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BUSINESS ENVIRONMENT

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Executive Summary
A business organization is directly related to the business environment. Therefore, the
performance of a business organization is dependent upon its interaction with its business
environment. Even the scope and the direction of the various tasks and activities of an
organization are guided by its business environment. The various elements of the business
environment pose restrictions and influence the activities of the organization.

This assignment has been written in consideration of Heathrow Airport, which is striving for the
revival of the UK’s economy after recession as per the scenario given. The assignment discusses
about the impact of the elements of the macro environment on business of Heathrow airport and
its suggestion to introduce a third runway as a mode of expansion of the airport to support the
revival of the economy.

The assignment focuses on perceiving the impact of the national environment over the business
operations of an organization, comprehending the organizational behavior in their market
environment and evaluation of the importance of the global factors in shaping the national
business activities.

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Table of Contents

Executive Summary ...................................................................................................................... 3

Introduction ................................................................................................................................... 5

Task 1 ............................................................................................................................................. 5

1. Introduction of Heathrow Airport ........................................................................................... 5

2. PESTLE Analysis of Heathrow Airport ................................................................................. 6

b. Impact of UK’s fiscal and monetary policy on Heathrow Airport (P) (AC 2.2) .................... 6

i. Effect of the European Union policies on the UK’s businesses and expansion of Heathrow
Airport (P) (AC 4.3).................................................................................................................... 6

a. Allocation of resources by economic systems (E) (AC 2.1) ................................................... 7

d. Pricing and output decisions of Heathrow Airport on the basis of the market structure (E)
(AC 3.1) ...................................................................................................................................... 7

g. Impact of expansion of Heathrow Airport on the International Trade of UK (E)(AC 4.1) .... 8

f. Impact of business and cultural environment on Heathrow Airport (S) (AC 3.3) .................. 8

e. Heathrow Airport’s response to the market forces (T) (AC 3.2) ............................................ 9

c. Influence of competition policy and legal mechanisms on Heathrow Airport (L) (AC 2.3) .. 9

h. Global factors affecting the businesses of UK through Heathrow Airport (E) (AC 4.2) ..... 10

3. Recommendation .................................................................................................................. 11

Conclusion ................................................................................................................................... 11

References .................................................................................................................................... 12

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Introduction
Business environment is defined as the summation of all the conditions, influences and events
that enclose and affect it (Shaikh, 2010). A business organization is affected by two types of
factors, namely, micro (internal) and macro (external). Similarly, the business environment of
Heathrow Airport also posed an impact upon its operations even in the period of recession.

Task 1

1. Introduction of Heathrow Airport

The London Heathrow Airport is owned and run by Heathrow Airport Holdings, Limited. It was
established in 1930 with a vision of making it a world class airport. The mission statement of the
airport states to provide security and safety the highest importance every time by meticulously
evaluating and managing security and safety risks through best practice management systems
and audit. Hence, the mission of Heathrow Airport is to make it a safe place to work. The
objectives to be achieved by the airport are to ensure safety and security of employees and
passengers, to ensure risk management, to ensure environmental information regulations, to
avoid discrimination based on disability etc. Heathrow Airport holdings are financially regulated
by Civil Aviation Authority (CAA) and Competition Commission (Heathrow Airport, 2015).
The security matters are regulated by CAA and the government of UK. The airport has its own
managing director and the team to manage the airport. The team is responsible for managing the
daily operations of the airport and delivering the outputs of the strategies set up by the airport
authorities.

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2. PESTLE Analysis of Heathrow Airport

b. Impact of UK’s fiscal and monetary policy on Heathrow Airport (P) (AC 2.2)
Fiscal policy is majorly concerned with the taxation and the government expenditure. Monetary
Policy is an attempt by the government to use interest rates as a mean to control the
macroeconomic variables, such as inflation, of an economy (Myers, 2013). Hence, these two
tend to exercise control over the economic activities of the country.

The change in the exchange rate has influenced the international flight operations of the
Heathrow airport. Since the position of pound has appreciated, therefore it has brought lot of
profit for the airport because of the rent paid by international airlines. The rates of interest over
the assistance from the financial institutions have negatively affected the operations of the
airport. The tax regulations have affected the business operations of Heathrow Airport. The
increased taxes have resulted in increasing the taxes over the departing passengers and thereby
negatively impacting them; whereas the change in the government spending in improving the
airport has attracted more traffic to the airport resulting in substantial growth of profits
(Heathrow Airport, 2015). Hence, the current fiscal and monetary policies of UK have hugely
influenced Heathrow Airport’s operations.

i. Effect of the European Union policies on the UK’s businesses and expansion of Heathrow
Airport (P) (AC 4.3)
The policies of EU allow its members to indulge into commercial activities inside and outside
the country (El-Agraa, 2011). The industrial policy of EU prevents variations in different
countries occurring by adopting different policies for safeguarding the domestic industries. The
environmental policy ensures the protection of the natural resources and environment from the
various type of damage done by the industrial operations. The competition policy tries to
prohibit anti competitive contracts between companies as well as anti competitive behavior by
large companies which tend to harm the competition due to the independent behavior of small
companies and carefully examine the mergers of companies to ensure that whether it is about to
result in a non competitive market structures.

