Chapter 3: Analysing the market environment

Chapter 3: Analysing the market environment

Essential reading
Kotler, P. and G. Armstrong Principles of Marketing. (Upper Saddle River, NJ: Prentice Hall, 2004) tenth edition [ISBN 0131018612] Chapter 4.

Keywords: Macroenvironment; microenvironment; trends.

Learning outcomes
By the end of this chapter you should be able to: distinguish between the micro- and macroenvironment of a rm understand how the different elements of the micro- and macroenvironment affect rms marketing activities.

Introduction
This chapter focuses on the environmental factors that affect the marketing activities of organisations. Such factors include demographic changes; changes in fashions, and changes in consumption due to economic development and political changes. It also examines how marketers cope with such changes. Another important theme that runs throughout this unit is the fact that marketers have to be aware of changes that take place in the marketing environment, since these can have a major impact on how marketers change and evolve their own marketing strategies. You should note that this chapter and the accompanying material in Kotler and Armstrong (2004) draw attention to specic aspects of the political, economic, social and technological environments these are all dynamic, and for examination purposes you are likely to need your own examples that illustrate, for example, how specic changes in the economic environment have had an inuence on marketers. As you complete the unit, you will note that a number of the issues covered here are also important factors to consider when companies enter foreign markets, one of the topics covered in Chapter 8. Clearly there is a similarity in concepts, and studying them in this chapter will repay you when you reach the end of the unit. Finally, you should remember that study of the marketing environment is important insofar as the environment can have an important impact on the activities of marketers. For this reason this topic has important, though often unstated, links with the other topics in this unit. Table 3 at the end of this chapter summarises some, though not all, of these links. You should be aware that examination questions on any of the other topics may require you to have an awareness of the issues addressed in this topic.

Types of environment
Companies interact with two types of environment: the microenvironment and the macroenvironment. The microenvironment comprises the companys suppliers, customers, marketing intermediaries and competitors. The macroenvironment is made up of wider forces that affect demand for a companys goods. These forces include demographics, economics, nature, technology, politics and culture.

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The microenvironment
The microenvironment can be separated into the internal environment and the external environment. The internal environment consists of the rms own management structure, the organisations strategies and objectives, and the departments within the company. The characteristics of the rms internal environment affect its ability to serve its customers. The external environment comprises suppliers, marketing intermediaries, customers, competitors and publics. As well as obvious groups such as shareholders, publics can also include local interest groups who may have concerns about the marketers impact on the environment or on local employment.

The macroenvironment
Demographics The demographic environment itself is affected by changes in the mix of age groups in the population. If the population becomes older, this will lead to rising demand for products and services consumed by older people and a similar fall in demand for products consumed by younger people. The development of ethnic markets can also be relevant. In a number of countries, the ethnic mix of consumers is changing due to immigration and other factors. This will be reected in changing demands for various goods, not only from the specic ethnic group but from other consumers whose tastes have been affected by them. Furthermore, as ethnic groups emigrate to other countries, their own tastes can affect those of consumers in the host nation (e.g. Asian foods are now sold in UK supermarkets). The demographic environment is also affected by the level of education in a country, since changes in education have an impact on the wealth of a nation and the tastes of its people. The lifestyles of a population also have an impact on the macroenvironment facing marketers. In Western countries there has been a growth in households made up of single people; and a large proportion of women now go out to work. This has resulted in an increase in the sales of convenience foods. There is also a greater proportion of couples whose children have grown up and left home. Such couples have more disposable income to spend on luxuries, holidays and home improvements. Economics The economic environment is important to marketers because it affects the amount of money people have to spend on products and services. One of the components of the economic environment is the distribution of income. Economies around the world not only vary in their absolute or total level of wealth but also in how their wealth is spread within the population. For example, poor countries may be classied either as those which have a highly unequal spread of wealth or those where it is more evenly shared. The former group of countries may be markets for luxury goods, despite the level of poverty. In contrast, the second type of country may be more attractive to marketers of inexpensive goods for the mass market. Consumers around the world differ in the extent to which they save money and the use they make of credit facilities. A high propensity to save will result in a lower propensity to consume. However, these patterns will also have a secondary effect on the overall macroeconomy of a nation. A country where people have a high propensity to save is likely to be characterised by low interest rates, which will affect industrys borrowing costs.

