Macro environment analysis

Macro environment analysis involves identification of external environment or far environment tha includes a combination of all factors coming from the outside of the organization that affect its performance.

Macro environment factors are usually split into four categories:

• political - related to the role of the government
• economical - including exchange rates, business cycles and economic growth
• social - considering demographics, ethics and cultures
• technological - containing the internet access and developed infrastructure.

Additional elements separately mentioned by authors are competitive, environmental and legal factors. Identification of how and which macro environment factors influence company is necessary for efficient strategic management. Maintaining company position and retaining the profits enforce the managers to deal with dynamic changes. The surrounding environment creates opportunities but understanding the factors is essential to avoid potential risks. The success of company is often defined as political stability, low legal barriers and economic development.

Key steps in analysis:

• Identify main factors of environment, decide if influence is positive or negative
• Analyze interrelation between factors and trends of change
• Try to identify future influence of factors
• Decide how to plan strategy according to analyzed factors

Typical methods used in macro environment analysis are:

• STEEPLE analysis
• PEST analysis

Fig.1. Near and far environment elements

Macro environment changes

The macro environment includes the society norms and political economy what means that any changes in this area have important influence on companies and in the same time all activities performed by entrepreneurs are the response to introduced development. There is well established link between macro factors, political economy, group behavior and way of thinking. This is kind of cycle where the changes in policies lead to fluctuation in macro environment which has direct and indirect effectiveness on people behavior. In literature there is distinguished three different stages which has affected on economy and companies development: colonialism and neo-colonialism where the production dominated the whole market, direct planning and production and the era of the business. Each of them has significantly variant effects on the structure of economy and group behavior as a result.

There are a few general sub-indexes which were created to have better possibility for analyzing current macro situation in a country:

• Government budget balance (ME1) - calculated as a percentage of GDP
• Gross National savings (ME2) - calculated as a percentage of GDP
• Inflation (ME3) - annual average percentage fluctuation in customer price index
• General Government debt (ME4) - calculated as a percentage of GDP
• Country credit rating (ME5) - the probability of solvency debt default calculated by the experts

Dealing with the changes in the macro environment enforces the top management of the organization to apply one of response strategies:

• strategic alliances - pooling of resources trough the cooperation of companies
• restructuring - changing the levels and numbers of management
• cost leadership - improving process efficiency and cost reduction
• leadership and culture - motivating and rewarding employees
• pricing - setting profitable prices
• investment - expanding into new markets and innovating
• outsourcing - using external services

Examples of Macro environment analysis

1. Political and Legal Environment: A macro environment analysis includes reviewing the political and legal environment in which a business operates. This includes factors such as government regulations, taxes, trade agreements, labour laws, and consumer protection laws. For example, the introduction of the General Data Protection Regulation (GDPR) in Europe has had a major impact on how businesses process, store and protect customer data.
2. Economic Environment: Changes in the economic environment have an impact on businesses. This includes factors such as inflation, deflation, economic growth, interest rates, exchange rates, and consumer spending. For example, a business in a country with high inflation will have to adjust its prices to keep up with rising costs.
3. Social Environment: The social environment of a business is made up of societal attitudes, values, and beliefs. Changes in the social environment can have an impact on consumer behaviour, which in turn can affect a business. For example, the emergence of the "green" movement has led to a surge in demand for eco-friendly products and services.
4. Technological Environment: New technologies can have a major impact on businesses. This includes the introduction of new products or services, as well as changes in production methods and marketing techniques. For example, the widespread adoption of smartphones and social media platforms has enabled businesses to reach a wider audience than ever before.
5. Natural Environment: Changes in the natural environment can have an impact on businesses. This includes factors such as weather, climate change, natural disasters, and resource availability. For example, a business that relies on natural resources may be affected by changes in the availability of those resources due to climate change.

Advantages of Macro environment analysis

A macro environment analysis can provide many advantages to an organization, such as:

• A deeper understanding of the external environment - Macro environment analysis helps organizations to identify opportunities and threats in the external environment and devise strategies to take advantage of the opportunities and mitigate the threats.
• Improved decision-making - Macro environment analysis allows organizations to make better decisions based on the external environment and potential impacts on their operations.
• Increased competitive advantage - Organizations can use macro environment analysis to gain a competitive edge over their rivals by anticipating their strategies and responding quickly to changes in the external environment.
• Improved resource utilization - By understanding the macro environment, organizations can allocate resources more efficiently and make better use of their resources.
• Greater stakeholder engagement - Macro environment analysis helps organizations to identify the needs of stakeholders, such as customers, suppliers, and investors, and develop strategies to meet their needs.

Limitations of Macro environment analysis

A macro environment analysis involves identifying external environmental factors that can impact organizational performance. However, there are several limitations associated with this type of analysis, which include:

• Not all external environmental factors can be identified - There are a variety of external environmental factors that can impact an organization’s performance, but it can be difficult to identify all of them.
• The impact of external environmental factors can be hard to quantify - It is difficult to measure the exact impact of external environmental factors on organizational performance.
• The analysis is based on generalizations - A macro environment analysis is based on generalizations and does not take into account the specific needs of an organization.
• It can be time consuming - Gathering and analyzing data related to external environmental factors can be time consuming and costly.

Other approaches related to Macro environment analysis

Other approaches related to macro environment analysis include:

• PESTEL analysis - this approach looks at the Political, Economic, Social, Technological, Environmental, and Legal factors that shape the external environment in which an organization operates.
• SWOT analysis - this approach examines an organization’s Strengths, Weaknesses, Opportunities, and Threats and how these factors affect the organization’s performance.
• Scenario Planning - this approach involves developing different scenarios for the future based on the external environment and how the organization should respond to each one.
• Five Forces Analysis - this approach looks at the industry as a whole and examines the forces of competition, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and threat of new entrants.
• Competitive Positioning Analysis - this approach examines how an organization’s products or services compare to those of its competitors.

In summary, macro environment analysis involves examining external factors that can affect an organization’s performance, and there are several other approaches that can be used to analyze the macro environment, such as PESTEL, SWOT, Scenario Planning, Five Forces, and Competitive Positioning.

Macro environment analysis — recommended articles

PEST analysis — Factors affecting business — External analysis — STEEP analysis — STEEPLE analysis — Industry environment — Opportunities and threats — Near environment — Environmental factors affecting business

References

• Ghasemi R., Mehregan M. J., (2014),Relationship between Macroeconomic Environment and Financial Market Development, European Journal of Economics Finance and Administrative Sciences - Issue, 65, 67.
• Frances S., (2000), Dynamic Interactions between the Macro-Environment, Development Thinking and Group Behaviour, Centro Studi Luca D’Agliano, 143, 1-3.
• Kozlinskis, V., & Guseva, K. (2006). Evaluation of some business macro environment forecasting methods. Journal of Business Economics and Management, 7(3), 111-117.
• Pallapothu M. K., Krause J., (2013),Strategic Macro-Environmental Factor Analysis for Entry into the Fish Vaccines Market in India, School of Business, University of Prince Edward Island, 3, 28.

Footnotes

Author: Justyna Kurnik