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Learning objectives
By the end of this chapter and the relevant reading, you should be able to:
• distinguish between the micro and macroenvironment of a firm
• describe how the different elements of the micro and
macroenvironment affect firms’ marketing activities
• distinguish between zero-sum and non-zero-sum games and the
implications for competitive behaviour
• explain the different methods firms can use to elicit co-operation.
Essential reading
Kotler, P. and G. Armstrong Principles of marketing. Chapter 3.
Note: You need to be aware of the impact of a changing population structure
but don’t need the level of depth or detail given by Kotler; for example, the
material dealing with baby boomers, millenials and the changing American
family is not needed; also not required is the material on geographic
shifts in population. You should understand the implications of increasing
diversity for marketers generally, but do not need to know the details of the
American situation. You need to know what secondary cultural values are
generally, but you do not need to know the specifics of the different types
that Kotler gives.
Further reading
Axelrod, R. The evolution of co-operation. (London: Penguin Books, 1990).
Deber, R.B., N. Kraetschemer, S. Urowitz and N. Sharpe ‘Patient, consumer,
client or customer: what do people want to be called?’ Health Expectations 8
(2005), pp.345–51.
McDonald, C. Challenging social work: the context of practice. (Basingstoke:
Palgrave Macmillan, 2006) p.115.
McLaughlin, H. ‘What’s in a name: ‘Client’, ‘Patient’, ‘Customer’, ‘Consumer’,
‘Expert by experience’, ‘Service user’ – what next?’ British Journal of Social
Work 1–17 (2008).
Redding, P. ‘The evolving interpretations of customers in higher education:
empowering the elusive’, International Journal of Consumer Studies 29(5)
2005, pp.409–17.
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141 Principles of marketing
Useful websites
www.tutor2u.net/economics/content/topics/monopoly/game_theory.htm
(last accessed 29 April 2009).
This site has a diagram illustrating the prisoners’ dilemma.
Introduction
This chapter has two parts. In the first part we will look at the marketing
environment, both the micro and macroenvironments. In the second part
we will look in more detail at how game theory can be used to understand
the interactions between competitors.
This chapter focuses on the environmental factors which affect the
marketing activities of organisations. Such factors include demographic
changes, changes in fashions, changes in consumption due to economic
development and political changes. How marketers cope with such
changes is also covered. Another important theme that runs throughout
this course 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 while this chapter and the accompanying material
in Kotler and Armstrong (2010) draw attention to specific aspects of the
political, economic, social and technological environments, these are all
dynamic areas and for examination purposes you need to have your own
examples that illustrate, for example, how specific changes in the economic
environment have had an influence on marketers. Clearly there is a
similarity in concepts and their study in this chapter will repay when you
reach the end of the subject. 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 subject.
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 company’s suppliers, customers, marketing intermediaries
and competitors. The macroenvironment is made up of wider forces which
affect demand for a company’s goods. These forces include demographics,
economics, nature, technology, politics and culture.
1
Those of you who studied
The microenvironment1 Principles of sociology
should recall the coverage of
The microenvironment consists of five major factors:
‘Elements of organisations’.
1. The marketer’s ‘internal environment’ (i.e. its own management That topic considered the
structure). role of ‘missions and goals’;
these are an important
2. The ‘marketing channel’ used by the firm (for example, its suppliers). element of the internal
3. The markets in which the firm may be selling (these may be consumer, environment for an
organisation. For example,
producer, reseller, government or international markets).
the mission of an
4. The firm’s competitors (also contained in the ‘internal environment’). organisation explains what
the organisation is about
5. Those groups of people who have an interest in the marketer’s and what different
ability to achieve their objectives. As well as obvious groups such stakeholders can expect
as shareholders, interested publics can also include local interest from it.
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Chapter 3: The marketing environment and a game theory perspective on competition
groups who may have concerns about the marketer’s impact on the
environment or on local employment. The characteristics of the firm’s
internal environment affect its ability to serve its customers.