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Chapter 3: Analysing the market environment

The economic problems faced by some countries have meant that some international marketers cannot be paid in hard currency. To make sales, therefore, they have had to barter their products. An example of this was the barter of Pepsi-Cola for Russian vodka by the Pepsi company and the former Soviet government. Nature This is important to marketers insofar as it is the source of many raw materials and uctuation in supply can affect the prices paid for purchases. Furthermore, the increasing cost of some raw materials has meant that recycling of some materials, such as aluminium, has become economic. There is increasing pressure from public opinion as to where raw materials are sourced from, and their effect on the natural environment. Paper manufacturers have had to pay attention to sourcing pulp from renewable forests, where trees are replanted to make up for those which have been felled. There is also pressure on them not to use chemicals and bleaches in their processing of paper. The increased cost of energy is also having an effect on the types of products that appeal to consumers. For example, in some countries there is a trend towards small cars and products that save energy. Finally, due to developments in technology, it is possible for manufacturers and consumers to cause less damage to the environment. Various European countries encourage the use of catalytic converters in cars to reduce the levels of poisonous gases that are emitted into the atmosphere. Technology Technological developments offer marketers both opportunities and threats. Although rms can offer customers a wider array of advanced products, changes in technology also mean that there may be more than one technical solution to a customers needs. Where a market converges towards one technological standard, there can be problems for marketers who have promoted an alternative standard. An example of such a situation is illustrated by the ght between two alternative video formats: VHS (promoted by JVC) and Betamax (promoted by Sony). Although Sonys technology was considered superior, most other manufacturers adopted the VHS format, and ultimately Sony stopped selling Betamax video-recorders and switched to making those using the VHS format. Today there is a similar struggle between suppliers of different types of hi- equipment. Increased technological development accelerates the speed of obsolescence. Marketers have to consider how their product may need to be developed over time, if it is to remain competitive. For example, Apple Computer gained an advantage over IBM and IBM compatibles through the use of its Graphic User Interface (GUI), which meant that the users can manipulate pictures on the computer screen rather than use complex commands. This made it much easier to use than IBM personal computers. However, the introduction by Microsoft of Windows meant that IBM users could also have a pictorial display on their screens, and this reduced Apples advantage. To regain the advantage Apple has recently introduced a new computer chip (PowerPC) which is supposed to be faster than the Pentium chip used by IBM. Technological developments affect how people work and do business. For example, the falling cost of telecommunications coupled with their increased sophistication has meant that it is possible for individuals to work away from the ofce. In the future this could lead to lower usage of transportation systems. Furthermore, the falling cost of technology has meant that many

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more small rms can function in areas such as publishing and lm production, which used to be the domain of large organisations. In a number of countries this has resulted in the establishment of small rms in these areas. The risks from technological changes have meant that rms are increasingly entering into strategic alliances with customers, suppliers and even competitors. Indeed, there has been an increasing emphasis on open, longterm relationships, based on trust between customers and suppliers. This is expected to help in the development of products and the management of technological risks. Politics Marketers are inuenced by the regulatory environment. This has implications for their obligations to customers and the wider public. Customers are increasingly able to seek redress for faulty products, and those who live near manufacturing plants are able to claim compensation for pollution. The political environment around the world has recently favoured the privatisation of public companies. Such companies have also been able to compete more freely in the private sector. Political changes in Eastern Europe have also meant that these markets are now open to marketers from around the world. Culture Peoples opinions and tastes are shaped by the society in which they live. It should be noted that societies are not made up of homogeneous populations. They contain sub-cultures, which are beliefs and values shared by smaller groups of people. Such groups may arise out of a common race, religion, social activity or hobby. Sub-cultures are important to marketers insofar as they may have different consumption habits from the rest of the population. The following are some aspects of culture that inuence peoples consumption: the core culture is that set of values handed down from generation to generation and which is reinforced by social institutions such as schools and places of worship. Core values are likely to be strongly held and it may be difcult for marketers to promote a message that runs counter to them. More susceptible to change are secondary values. Peoples opinions are inuenced by the media, role models and changing tastes. Chapter 5 of Kotler and Armstrong (2004) ends with a discussion of how marketers can respond to the marketing environment. This is an important issue that is signicant for examination purposes, and you should pay attention to it. Figure 3.1 shows the different elements of the macro- and microenvironments. It also shows that the marketing organisation (represented by the marketing mix) is directly inuenced by the microenvironment, and that both are inuenced by the macroenvironment.

