What is Macro Environment Analysis?
Every business is affected by the macro environment (external environment). An organization can ignore it at its own peril. One should know how to reduce the negative effects of the macro environmental factors and how to align with the positive factors to get the best out of the situation. One should also be able to forecast the changes in the macro environment so that one can plan certain things in advance and reduce future risks.
Let us first understand what the macro environment comprises. This contains external forces that an organisation cannot control directly. Instead as stated earlier, organisations need to manage their macro environment in a way that gives them benefits.
All businesses are affected by four macro environmental forces viz: Political-Legal, Economic, Technological and Social. How much influence these factors have on a company depends on how interconnected they are with the company.
PEST : A Tool For Macro environment Analysis
To do macroenvironment analysis, we make the use of a tool called the PEST analysis. The PEST analysis of the macro environment examines the influence of political-legal, economic, technological and social factors on a business. These factors can’t be directly controlled, yet these factors influence each and every business irrespective of the industry.
These are related to the government. Political-Legal forces include election outcomes, court judgments and the diktats given by commissions and various government agencies. All organisations have to operate within the restrictions of the political environment.
The more important government policies comprise legislative bills, taxation, regulation, expenditure, health and safety laws and government stability. Businesses should understand these factors and align their operations in accordance with these government rules and regulations.
Economic forces refer to the nature and direction of the economy in which the businesses operates. All businesses are influenced by the state of the national and global economy. National and global interest rates and fiscal policy are set around the economic conditions. The economic climate dictates how consumers, suppliers and other organizational stakeholders act within the society. An economy that is having recession will have high unemployment, low spending power and low stakeholder confidence. On the other hand, a booming economy will have high employment, high spending power and high stakeholder confidence.
In short, the general state of the economy viz: depression, recession, interest rates, balance of payments, monetary policy and fiscal policy are the key variables in investment, employment, and pricing policies.
The effect of growth or fall in gross national product and increases or decreases in interest rates, inflation, and the dollar exchange rates are core examples of noteworthy effect on business operations.
Other than the above, organizations will need to assess the impact of the economic conditions on their competitors and respond appropriately. In the current global situation, organisations are affected by economies throughout the world.
These consist of consumers. Consumers buy products based on many different factors. This includes their demographic location, ethnic background, traditions, values, social status, expectations, immediate needs, lifestyle changes and societal trends.
The key concerns in the social environment are the Demographics like population growth rates, the average age of the workforce, educational qualifications etc., Ecology like global warming, Quality of life by way of healthcare, standard of living etc. Furthermore, social issues can snowball into political and legal issues. Social forces have a strong impact on people’s behavior and since consumer buying is dependent on consumer behavior, it is an important element in the survival of organisations. Hence, the changing values, attitudes and demographics of the consumers is an key element for the success of an organization.
It’s important to listen to the consumers on a macro level rather than waste time and money in trying to change their mind.There’s always another company they can go to.
Technological developments impact industries in various ways. A technological innovation can suddenly reduce the demand of existing products or services. A technological upgradation in one organization can make the other organisations in the industry redundant.Technological changes can destroy entire industries because of a shift in demand for newer products or services. Furthermore, technological changes can change the operations of the organization i.e. the raw material, processes etc. and thus the products or services offered.
An organization that is swift and aware in forecasting and implementing new technology can easily outbeat any competition.
Thus by identifying and examining how external influences that cannot be directly controlled by an organization are interlaced with your organization and even the industry you are working in, you can keep ahead of the competition and reduce the risk of any futuristic changes in the macro environment by extracting the best out of the given environment.