The assess the external impacts faced by an

The aim of this essay is to critically assess the external
impacts faced by an organization in a business environment, using the
theoretical frame work PEST.  This
framework is described as a ‘… logical
and comprehensive picture of a business’s environment’ (Brooks et al, 2011:5),
which will draw upon the political, economic, social and technological factors
that are somewhat affecting firms. For businesses to compete, companies are required
to take into account these factors so that they can adapt, and cater to these
changes. This will enable firms to remain competitive and stay current within the
changing environment. The business that will be the main focus of this essay
will be Tesco, and will be limited to external factors within the UK that could
potentially affect the firm.

There are a number of political factors within the UK that Tesco
are obliged to comply to. The business is currently facing a 19% Corporation
tax, which has seen a slight decline from 20% in 2016.  (Gov, 2017) This reduction in taxation may
benefit Tesco, as it will increase the firm’s available capital for investment,
such as the expansion of opening new stores and increasing employment levels.
(The Week, 2017). However, the decrease in taxation is only marginal and may still
be considered as high, which has the potential to affect the firm’s business
model. For example, over the next three years Tesco are considering cutting
store staff, due to the firms raising expenses (Butler, 2016). This may be due
to the high corporation tax that is taking up a high percentage of the firm’s
profits, and forcing them to reduce employee numbers.

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Moreover, the interest rate figure in the UK saw a rise from
0.25% to 0.5% (Bank of England, 2017), which has risen for the first time since
2009 (Bank of England, 2017). Although this figure is still considered as low, it
may have caused an increase in interest costs for Tesco from £(490)m in 2016,
to £(523)m in 2017 (Tesco PLC, 2017-a). In the long term, this rise may impact
the business when wanting to open more stores, or the refurbishment of current
stores due to an increase in the cost of borrowing.

The UK is a liberal democracy with a capitalist economy that
allows citizens to vote (Garnett, 2015). The 2016 EU referendum meant that the
UK may no long be a part of Europe in March 2019 (Hunt and Wheeler, 2018). This
result of ‘Leave’, was one of the causes of the depreciation of the UK pound,
which was concerning for Tesco when trading with suppliers (Mortimer, 2016).
The firm currently trades with the supplier ‘Unilever’ that is based in the
Netherlands, which after the referendum the firm had to raise their prices due
to the deprecating pound. Tesco were unwilling to pay the suppliers prices or increase
their own, due to the risk of losing customers (Mortimer, 2016). This raises
the issue that Tesco could be short of stock, or may have to trade with cheaper
brands. Consumers in response to this may purchase goods elsewhere which could
make the firm uncompetitive within the market. However, there are competing
views of Brexit having a negative effect on Tesco. For instance, Coupe (2017)
stated “If we see customers’ incomes
being squeezed — and are beginning to see a slowdown in disposable income
growth — supermarkets tend to do better, because people stop eating out and
start eating in,” (Colson, 2017:online). From this, Tesco may instead see
a growth in sales due to an increase in the amount of food purchases consumers
will be making.

 In addition to this,
Tesco has to take into account the cost of employing individuals and employment
laws such as the Minimum Wage Act. The minimum wage rate rose in October 2016
to £7.50 an hour for those 25 and over, and to £7.05 for employees aged 21-24
(Gov, 2017). This rise may have had a knock on effect with the firms employee
pay, which increased from £6,897m in 2016 to £7,362m in 2017 (Tesco PLC, 2017-a),
increasing the firm’s expenses. This could have an impact on the number of staff
Tesco employ in the future, or may force them to reduce employment levels.

With regards to the economic environment, Tesco need to
weigh up the economic impacts that may affect the firm’s performance. The UK
has one of the largest economies (BBC, 2017) that has undergone a number of
changes, which has had a huge effect on businesses (John and Elizabeth, 2011). It
is important for Tesco to be aware of the economic environment they operate in,
as the firm operates in a highly competitive, oligopoly market (Ellickson, 2012).
 

One economic impact, is that the current inflation rate for
the UK is 3.1% (Bank of England, 2017), which is the highest the figure has
been since 2012 (Elliot, 2017). Consequently, this rise has affected Tesco in
trying to maintain low prices with suppliers, where the firm was running low on
stock from a number of Unilever brands, as a result of Tesco not agreeing with
suppliers prices (Mortimer, 2016). This ultimately will impact the firm’s
performance, due to the concern of having to trade with less established brands,
and being short of stock. Not only will the business be affected, but consumers
may experience the effect of this rise. Poorer families in the UK will experience
a rise in food prices of 2.7% (Gavin Jackson, 2017) which could affect the
purchasing patterns of consumers and the profit made by Tesco. This may steer
consumers to low cost competitors such as Aldi or Lidl.

Another key factor, is the UK currently has a GDP figure of
£490,704m (Office of National Statistics), which has grown by 1.7% in the last
twelve months (Chu, 2017). The GDP acts as a macro economic indicator of the
performance of businesses and an overall image of the UK economy (Houston, 2017)
This high GDP that the UK currently holds, may have created confidence for
Tesco in planning to open more Arcadia fashion concessions by the end of 2017 (Butler,2016).
This could increase the firm’s employment and profit levels.  

Furthermore, Tesco need to monitor unemployment levels
within the UK. The unemployment rate is expected to rise in 2018 and 2019 (BBC,
2017), which may cause a drop in household income figures.  For Tesco, this could create uncertainty in
terms of future profits, as individuals’ disposable incomes may reduce. This
highlights the concern that consumers may begin to shop at cheaper, alternative
supermarkets such as Lidl or Aldi due to their reduced incomes. Therefore to
prevent this risk, Tesco may have to decrease their prices to maintain customers.
 

