OxfordAQA A-Level Business: Analysing the external environment to assess opportunities and threats (9725)

Aligned to the OxfordAQA International AS and A-level Business (9725) specification, Version 1.1 (International AS exams from May/June 2027, International A-level exams from May/June 2028), this guide teaches section 3.3.4, Analysing the external environment to assess opportunities and threats. None of it is AS content: label it International A-level only. If your exams are on the older 9625 specification, follow that document, not this page.

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What this section covers

Spec area (3.3.4)	What you must be able to do	Stage
PESTLE analysis	Judge the value of PESTLE	International A-level only
Political and legal	Analyse how law and government policy affect strategy and functions, and responses	International A-level only
Economic	Analyse GDP, tax, exchange rates, inflation, unemployment and interest rates; calculate exchange rate and repayment effects; interpret a price index	International A-level only
Social, technological, environmental	Analyse population and workforce change, CSR, digital technology, AI and climate change	International A-level only

The specification lets you focus on your own country, but you must know that external environments differ between countries and that, in a global economy, a change in one country can affect businesses in another.

How it is examined. Unit 3: Business analysis tests section 3.3 through two case studies in one paper (80 marks in 1 hour 45 minutes, worth 30% of the International A-level). Each case study opens with a 4-mark calculation, according to the specification. AS section 3.1.1.3 (see the What is business? study guide) covered how incomes, interest rates and exchange rates affect demand and costs. Here the focus is strategy and the functional areas.

1. PESTLE analysis

PESTLE sorts external factors into Political, Economic, Social, Technological, Legal and Environmental, feeding the opportunities and threats of a SWOT analysis (see Mission, objective and SWOT analysis).

One change can be an opportunity for one firm and a threat for another: an ageing population gives Ivybrook Care, a care-home group, more customers, but shrinks the pool of young drivers Rushbank Couriers recruits from.

Value of PESTLE

• A structured scan of the outside world, so fewer changes are missed.
• Early warning, so the firm can adjust before rivals do.
• A sensible first step before entering a new country, where the factors may be very different.

Limitations: it is a snapshot that fast-moving factors soon date; it does not rank factors by likelihood or impact; categories overlap (an emissions law is legal and environmental); forecasting change is uncertain. Its value depends on how often it is updated and whether managers act on it.

2. The political and legal environment

You need to understand how law within a country affects business. Specific laws are not required.

Area of law	Typical effect on the business	Possible response
Competition	Limits price-fixing, abuse of dominance, some mergers	Grow organically; compete on product
Consumer protection	Product safety, honest labelling and advertising, refunds	Tighter quality control; checked marketing
Labour market and employee rights	Minimum pay, hours, fair dismissal, non-discrimination	Raise productivity; review HR policies
Environmental issues	Limits on emissions, waste, land use	Cleaner processes; green positioning
Health and safety	Risk assessment, training, protective equipment	Training; safer workplace design

Government policy. You must be able to analyse policy on:

• Supporting businesses: grants and subsidies (for research or energy-saving equipment) lower costs but come with conditions and can be withdrawn.
• The ease of doing business: how quickly a firm can register, get permits, pay tax and enforce contracts. It shapes location decisions.
• International trade agreements: lower tariffs and shared standards open export markets, but also let foreign rivals in.
• Protectionism: tariffs (taxes on imports), quotas (limits on the quantity imported) and trade regulations (standards, licences, paperwork) protect domestic producers but raise costs for importers of inputs and invite retaliation against exporters.
• Infrastructure: investment in roads, ports, power and internet affects delivery times, reliability and costs.

Specific government spending and taxation policies are not required.

Worked example: Coldharbour Paints. Coldharbour exports a third of its paint. A stricter solvent-emissions limit at home arrives just as its largest export market imposes a 20% tariff on imported paint. Operations must invest in water-based formulas; finance faces capital spending as export margins fall; marketing must raise the export price or absorb the tariff, and can promote the low-solvent range; HR retrains staff. The strategic response could be to switch export effort to countries covered by a trade agreement, or to open a small mixing plant inside the tariff wall.

3. The economic environment

GDP, growth and recession

Gross domestic product (GDP) is the value of output produced in an economy. Growth usually lifts incomes and demand; a recession is a period of falling GDP, which hits income-elastic products hardest. Responses: cheaper ranges, cost cuts, protecting cash, delaying expansion. A recession in a major export market hurts exporters even when the home economy is growing.

Taxation rates

• Income tax changes disposable income (so demand) and employees’ take-home pay.
• Sales taxes are added to the price; a firm passes a rise on or absorbs it.
• Corporation tax is a tax on company profit. A rise from 25% to 30% on a profit before tax of £640,000 cuts profit after tax from £480,000 to £448,000, leaving £32,000 less for dividends or reinvestment.

Worked example: Thistlecombe Bakehouse. A loaf sells for £8.00 before sales tax. The rate rises from 10% to 12.5%.

Price with tax before = 8.00 × 1.10  = £8.80
Price with tax after  = 8.00 × 1.125 = £9.00
If the shop keeps the shelf price at £8.80:
Revenue kept per loaf = 8.80 ÷ 1.125 = £7.82 (to 2 d.p.)
Loss per loaf         = 8.00 − 7.82  = £0.18, about 2.2% of revenue

Passing the rise on risks lost sales if demand is price elastic; absorbing it squeezes margin.

