Chapter 5
- Constraint is something that limits or controls the actions and decisions of a business
- External Constraints are constraints which a business has no direct control over
| External Influence | Example | Impact on a business |
| New advanced products | Smartphones | Existing products become old-fashioned Jobs will be lost in companies without new products but New market opportunities open up |
| New advanced production processes | Robots | Existing production methods become expensive and uncompetitive Workers could lose their jobs but Average production cost falls |
| Increased competition | Newly formed low cost airlines | Reduction of demand for existing firms Jobs may be lost but Forces firm to become more efficient |
| Environmental Issues | Pollution | Bad publicity Clean methods may be more expensive but Clean methods bring a unique image |
Technological Change
Advantages:
- Products purchased more often
- Competitive advantage
- Increase productivity
- Lower average costs
- Fewer workers required
- Flexibility
- Internet provides a larger market
Disadvantages
- Expensive to research and develop new products
- Old firms will lose sales and market share
- Expensive production methods
- Retraining required
- Fall in motivation of labor
- Reduce personal contact with customers
How to Introduce Technological Change
- Involve workers in change
- Workers encouraged to make suggestions
Environmental Constraints
- Social Responsibility is when a business takes decisions that may benefit stakeholders other than shareholders
| Against Protecting Environment | In Favor Of Protecting Environment |
| Expensive, reduces profit | It is our social responsibility |
| Increase prices to pay for environmental friendly policies | Leaves less raw material for the future generations |
| Lose sales to un-environmentally friendly firms | Increased social awareness |
| Consumers will buy less due to higher prices | Marketing advantage if environmentally friendly |
| Government should pay to clean pollution | Pressure groups may take action |
Laws Passed by Government
- Illegal to:
Locate in environmentally sensitive areas
Dump waste
Making unrecyclable products
- Financial penalties and pollution permits:
Pollution permits are licenses to pollute up to a certain level
If a company produces more than the permit allows, it must either buy more permits from ‘clean’ firms or pay heavy fines
This encourages firms to produce goods in less polluting ways
Other financial penalties could be additional taxes on goods or factories that lead to pollution
- Consumer action and pressure groups:
If a firm is reported as destroying important natural sites or dumping waste in the sea, many consumers will stop buying from it
Pressure Groups
- Most likely to work when:
They have public support
Consumer boycotts occur
It is well organized and financed
- Most likely to fail when:
Firm is not doing anything illegal
Cost of business changing is more than the possible cost of poor image and lost sales
Firms sell to other firms, not to consumers
Cost-Benefit Analysis
- The valuation by a government agency of all external and private costs and benefits resulting from a business decision
| External Cost | costs paid by the rest of society due to a business decision |
| External Benefits | benefits to the rest of society due to a business decision |
| Private Cost | costs paid by the business due to a business decision |
| Private Benefits | benefits to the business due to a business decision |
| Social Cost | private cost added to the external costs of a business decision |
| Social Benefit | private benefit added to the external benefits of a business decision |
Business Studies IGCSE