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Components of a Company's Macro Environment
The world at large forms the external environment for businesses. A company must confront, adapt to, take advantage of, and defend itself against what is happening in the world around it to succeed. To make gathering and interpreting information about the external environment easier, strategic analysts have defined several general categories of activities and groups that managers should examine and understand. A company’s macro environment contains elements that can impact the company but are generally beyond its direct control. These elements are characteristics of the world at large and are factors that all businesses must contend with, regardless of the industry they are in or type of business they are.
The macro-environment comprises a range of external factors-demographic, physical, natural, economic, technological, political, legal, and socio-cultural conditions. Neither businesses nor governments can entirely control external factors. But diligent decision-making and strategies can reduce the impact on the economy.
Let us look at the basic outline of these factors −
Demographic Factors − Demographics refers to age, language, lifestyle, income distribution, cultural differences, etc. Financial literacy also depends on demographics.
Ecological and Physical Factors − Business performance depends on various geographical and ecological forces-availability of natural resources, climate change, weather conditions, biological balance, pollution, etc.
Political and Legal Factors − The government imposes various regulations on businesses-employment laws, import/export laws, copyright laws, labor laws, health and safety laws, and discrimination laws.
Economic Factors − Consumer buying decisions are significantly impacted by macroeconomic factors-demand-supply, inflation, interest rates, taxes, exchange rates, and recession.
Technological Factors − Technological growth and advancement within a nation greatly influence the production and sale of goods or services. Innovation, automation, and internet facilities are some examples.
Socio-Cultural Factors − A business needs to be socially responsible and culturally aware. Socio-cultural factors comprise education, population growth rate, life expectancy rate, social status, buying habits, religion, etc.
Let us now look at the factors in detail below.
The social values and culture of an environment or society play a huge role in the functioning of the company. So, when there is a change in the social environment changes, it can have a direct or indirect effect on the company. The basis for these factors is formed by the fact that people are part of a society and cultural group that shape their beliefs and values.
Cultural forces also have a significant impact on the success of a company in the long run. Especially in a country like India where the cultural influences are strong and complicated.
For instance, symbols of one culture may carry a negative meaning in another culture. Organizations need to understand these and be careful about.
Technological forces form a crucial influence in the Macro Environment. They relate to factors that create new technologies and thereby create new product and market opportunities.
In the times we live in, technology is constantly changing. Thus, it is important that the business can keep up with the changes. Technology does not only confine to computers and IT services. It includes products, manufacturing processes, techniques, etc. This may mean that there is emergence of opportunities for a business, but companies need to be careful. Every new technology replaces an older one.
Thus, marketers must watch the technological environment closely and adapt in order to keep up. Otherwise, the products will soon be outdated, and the company will miss new product and market opportunities.
The economic conditions of a country and the performance of a business have a very close relationship.
A business depends on the economy for all its inputs and factors of production.
It also sells its products and services in the same market. A market is rarely in one stable condition.
It is always in a flux. If there is a sudden positive change in the market, then all businesses will benefit from the favorable conditions. The income will be higher, rate of interests will be low, new capital will be available, etc.
The Economic forces relate to factors that affect consumer purchasing power and spending patterns.
For instance, a company should never start exporting to a country before having examined how much people will be able to spend.
Important criteria are GDP, GDP real growth rate, GNI, Import Duty rate and sales tax/ VAT, Unemployment, Inflation, Disposable personal income, and Spending patterns.
Ecology and Physical Environment
Ecology and physical environment play a huge part in the performance of any business. This is especially true for manufacturing/production companies. Weather conditions, topographical elements, geographical location, climate changes and other ecological factors are a very important element in the macro environment of a business.
The physical environment, which provides natural resources for manufacturing and energy production, has always been a key element of human business activity. As resources become scarcer and more expensive, environmental factors impact businesses more every day. Firms are developing technology to operate more cleanly and using fewer resources.
For example, in 2017, London, Barcelona, and Paris announced their plans to ban cars with internal combustion engines over the next few decades, in order to combat air-quality issues. In Delhi, diesel vehicles over 15 years have been banned and there is a push from the government to shift to alternate fuel options such as CNG and Electricity.
Political and Legal Factors
The political environment of a country is the combination of three branches of the government – legislature, executive and the judiciary. The political environment of a country will mainly depend on the political beliefs and ideologies of the party in power at the state and central levels.
The legal environment refers to the rules, laws, regulations, and judgments etc., that affect the functioning of a business. And this will also include the taxation laws and the budget for the given year.
Legal factors in the external environment often coincide with political factors because laws are enacted by government entities. This does not mean that the categories identify the same issues, however. Although labor laws and environmental regulations have deep political connections, other legal factors can impact business success.
For example, Netflix or Prime Videos pay billions of dollars every year to movie and television studios for the right to broadcast their content.
In addition to the legal requirement to pay the studios, Netflix must consider that consumers may find illegal ways to view the movies they want to see, making them less willing to pay to subscribe to Netflix.
Intellectual property rights and patents are major issues in the legal realm.
As we have seen, the company is surrounded by a complex environment. The Macro Environment consists of a large variety of different forces. All of these may shape opportunities for the company but could also pose threats. Therefore, it is of critical importance that marketers understand the six forces of the Macro Environment.
Also, you should always have an eye on the development of the Macro Environment, to make your business grow in the long term.
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