The macro-environment is dynamic and constantly changing from time to time. Globalization makes it challenging to avoid external shocks to domestic business. The economy also intertwined from one country to another. Shocks in one country, such as the 2008 crisis, spread to other countries. It gives rise to a quick and dramatic contagion effect.
Likewise, technology also brings significant changes to the market. The world is getting online. Changes in technology are disrupting many conventional businesses as well as introducing new business models.
The macro-environment, or external environment, consists of various factors and forces outside the company, which affects business operations. And, companies have no control over their changes. Any change in those factors could have an impact on the competitive environment and the company’s internal conditions.
The competitive environment, or industry environment, represents various forces that represent the influence of the company’s external stakeholders. They consist of competitors, government, suppliers, customers, the local community, creditors, and so on.
Meanwhile, the internal environment consists of various aspects within the organization, such as corporate culture, organizational structure, and company resources.
Six macro-environment forces and its examples
The macro-environment consists of seven factors, namely:
- Political factors such as the change of state leadership, political unrest, coups, corruption, government policies, and welfare programs.
- Economic factors such as economic growth, inflation, interest rates, exchange rates, taxes, stock indices, bond prices, and the unemployment rate.
- Socio-cultural factors such as population growth, demographic composition (age, religion, and ethnicity), tastes and preferences, household income and wealth, and migration.
- Technologies such as the internet, 3D printers, fiber optic technology, and nanotechnology.
- Environmental factors such as natural disasters, global warming, and pollution.
- Laws such as competition regulations, consumer protection, product health requirements, carbon emissions regulations, trade policies, and environmental policies.
Those six factors are familiar with the acronym PESTEL.
Remember, the six factors can be local, national, or global. Trade protection by trading partners, for example, is a global issue rather than local. The policy affects domestic export-oriented companies. But, that is less significant for companies with sources of revenue from local sales.
How does the macro-environment affect the business
The macro-environment influences the decision, profitability, and functioning of companies. And, they do not have absolute control to direct the impact to their advantage.
Companies need to consider these factors in strategic planning. I will take the example of an insurance company.
One source of income of insurance companies, excluding premiums, is investment income. To allocate investment to the right asset class, they should predict future trends of some economic indicators such as stock and bond price indices, interest rates, economic growth, and inflation.
Say, the company predicts the central bank will raise policy rates next year. An increase in interest rates means bond prices would be down. Hence, companies need to consider whether or not to reduce their investment exposure in bonds.
Dynamic, but not all strategic
Six elements of the macro-environment are dynamic. I mean, they change from time to time and bring uncertainty to businesses. And, some factors can be more significant in specific industries, but not in other industries. So, you should not have to include all the factors when analyzing a company. Just focus on the significant factors for the company.
Changes in macroeconomic elements present opportunities as well as threats. Because out of control, you need to analyze which factors influence your company most significantly. That way, you can exploit every opportunity and minimize every threat.
The significance of opportunities and threats depends on the industry where your business operates. For example, interest rates are more significant on commercial banks than manufacturing companies. Likewise, inflation is more significant for food and beverage companies than utility companies.
How to adapt to the macro environment
Businesses should identify which factors are most uncertain and most significantly affect business operations. They need to sort out the key elements and determine their significance.
Typically, the steps in macro-environment analysis involve the following stages:
- Identify and sort out the most uncertain and most significant key factors affecting the company
- Determine the trends of each factor, whether moving in a favorable direction or not
- Classify these factors as “opportunities” or “threats.”
- Evaluate the significance of each opportunity or threat to the company’s performance and the probability of its occurrence.
You then use the results in the SWOT analysis. Next, you map and connect these opportunities and threats with the company’s internal strengths and weaknesses. Ideally, you should be able to take advantage of opportunities by utilizing existing internal strengths and minimizing the impact of threats to internal weaknesses.