CHAPTER 3

The Market Environment

The marketing strategy planning process requires narrowing down to the best opportunities and
developing a strategy that gives the firm a competitive advantage and provides target customers
with superior customer value. This narrowing down process should consider the important elements
of the market environment and how they are shifting. A large number of forces shape the market
environment. The direct market environment includes customers, the company, and competitors.
The external market environment is broader and includes four major areas:

1. Economic environment

2. Technological environment

3. Political and legal environment

4. Cultural and social environment

Analyzing Competitors and the Competitive Environment

The competitive environment affects the number and types of competitors the marketing manager
faces and how they may behave. Although marketing managers usually can’t control these factors,
they can choose strategies that avoid head-on competition. And where competition is inevitable, they
can plan for it.

Economists describe four basic kinds of market (competitive) situations: monopoly, oligopoly, pure
competition, and monopolistic competition. Understanding the differences among these market
situations is helpful in analyzing the competitive environment, and our discussion assumes some
familiarity with these concepts.

Monopoly situations occur when one firm completely controls a broad product market. These are
relatively rare in market-directed economies. When monopolies are necessary, monopolists often
face a great deal of government regulation. For example, in many parts of the world prices set by
utility companies (electricity and water) must be approved by a government agency. Monopolists can
be tempted to ignore customer needs, but a customer orientation can fend off increased government
regulation and help the firm if competitors later enter the market.

Most product-markets head toward pure competition or oligopoly over the long run. In these
situations, competitors offer very similar marketing mixes, and customers see the alternatives as
close substitutes. In other words, competitors have failed to differentiate their offerings. In this
situation, managers usually compete on low prices, and profit margins shrink. In oligopoly there are
a few large firms competing, whereas in pure competition there are often many firms. Avoiding these
competitive situations is sensible and fits with our emphasis on finding a competitive advantage.
Marketing managers can’t just adopt the same “good” marketing strategy being used by other firms.
That leads to head-on competition and a downward spiral in prices and profits. So target marketers
try to offer a marketing mix better suited to target customers’ needs than competitors’ offerings.

 Marketing managers should actively seek sustainable competitive advantage, a marketing mix that

 Customers see as better than a competitor’s mix and cannot be quickly or easily copied

The best way for a marketing manager to avoid head-on competition is to find new or better ways to
satisfy customers’ needs and provide value. The search for a breakthrough opportunity or some sort
of competitive advantage requires an understanding not only of customers but also of competitors.
That’s why marketing managers turn to competitor analysis an organized approach for evaluating
the strengths and weaknesses of current or potential competitors’ marketing strategies. The basic
approach to competitor analysis is simple. You compare the strengths and weaknesses of your
current (or planned) target market and marketing mix with what competitors are currently doing or
are likely to do in response to your strategy.

The Economic Environment

The economic environment refers to macro-economic factors, including national income, economic
growth, and inflation, that affect patterns of consumer and business spending. The rise and fall of the
economy in general, within certain industries, or in specific parts of the world can have a big impact
on what customers buy. The economic environment can, and does, change quite rapidly. The effects
can be far-reaching and require changes in marketing strategy. Even a well-planned marketing
strategy may fail if a country or region goes through a rapid business decline.

The Technological Environment

Technology is the application of science to convert an economy’s resources to output. Technology
affects marketing in two basic ways: it creates opportunities for new products and it drives the
development of new processes (ways of doing things). Throughout this book we offer many
examples, so let’s start by showing how anticipating technologies helps firms spot threats and
opportunities. Although most technological developments don’t come out of nowhere, it is not always

clear how a technology just over the horizon might change a business. For example, producers of
cameras and GPS systems might not have seen how quickly smart phones would cut into their
business. Marketing managers should monitor technologies that might impact their industry and
engage in scenario planning to identify possible opportunities and threats.

Technology changes how customers and marketers do things. Face book was founded in 2004 and
just a dozen years later boasts more than 1.5 billion users. The Internet has changed the nature of
retailing as many consumers shop from their keyboard or tablet device and have purchases
delivered to their homes. Hotels and airlines change prices depending on supply and demand on
specific dates.

The Political Environment

The attitudes and reactions of people, social critics, and governments all affect the political
environment. Consumers in the same country usually share a common political environment, but the
political environment can also affect opportunities at a local or international level.

Strong sentiments of nationalism an emphasis on a country’s interests before everything else affect
how macro-marketing systems work. They can affect how marketing managers work as well.
Nationalistic feelings can reduce sales or even block all marketing activity in some international
markets. For many years, China has made it difficult for outside firms to do business there—in spite
of the fact that the Chinese economy has experienced explosive growth as its factories have turned
out larger and larger portions of the goods sold in the United States, Europe, and other parts of the
world.

Important dimensions of the political environment are likely to be similar among nations that have
banded together to have common regional economic boundaries. Free trade refers to agreements
between countries to not restrict imports and exports

The Legal Environment

Changes in the political environment often lead to changes in the legal environment and in the way
existing laws are enforced.

The Cultural and Social Environment

The cultural and social environment affects how and why people live and behave as they do—which
affects customer buying behavior and eventually the economic, political, and legal environments.
Many variables make up the cultural and social environment. Some examples are the languages
people speak; the type of education they have their religious beliefs; what type of food they eat; the
style of clothing and housing they have; and how they view work, marriage, and family. Because the
cultural and social environment has such broad effects, most people don’t stop to think about it, how
it may be changing, or how it may differ for other people. Some social cultural trends reflect broad
changing attitudes. For example, many consumers are becoming more careful about the food they
eat; organic foods have become more popular.

It is also because baby boomers, those born between 1946 and 1964, began to reach age 65 in
2011.Baby boomers are a powerful demographic force, as there are large numbers of people in this
group. Looking ahead, these shifts create new opportunities in industries such as tourism, health
care, and financial services all of which are more important to the middle-aged and retired.

Generation X, sometimes called Gen X, refers to the generation born immediately following the baby
boomers from 1965 to1977. This group is much smaller in number than the baby boomers it follows
notice the decline in 40–49 year olds from 2005 to 2015 and the decline in 50–59 year olds from
2015 to 2025. Starting in the mid-1980s, when the Gen X group reached college age, colleges were
left with excess capacity and lost revenue. To keep their doors open, colleges aggressively recruited
these students, which helped make Gen X better educated than previous generation

Generation Y, sometimes called Millennials, refers to those born from 1978 to 1994. This group
emerged from the echo boom—when baby boomers started having kids. This is most prominent in
the rise of those in their 20s from 2005–2015 and in their 30s from 2015 to 2025. Millennials are an
especially important group for many types of products. This group has income but is still forming
brand preferences in many product categories. Millennials tend to favor a authentic, handmade,
locally produced goods and natural foods but with relatively smaller paychecks, they still seek deals

Generation Z refers to those born since 1995. This group is still young, so ideas about its emerging
values are more speculative. These “digital natives” were born into a world that already used text
messaging, cell phones, and the Internet. The Zs are also part of a more ethnically diverse United

States than their parents knew, and they appear to be more accepting of different cultures, races,
and religions, this group tends to have realistic (as opposed to optimistic) views of the world. The Zs
may prefer brands that suggest long-term value, safety, and security. Marketing managers will
closely monitor this group to identify other trends, patterns, and opportunities.