Macro Environment Analysis

7th Semester
CH-1: Introduction
Table of Contents:
 What is Business?
 Characteristics of contemporary business
 Business environment
 Market conditions
 Environment Analysis
 Why understanding business environment is important?
 Environmental factors and features
 Process of environmental analysis

What is Business?

Business may be understood as the organized efforts of enterprises to earn profit. Business may be small or
begin size, but all of them aim at making profit.

The purpose of business goes beyond earning profit. It is an important institution in society. Be it for the
supply of goods and services; creation of job opportunities; offer of better quality of life; or contributing to the
economic growth of the country and putting it on the global map; the role of business is crucial. Society cannot
do without business. It needs no emphasis that business needs society as much.

A simple item such as a ball pen necessitates a long chain of activities so as to make your purchase possible.
Let us assume that you have decided to buy an automobile. Behind your purchase, there is the supplier of raw
materials; there is the manufacturer who converts these raw materials and other inputs into usable vehicles;
there is the dealer who makes the vehicles available at places convenient to you; there is the transport agent
who assists in moving materials to the manufacturing plant and vehicles from plant to the market; there is the
banker to finance various activities; there is the advertising agency which tells you about the vehicles, where
and how they can be procured; there is the insurance agent which assumes risks on your behalf; and a host of
other activities.

CHARACTERISTICS OF CONTEMPORARY BUSINESS:

Business in Transition: if there is any single word that can best describe today’s business, it is change. Modern
business is dynamic. New technologies opened the way for the arrival of new products leaving behind the old
ones. The ever changing market place has become a ‘battle ground’, for various companies surviving on
consumers’ loyalty and preferences. In order to confront the rapidly-evolving world around us, you need to
have a system in place to adapt with the changes. Virtually every industry has been experiencing rapid,
massive, and sometimes devastating change over the last couple years.

Just look at what Airbnb has done to the hospitality industry. Or what Uber have done to the transportation
industry. How prompted Apple Music to advance their iTunes platform—which was itself a profound
innovation to the music industry. This change makes the companies spend substantially on Research and
Development (R&D) to survive in the market. As technology changes, so too do the industries that use it.
Mobile devices and apps are piloting major industry shakeups as they either find their way into new markets
(hospitality) or change the way people interact with a market (transportation).

Pressure of Competition: Competition is another feature of modern business. Businessman has worked out
strategies to eliminate inefficiencies, cut down costs and improve productivity. Inefficient and marginal firms
will either be forced to wind up or rewrite their success plan. Competition is beneficial for both the
competition firms and the consumers. The customer has several options. He or she can pick and choose. Thus,
nowadays the officer at the counter of an office of LIC greets you with a smiling face, the clerk in a bank
addresses you politely as Sir or Madam, and for your surprise the cashier at the counter of a water supply
board greets you politely and for your shock and disbelief, the conductor in a local transport bus is now the
embodiment of politeness and smiles. Competition benefits the consumer as has been proved in our country.
Not that competition benefits only consumers. It benefits even the rival firms. Competing firms benefit from
having strong domestic and foreign rivals. Competition, for example—defines new ways of doing business;
helps build new capabilities; builds new customer satisfaction standards; and makes business leaders become
proactive.

Immense Opportunities: In today’s business environment, sustaining growth and profitability is never a
guarantee. Technological and scientific advances shorten life cycles of products and services, business models
change and new competitors appear from outside the industry. This constant instability makes it necessary to
seek new business opportunities. First, you need to define a framework to help search for opportunities. To do
this, it is necessary to understand your company’s business direction and to have knowledge of the resources,
strengths and capabilities of your company. Once you have a good understanding of company goals and areas
of expertise, the next step is to analyze the market, assessing consumer needs and how they are being met by
companies today. Using a variety of analysis will help your business gain a holistic view of opportunities and
help create long-term strategic business plans. Some of the types of market analysis are:

Consumer segmentation- To understand your demand, you must identify consumer segments that share
common characteristics. These characteristics can be “hard” variables such as age, gender, place of residence,
educational level, occupation and level of income or “soft” variables such as lifestyle, attitude, values and
purchasing motivations. Hard variables can help estimate the number of potential customers a business can
have. For example, a nappies/diapers producer should know how many children under 3 years live in a certain
country as well as the birth rate. Soft variables can help identify motivations that lead to purchasing decisions
including price, prestige, convenience, durability and design

Purchase situation analysis- Purchase situations must also be examined to uncover expansion opportunities.
Questions to ask when reviewing purchase analysis are:

 When do people buy the product or service?

