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 firm
• understand how the different elements of the micro- and
macroenvironment affect firms’ 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 specific 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 specific changes in the economic environment
have had an influence 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
company’s suppliers, customers, marketing intermediaries and competitors.
The macroenvironment is made up of wider forces that affect demand for a
company’s 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 firm’s own
management structure, the organisation’s strategies and objectives, and the
departments within the company. The characteristics of the firm’s 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 marketer’s
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 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 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 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.

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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 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 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 firms 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 customer’s 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 fight between two alternative video formats: VHS
(promoted by JVC) and Betamax (promoted by Sony). Although Sony’s
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-fi 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 Apple’s 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 office. 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 firms can function in areas such as publishing and film
production, which used to be the domain of large organisations. In a number
of countries this has resulted in the establishment of small firms in these
areas.
The risks from technological changes have meant that firms are increasingly
entering into ‘strategic alliances’ with customers, suppliers and even
competitors. Indeed, there has been an increasing emphasis on open, long-
term 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 influenced 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
People’s 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 influence people’s
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 difficult for marketers to promote a message that runs counter
to them. More susceptible to change are secondary values. People’s opinions
are influenced 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
significant 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 influenced by the
microenvironment, and that both are influenced by the macroenvironment.

Figure 3.1: Macro- and microenvironment.

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 Chapter 3: Analysing the market environment

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 firms
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 figure 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 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.

Reminder of the learning outcomes

By the end of this chapter you should be able to:
• distinguish between the micro- and macroenvironment of a firm
• understand how the different elements of the micro- and
macroenvironment affect firms’ 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 Implication

1 Wants will be influenced by levels of economic prosperity and social and

cultural factors.
2 Macroenvironment issues will be important areas for firms to do marketing
research, both secondary and primary.
4 Consumer buying behaviour will be influenced 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 influence the
5
strengths/weaknesses/opportunities/threats facing an organisation.
The microenvironment will influence the opportunities and threats facing
an organisation.

6 The types of products developed by organisations will have to take into

account both the micro- and macroenvironment.
Social and other trends may influence 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 influence the level of ‘noise’ in
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communications. They will also influence 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.

8 Economic factors may determine which markets are more profitable 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 influence how easy or difficult
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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