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Business · Understanding external influences on business
External influences
Technology, legislation and the economy all change - and a small business cannot stop them. What it can control is how it responds. This lesson brings the chapter together and shows how businesses react to each kind of change.
Last Lesson
Answer from memory before the answers appear.
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How does rising unemployment affect a business selling luxuries?
Customers have less income, so sales fall.
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What does SPICED stand for?
Strong Pound, Imports Cheap, Exports Dear.
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How do higher interest rates affect a business with a loan?
Repayments rise, increasing costs and reducing profit.
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What is VAT?
A tax added to the price of most goods and services.
Learning Objectives
- 1Explain why external influences are important to a business.
- 2Explain possible responses to changes in technology.
- 3Explain possible responses to changes in legislation.
- 4Explain possible responses to changes in the economic climate.
Why External Influences Matter
External influences are factors outside a business that it cannot control but that affect how it operates.
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Outside its control
A small business cannot stop a new law, a rise in interest rates or a new technology.
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Opportunities
Some changes help - a new technology may cut costs, or a weaker pound may boost exports.
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Threats
Others hurt - rising costs, new rules or customers with less to spend.
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The key skill
Spotting changes early and responding well, so the business survives and even benefits.
The Three External Influences
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Technology
New ways to sell, promote, communicate and take payment - e-commerce, social media, digital communication and payment systems.
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Legislation
New or changed laws on consumer rights, pay, discrimination, and health and safety.
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The economic climate
Changes in unemployment, incomes, inflation, interest rates, taxes and exchange rates.
Responding to Changes in Technology
Adapt, or be left behind by competitors who do.
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Adopt it
Start selling online, take contactless payments or promote on social media.
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Train staff
Make sure staff can use new systems to serve customers well.
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Change the marketing mix
Sell through new channels, compete on price online, promote digitally.
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Weigh the cost
New technology costs money, so a small business must judge whether the extra sales or savings are worth it.
Responding to Changes in Legislation
Obeying the law is not optional, but how a business adapts is a choice.
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Update practices
Change pay rates, refund policies, recruitment adverts or safety procedures.
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Absorb or pass on costs
Accept lower profit, or raise prices to cover the extra cost - for example after a minimum wage rise.
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Cut other costs
Find savings elsewhere, such as reducing waste or energy use.
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Use it positively
Promote high standards, such as a five-star hygiene rating, to win customers.
Responding to Changes in the Economic Climate
When the economy changes, the marketing mix and costs usually change with it.
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Falling incomes or rising unemployment
Offer cheaper products, value deals or smaller portions, and target new customers.
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Inflation
Raise prices carefully, find cheaper suppliers, cut waste and reduce costs.
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Higher interest rates
Pay off loans, avoid new borrowing, and delay expensive plans.
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Exchange rates
An importer might find a UK supplier when the pound is weak; an exporter might sell more abroad.
Change and Response
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A rival starts selling online
Threat or opportunity?: Threat. Possible response: Build a website or use an online marketplace
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The minimum wage rises
Threat or opportunity?: Threat. Possible response: Raise prices slightly or cut costs elsewhere
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Inflation raises ingredient costs
Threat or opportunity?: Threat. Possible response: Find cheaper suppliers or reduce portion sizes
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Interest rates fall
Threat or opportunity?: Opportunity. Possible response: Borrow to invest in new equipment
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The pound weakens
Threat or opportunity?: Opportunity for an exporter. Possible response: Promote more to overseas customers online
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Unemployment rises
Threat or opportunity?: Threat for luxuries. Possible response: Offer value deals and cheaper options
Adapting to Survive
This café is responding to several external influences at once. A value lunch deal answers customers who have less to spend; online ordering and contactless payments answer changing technology. None of the changes were the owner's choice - but the response was.
Value deals for the economy, online ordering for technology: responding to change.
Case study
2020: Every Influence at Once
In March 2020 the COVID-19 pandemic brought sudden changes from every direction. New laws forced cafés, restaurants and pubs to close their doors to customers. Many small food businesses responded with technology, switching to takeaway, delivery apps and online ordering almost overnight. The government responded to the economic damage with support such as the furlough scheme, which paid most of the wages of staff who could not work, and in August 2020 "Eat Out to Help Out", which paid half the cost of meals out from Monday to Wednesday, up to £10 per person. The businesses that survived were those that adapted fastest.
The Business Response Plan
You run a small independent bike shop that imports most of its bikes from Europe. In the same year, the pound weakens, the National Minimum Wage rises, and a large online retailer starts selling bikes more cheaply. For each change, say whether it is a threat or an opportunity, and plan one response.
1. Weak pound: threat or opportunity? Response?
2. Minimum wage rise: threat or opportunity? Response?
3. Online competitor: threat or opportunity? Response?
A good answer shows: All three changes identified as threats, each with a realistic response - e.g. find UK suppliers, raise prices carefully or cut costs, and compete on repairs, expert advice and servicing that an online retailer cannot offer.
Can I...?
- 1Explain what an external influence is.
- 2Explain why external influences matter to a business.
- 3Explain responses to changes in technology.
- 4Explain responses to changes in legislation.
- 5Explain responses to changes in the economic climate.
- 6Judge whether a change is a threat or an opportunity.
Summary & Exam Focus
- External influences are outside a business's control but affect everything it does.
- The three influences are technology, legislation and the economic climate.
- Changes can be threats or opportunities.
- The business can choose how it responds - adapting quickly helps it survive.
Exam focus
Justify how a small business should respond to a rise in the cost of its raw materials. (9 marks) (9 marks)
For response questions, weigh up two options, explain the effect of each on sales, costs and profit, and make a clear, justified choice - "it depends on" how customers react.
Key terms
The vocabulary this lesson expects you to use. Each one is linked from the first place it appears above.
- External influence
- A factor outside a business that it cannot control but that affects it.
- Economic climate
- The state of the economy, including jobs, incomes and prices.
- Opportunity
- An external change that could help a business.
- Threat
- An external change that could harm a business.
- Adapt
- To change the way the business works in response to an external change.
Downloads
Free to keep, print and annotate.
- External influences.pptx Built from the lesson script on 25 September 2026. View
- External influences - Completed Notes.docx The full notes for the lesson, to revise from. Built from the lesson script on 25 September 2026. View
- External influences - Exam Questions.docx Built from the lesson script on 25 September 2026. View
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