 Is it when they need it?
 Where do people make the purchase?
 How do they pay?

Direct competition analysis- In addition to analyzing demand and purchasing situations, it is important to
analyze supply. Knowing the existing players in the market where you are competing or going to compete is
important when evaluating opportunities.  Relevant questions in this case are:

 What are the products and brands of our industry that are growing more significantly and why?
 What competitive advantage do we have over them?
Indirect competition analysis- Opportunities can also be found by analyzing substitute industries. For example,
decrease in airfares, airlines may look for opportunities in consumer segments currently supplied by other
means of transport.  Air carriers should research how many people travel on long-distance buses and trains,
which routes are the most in-demand, how much travelers pay for their tickets, what the occupation rate of
long-distance buses and trains is and what is necessary to persuade a current passenger of buses or trains to
choose to travel by plane instead. This type of analysis helps establish competitive advantages against indirect
competitors and provide insight on additional opportunities for growth.

Changes in a country’s regulatory framework can also create opportunities. Other transformations in the
environment such as climate change also influence market opportunities.

Globalization: Going international is yet another trend followed by modern businesses. Production facilities
are being set up in different countries and products are being sold through a global network. Gradually,
business houses are exposed to global competition which forecast well for consumers. In fact,
internationalization or globalization is fast becoming important for modern business due to technological
innovations; crumbling trade barriers; global flow of capital and technology; information explosion; intensity
of market competition; changing lifestyles and the demand for new products. Internationalization of business
is a means of sustaining a strong domestic base in terms of technology, product, market and the capital over a
longer period. Globalization, however, is under fire. The economic meltdown all over the world has cast
doubts on the future of internationalization. Across the globe, countries are no more interested in further
liberalization of world trade. There is a frontal attack on trade liberalization and a tendency to revert to
protectionism.

Technology: Business is characterized by increasing use of technology. The impact of technology on business is
spreading widely. The way production function is organised; the way products are marketed; the way
employees are hired and motivated; the way finance function is carried on; and the way managers and
subordinates communicate with each other — all are influenced by technology.

Business environment

A business can be established, but to successfully sustain a business, the business needs resources like finance,
for which it has to depend on financial institutions. Acceptance of social norms, for which it has to depend on
society. Proper market conditions, for which it has to depend on the market. The sale of products/services, for
which it has to depend on the customers. The labour, for which it has to depend on society.

Then there are natural resources and raw material, for which it has to depend on Nature. Also the legal
support, for which it has to depend on the government. There are many factors and dimensions that affect
Business Environment. These factors are many different components of a single concept called Business
Environment.

These factors which business depends upon aren’t standstill; they are very dynamic and changing all the time.

What are market conditions?

Market condition is the characteristics and the situation of a particular market at a particular point of time.
Such as the number of competitors in a particular market, the intensity of competitiveness, how fast the
market is growing etc.
Real estate business

Market conditions affect everything from what types of property people want to buy to how much a typical
house costs. The economic factors, if unemployment is high and jobs are hard to get, there will be fewer
people taking out mortgages. If people are paying more for groceries, health care and other necessities, they
might not be able to afford a new home.

Interest rates also affect market conditions. When they rise, obtaining any type of loan, including a mortgage,
is more expensive. Because of this, fewer people may be in the market for new homes. Lower demand then
drives down housing prices.

The demographics of a nation influence real estate. For example, an older population might be looking to buy
vacation homes for retirement. Or, because they’re no longer working full time and their children have moved
out, they may want smaller homes, creating less demand for larger properties.

For example, when unemployment is low and employers are adding new jobs, consumers are more confident
in their ability to stay employed and maintain their mortgage payments. If interest rates are exceptionally low,
the demand for houses surges.

Environment Analysis:

If manager do not understand how the environment affects their organization or cannot identify threats and
opportunities, which are likely to be important , their ability to make decision and execute plan will be
severely limited. For example, if manager know little about customer likes and dislikes, organization will have a
difficult time designing new product, scheduling production or developing marketing plans. But information
about the environment is not always readily available. Manager find it difficult to forecast how well their own
products will sell and later on how the competitor will respond. In other words managers often operate under
conditions of uncertainly.

