The External Environment

• The external environment is the factors that can influence a business's activities and can determine its success or failure.
• External factors influencing a business's activities and determining its success or failure include market conditions and competition, incomes, interest rates, demographic factors, environmental issues and fair trade.
• Market conditions are the features of a market, such as the level of sales, sales growth, price levels, the number and strength of rivals, their market position and market share, etc.
• A market with high market growth and low intensity of competitiveness is likely to present greater opportunities for higher demand than the opposite.
• Competition in a market refers to the number and relative power of firms trading in the same or similar markets.
• If there are many competitors in the market, it will increase the selling power of the supplier as they will have a range of firms wanting to buy their goods or services, which can push costs up.
• Competition may attract new suppliers into a market, increasing the availability and therefore driving costs down.
• Competition can encourage firms to compete on price, lowering prices overall and increasing demand in the market.
• A number of firms competing may see a spread in demand between firms, reducing the market share of each firm if the market size remains unchanged.
• Incomes will clearly have an impact on the demand for all goods, with some products such as normal and luxury goods seeing sales rise as income levels rise.
• Some products may see their demand fall as consumers’ incomes rise and these are known as inferior goods.
• Interest rates are the cost of borrowing or the reward for saving.
• Rising net migration has increased the size of the workforce in the UK, driving average wage costs down and lowering the costs of production.
• Fair trade is a system in which producers in developing countries are paid a fair price for their products, and businesses are committed to sourcing products from fair trade suppliers.
• Concern for environmental issues may lower costs in terms of lower energy usage or avoidance of fines.
• Concern for environmental issues may increase costs of production in terms of safe disposal of waste or upgrading of equipment to reduce emissions.
• Businesses can use environmental issues and fair trade as a USP or a recognisable feature of a brand, leading to an increase in demand.
• Fair trade may increase costs as a business is making a commitment to pay suppliers a fair price, hence increasing the cost of raw materials.
• A fall in interest rates can encourage consumers to save and discourage spending.
• If increased costs are passed on to the consumer in the form of higher costs, this may lead to a fall in demand.
• High interest rates may lead to a fall in demand, especially for items where consumers spend on credit.
• Migration has increased demand for a wide range of goods and services, such as housing, public transport, and healthcare.
• Demographics also influences the types of products demanded, changing taste of a more diverse nation and different demands from an ageing population.
• An ageing population can affect demand for social care and other services.
• Demographic factors, including migration and the size and age of the population, can increase costs to the public sector, such as health care and education.
• Interest rates affect the cost of borrowing by businesses and can increase the fixed costs of a business.