In terms of the social aspect, the UK is described as having
‘…a growing and ageing population, with a
particular racial and ethnic structure and pattern of inequality’ (Weatherly
and Otter, 2014:144). The diversity in ages within the UK may possess a number
of problems for Tesco, such as the pension crisis and the care for elderly
(Weatherly and Otter, 2014:150) which may require the firm to alter themselves,
to cater to these changes. The business also needs to take into account the
effect of immigration, which may be beneficial for when seeking more workers,
due to immigrants mainly being young.

One important factor, is that the retirement age in the UK
has seen a steady rise to 64.6 for men and 62.3 for women (Roper, 2017). Tesco
are expected to cater to the age diversity of the workforce that is developing
in the UK, by altering their HR policies, due to the risk of conflict arising
from the different wants and needs from employees. For instance, individuals in
the work force aged 50 or over, have at least one long term health condition,
which some jobs could worsen from aspects such as long working hours
(Government Office for Science, 2017). In 2008, the number of workers Tesco
employed who were over the age of 50 was 1 in 5 (Crush, 2008). This may put pressure
on Tesco to adapt the firms HR policies, to reduce the risk of conflict occurring
between workers. However there are benefits associated with an ageing
population for Tesco. Older employees may be able to provide knowledge for the
firm due to their years of experience within the work place, where younger
employees may benefit from working alongside older colleagues (Andalo, 2013). 

Another important factor is immigration, in which the UK is
said to have created a multicultural or cosmopolitan society (Weatherly and Otter,
2014). This stemmed from the Second World War, where individuals from the
Caribbean and India began to migrate in the 1950s and 1960s (Weatherly and
Otter, 2011). Primarily, this diversity of the population will have an impact
on the goods provided by Tesco, in terms of the businesses perishable goods,
household department and clothing sector. The company may have to adapt their
products and services to the different tastes acquired by different
ethnicities, to meet a wider target market. Immigration may benefit Tesco when
seeking more employment. Immigrants contribute significantly to the labour
supply, where in 2011 there were 2,576,056 non EEA (European Economic Area)
citizens working in the UK (Dustman, 2014). These individuals tend to be of a low
skill, which makes employment attractive for Tesco. However, it could be argued
that the business may not benefit from immigration. After the 2016 EU
referendum, 122,000 Europeans left the UK (Dearden, 2017), which could put Tesco
at risk of losing employees rather than gaining more. 

The Technological environment has transformed the way in
which markets are now functioning in the UK (Grant, 2010), through the
development of apps and online purchasing, that Tesco have ventured out into (Tesco,
2017-a). This element of the PEST framework has provided Tesco with a
competitive advantage, in which the firm has been described as ‘the number one in the retail sector by being
a proactive and innovative organisation’ (ICL (2000) cited in Yoruk and Radosevic,
2000:13). This impact maybe considered as essential, due to it enabling the
firm to innovate original inventions, into more profitable products and
services.

Changes within the market include changes in the way that consumers
now purchase goods. Online grocery shopping grew by 15% in 2016, whilst retail
supermarket shopping growth was significantly lower at 1.5% (Mintel, 2017-b).
The shift in purchasing patterns has led to an increase in the amount of
competitors branching out their products availability to online, which
highlights the importance of Tesco remaining current, due to the
competitiveness of the market. Tesco have benefited from this technological change,
where the firm experienced an increase in revenue by 6% in 2016, taking profit
figures to £3.8 billion from online services (Mintel, 2017-a). This enables the
firm to gain more capital for potential investments in the future, such as
expansion.

Furthermore, technology has also enabled Tesco to monitor consumer
purchases through the firms club card service (Tesco, 2017-b). Consumers from
this, will receive rewards such as discounts on frequently purchased goods.
This may be key in incentivising and building relationships with consumers, to
increase their loyalty in buying goods from Tesco, which could lead to higher
to profits. As well as this, it may provide Tesco with a competitive advantage
by enabling the business to track consumers purchasing habits to ensure these
goods are always in stock, which again may result in a growth of profit. However
there is a contrasting view as to whether individuals are still using this
service as often. The number of consumers who are using the club card
frequently, has fallen due to the rewards being far from often (Christie, 2013).
This may prevent Tesco knowing enough about consumer’s tastes.

Not only has technology allowed Tesco to improve their purchasing
methods, but the firms marketing strategies to. Tesco have branched out their
advertisements strategies to social media sites such as Facebook and Twitter to
keep individuals up to date with the latest offers (Tesco PLC, 2017-b). This
method could build the businesses brand awareness, which may lead to a growth
in sales. It also may act as an effective method of communication for the
business to respond to consumer’s queries, giving Tesco a good reputation of
responding to problems quickly.

To conclude, Tesco is faced with a number of challenging
external impacts that may affect the firm’s performance. With regards to the current
political event of the EU referendum, the UK has been hit with a depreciating
pound, which as a result may cause them to lose suppliers. This ties in with
the Economic impact of the rising inflation rate, where one of its causes was the
depreciation of the UK pound, and had a knock on effect with the firm’s
suppliers raising their prices. In terms of the ageing population, this could
be a concern for Tesco in having to alter their policies, however they do contribute
a large amount of knowledge and skills to the workforce, and have years of experience
of working within a business. The technological environment has clearly had a
huge effect on Tesco. The firm have been able to take advantage of this
opportunity to innovate their products or processes, in which it has enabled
Tesco to see an increase in profits.