These are broad forces also known as macro environment which shape up opportunities and threats. No organization has control over its macro environment rather, it can only respond to the changes taking place in the environment. The macro environmental variables are
Economic environment: This particular variable is so volatile that it affects the entire business operations in particular and, the resources allocation in a free market economy.
For of inflation, the level of unemployment, interest rates and exchange rates impact greatly on example, economic growth or decline, cyclical fluctuations of economic activities, the Tom the general business environment. Markets require purchasing power as well as people.
The available purchasing power in an economy depends on current income, prices, savings, debts and credit availability. A market operator must pay particular attention to trends tha are likely to affect purchasing power e.g. tax system.
Political and Legal Environment: According to Kotler & Keller, marketing decisions are strongly affected by the developments in the political and legal environment. This environment is composed of laws, government agencies, and pressure groups that influence and limit various organizations and individuals.
Different policies of government often affect business activities e.g. tax regime (i.e. level and nature of taxes) and the extent of government interest in creating a friendly business environment.
Social and Cultural environment: The consumer attitude is directed towards certain goods and services and away from others in accordance to individual taste, preferences and the purchasing power.
The culture of the society often shapes the system of beliefs, values, customs and norms that largely determine the pattern of product choice and preferences.
It is therefore imperative for an organization to understand the nature of the community it intends to serve as it is not possible to change the belief of the community, rather it must adapt to these cultural beliefs. The demographic profile of the society such as, age distribution, lifestyle, family size and income level are the necessary factors that an organization must understand in order to satisfy its customers better.
Technological environment: Technology is the application of knowledge and tools to solve problems and perform tasks more efficiently. The dynamic nature of technology has contributed to the rapidly changing business environment. The invention of new goods and services are on the increase, bringing about what is usually referred to as ‘creative destruction’.
New technology facilitates mass customization, more responsive operations; shorter lead time and the development of e-commerce are the outcome of technological advancement. A typical example is the development of the Information Communication Technology that has re-defined business.
Technology has impacted business in the sense that it brings dynamism through constant changes in the business environment, the society each i.e. technology spread within the society and finally it is self-sustainning as the catalyst for faster development.
Four variables that are outside the control of a marketing manager are;
Economic variables: These include the various monetary policies of government, exchange rate, fixing of minimum income wage etc
Political variable: This has to do with stability of the political systems as well as the consistency of the policy of government in power.
Technological variable: What is constant is change, because technology changes so rapidily, hence, organization managers must learn to cope with new developments.
Socio cutural variable: This has to do with belief, customs and ways of life of a given society. No marketer can change the beliefs of the people, therefore marketers offer products that do not offend the community. All these variables cannot be controlled by any organization.
Advantages of understanding Macro Environment Forces
It is essential to planning
It helps a business to compete effectively
It assists in identification of opportunities
It enables an organization to take advantage of emerging strategic opportunities
Scanning and Analyzing Marketing Environment
Environmental scanning is the process of collecting information about forces in the marketing environment through observation, secondary sources and market research while environmental analysis is the process of assessing and interpreting the information gathered through environmental scanning. There are three methods of environmental analysis:
1. Michael Porter’s Five Forces Analysis
2. PEST Analysis
3. SWOT Analysis
Michael Porter’s Five Forces Analysis
Since the development of Michael Porter’s Five Forces Analysis, the model has become an important method for analyzing an organization’s industry structure in strategic processes. The model is based on the fundamental understanding and assumption that a corporate strategy should match the opportunities and threats in the organization’s external environment.
Especially, competitive strategy should be based on an understanding of industry structures and the way they change. Porter, in the model, identified five competitive forces that shape every industry and every market. These forces determine the dynamic nature of competition in the industry, and hence, the profitability and attractiveness into the industry.
The focus of corporate strategy should be to influence these competitive forces in a way that will bring about a competitive advantage to the organization that is undertaking environmental analysis. Porter’s model supports analysis of the driving forces in an decide how to influence or to exploit particular characteristics of their industry. It has helped industry.
Based on the information derived from the Five Forces Analysis, management can to contrasta competitive environment and it has similarities with other tools of environmental audit such as PEST analysis, except that it tends to focus on the single, stand alone business or Strategic Business Unit (SUB) rather than a single product or a range of products.
The Five Forces Model
The entry of competitor: The following questions needed to be addressed (e.g.how easy or difficult is it for new entrants to start? What are the extents of competion? Which barrie exist? etc)
The threat of substitute (How easily can our product or service be substituted especially cheaply?)
The bargaining power of the buyer (How strong is the position of buyers? Can they work together to order large volumes?)
The bargaining powers of the suppliers (How strong is the position of sellers? Are they many or only few suppliers? Is there a monopoly?)
The salary among the existing players (Is there a strong competition between the existing players or some of the players very dominant or are all of equal strength/size?)
Threat of new entrant: The easier it is for new companies to enter the industry, the more cut-throat competition there will be Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
Existing loyalty to major brands
Incentives for using a particular buyer (such as frequent shopper programmes)
High fixed costs
Scarcity of resources
Government restrictions or legislation
Entry protection (patents, rights, etc.)
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Absolute cost advantages
Learning curve advantages
Expected retaliation by incumbents.
