arnold, 2013). Even so, it should be noted that price of a product is inversely related to its supply elasticity value. This implies that products with less elastic supply experience higher prices than ones experiencing elastic supply. For instance, a fisherman cannot increase supply of its product in the short run but it can be enhanced in the long run. Competition Increased competition forces firms to enhance the core competencies in business. Firms facing high threats of market rivalry lower product prices or improve quality of products for attracting more buyers. It should be noted that increased competition in a particular industry increases bargaining power of the suppliers and consumers within the market. Increased investments in research and development purposes accompanied with higher advertisement expenses are commonly practiced by organizations to lead within a competitive industry. Customers Perceptions and Actions If the customers expect that price level for a product manufactured by a company would increase in future, then they generate higher demand for it at a given point of time and price level. On the contrary, if buyers believe that the products manufactured by a company would experience higher price in long run, then they create greater demand before the price hike. Moreover, consumers, as stated in Veblen effect theory, often judge quality of a product in terms of its price value (Arnold, 2013). In case of conspicuous consumption situations, the buyers demand for products or services rises with that in their price level. Such products are primarily consumed by rich buyers, who make purchases to display status in the market. Long and Short Run Costs Short run production costs of the firms are primarily higher than the long run costs. Short run refers to a period of time when only the variable resources such as, labour and raw materials, can be changed. On the other hand, in long run, all factor services such as, machines, raw materials, land and labour, can be altered. In long run, firms experience scale economies in production, when the change in output is observed with respect to same in the scale of production (all factors are changed simultaneously in equal proportion). While in short run, production costs of firms are subjected to the law of variable proportions (Arnold, 2013). This law states that given the fixed factor, if a variable factor of a firm is increased by units, then total cost initially increases at a decreasing rate and finally starts to rise at an increasing rate with every unit rise in total output. Figure 10: Short Run Costs (Source: Author’s Creation) Figure 10: Long Run Economies of Scale (Source: Author’s Creation) (Source: Dwivedi, 2010) Technology Improvement in the state of technology helps organizations allocate productive resources more efficiently. This helps to lower manufacturing cost and enhance profit margins. This is the reason for which the production possibility frontier for a firm shifts upward with the essence of improved technological status (Arnold, 2013). Figure 11: PPC Curve Shift due to Improvement in Technology (Source: BYU, 2001) Firms not only react to the changes in forces of the external business environment; but, in reality, also affect the external market through specific responses. Market Research The firms make their product, price, place and promotion related business decisions after performing adequate market research. Appropriate information regarding a company’s market competitors, political, economic, social, technological and environmental situation can be gathered only through adequate market research. For instance, companies like Coca Cola expand its business across international markets through adequate market research. Segmentation Through the process of market segmentation, a firm targets the most potential customers for products or services manufactured. The marketing mix, positioning and pricing strategies of firms are formulated according to each customer segment. Segmentation can be demographic, geographic or psychographic in nature. In case of demographic market segmentation, the firms target potential buyers based on demographic features such as, income, gender and age (Arnold, 2013). Marketing Mix The marketing mix strategies guide entire value chain process of an organization. It can be explained primarily through the 4 P model. Product Through this strategy, the firm undertakes decisions regarding its product. Price After making product related decisions, organizations frame their product pricing strategies. Place The distributional strategies are established by organizations only after determining prices of the products. Promotion The promotional strategies are implemented by firms for enhancing sales and improving brand recognition. Discounts and advertisements are types of promotional strategies. For instance Apple Inc. frames its market mix strategies through 4 P analysis model. Product The company produces differentiated products such as iMac, iPhone and iPad (Apple, 2013). Price The firm implements premium pricing strategies in business Place The company expands its business across numerous markets through direct investments and franchising Promotion The firm commercializes its brand through television, social media and newspapers. Cost Leadership Strategy Through cost leadership strategy, an organization tries to lower operational cost compared to its potential competitors. Economy of scale, business expansion and technological improvements lower the costs of firms, thereby improving their profit margins (Cuadra, Sanchez and Sapriza, 2010). Resource