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The employment and social policy enables the creation of more jobs by the expansion of
Heathrow Airport. Similarly, the reduction of noise pollution is the concern of the air transport
policy of EU (Heathrow Airport, 2015). Therefore, with the expansion of the Heathrow Airport,
the airport authorities will have to take care to monitor and control it.

a. Allocation of resources by economic systems (E) (AC 2.1)

The types of economic systems are Socialist economic system in which the complete power of
allocation of the scarce resources to the businesses lies with the government of the country;
whereas Capitalist economic system is one in which the government doesn’t have much
interference in the business organizations and the resources are allocated with the help of market
driven forces. The resources are mostly owned by the organizations themselves.

On the other hand, Mixed economic system have a blend of both government planning and
market forces which shape the operations and resource allocation of business organizations (Hall
& Lieberman, 2009). The resource allocation is most efficient in Mixed economic system. In
UK, mixed economic system is followed. Therefore, several operations of the airport, related to
finance, security and safety, economic, transport, price, etc. are regulated by the policies of the
government, Civil Aviation Authority as well as Heathrow Airport itself.

d. Pricing and output decisions of Heathrow Airport on the basis of the market structure (E)
(AC 3.1) Commented [HM1]: Answer modified according to the
requirement

If the airports of London operate under separate ownership, then the market structure of the
industry will be oligopolistic (Niemeier, et al., 2012). Liberalization and privatization of airports
have led to immense competition in the airport industry. In such a case, due to low elasticity of
demand, the prices will be higher. Hence, the airport will charger higher for the quality product
provided by it to the customer who is willing to pay for it.
In long run, the prices will be higher but the output will be low due to the usage of market power
by Heathrow airport. The outcome will be good in terms of efficiency. Due to price
discrimination, the loss of output will be met effectively, in the presence of adequate change

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(McEachern, 2011). Hence, the oligopolistic airports such as Heathrow invest to provide high
quality of output, i.e. services, at higher prices. However, if an airport observes that one of the
airports is achieving lower costs and using lower price to acquire market share, then this strategy
of the competitor pressurizes other airports to adopt the same.

g. Impact of expansion of Heathrow Airport on the International Trade of UK (E)(AC 4.1)

The European Union has emerged as the most significant market for many of the UK’s exporters.
This has resulted into two-thirds of the trade of UK (Reuvid & Sherlock, 2011). UK is dependent
upon customers in only two countries- US and Germany for one fourth of its goods exports.
Also, in 2013 UK became the leading European country for the largest foreign direct investment
inwards (Hamilton & Webster, 2015). For example, if there is a concurrent and fast expansion in
the economies of US and Germany, then it will positively affect the UK’s International Trade as
well as economy.

Since UK has developed into a trading nation, the expansion of Heathrow Airport will improve
the International Trade further by allowing more businesses to arrive and depart from the airport.
The race of globalization has made UK to be a part of it to improve its connections with the
developing economies like India, Mexico, Brazil and China to develop trade, jobs and economic
growth (Heathrow Airport, 2015). Hence, it will enforce the expansion of Heathrow Airport to
improve the business relations with the other countries.

f. Impact of business and cultural environment on Heathrow Airport (S) (AC 3.3)
The micro environment of Heathrow Airport constitutes Competitor like Gatwick Airport which
triggers the need of improvement to sustain and improve the market share, Public for the safety
of which the airport has reduced the environmental impact of noise, pollution and providing jobs
etc. (Heathrow Airport, 2015). The various Intermediaries help in delivering the right service to
its customers. The Customers or the passengers arriving or departing influence the managerial
decisions of Heathrow Airport as their demand shape the service delivery of it. The Suppliers
affect the airport because they provide operational efficiency to the airport.

The macro environment of Heathrow Airport constitute technological environment consisting of

the technologies responsible for the management of the operations of airport, the legal

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environment consisting of the laws which are followed to run the airport, the demographic
environment influences the employability of the staff members on the airport as well as the
natural environment whose safety is the concern of all the airport operations.

The cultural environment has influenced the operations of Heathrow Airport in terms of its
aesthetics, service value delivery, and promptness in problem as well as query solution.

e. Heathrow Airport’s response to the market forces (T) (AC 3.2)

The forces such as marketplace, technology, labor market forces, passenger expectations,
economies of scale, output and costs etc. shape the aviation related organizations (Williams &
O'Connell, 2012). The oligopolistic market structure influences the policies and output of the
Heathrow Airport. The technology used in operating the airport, managing the activities, safety
and security of employees as well as passengers also influence the business decision making.