Power of supplier: This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company’s margins and volumes, then they can hold substantial power. Here are a few reasons why suppliers might have power:
There are very few suppliers of a particular product
There are no substitutes
The product is extremely important to the buyers; they cannot do without it
The supplying industry has a higher profitability than the buying industry
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Presence of substitute inputs
Supplier concentration to firm concentration ratio
Threat of forward integration by suppliers relative to the threat of backward integration by firms
Cost of inputs relative to selling price of the product
Power of buyer/customers: This is how much pressure customers can place on a business. One customer can hold substantial power if he/she has a large enough impact to affect company’s margins and volumes. Here are a few reasons why customers might have power
Small number of buyers.
Purchases of large volumes.
Switching to another (competitive) product is simple.
The product is not extremely important to the buyers, they can do without it for a period of time.
Customers are price sensitive.
Buyer concentration to firm concentration ratio.
Bargaining leverage.
Buyer volume
Buyer switching costs relative to firm switching costs.
Buyer information availability.
Ability to backward integrate.
Availability of existing substitutes products.
Buyer price sensitivity.
Price of total purchase.
Availability of substitute: What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses a serious threat. Here are a few factors that can affect the threat of substitutes:
Relative price performance of substitutes
Buyer propensity to substitute
Buyer switching costs
Perceived level of product differentiation
Fad and fashion
Technology change and product innovation
The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker is likely to switch over to a beverage like tea because the
products are similar. If substitutes are similar, then it can be viewed in the same light as a new entrant.
Consider technology substitutes (who would have thought that MP3 technology would replace tape and CDs?)
Competitive Rivalry: This describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might be as a result of:
1. Many players of about the same size, no dominant firm.
2. Little differentiation between competitor’s products and services.
3. A mature industry with very little growth.
4. Companies can only grow by stealing customers away from competitors.
Having studied the contributions of Michael Porter’s Five Forces Analysis, can you quickly identified the five variables of interest? In addition, make an attempt to illustrate their interaction with the aid of diagram.
The entry of competitor:
The threat of substitute
The bargaining power of the buyer
The bargaining powers of the suppliers
The rivalry among the existing players
PEST Analysis
It is simply a way by which a marketing organization attempts to analyze its marketing environment using the acronym PEST) which stands for Political, Economic, Social cultural and Technological factors. Please see the discussion of these variables/factors under the
macro environmental factors.
P – Political Factors
E – Economic Factors
S – Sociocultural Factors
T – Technological Factors
SWOT Analysis
SWOT stands for Strength and Weakness, Opportunities and Threat. It is a tool used for the auditing of an organization and its environment.
It is also the first step towards planning and it helps marketers to focus on key issues. While SW stands for Strengths and Weaknesses which also focus on the internal analysis of the organization, OT stands for Opportunity and Threats which focus on the external analysis of the organization.
Organizational strength has to do with the areas of competencies identified within the organization. The strength may be in the geographical location, the human capital available, or the organizational culture that encourages the development of intrapreneurs.
An organization must be able to identify the area of its strength and ensure the use of such Strength for competitive advantage. When Nigeria Bolling Company introduced Eva Water some years ago, the company must have relied heavily on the already existing distribution outlets of their other brands, within a short time the company became the market leader.
Organizational weaknesses: The need for an organization to sincerely assess itself cannot be over emphasised, because failure to do this will imply that the organization is digging its own grave. It is important for the organization to identify areas of its operations and resources where it is not measuring up.
The need to make efforts to correct areas of lapses is not contestable as failure to do so may bring about the death of such organization. Some criteria that can be used to identify and evaluate the organization’s weaknesses.
Marketing opportunity: A marketing opportunity is a challenge to purposeful marketing that is characterised by a general favourable set of environmental circumstance and an acceptable probability of success. Some of the criteria to identify and evaluate possible opportunities that may be available within the marketing environment.
Environmental Threats: It is the challenge posed by an unfavourably trend or specific disturbance in the environment that would lead, in the absence of purposeful marketing action, to the stagnation or collapse of a company, product or brand. Given the seriousness and the
dynamism of the environmental changes, a proactive organization must map out a programme of continuous threat analysis.
Competition as an Environmental Factor
Every organisation is operating in a competitive environment, since all producers of and services are competing for the limited income of the consumers. The product that peals to the customers in terms of quality of product service as well as reasonable offering will receive the attention of the buyers. The nature of competition faced by individual firms can be broadly classified into four
Direct Competition: This type exists where firms that produce a similar product which is a director eg. Coca-cola and Pepsi-cola, or Malta Guinness and Multina etc
Close Competitors: This group produces similar products having the same salt e.g pharmaceutical product’s paracetamol has different brands from different producers.
Substitutes: These are products that are different but can be considered for buying as an alternative e.g Milo’ and Boum-vita’. gas and kerosene etc
Indirect Competitors: This is a group of producers who produce the same products that Gill the same need as their own product e.g print books and e-books.
Marketing Manager’s Response to the Environment
There are two classifications by which a marketing manager can relate with the environment namely
Reactive approach: It is an approach by which a manager adopts a passive view of the environment as uncontrollable and he adjusts cautiously the current strategies to accommodate environmental changes
Proactive approach: On the other hand, managers actively attempt to shape and influence the environment through appropriate new strategies to overcome market challenges and take advantage of opportunities. In other words, a proactive manager is innovative and creative and he/she is often the source of the dynamism in the environment