External Environment

• External environment


  Factors outside the business's control that will affect it and therefore affect its costs and demand
• Influences to be aware of in the external environment

  • Environmental issues
  • Demographic factors
  • Interest rates
  • Incomes
  • Market conditions
  • Competition
• Competition

  You can either have no competition (monopoly) or lots of competition which means lots of rivals. More competition requires more marketing costs. Limited competition or no competition (pure monopoly) leads to reduced marketing costs
• Lots of competition


  Likely means lower demand in the market as it is spread thin across all competitors
• Lots of competition

  Price elasticity of demand will be elastic as consumers will be extremely sensitive to price changes
• Limited competition


  Likely to get all the demand within the market. Price elasticity of demand will be extremely inelastic as consumers will not be very sensitive to price changes
• Market conditions

  Factors like unemployment can impact the business. High unemployment means a large supply of workers, leading to suppressed wages
• Market conditions


  Seasonality can affect demand, for example, in the hospitality industry, summer months lead to more demand
• Economy doing well


  Likely means higher incomes
• Seasonality affects a business in terms of demand in the hospitality industry


  Summer months lead to more demand
• Economic performance affects incomes


  If the economy does well, incomes increase
• Income increase affects labor costs

  Labor costs increase
• Income increase affects demand

  More demand, especially for luxury goods with income elasticity of demand greater than one
• Interest rates affect debt

  High interest rates lead to higher costs on servicing loans, bonds, or overdrafts
• High interest rates affect interest costs

  Interest costs increase
• Low interest rates affect consumer behavior


  Consumers have limited incentive to save, cheaper to take on debt, more likely to spend
• Demographic factors affect industries

  High immigration may lead to a higher supply of workers and suppression of wages
• Aging population affects demand

  Extra demand for industries that suit the aging demographic
• Undertaking fair trade affects costs


  Paying farmers more leads to higher costs
• Undertaking fair trade affects demand


  Seen as more ethical, consumers more likely to support and demand it, leading to higher demand
• External environment influences costs and demand