Factors that Influence Industry Growth, Profitability, and Risk

External factors affecting an industry’s growth include macroeconomic, technological, demographic, governmental, and social influences.

Macroeconomic Influences

Cyclical or structural trends may have significant effects on the demand for an industry’s products or services. An industry’s sales and profitability may be impacted by gross domestic product, interest rates, credit availability, and/or inflation.

Technological Influences

New technologies create new or improved products that can radically change an industry and change how other industries use the products to conduct their operations.

Demographic Influences

Changes in population size, the distribution of age and gender, and other demographic characteristics may have significant effects on economic growth and the amount and types of goods and services consumed.

Governmental Influences

Governments may have a significant influence on industries through their ability to control tax rates and their status as major purchasers of goods and services from a range of industries. Governments may also exert their influence indirectly by empowering other regulatory or self-regulatory organizations to govern the affairs of an industry.

Social Influences

Societal changes involving how people work, spend their money, enjoy their leisure time, and conduct other aspects of their lives can significantly affect the sales of various industries.

Question

What is an example of a demographic influence?

1. The housing industry benefitting from the Fed’s decision to lower interest rates.
2. The decline of the traditional brick-and-mortar video rental industry facing competition from online-only rivals.
3. High growth in the healthcare sector partially due to an increasing number of seniors as a proportion of the United States’ population.

Solution

The correct answer is C.

The shifting proportion of the US population towards the older end of the age spectrum represents a demographic influence.

A is incorrect. The Fed’s decision to lower interest rates could be considered both a macroeconomic influence and governmental influence.

B is incorrect. The decline of traditional video stores was largely caused by technological influences.