Environmental uncertainly means that managers do not have enough information to understand and predict
the future. Uncertainly rises from two related factor. Firstly complexity and second is dynamism.
Environmental complexity refers to the number of issues to which a manager must attend as well as their
interconnectedness. Industries that have many firms that compete in vastly different ways pretend to be more
complex and uncertain than industries with only a few key competitors. Similarly, environmental dynamism
refers to the degree of discontinuous change that occurs within the industries. High growth industries with
products and technology that change rapidly tend to be more uncertain that stable industries where change is
less dramatic and more predictable.

Why understanding Business Environment is important?

Because business environment has both positive and negative effects within and outside the company, they
can produce suitable strategies to handle any predicted and unpredicted situation. It can be said that the
Business Environment is the most important aspect of any business. To be aware of the ongoing changes, not
only helps the business to adapt to these changes but also to use them as opportunities.
Business Environment presents threats as well as opportunities for any business. A good business manager not
only identifies and evaluates the environment but also reacts to these external forces. Understanding will help
to:

Identify Business Opportunities- All changes are not negative. If understood and evaluated them, they can be
the reason for the success of a business. It is very necessary to identify a change and use it as a tool to solve
the problems of the business or populous.

Help in get useful Resources- Careful scanning of the Business Environment helps in getting the useful
resources required for the business. It helps the firm to track these resources and convert them into goods
and services.

Cope with Changes- The business must be aware of the ongoing changes in the business environment,
whether it is changes in customer requirements, emerging trends, new government policies, technological
changes. If the business is aware of these regular changes then it can bring about a response to deal with
those changes.

Assistance in Planning- This is another aspect of the importance of the business environment. Planning purely
means what is to be done in the future. When the Business Environment presents a problem or an
opportunity, it is up to the business to decide what plan would it have to come up with in order to address the
future and solve the problem or utilize the opportunity. After analyzing the changes presented, the business
can incorporate plans to counteract the changes for a secure future.

Helps in Improving Performance- Enterprises that are thoroughly scanning their environment not only deal
with the changes presented but also flourish with them. Adapting to the external forces help the business to
improve the performance and survive in the market.

Environment Factors and Features

PESTLE is a mnemonic which in its expanded form denotes P for Political, E for Economic, S for Social, T for
Technological, L for Legal and E for Environmental. PEST or PESTEL analysis is a simple and effective tool used in
situation analysis to identify the key external (macro environment level) forces that might affect an
organization. These forces can create both opportunities and threats for an organization. Therefore, the aim of
doing PEST is to:

 find out the current external factors affecting an organization;

 identify the external factors that may change in the future;
 to exploit the changes (opportunities) or defend against them (threats) better than competitors would do.

The outcome of PEST is an understanding of the overall picture surrounding the company.

PEST analysis is also done to assess the potential of a new market. The general rule is that the more negative forces are
affecting that market the harder it is to do business in it. The difficulties that will have to be dealt with significantly
reduce profit potential and the firm can simply decide not to engage in any activity in that market.

Gathering PEST, PESTEL and STEEPLED information

In order to perform PEST (or any other variation of it) managers have to gather as much relevant information as
possible about the firm’s external environment. Nowadays, most information can be found on the internet
relatively easy, fast and with little cost. The following templates might be useful when gathering information for
PEST, PESTEL and STEEPLED analysis.

PEST analysis
Political factors Economic factors
 Bureaucracy  Growth rates
 Corruption level  Inflation rate
 Tax policy (rates and incentives)  Interest rates
 Freedom of press  Exchange rates
 Regulation/de-regulation  Unemployment trends
 Trade control  Labor costs
 Import restrictions (quality and quantity)  Stage of business cycle
 Tariffs  Credit availability
 Competition regulation  Trade flows and patterns
 Education Law  Level of consumers’ disposable income
 Discrimination law (income remaining after deduction of taxes,
 Copyright, patents / Intellectual property law available to be spent or saved as one wishes).
 Consumer protection and e-commerce  Price fluctuations
 Employment law  Stock market trends
 Health and safety law  Weather
 Laws regulating environment pollution  Climate change