Based Strategy Contemporary organizations try to conduct operations based on transaction cost economies and resource based view. Through this, the firm exploits its productive business resources in new international markets, after saturation of the domestic market. Differentiation Strategy By implementing differentiation strategy in business, firms try to separate its product, pricing, place and promotional decisions from that of its market competitors for gaining competitive advantages. Focus Strategy With the help of focus strategy, the firm introduces marketing mix strategies only on the basis of targeted consumers within the market. It is a type of business level strategy. Innovation and Development Product, process, promotional or organizational innovation is always extensively practiced for attaining competitive business advantage. Innovation helps to develop a company’s learning experience and ultimately facilitates enhanced brand value in the market (Checkland, 2013). Collaboration Firms primarily conducting business in an oligopolistic industry often collaborate to become a dominant business power therein. With higher dominance, firms are able to better their bargaining power within the industry. External Business Environment Analysis The following context of the paper will explain the PESTLE model analysis for the multinational company, Walt Disney. Political Being an international company, Walt Disney needs to abide by all political policies across diverse marketplaces. As scale and scope of industrialization is increasing across countries, cost as well as value of industrious land is rising. Political authorities of nations have forced heavy taxes and regulations on land trading. Companies like, Walt Disney, require large quantities of productive land for theme parks and as a result, have to incur heavy expenses related with land dealings. Economical After the international financial crisis in 2009, aggregate employment opportunities and per person income thresholds of individuals residing in developed economies have remarkably fallen. This has condensed the demand for entertainment services. Furthermore, aggregate expenditure on comfort services is growing in emerging countries with rising percentage of middle income consumers (Besanko and Braeutigam, 2010). Due to such factors, in North America and Western Europe, the company’s prosperity has radically declined (The Walt Disney Company, 2012). Nonetheless, its profitable revenue from Asian marketplaces such as, Hong Kong and Singapore, are on the rise. Cultural Over time, income and employability of individuals in different nations have greatly improved. The living standards of contemporary household consumers have bettered due to these reasons, which in turn are found to increase demand for Walt Disney’s entertainment services and products. Individuals nowadays are exceedingly brand conscious in nature and like to avail world class amusement services of Walt Disney. Technological With progress of industrialization worldwide, state of technology has enhanced. Presently, companies attempt to invent new technologies for enhancing market capability. International Association of Amusement Parks and Attractions (IAAPA) is an association that conducts special display events, where newly invented technologies used in amusement parks are presented (The Walt Disney Company, 2014). Walt Disney has effectively attained industrious technologies for the purpose of introducing unique rollercoaster rides and other services pertaining to audio and video entertainment. The special effects and interactive technology employed in theme parks of Walt Disney have gained popularity all over the globe. Legal The company needs to strictly follow legal regulations imposed by the judiciary authorities of different economies. Walt Disney requires paying different excise, valuing added and corporate tax rates in different economies. The company needs to simultaneously ensure that products and services offered do not breach safety standards of the consumers (The Walt Disney Company, 2011). The business of Walt Disney is subjected to be penalized legally, in case services provided appear to harm the environment or human beings. Environmental The theme park and entertainment business yields seasonal profits. Walt Disney’s annual revenue and surplus are subjected to seasonal volatilities. The company is often forced to close down amusement parks in winter and during poor weather conditions. Even so, during holidays or occasions such as, Christmas, the market demand for amusement park services of the company considerably rises (The Walt Disney Company, 2011). Nevertheless, as the company makes seasonal profit, it can reconstruct its parks and resorts during off seasons. International Trade in United Kingdom International Trade David Ricardo had stated that companies or countries should manufacture only those products over which they possess competitive advantage. International trade is the process that involves commercial exchange of services and goods between countries based on comparative advantage. Products and services that are sold by the U.K. are its exports and ones that it purchases are the imports. As a result, trade surplus of the country is the positive difference between exports and imports. International trade is important because it helps to make business environment competitive and in turn lowers the prices of most goods and services due to increased competition. Higher degree of market rivalry in the U.K., encouraged through foreign trade, helps to maximize net social welfare level of the