External Influences on Business Activity

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 InfluenceExampleImpact on a business
New advanced productsSmartphonesExisting products become old-fashioned

Jobs will be lost in companies without new products


New market opportunities open up

New advanced production processesRobotsExisting production methods become expensive and uncompetitive

Workers could lose their jobs


Average production cost falls

Increased competitionNewly formed low cost airlinesReduction of demand for existing firms

Jobs may be lost


Forces firm to become more efficient

Environmental IssuesPollutionBad publicity

Clean methods may be more expensive


Clean methods bring a unique image


Technological Change


  • Products purchased more often
  • Competitive advantage
  • Increase productivity
  • Lower average costs
  • Fewer workers required
  • Flexibility
  • Internet provides a larger market


  • 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 EnvironmentIn Favor Of Protecting Environment
Expensive, reduces profitIt is our social responsibility
Increase prices to pay for environmental friendly policiesLeaves less raw material for the future generations
Lose sales to un-environmentally friendly firmsIncreased social awareness
Consumers will buy less due to higher pricesMarketing advantage if environmentally friendly
Government should pay to clean pollutionPressure 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 Costcosts paid by the rest of society due to a business decision
External Benefitsbenefits to the rest of society due to a business decision
Private Costcosts paid by the business due to a business decision
Private Benefitsbenefits to the business due to a business decision
Social Costprivate cost added to the external costs of a business decision
Social Benefitprivate benefit added to the external benefits of a business decision


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