Socio-cultural factors Technological factors

 Health consciousness
 Attitudes toward imported goods and services
 Attitudes toward work, leisure, career and retirement
 Attitudes toward product quality and customer service
 Attitudes toward saving and investing
 Emphasis on safety
 Lifestyles
 Spending on research & development
 Buying habits
 Technology level in your industry
 Religion and beliefs
 Communication infrastructure
 Attitudes toward “green” or ecological products
 Access to newest technology
 Population growth rate
 Internet infrastructure
 Immigration and emigration rates
 Gender discrimination
 Average disposable income level
 Social classes
 Family size and structure
 Minorities
 Attitudes toward and support for renewable energy

Environmental (ecological) Legal

 Weather  Discrimination law
 Climate change  Copyright, patents / Intellectual property law
 Laws regulating environment pollution  Consumer protection and e-commerce
 Air and water pollution  Legislation regarding technology
 Recycling  Employment law
  Waste management  Health and safety law
 Attitudes toward “green” or ecological products  Laws regulating environment pollution
 Attitudes toward and support for renewable energy

STEEPLED analysis template

+
Ethical Demographic
 Population growth rate
 Immigration and emigration
rates
 Ethical advertising and sales practices
 life expectancy rates
 Accepted accounting, management and marketing standards
 Gender
 Attitude towards counterfeiting and breaking patents
 Average disposable income
 Ethical recruiting practices and employment standards (not using
level
children to produce goods)
 Social classes
 Family size and structure
 Minorities

Identifying opportunities and threats

Gathering information is just a first important step in doing PEST analysis. Once it is done, the information has
to be evaluated. There are many factors changing in the external environment but not all of them are affecting or
might affect an organization. Therefore, it is essential to identify which PEST factors represent the opportunities
or threats for an organization and list only those factors in PEST analysis. This allows focusing on the most
important changes that might have an impact on the company.

The Process of Environmental Analysis

Environmental analysis is a challenging, time-consuming and expensive affair. The analysis consists of four
sequential steps: (i) scanning, (ii) monitoring, (iii) forecasting, and (iv) assessment.

Scanning - Being the first step in the process of environmental analysis, scanning is the process of searching
the environment for information. Often times, information that is not commonly available and sorting through
the information to analyze, organize and produce competitive intelligence. Competitive intelligence is the
result of a company's efforts to gather and analyze information about its industry, business environment,
competitors, and competitive products and services. The information-gathering and analysis process can help
a company develop its strategy or identify competitive gaps. Intelligence is a refined, useful form of
information that helps manager guide or handle uncertain environments. The fundamental challenge for
analysis in scanning is, therefore, to make sense out of ambiguous and unconnected data.

To address what is important, mangers ask questions such as:- Who are our current competitors?; Are there a
few or many barriers to entry to our industry?; What substitutes exist for our products or service? Is the
company too dependent on powerful suppliers?; Is the company too dependent on powerful buyers?
Monitoring - Monitoring involves tracking the environmental trends, sequences of events, or flow of activities.
The purpose of monitoring is to assemble sufficient data to find out whether certain trends and patterns are
emerging. Thus, as monitoring progresses, the data turn frequently from imprecise to precise. Three outcomes
emerge out of monitoring: (a) a specific description of environmental trends and patterns to be forecast; (b)
the identification of trends for further monitoring, and (c) the identification of areas for further scanning.
These outputs (particularly the first) become inputs for forecasting. They will also cause for further scanning
and monitoring.

Forecasting - Scanning and monitoring provide a picture of what has already taken place and what is
happening. Strategic decision-making, however, requires a future orientation. Naturally, forecasting is an
essential element in environmental analysis. Forecasting is concerned with developing plausible projections of
the direction, scope, and intensity of environmental change. It tries to draw a layout for the evolutionary path
of anticipated change. For example, how long will it take the new technology to reach the marketplace? Are
current lifestyle trends likely to continue? These kinds of questions provide the grist for forecasting efforts.
Unlike scanning and monitoring, forecasting is well focused and is much more logical and complex activity.
Forecasting is used to more precisely predict the impact certain factors have on future outcomes.

Assessment - Scanning, monitoring and forecasting are not ends in themselves. Assessment involves
identifying and evaluating how and why current and projected environmental changes affect or will affect
strategic management of the organization. In assessment, the frame of reference moves from understanding
the environment — the focus of scanning, monitoring and forecasting — to identifying what the
understanding means for the organization. Assessment, therefore, tries to answer questions such as what are
the key issues presented by the environment, and what are the implications of such issues for the
organization?