The labor market forces, i.e. the availability of the right skilled candidate for a specific job at the
airport influences the operational decisions of Heathrow Airport. The passengers arriving and
departing from the airport expect certain standards of services from it; therefore the amount and
quality of services affect the organizational responses towards the business environment. The
costs incurred in producing and delivering the expected level of services also influence the
business decisions of the airport (Williams & O'Connell, 2012). Even the economies of scale to
be achieved in comparison to the competitors also influence the operations and response of the
airport to the forces of its external environment.

c. Influence of competition policy and legal mechanisms on Heathrow Airport (L) (AC 2.3)
Competition policy of a country is concerned with the reduction and prevention of the ill effects
of the monopoly power. (Drexl, et al., 2011). The separation of airports from British Airport
Authorities led to less authoritarian regulation leading to a positive impact on the airport
performances. Several regulatory bodies are responsible for affecting the operations at Heathrow
Airport, such as Department for Transport, CAA as well as Competition and Markets Authority

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(Heathrow Airport, 2015). It has resulted in the regulation of price structures and capacity
utilization by the Heathrow airport.

It has led to the optimum utilization of the commercial revenues in improving the performance
and service delivery. It has affected the slot allocation and the rent to be levied on the airlines
visiting at the Heathrow and Gatwick airport, which is its competitor. The varying competitive
and regulatory mechanisms have affected the distributional aspects of slot systems, rents etc.
(Niemeier, et al., 2012). Hence, due to the competition policy and the other regulatory
mechanisms, the performance outcome of the airports has been good.

h. Global factors affecting the businesses of UK through Heathrow Airport (E) (AC 4.2) Commented [HM2]: Changed the answer according to WTO,
BRIC and exchange rate
Most of the economic activities of UK take place in the western part of London and the location
of such a hub international airport is said to be the best for it.

The agreement of liberalization of EU in WTO has led to the reduction in economic barriers.
Therefore, despite of being the busiest airport, the access to Heathrow has been made almost
unrestricted for the business leaders (Tacker, et al., 2013). This has greatly affected the global
business of UK.

The lesser number of new flights from Heathrow airport to the BRIC countries has led to the
severe disappointment of the business leaders due to the limitation of access experienced by
them in the emerging economies (Graham, 2012). Hence, the business of UK in the developing
economies and vice versa is affected by the Heathrow airport.

The changes in the currency exchange rates will affect the passengers arriving and departing UK.
Hence, the businesses which run solely on tourists’ visits will be highly influenced, such as
hotels, motels, restaurants etc. For example, low exchange rate of currency will bring more visits
of international tourists via Heathrow Airport and more business profits to the local vendors of
UK.

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3. Recommendation
The absence of a hub airport capacity in Britain is taking a toll over its jobs and trade. The only
hub airport in UK is Heathrow but even the capacity of this airport is underutilized, i.e. it is just
98% (Heathrow Airport, 2015). Only Heathrow has the capacity to accommodate hauls for long
journeys and hours. This makes it a good option for the long flights and passengers of it.
Therefore, the expansion of Heathrow Airport in the form of the addition of third runway is
recommended. The expansion of the airport will result in creation of 123,000 new jobs in which
only half of the newly employed will be from the local area, the rest will be from the other parts
of the country. It will also make UK competitive in the international trade.

The third runway will cost an investment of £15.6 billion but it will fetch huge benefits of around
£100 billion for the UK’s economy (Heathrow Airport, 2015). All these factors will result in the
growth of the economy of UK by providing many economic, jobs and trade benefits to the
community as well as the country.

Conclusion
Business environment of a company influences its managerial decisions directly as well as
indirectly. Heathrow Airport conducted the PESTLE analysis to understand its business
environment before presenting a proposal of the introduction of the third runway for the benefits
of the UK’s economy.

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References
Drexl, J., Kerber, W. & Podszun, R., (2011) Competition Policy and the Economic Approach:
Foundations and Limitations. Cheltenham: Edward Elgar Publishing.

El-Agraa, A. M., (2011) The European Union: Economics and Policies. Cambridge: Cambridge
University Press.

Hall, R. & Lieberman, M., (2009) Economics: Principles and Applications. New York: Cengage
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Hamilton, L. & Webster, P., (2015) The International Business Environment. Oxford: Oxford
University Press.

Heathrow Airport, (2015) About Us. [Online]

Available at: http://www.heathrowairport.com/about-us/company-news-and-
information/company-information
[Accessed 10 July 2015].

Heathrow Airport, (2015) Community and Environment. [Online]

Available at: http://www.heathrowairport.com/about-us/community-and-environment
[Accessed 12 July 2015].
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Heathrow Airport, (2015) Economic Regulation. [Online]
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information/economic-regulation
[Accessed 10 July 2015].

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[Accessed 12 July 2015].

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Niemeier, P. D. H.-M., Müller, P. D. J., Gillen, P. D. & Forsyth, P. P., (2012) Airport
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