Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing) 1
Learning Objectives What are macro and micro environment? What are the factors in the internal and external environment? Understanding on different analysis tool such as PEST, Porter s Five Force 2
Introduction Change is the fact of life, and organization have to adapt to this ever changing environment. If they want to survive they need to take into account of, and adapt to, changing economic and technological conditions and monitor changing needs and wants of their target markets. By identifying environmental trends in good time, management can anticipate their likely effect on the organization and react quickly. Otherwise, management runs the risk of becoming a market follower, rather than playing a part in change & influencing events and being a market leader. 3
Introduction (cont ) Companies have been divided into three categories: 1. Companies that make things happens: identify & understand forces and conditions that bring about change. They continually adapt, and stay ahead of the game. 2. Companies that watch things happen: fail to adapt early enough to become part of that change. They have little opportunity to influence events, but usually make changes to survive. Such changes are reactive rather than planned. 3. Companies that wonder what happen: are impervious to change and fail to realize that circumstances have altered. Even when change is acknowledged management refuses to adapt to an ever changing environment. Such firm are unlikely to survive in the long run. 4
Marketing Environment 5
Marketing Environment (cont ) Marketing Environment is divided into two: 1. Micro Environment 2. Macro Environment 6
Micro Environment The Micro Environment is the internal environment in which an organization operates, i.e. its market/s. Micro forces include: Competitors who can be either direct (offering similar products/services) or indirect (offering alternative products that may be purchased in place of the organization's products/services). It is important for organizations to analyze competitor strategy and how it may affect their own marketing strategy, for example if a competitor launches a new product this may impact on the sales of an organization's products. Suppliers provide the materials necessary to produce the product and can play an important role in adding value to an organization's products, for example by offering a quick delivery. Therefore, it is important that organizations understand who the best suppliers are, what their costs will be, how strong their bargaining power is. 7
Micro Environment (cont ) Customers have wants and needs that an organization will try to satisfy with its products and services. A group of customers is the target market to which an organization will make a product/service offering. An organization should be aware that a customer s needs and wants may change over time and it is important that an organization's marketing activities change to continue to satisfy customer needs. Stakeholders are anybody who has an interest or can influence the activities of the organization, therefore it is important that an organization can identify its stakeholders and any impact they may have, in order that it can decide if it needs to take any action, such as a communications campaign. Distributors Organizations may use distributors, such as retailers, to get their products to their target markets. Distributors can add value to a product, particularly in relation to the service they provide. 8
Macro Environment The Macro Environment is the external environment in which an organization operates. The external environment has certain forces that will impact on an organization; these external forces are known as PEST, which stands for: Political factors are influences such as a change of government in a country, resulting in a change in legislation, e.g. trading regulations or taxation policies that could affect not only how an organization operates but the markets it is able to operate in. Economic factors are influences related to the economy, such as interest rates and rates of inflation. Changes in interest rates could affect an organization's net profit margin if it is borrowing money or selling products on credit. 9
Macro Environment (cont ) Social factors are influences relating to the lifestyles and culture of the customers that make up an organization's market, such as its demographic profile, lifestyle and attitudes. Recently many organizations have experienced a change in the attitude of consumers towards environmentally-friendly products. Technological factors are developments in technology that influence buyer behavior or decision-making. The most recent example is the large growth in on-line purchasing, resulting in many organizations developing websites to provide consumers with information on their products and allowing them to order on-line. 10
Ports Five Force 11
Ports Five Force (cont ) Porter s Five Forces is a model/tool that organizations can use in trying to analyze and understand their own micro environment to enable them to obtain a broad picture of the competitive nature of the market in which they operate. The five forces are as follows: Bargaining Power of Suppliers This requires the organization to acknowledge the fact that suppliers can impact on an organization's marketing activity. It requires the organization to understand who its suppliers are and how much the organization is reliant on a particular supplier. The more reliant the organization is on a supplier, the greater the competitive pressure on the organization and the more important it is to develop a long term, mutually beneficial relationship with that supplier. 12
Ports Five Force (cont ) Bargaining Power of Customers Here the organization assesses its customer base and its needs and wants. It considers how easy it is for customers to switch to competitor products should they become dissatisfied with the organization's products or if competitors take aggressive marketing action, perhaps such as reducing price. The easier it is for customers to switch, the stronger the competitive pressure on the organization. Threat of New Entrants This is an assessment of how easy it would be for a competitor to enter the organization's market and the pace at which this is likely to happen. The organization will need to identify barriers to entry and indeed if it can use its marketing activities to try to create barriers to entry. Strong brand image and good customer relationships are strong barriers to entry. 13
Ports Five Force (cont ) Threat of Substitutes This acknowledges the threat of indirect competition (described above). The organization will need to understand the choices available to customers and also be aware of new technological developments that could see an increase in substitute products. Competitive Rivalry This is an assessment of the competitive nature amongst competitors in a market. In some markets competitors compete aggressively, using marketing tactics such as sales promotions, price, etc. However, in some markets competitors do not compete in aggressive ways such as reducing price, because of low profit margins or the risk of long term failure. An understanding of how competitors are likely and able to respond to an organization's marketing activity will help the organization with its marketing planning. 14
Past Paper Q & A (cont ) June 2008 / Q8 (a) Identify and describe the forces involved in the Macro and Micro Marketing Environment. Use examples to illustrate your answer. (16 marks) 15
Past Paper Q & A (cont ) (Answer: Slide 7-10) 16
Past Paper Q & A (cont ) June 2009, Q1 (a) Identify and define the four main factors that influence an organization's macro environment. Give examples to support your answer. (12 marks) (b) Using an organization or product of your choice, demonstrate how its market has been influenced by the four factors that you have identified above. (13 marks) 17
Q1 a Past Paper Q & A (cont ) (Answer: Slide 9-10) 18
Past Paper Q & A (cont ) (b) The product I will use to demonstrate the effect of PEST factors is the music industry: Political Influences The music industry is influenced by different legislation in different countries. For example, a music company may be developing a music album with different artists from different countries, therefore the contracts between the music company and the artist may differ in each country as the contract will be bound by the countries respective laws of contract/doing business. Economic Environment The music industry is a global industry and music companies export their music world-wide. In many countries the sales/retail price is often pre-set and therefore the music company is very sensitive to changes in exchange rates between countries. A significant change in an exchange rate can mean that the music company s profit margin is reduced by an increase in the cost of exchanging monies. 19
Past Paper Q & A (cont ) Social Environment Music is greatly influenced by culture and fashion. To develop artists, the music industry must have a detailed understanding of the culture and attitudes of its target market. Should an artist be seen to act in a way that is contrary to the culture, such as taking drugs, then this can directly affect the sales of that artist s music. Technological Environment Changes in the technological environment have had a major impact on the music industry and the way it distributes its music. Recent years have seen an increase in music downloads via the internet and a reduction in the sales of music singles. Traditionally the music industry has distributed its products via retail outlets, however, a result of the recent changes is that the music industry has had to work with different distributors such as Apple/iTunes, mobile networks such as T-Mobile, and online music distributors such as Amazon to make its products available to consumers via the internet. 20
Past Paper Q & A (cont ) June 2010, Q2 (a) Identify and explain five factors that make up an organization's micro environment. (15 marks) (b) Briefly describe Porter s Five Forces model and explain how this model can be used to analyse an organisations micro environnement. (10 marks) 21
Past Paper Q & A (cont ) a. Answer: Refer Slide 7-8 b. Answer: Refer Slide 11-14 22
Q & A 23