country. Comparative and Absolute Theory Absolute Advantage Theory Comparative Advantage Theory A firm gains absolute advantage in business, when it is able to produce more of a particular commodity than its market competitors with same amount of resources. Adam Smith claimed that advantage can be gained through labour productivity. The absolute advantage theory of international trade claims that if a country has no absolute advantage, then it will not be able to participate in international trade. A firm or party is considered to gain comparative advantage compared to market rivals, if it can produce a particular product or service with a lower opportunity and marginal cost. Under this regime, two countries with notably different production efficiency levels would continue to trade; provided they acquire differential relative efficiency levels. U.K. International Trade Requirement and Benefit There are several benefits of international trade in the U.K. International trade was indispensible in the U.K. after emergence of the Industrial Revolution. During this period of time, capitalist business firms of the country required raw materials from agricultural economies such as, India and China, in order to meet requirements of its mechanical manufacturing (Bunse, et al., 2011). International trade has carved new trading opportunities for native companies of the U.K. The giant U.K. firms are able to expand scope of their business internationalization process in new markets through foreign trade. Several companies from diverse economies have entered and established in the economy of U.K., which has helped to improve aggregate employability of the country. Individuals of the U.K. are able to make their consumption choices from a large variety of goods and services with the essence of foreign trade. This is because both domestic and foreign companies are presently found to operate in the U.K. and jointly manufacture wide-ranging products. Foreign trade has effectively rendered the U.K. market more competitive in nature, thereby enhancing social welfare level. With the essence of international trade, companies operating in the U.K. can acquire labour resources at lower costs from developing economies with lower currency values. International trade has also helped to increase revenue of the government of the U.K. Foreign trade has facilitated a rise in per capita income thresholds and living standards of natives in the U.K. European Union Policies Type of Policy Policy Implication Positive Impact Negative Impact Welfare The European Union (EU) implements special social policies whereby social welfare level of member states can be maximized (European Commission, 2012). This policies helps to enhance education, health, employment and nutritional status for countries within the EU such as, the U.K. Countries such as, Greece and Italy, reflect weaker welfare status than other nations as, Germany and the U.K. Social policy of the EU is very expensive and often crowds out private investments. In recessionary situations, the EU faces difficulty in obtaining adequate financial reserves to invest in welfare maximizing processes. Employment The EU employment policy aims to increase employment opportunities in member countries of the EU (European Commission, 2005). Higher employments generated in the countries through this policy helps to improve per capita income levels and living standards of the individuals in the EU countries. Extensive immigration of skilled and semi-skilled labour force from foreign countries in the U.K. lowers its domestic employability capacity, thereby further weakening the EU employment policies (Watt, 2014). Reference List Arnold, R. A., 2013. Microeconomics. Connecticut: Cengage Learning. Apple, 2013. Apple Legal. [online] Available at: [Accessed 30 June 2014]. Besanko, D. and Braeutigam, R., 2010. Microeconomics. New York City: John Wiley & Sons. Boyle, S., 2007. Impact of changes in organisational structure on selected key performance indicators for cultural organisations. International Journal of Cultural Policy, 13(3), pp.319–334. Bunse, K., Vodicka, M., Schönsleben, P., Brülhart, M. and Ernst, F. O., 2011. Integrating energy efficiency performance in production management–gap analysis between industrial needs and scientific literature. Journal of Cleaner Production, 19(6), pp. 667-679. BYU, 2001. The production process. [online] Available at: [Accessed 17 June 2014]. Checkland, P., 2013. Soft systems methodology. In Encyclopedia of Operations Research and Management Science, pp. 1430-1436. Cuadra, G., Sanchez, J. M. and Sapriza, H., 2010. Fiscal policy and default risk in emerging markets. Review of Economic Dynamics, 13(2), pp. 452-469. Dwivedi, D. N., 2010. Microeconomics. New Jersey: Pearson Education. European Commission, 2005. Directorate general for economic and financial affairs. [pdf] EC. Available at: > [Accessed 17 June 2014]. European Commission, 2012. The economic and monetary union and the euro. [pdf] EC. Available at: [Accessed 17 June 2014]. The Walt Disney Company, 2011. External stakeholder engagement. [online] Available at: [Accessed 17 June 2014]. The Walt Disney Company, 2012. The Walt Disney company reports fourth quarter and full year earnings for fiscal 2012. [online] Available at: [Accessed 17 June 2014]. The Walt Disney Company, 2014. Reports and financial information. [online] Available at: [Accessed 17 June 2014]. Tucker, I., 2012. Survey of economics. Connecticut: Cengage Learning. Watt, N., 2014. Eurozone countries should form United States of Europe, says EC vice-president. The guardian, 17 February. Read More