Figure 3.1: Macro- and microenvironment.

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Activity Choose an industry about which you can get information from either newspapers or books. Using Chart 1, describe any political, economic, social and technological changes taking place that will affect the demand for the products/services produced by that industry. Then explain what impact this is having on the marketing activities of the rms in that industry. Where possible, collect relevant statistics and details of the source of the information. The examples you use and the sources of information can be either local or international. An example for using the chart is as follows. It is based on an extract from a UK national newspaper.
Within the UK a social change which is taking place is the rise in the sales of ethnic foods. Last year 366 million was spent on such foods, an increase of 87 per cent in four years. Of this gure Indian food is the most popular, accounting for 171 million. Furthermore 37 per cent of people questioned had tried cooking Indian meals at home. Industry experts say that the recession and the ease of ethnic cooking is encouraging people to cook at home.

The marketing impact of this information would be on producers of ethnic cooking ingredients, whose forecasts of sales could take into account the news of a healthy and growing market.

Summary
The rm is affected by both its microenvironment and the macroenvironment. The characteristics of the marketers microenvironment affect its ability to serve its customers. The macroenvironment comprises the wider societal forces which determine the opportunities and threats facing a rm.

Reminder of the learning outcomes

By the end of this chapter you should be able to: distinguish between the micro- and macroenvironment of a rm understand how the different elements of the micro- and macroenvironment affect rms marketing activities.

Sample examination questions

1. Singapore is currently experiencing relatively slow economic growth. What effects of this have you observed on the marketing of goods and services in Singapore? 2. What are the main components of the microenvironment of marketing? With respect to each of these components identify the major questions that the marketer should be asking him/herself when carrying out an audit of the microenvironment. (Zone B 2000 BSc Econ)

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Chapter 1 2 4

Implication
Wants will be inuenced by levels of economic prosperity and social and cultural factors. Macroenvironment issues will be important areas for rms to do marketing research, both secondary and primary. Consumer buying behaviour will be inuenced by technological, economic, social and cultural factors. Demand for various goods will vary between countries according to economic, political, technological factors for example, also see discussion for Chapter 8.

Changes in macroenvironment (external environment) may inuence the strengths/weaknesses/opportunities/threats facing an organisation. The microenvironment will inuence the opportunities and threats facing an organisation.

The types of products developed by organisations will have to take into account both the micro- and macroenvironment. Social and other trends may inuence the shape of the product lifecycle curve and therefore have an impact on new product development. The pricing strategy undertaken by an organisation may have to take into account the health of the wider economy, as well as the prices charged by competitors.

Social and cultural factors will inuence the level of noise in communications. They will also inuence the methods of distribution that are most likely to be effective in a given situation. Channel intermediaries will have to take into account the level of power that they have in comparison to their suppliers and customers (microenvironment) when negotiating with them.

Economic factors may determine which markets are more protable than others. Note that low levels of economic success are not necessarily bad predicted growth is important, as is the degree of local competition, which may be low in developing countries. Cultural factors may determine whether or not adaptation is required for the elements of the marketing mix. Countries vary in terms of political stability/instability and the extent to which governments encourage overseas corporations. Technology (levels) are important since they inuence how easy or difcult it will be to do business in other countries. Table 3: Implications of the marketing environment for other areas of marketing.

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