The macro environment is dynamic and keeps changing from time to time. In comparison, changes in demographic factors may take a long time, but not for other factors such as technology and the economy.
For example, globalization makes it difficult for domestic companies to avoid external shocks. The economy has become increasingly intertwined from country to country. Thus, shocks in one country, such as the 2008 crisis, spread quickly to other countries. It creates a rapid and dramatic contagion effect.
Likewise, technology brings significant changes to the market. The world is getting online. Changes in technology are disrupting many conventional businesses, such as retail. It also introduces new business models, such as ride-hailing services.
What is a macro environment?
The macro-environment refers to the factors and forces outside the company which affect business operations. Every change in these factors can impact the competitive environment and the company’s internal environment. But the company has no control over its changes.
- The competitive environment, or industry environment, is around the company’s external stakeholders. It is formed through the relationships and linkages between companies and their stakeholders, such as competitors, governments, suppliers, customers, local communities, creditors, etc.
- The internal environment includes aspects within the organization, such as corporate culture, organizational structure, and company resources.
The macro environment is vital because it exposes opportunities and threats to the company. Thus, failure to adapt to changes makes companies lose opportunities to exploit external opportunities to build competitive advantage. Or, it exposes the risk where the company fails to address external threats, leading to business failure.
Factors in the macro environment
The macro-environment comprises seven factors, namely:
- Political factors
- Economic factors
- Socio-cultural factors
- Technological factor
- Environmental factor
- Legal factors
We briefly PESTEEL these seven factors.
Please remember these six factors can be local, national, or global. Thus, their exposure will also differ between businesses.
Take economic factors as an example. For example, trade protection by trading partners is a global rather than a local issue. The policy affected domestic export-oriented companies. However, it is less significant for companies if their revenue comes from local sales.
Developments in the political environment can significantly expose businesses to opportunities and threats. Changes in taxation, laws, and government policies are examples.
In addition, the political environment also includes political stability, corruption, rule of law, and institutional strength. For example, a change in a country’s leadership might create political instability and policy uncertainty, which raises business concerns.
Economic factors include many variables, such as:
- Economic growth
- Interest rate
- Exchange rate
- Unemployment rate
The economic environment also includes government policies such as fiscal policy, monetary policy, and trade policy. They all affect business operations, either directly or indirectly.
For example, an increase in import tariffs reduces competition in the market. It makes foreign goods more expensive when they arrive in the domestic market, making them less competitive.
Take exchange rates as another example. For example, a depreciating exchange rate makes aluminum imports more expensive. The increase has a direct impact on car manufacturers. Meanwhile, service companies may not be directly affected. They may be exposed to depreciation if automakers increase prices to maintain profitability.
Economic factors can also have an indirect impact by influencing consumers’ purchasing power and spending patterns. For example, an increase in interest rates makes borrowing more expensive. Consumers responded to this condition by reducing demand for durable goods, which have relied on loans to purchase them.
These factors include demographic factors related to changes in the population and its composition (such as age, sex, race, education, religion, and ethnicity). In addition, there are socio-cultural factors.
Socio-cultural factors include aspects such as:
- Social class
- A religious norm
- Distribution of wealth
- Shared practices, values, norms, and behaviors
- Social standards and traditions
Socio-cultural factors influence business in several ways. First, it affects consumer spending patterns and behavior. For example, the middle class spends more on services than the lower class. The middle class also has higher education, influencing their spending patterns.
Second, it influences practices and culture within the organization. For example, employees’ social values, traditions, and beliefs shape the workplace’s culture.
Technological advances have disrupted several conventional businesses. For example, e-commerce makes traditional retail bankrupt. They also influence production techniques and communication channels.
Technology also affects work practices, such as working from home. Moreover, they are bringing a new business model as introduced by Uber through its ride-hailing service.
The technological factor includes not only outputs such as the internet, 3D printers, fiber optic technology, and nanotechnology. However, the knowledge surrounding its development is also essential, including research and development.
Environmental factors include natural resources, physical environment, or natural ecological conditions. This factor is becoming increasingly important as environmental issues have increased recently.
Natural disasters, global warming, and pollution expose many businesses. Logistical disruption due to natural disasters is an example.
Consumers and governments have also increased their concern for the environment and sustainability for future generations. As a result, these factors have influenced consumer demand patterns for products and prompted the government to launch related policies and regulations.
Legal factors are closely tied to political factors. For example, political stability significantly influences changes in laws and government regulations. Unstable politics can encourage inconsistency in laws or regulations issued by government regimes.
Legal aspects affect business in many areas, including:
- Labor practices
- Consumer protection
- Product health and safety
- Environmental regulations
How the macro environment affects the business
On the one hand, changes in the macro environment affect decisions, profitability, and operations. On the other hand, companies do not have absolute control to direct their impact in their favor.
Therefore, companies need to consider these factors in strategic planning. For example, they forecast interest rates in the next few years to inform investment decisions.
Let’s take the insurance company as a case.
Insurance companies earn premium income. In addition, their revenue also comes from investment. Let’s narrow the discussion to investment income.
Insurance companies must predict future trends to obtain optimum return on investment at a tolerable risk level. For example, they forecast economic indicators such as stock and bond price indices, interest rates, economic growth, and inflation. The forecast is helpful for properly allocating investments to asset classes.
Say, an insurance company predicts the central bank will raise policy rates next year. Among asset classes, rising interest rates significantly expose bond prices. Higher interest rates push bond prices down. So, for example, the company might reduce its exposure to bonds.
Dynamic, but not all strategic
The factors in the above macro environment are dynamic. They change from time to time. And the changes bring both opportunities and threats to businesses.
However, businesses have varying exposure to these factors. Some factors can have a more significant effect on specific industries but not on other industries.
For example, an increase in interest rates has a more significant impact on the banking industry than manufacturing. Meanwhile, inflation was more important for food and beverage companies than utility companies.
So, we don’t have to include all the factors when analyzing a company. Just focus on the significant aspects of the company.
Analyze changes in the macro environment and their impact
Businesses must identify the most uncertain factors and significantly affect business operations. They need to sort out the main factors in the macro environment and determine their significance.
The steps in analyzing the macro environment involve the following stages:
- Identify and sort out the most uncertain and most significant key factors affecting the company.
- Determine the future trend for each factor and whether it is moving in a favorable direction or not.
- Classify each factor as an “opportunity” or a “threat.”
- Evaluate how significant the opportunities or threats affect the company’s performance and how significant the opportunities are
We use the results in a SWOT analysis. Next, we map and relate these opportunities and threats to the company’s internal strengths and weaknesses. Companies should be able to optimize opportunities by exploiting existing internal strengths and minimizing threats impacting internal weaknesses.