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 reflected in changing demands for various
goods not only from the specific 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 within 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; a large proportion of
women go out to work. This has resulted in an increase in the sales of
convenience foods. There are also more couples whose children have
grown up and left home. Such couples have more disposable income to
spend on luxuries, holidays and home improvements.
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Chapter 3: The marketing environment and a game theory perspective on competition
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 how their wealth is spread within the population. For
example, poor countries may be classified 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 industry’s borrowing costs.
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 is the
barter of Pepsi-Cola for Russian vodka by the Pepsi company and the old
Soviet government.
Nature
This is important to marketers insofar as it is the source of many raw
materials and fluctuation 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 the sources of raw
materials 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 which appeal to consumers. For example, in some countries
there is a trend towards small cars and products which save energy.
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 2
Those of you who have
levels of poisonous gases which are emitted into the atmosphere. studied Principles of
sociology will recall
Technology2 the argument between
modernists and post-
Technological developments offer marketers both opportunities and modernists. The latter ar-
threats. While firms can offer customers a wider array of advanced gue that the information
products, changes in technology also mean that there may be more than explosion of recent years
one technical solution to a customer’s needs. Where a market converges has not led to increas-
ing conformity, as the
towards one technological standard, there can be problems for marketers
modernists have argued,
who had promoted an alternative standard. An example of such a situation but it has led to an
was illustrated by the fight between two alternative video formats: VHS increase in diversity and
(promoted by JVC) and Betamax (promoted by Sony). While Sony’s choice. This highlights
technology was considered superior, most other manufacturers adopted the issue that there can
be considerable debate
the VHS format and ultimately Sony stopped selling Betamax video
about the impact of
recorders and switched to making those using the VHS format. Today there changes in technology
is a similar struggle between suppliers of different types of hi-fi equipment. on society.
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141 Principles of marketing
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Chapter 3: The marketing environment and a game theory perspective on competition
Figure 3.1 shows the different elements of the macro and micro
environments and also shows that the marketing organisation (represented
by the marketing mix) is directly influenced by the microenvironment and
that both are influenced by the macroenvironment.
Demographics
Technology
customers competitors
Economics management
Culture
External strategies & Internal public
Environment objectives Environment
Nature
Activity
Choose an industry about which you can get information from either newspapers or
books. Using Figure 3.1, describe any political, economic, social and technological
changes taking place which 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
firms in that industry. Where possible collect relevant statistics and collect 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 above figure is as follows; it is based on an extract from
www.foodanddrinkeurope.com/news/ng.asp?n=62404-indian-packaged-foods-ethnic/
(last accessed 29 April 2009).
‘Average annual growth in consumer spending on ethnic packaged foods in Europe has
been running at 14 per cent since 1999 – a rate far higher than 5 per cent in the US.
Food formulators could delve deeper into Chinese offerings, with the report showing that
Chinese food is the leading pre-packaged ethnic cuisine, popular across all of Europe,
even where Chinese immigration is relatively low. “This reflects Chinese food’s relative
ease of consumption: it is not heavily spiced and it often features familiar ingredients,”
comments Band.’5 5
John Band, consumer
markets analyst at
The marketing impact of this information would be on producers of ethnic cooking Datamonitor.
ingredients, whose forecasts of sales could take into account the news of a healthy and
growing market.
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Chapter 3: The marketing environment and a game theory perspective on competition
Activity
Give some examples of ‘standards’ that have helped competitors in an industry.
Answer
The following website gives an example of how standards can be commercially important:
www.udel.edu/alex/dictionary.html#sta (last accessed 29 April 2009).
In summary it explains how alliance-forming in the video market by JVC enabled the
company to have its standard VHS format accepted, even though the competitor format
developed by Sony was widely considered to be technically superior.
Activity
Identify current examples of the tragedy of the commons. What measures have or could
be taken to ensure that the outcome comes closer to maximising the common good?
