TOPIC: THE ENTERPRISING ENVIRONMENT

SUBTOPIC: BUSINESS CONSTRAINTS

OBJECTIVES
By the end of this subtopic learners should be able to:
 Define business constraints.
 Identify business constraints.
 Explain the business constraints.

Business constraints
 It is any restriction that limits or interferes with the success of an
enterprise.
 Business constraints holds back a business’s ability to achieve its
objectives.
 These are factors which a business has no control over and which need to
be understood by every organisation.
 These factors can be called external factors or influences.
 For a business to be successful it need to identify external factors within
their environment that could impact on their operations.

Business constraints in an environment

 A business does not operate in a vacuum.
 Business activities are constrained by the environment which it operates
in.
 A popular tool used to identify business constraints is the PESTLE
Analysis.
 It is an acronym for Political, Economic, Social, Technological, Legal,
Environmental
PESTLE Analysis
 It is a tool that is used to identify, analyse and monitor the macro-
environment factors in which an enterprise is operating and the
opportunities and threats that lie within the environment.
 It is a framework that analyse the key drivers of change that have an
impact on an organisation.
 It is a macro environmental framework used to scan and understand the
impact of the external factors of the organisation.
 It is a tool used by an enterprise to track the environment they are
operating in or when planning to launch a new product or service.

Political factors
 These are factors which determine the extent to which a government
policy impact the business.
 It consists of law, government agencies and pressure groups that
influence business operations.
 A government can change its rules and regulations (legislation), which
impacts the relationship between the firm and its customers, suppliers
and other organisations.
 The political environment (political condition whether stability or
instability) has a great impact on business organisations.
 For instance, wars could add risks which leads to business loss.
 Political factors which affect a business are:

Tax policy
 It affects the price of goods through Value Added Tax (VAT).
 A government can impose a new tax or duty which will affect the
generating structures of an organisation.

Shifts in interest rates

 It can affect a business positively or negatively.

Political instability
 It is a situation whereby there are forms of violence within a country.
 This can lead to business malfunctioning.

Economic factors
 Business activities are affected by consumer disposable income and other
financial resources.
 Economic factors affecting business activities include interest rates,
inflation, recession, demand and supply etc.

Demand and supply

 Demand is the willingness of consumers to purchase a commodity at a
given price at a given time and supply is the quantity of commodity
provided at a given price at a given time.
Consumer income
 Income refers to money earned or received through investing or working.
 This affect the purchasing power of consumers, spending patterns and
also determines the rate of demand.
Economic growth and development
 Economic growth refers to an increase in output of a country at a given
time.
 An enterprise must cater for the demands of the economy which brings
economic development.
Interest rates
 Interest rates reduces business revenue or income.

Inflation
 Increase business expenses, for example, cost of materials used in
production, rent and utilities.
 Inflation also reduces consumer purchasing power.

Exchange rates
 Exchange rate affect exportation and importation of products within a
country.

Recession
 It refers to a period where there is a temporal decline in the economy
which results in reduced activities.
 During this period, business make great loss in sales and profits.

Money and banking

 The banking policy affect prices of goods, interest rates along with
investments.
 Money in circulation determines the purchasing power of the consumers.

Trade control
 This is whereby quality and quantity of products are regulated within an
economy through legislative measures.
Social factors
 They are also known as socio-cultural factors.
 There is no doubt that the society is changing each day and businesses
should meet demands of the society.
 The socio-cultural factors that relate to society are attitudes, beliefs,
opinions, behaviours, interests that directly affect how a business
operates.
 Demographic factors such as level of education, population, lifestyle and
social classes may be included in the socio-cultural factors. .
 These include:

Population growth
 The population structure of a country has an impact on business
operations.
 Population growth affects demand and supply for certain products.

Lifestyles
 A business should aim to offer products which benefit different people’s
lifestyle.
 Multiple lifestyles increase the complexity of consumers’ buying habits.
 Customers choose goods and services that meet their diverse needs and
interests.

Education level
 Poor education system limits innovation and productivity.

Values
 Values are a key determinant of what a person want or do not want.
 Values affect demand for goods and services.
Technological factors
 Technology refers to how the rapid pace of change in new inventions and
development.
 Technology is continuously advancing and the advancement has a great
impact on business activity.
 These factors affect the operations of the businesses in a favourable or
unfavourable way.
 Technological factors that affect businesses are:

Internet connectivity

 Nowadays businesses are using internet to connect with their customers,

suppliers and distributors.
 An example of use of wireless devices enhance business communication.
 An organisation which is still using traditional communication methods
might find it difficult to embrace technology.

Cloud computing

 This is when businesses store documents on virtual devices or computers

which can be accessed by co-workers.
 Documents can be corrupted by viruses and bad network connection.
 Some customers are illiterate and not able to access information on the
internet.

Automation

 Machines have replaced human power (employees).

 Products are produced using computerised machines which therefore
require highly skilled personnel to use such kind of machines.
 Businesses must stay connected all the time so that production is not
interrupted.
Legal factors

 These are factors which relate to how the legislation affect the way
businesses operate and customers behave.
 Businesses need to know legal and illegal factors for them to run
smoothly.
 These factors include consumer law, employment law, trade policies,
health and safety, tax etc.

Consumer laws

 These are government regulations that protect the rights of consumers.

 These are laws which are designed to prevent businesses from unfair
practices towards consumers.
 Businesses can be affected where there are private watchdog companies
who will be watching out for detailed information about their products.

Employment law/labour law

 It governs the employer-employee relationship.

 It is aimed at protecting the health, safety and rights of employees.
 It is essential for businesses to comply with labour laws to avoid lawsuits.

Competition law

 It aims to ensure fair competition takes place in an industry.

 Businesses require several patents and copyrights to ensure competitors
do not copy their products.

Tax

 Government can increase or reduce taxes to promote economic growth.

 Increase in tax affects business operations negatively as it reduces
consumer spending.

Trade policies

 Trade policies allow business to grow or fail.

 If government restrict free trade, operating a business becomes difficult.
Environmental factors

 These are external factors which are determined by the surrounding

environment (location).
 It refers to the physical environment which comprises of the available
resources that can hinder business production.
 The environment affects enterprises especially on products that vary with
season and climate.
 The factors include geographical location, weather, climate, resources etc.

Climate

 Climate variations may affect negatively production of certain products.

Location

 Location hinders successes of a business.

 It is expensive to build distribution channels for companies whose target
markets are geographically dispersed.
 In hilly areas it is difficult and expensive to bring products to the
customers.

Resources

 Availability of non-renewable resources such as oil or natural gas.

 If the supply for these resources decreases its price increases and this
has a great impact to a business that use these fuels.