These external influences include:

Macroeconomic Influences

GDP, interest rates, inflation, the availability of credit, etc.

Technological Influences

Established companies face the threat of technological obsolescence, while technological developments may also help established industries reinforce growth. Infant industries face the threat of a new product not being accepted by the marketplace.

Demographic Influences

Broad shifts in population distribution, age, and income can have very marked effects on different industries. For example, a greater role of sports in the lives of many Americans has increased demand for sports trauma orthopedics.

In most cases, demographic shifts are easy to identify, because they occur over a very long time period. However, it is much harder to quantify such trends and determine their influence on a particular industry.

Governmental Influences

Government regulations, laws, and tax policies can have a marked influence on many industries. They may potentially increase or decrease an industry's prospects.

In certain cases, government policies create new industries. For example, after the Firestone case, governments required the original auto manufacturers to submit all information about their cars, which created a new auto business intelligence software industry.

Trade barriers established by governments support demand for specific domestic industries by fending off foreign competition (an example would be the steel industry in the U.S.).

Social Influences

Fashion changes tend to be short-term and less predictable. For example, new products in the cosmetics or film industries may enjoy a brief spark in demand, which will dissipate shortly.

Lifestyle changes tend to be long-term and more predictable. For example, as a result of greater health consciousness, natural foods and nutritional products enjoyed a boom and hard liquor sales were depressed.

Practice Question 1

Which of the following statements is (are) true with respect to the impact that external factors may have on industries?

I. Technological change will benefit all firms operating within a particular industry.
II. Consistent statutory tax rates across all industries will ensure that all industries are faced with the same degree of tax burden.
III. Lifestyle changes will have a more profound impact on an industry over the long term than the short term.
IV. Trade liberalization will benefit all industries as it expands their respective target markets.

Correct Answer: III only

I is incorrect because only the firms that are quick to adopt the technological change will benefit.

II is incorrect because consistent statutory tax rates across all industries does not imply that all industries are faced with the same "effective" tax rates. For instance, simply changing the rules as to what items may or may not be included for taxation could change the effective tax rate faced by an industry.

IV is not always true. Trade liberalization will benefit some industries as it expands their respective target markets; however, for other industries, it makes things more difficult as new foreign competition is introduced.