External constraints and constraints on business activity

Businesses cannot survive by neglecting the “real world”, which includes influences that forces a business to make certain decisions or constraints that limits or controls actions. External constraints are things that businesses cannot control, these are:

  • Technological change: New products.
  • Technological change: New production processes.
  • Increased competition.

Environmental issues.

Here is a table from the book giving examples and the possible impacts on business activity:

Technological changes

Technological change bring about constant changes in consumer products and production processes. By using R&D to develop new products, companies could open up new markets and make huge amounts of money. Such companies include Microsoft, Sony and Apple. However, new products quickly replace old ones just like how machines are replacing workers in production processes.

There are two general things a firm could do when facing technological change:

  • Ignore the changes and operate in the “traditional and old fashioned way”. However, they can only sell to a small and limited market.

  • Compete by welcoming changes and have an access to huge mass markets. Here are some Advantages and disadvantages of technological change:


  • New products encourage customers to buy more.
  • If a business comes up with a new product first, they gain a huge competitive advantage.
  • “High-tech” production methods make production more efficient.

  • Fewer workers are required.

  • New production methods can be adapted very quickly which gives businesses more flexibility in meeting consumer wants.
  • E-commerce opens up new markets and the Internet is a medium of advertising


  • R&D is expensive, without guaranteed success.
  • Businesses that do not develop new products will fail, leaving workers unemployed.
  • New production methods and machines are expensive.
  • Workers will need retraining which is expensive. They might be reluctant to learn or fear that they will not do well. This could lead to a fall in motivation.
  • E-commerce lacks personal customer service.
  • Smaller businesses cannot afford these things.

Introducing technological change successfully

Workers and managers may fear change. Workers might think:

  • Will I be able to operate the new machines?
  • Will I lose my job because the machines are more efficient?

Older workers are especially afraid of loosing out to younger and better trained workers. Managers also fear change, since recruiting technology experts will make them look more inferior in some way.

To make these changes work better, workers need to be involved in the changes. Workers might be told why the new machines are necessary and how they will be trained to use them, as well as letting them suggest ways to make work more efficient with the machines. It leads to more opportunities for trained and skilled staff and can lead to new ideas and products.


Most businesses have competitors. Most business decisions are based on:

  • What competitors are doing?
  • How they might react?

When you develop a successful product, other businesses will undoubtedly copy you. Therefore, you will need to research and develop even more products, keeping ahead of them. Competition is a major influence on business activity.

Environmental constraints on business activity

There are two general opinions on caring about the environment:

Opinion A: Keeping the environment clean is too expensive. We want to keep prices low and this is what consumers want too.

    • Protecting the environment is too expensive and reduce profits.
    • Increased prices mean increased costs.

    • Firms could become less competitive compared to others who are not environmentally friendly.
    • Governments should pay to clean it up.

Opinion B: Consumers are now starting to prefer businesses with social responsibility. Cleaner and more efficient machinery benefit the business in the long-run.

    • Environmental issues affect us all and businesses have a social responsibility to deal with them.
    • Using up scarce resources leaves less for future generations and raise prices.
    • Consumers are becoming more socially aware. More now prefer firms that are environmentally friendly which could become an marketing advantage.
    • If a business damages the environment, pressure groups could protest and damage its image and reputation.

Ways to make a business more environmentally friendly

Governments make these business activities illegal:

  • locating in environmentally sensitive areas.
  • dumping waste products into waterways.

making products that cannot be easily recycled.

Manufacturers often complain that these laws raise prices. Therefore, some governments usually do not make these laws

strict with the hope of increasing output and in turn employmentFinancing penalties, including pollution permits

Pollution permits are licences given to a business to pollute up to a certain level. If “dirty” businesses pollute over the permitted level, they either have to buy permits from “cleaner firms” or pay heavy fines. This encourages firms to be cleaner and sell their permits to dirtier companies for more money. Other penalties include additional taxes.

Consumer action and pressure groups

Consumers are becoming more socially aware, and many of them will stop buying goods from companies which pollute the environment, harming a business’ reputation and image. Bad publicity means lower sales. If they want to keep their sales revenue up firms would have to adapt to more environmentally friendly production processes again.

Pressure groups are becoming very powerful nowadays. They can severely damage businesses that are not socially responsible.

These are their powers:

  • Consumer boycotts

  • Protests

  • Blocking waste pipes.

These are times when they are likely to take action:

  • They have popular public support and has a lot of media coverage.
  • The group is well organised and financed. These are times when they are less likely to take action:
  • What a company is doing is unpopular but not illegal. (e.g. testing drugs on rats)
  • The cost of making the company cleaner is more than losses that could be made by losing image and sales.

The firm supplies other firms and not customers, public support will be less effective.

Environmental issues and cost-benefit analysis

Governments are increasingly concerned about the social and environmental effects of business activity. They have started to use a new type of analysis on businesses and government proposals which will not only take into account financial costs but also external costs.

Cost-benefit analysis requires and awareness of external costs (costs to the rest of society) and external benefits (gains to the rest of society). Here are some examples.

Decision: A new chemical plant will be built.

Social costs are worked out from private costs and external costs.

Social benefits are worked out from private benefits and external benefits.

In other words:

  • Social costs private costs external costs.

  • Social benefits private benefits external benefits