Commentary
Planning and building laws restrict the ability of individuals and firms
to build their homes and shops however they like. The restriction on the
rights of individuals, however, means that the wider community is able to
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141 Principles of marketing
gain from better planned towns and cities. Where shops adhere to such
laws the shopping experience can be more rewarding than situations
where people have been able to expand their businesses however they like.
Zero-sum games
Zero-sum games are those where one player’s gains can only be at the
expense of the others. Certain types of examinations are examples of a
zero-sum game. In such examinations there are only a limited proportion
of firsts and upper seconds. If one candidate gains a first, it means that
there is one fewer first-class result available for the other players (or
students). In marketing the competition for market share can be seen as a
zero-sum game: if one firm wins a 30 per cent share of a market, there is
less for everyone else.
Non-zero-sum games
Non-zero-sum games (which are also known as positive-sum games) are
those in which the total combined score of the players can vary, depending
on the different combinations of moves they make. This means that if
people co-operate they can all gain.
Activity
Are the prisoners’ dilemma and the tragedy of the commons, zero-sum games or non-
zero-sum?
Answer
The prisoners’ dilemma and the tragedy of the commons, and the examples of their
application, are all non-zero-sum games, which is why co-operation can evolve.
Co-operative games
Zero-sum games are always going to be non-co-operative: win–lose offers
no opportunity for mutual benefit to be derived by co-operation. Non-zero-
sum games, on the other hand, offer the participants potential benefits
from co-operation. The challenge is how to establish the conditions and
processes whereby co-operation can be achieved.
It is possible to establish co-operation in various ways. The first, and
most obvious, is through direct communication between the parties. The
advantages of collusion to oligopolistic suppliers are obvious, matched by
the equally obvious disadvantages to the paying public. Most countries have
enacted legislation against collusion, prohibiting cartels among companies.
However, even where direct communication is not possible, co-operation
can be established through reciprocity and a pattern of behaviour. Axelrod
(1990) identifies four principles that can make for an effective strategy –
being:
• nice
• retaliatory
• forgiving
• clear.
Niceness prevents a player from getting into unnecessary trouble.
Retaliation discourages the other side from persisting whenever defection
is tried. Forgiveness helps restore mutual co-operation. And being clear
makes it obvious to the other companies which strategy a firm is adopting
and this can help develop long-term co-operation.
Eliciting co-operation can be achieved through the following methods:
Enlarge the shadow of the future… Mutual co-operation can be
stable if the future is sufficiently important relative to the present.
This is because the players can use an implicit threat of retaliation
against the other’s defection – if the interaction will last long
enough to make the threat effective… There are two basic ways
of doing this: by making the interactions more durable, and by
making them more frequent… Durability of an interaction can help
not only lovers, but enemies. The most striking illustration of this
point was the way the live-and-let-live system developed during
the trench warfare of World War I… The same small units of troops
would be in contact with each other over extended periods of time.
They knew their interactions would continue because no one was
going anywhere… This prolonged interaction allows patterns of
co-operation which are based on reciprocity to be worth trying and
allows them to become established.
Another way to enlarge the shadow of the future is to make the
interactions more frequent. In such a case the next interaction
occurs sooner, and hence the next move looms larger than it
otherwise would… frequent interactions promote stable co-
operation. (Axelrod, 1990, pp.126–30)
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141 Principles of marketing
Summary
The firm is affected by both its microenvironment and the
macroenvironment. The characteristics of the marketer’s
microenvironment affect its ability to serve its customers. The
macroenvironment comprises the wider societal forces which determine
the opportunities and threats facing a firm. Game theory presents
a number of models which show how it may pay competitors to co-
operate and/or cheat on each other. These models help to identify the
characteristics of situations when these different strategies may be
relatively effective. Game theory also presents various ideas as to how
firms can try and increase the possibility of co-operation.
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Chapter 3: The marketing environment and a game theory perspective on competition
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