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3.3. The External Environment

The external environment consists of two further divisions: factors close to the organization (called the micro-environment), and those factors common to society as a whole (the macro-environment). Micro-environmental factors might include such things as the customer base, the location of the company’s warehouses, or the existence of a local pressure group that is unsympathetic to the business. The macro-environment might include such factors as government legislation, foreign competition, exchange rate fluctuations or even climatic changes. The external environment is often not susceptible to direct control; the best that marketers can do is to influence some elements of it, and to react in the most appropriate ways to avoid the threats and exploit the opportunities it presents.

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STEP (Socio-cultural, Technological, Economic, and Political) analysis is a useful way of looking at the external environment (it is also sometimes written as PEST).

The micro-environment - The micro-environment is made up of those factors that impact closely on the organisation, and typically consists of competitors, customers; suppliers, intermediaries & some publics.

  • Competitors - Frequently firms fail to recognize who their competitors are. It is not at all unusual for firms to define competition too narrowly, simply because they define their business too narrowly. Marketing managers need to decide which competitors offer the closest substitutes in terms of meeting the consumers’ needs. Competitors can therefore be either firms supplying similar products or firms competing for the consumer’s hard-earned money, but either way marketers need to provide a product that meets consumers’ needs better than the products offered by the competition. In practice, most marketers are faced with monopolistic competition, where each company is trying to establish a big enough market share to control the market, but has no real prospect of becoming the sole supplier for the product category. The largest firm in such a market may find it more worthwhile to seek to increase the total market for the product category than to try for a bigger share of the existing market. This approach has the added advantage that it will not attract the attention of the government monopoly regulators.

Michael Porter’s Five Forces model offers a useful approach to competitor analysis. The five forces are as follows:

    • The bargaining power of suppliers: the greater this is, the stronger the competitive pressures.
    • The bargaining power of customers: again, the stronger this is, the more competitive the environment.
    • The threat of new entrants.
    • The threat of substitute products and services. This threat is often not seen until itis too late.
    • The rivalry among current competitors.

The main strength of Porter's model is that it broadens the concept of competition and enables marketers to look at the wider picture.

  • Suppliers - Suppliers also form part of the micro-environment since they impact closely on the company. At first sight, suppliers would appear to be outside the scope of the marketing department, but in fact the firm relies heavily on the goodwill of its suppliers, and a good public relations exercise will always try to involve suppliers. A supplier can easily cause an adverse effect within a firm by supplying shoddy goods, or failing to meet delivery dates, and this will inevitably impact on the firm’s customersCurrent thinking in purchasing and supply is that the relationship between suppliers and their customers should be a close one, with frequent visits to each other’s premises and a high level of information exchange. This is encompassed within the logistics approach to supply, in which the firm is seen as a link in a system for providing the right goods and services in the right place at the right time; the system as a whole takes raw materials and moves and transforms them. The marketing environment into goods that consumers need. This philosophy relies on the supplier and purchaser integrating their activities and developing a mutual understanding of each other’s problems.
  • Intermediaries -Intermediaries are the retailers, wholesalers, agents and others who distribute the firm’s goods. Relationships with these intermediaries need to be good if the firm is to succeed in getting its goods to the final consumer successfully (this is part of the logistics approach). Intermediaries may also include marketing services providers such as research agencies, advertising agencies, distribution companies providing transport and warehousing, and exhibition organisers – in fact, any individuals or organisations that stand between the company and the consumer and help in getting the goods out. These relationships are, of course, of great importance to marketers, but intermediaries have their own businesses to run and are working to their own agendas. As with suppliers, it pays dividends to establish good relationships with intermediaries, mainly by sharing information and by maintaining good communication links.
  • Publics - Finally, some of the firm’s publics form part of the micro-environment. ‘Publics’ is a generic term encompassing all the groups that have actual or potential impact on the company. The range of publics can include financial publics, local publics, governmental publics, media publics, citizen action publics and many others. The marketing activity concerned with these publics is called (not surprisingly) public relations. Financial publics might include the banks and shareholders who control the firm’s finances, and who can pressure the firm to behave in particular ways. These pressures can be strong, and can even threaten the firm’s existence; firms are often compelled by their financial publics to do things they would otherwise prefer not to. It is to address this problem that glossy company reports are produced for shareholders, and positive information about the company is issued to banks and others. Local publics consist mainly of the firm’s neighbours. These local organizations and individuals may well pressure the company to take local actions, for example clean up pollution or sponsor local charities. Obtaining the goodwill of the local public will, of course, make it much easier for the company to live harmoniously with its neighbours and will reduce short-term local difficulties. For example, Body Shop expects its franchisees to participate in projects that will help the local community, whether by supervising a play area or by raising funds for a local charity. Employees participate in these projects on company time; the activities improve the image of the company and generate positive feelings about the store among local residents. There is a spin-off for the firm’s staff, who feel that they are working for a caring company; Body Shop employees tend to be very positive about their employer.

Each of the elements in the micro-environment is small enough that the organization at the centre should have influence over most of them, and be able to react effectively to the remainder.

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