Exchange rates

A currency appreciates when it buys more foreign currency and depreciates when it buys less. Volatility means frequent, unpredictable movement, which makes costs and revenues hard to plan.

Rates in these examples are illustrative.

Worked example 1, import costs: Gillamoor Bikes. Gillamoor buys motors from a Japanese supplier at ¥36,000 each. The rate moves from £1 = ¥200 to £1 = ¥180, so the pound has depreciated.

Cost per motor before = 36,000 ÷ 200 = £180
Cost per motor after  = 36,000 ÷ 180 = £200
Increase              = 20 ÷ 180 × 100 = 11.1%
Order of 4,000 motors: £720,000 → £800,000, an extra £80,000

Worked example 2, selling prices abroad: Corrowan Spices. Corrowan sells a jar for £12 and exports to the eurozone. The rate moves from £1 = €1.15 to £1 = €1.25, so the pound has appreciated.

Euro price before = 12 × 1.15 = €13.80
Euro price after  = 12 × 1.25 = €15.00   (an 8.7% rise for buyers)
If Corrowan holds the euro price at €13.80:
Revenue in pounds = 13.80 ÷ 1.25 = £11.04, 8% less per jar

Responses: fix a rate in advance with the bank, invoice in the home currency, match the currency of inputs to the currency of sales, or switch suppliers. Whether to change price depends on price elasticity and rivals’ prices.

Inflation and deflation

Inflation is a sustained rise in the general price level; deflation is a sustained fall. Both are measured with a price index, where a base year is set at 100.

Worked example: Quenby Laundry. A national price index reads 106.0 in one year and 110.24 the next.

Change in points = 110.24 − 106.0 = 4.24
Inflation rate   = 4.24 ÷ 106.0 × 100 = 4%

Divide by the earlier index, not by 100. Quenby raised its prices by 3%, so in real terms they fell by about 1% (1.03 ÷ 1.04 = 0.990). An index falling from 100.0 to 98.5 shows 1.5% deflation. Inflation raises input costs and wage demands; deflation can make customers delay purchases and makes debts heavier in real terms.

Unemployment rates

Rising unemployment cuts demand but eases recruitment and pay pressure. Low unemployment brings skills shortages, so firms raise pay, train their own staff or automate.

Interest rates

Worked example: Brindlecombe Haulage. Brindlecombe has a variable-rate loan with £1,500,000 outstanding. Each year it repays £300,000 of the loan plus interest on the opening balance. The rate rises from 5% to 6.5%.

Interest at 5%   = 1,500,000 × 0.05  = £75,000  → total payment £375,000
Interest at 6.5% = 1,500,000 × 0.065 = £97,500  → total payment £397,500
Extra cost this year = £22,500, a 6% rise in the annual payment

Higher rates also cut credit-financed demand. Responses: fixed-rate borrowing, delayed projects, or growth funded by retained profit.

4. The social environment

• Age structure: an older population shifts demand towards health, leisure and care, and shrinks the young workforce.
• Migration: inward migration enlarges the labour pool and creates new markets; outward migration can drain skills.
• Size and composition of the workforce: more part-time or older workers changes recruitment and shift patterns.
• Education and training: a well-educated labour market supports high-skill strategies; skills gaps raise training costs.
• Cultural issues: tastes, religion, language and attitudes differ between and within countries, so products and promotion may need adapting.

Responses: redesign products for new customer groups, offer flexible working, train in-house.

Corporate social responsibility (CSR)

CSR means a business taking responsibility for its effect on society and the environment, beyond what the law requires.

• Reasons for: reputation and customer loyalty, easier recruitment and retention, investor support, lower long-term risk, owners’ values.
• Reasons against: cost cuts short-term profit, benefits are hard to measure, and a gap between claims and conduct damages trust.
• Pressures come from customers, pressure groups, media and social media, employees, investors and government. Its value is greatest when it fits the brand and customers reward it.

The shareholder concept says a business exists mainly to maximise owners’ returns; the stakeholder concept says it should balance the interests of all groups it affects, which makes CSR more likely.

5. Technological change

• Digital technology (online sales, data analysis, cloud systems, automation) cuts costs and opens channels, but needs investment, skills and data security.
• Disruptive technology is a new product or business model that displaces established ones, often starting as a cheaper, simpler offer; firms that ignore it can lose their market.
• Artificial intelligence (AI) can answer customer queries, forecast demand, check quality and draft content: lower unit costs and faster decisions, but fewer roles in some jobs, retraining needs, and risks over errors, bias and data use.

Responses: invest early, retrain staff, partner with technology firms, or reposition towards what technology cannot easily copy.

6. Environmental change: climate change

Climate change brings physical risks (floods, heat, disrupted supply chains, higher insurance), pressure to cut emissions from law, customers and investors, and opportunities for low-carbon products. Responses: cut energy use, change inputs, diversify suppliers, protect sites and report progress honestly.

Common errors

• Listing PESTLE factors without saying whether each is an opportunity or a threat for this business.
• Multiplying when you should divide by the exchange rate, or saying an appreciation helps exporters.
• Dividing an index change by 100 instead of by the earlier index value.
• Charging interest on the original loan instead of the outstanding balance given.
• Describing a change without tracing it to a functional area and a response.
• Quoting specific laws, which the specification says are not required.

Next: the revision notes, then the practice questions and exam preparation.

Official syllabus

OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. Published by OxfordAQA.