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In this lesson, we will introduce you to the forces that define marketing’s external environment. After you work out this lesson, you should be able to:
- Identify, analyze and monitor external forces and assess their potential impacts on the firm’s goods and services
- Understand how marketers formulate their strategy within the frame of reference provided by the forces in the external environment
In this lesson, we will discuss the following:
- Competitive environment
- Political-legal environment
- Economic environment
- Technological environment
- Social-cultural environment
Introduction in Marketing Environment
Industry competition, legal constraints, the impact of technology on product design and social concerns are some of the many important conditions that shape the business environment. This lesson examines the forces that define marketing’s external environment. Every organization needs to think seriously about the environments in which it operates.
All firms must identify, analyze and monitor external forces and assess their potential impacts on the firm’s goods and services. Although external forces frequently operate outside the marketing manager’s control, decision makers still must consider those ‘uncontrollable’ influences together with the variables of the marketing mix in developing the firm’s marketing plan and strategies.
Environmental Scanning and Environmental Management
Marketers must carefully and continually monitor crucial trends and developments in the business environment. Environmental scanning is the process of collecting information about the external marketing environment to identify and interpret potential trends. This activity then seeks to analyze the collected information and determine whether identified trends represent opportunities or threats to the company. This judgment, in turn, allows a firm to determine the best response to a particular environmental change.
Environmental scanning is a vital component of effective environmental management. Environmental management is the effort to attain organizational objectives by predicting and influencing the firm’s competitive, political-legal, economic, technological and social-cultural environments. The development of a global marketplace has complicated environmental scanning and environmental management. These processes may now need to track political developments, economic trends and cultural influences anywhere in the world.
While the marketing environment may exceed the confines of the firm and its marketing mix components, effective marketers continually seek to predict its impact on marketing decisions and to modify its conditions whenever possible.
The Competitive Environment
The interactive exchange in the marketplace as organizations vie with one another to satisfy customers creates the competitive environment. Marketing decisions by each individual firm influence consumer responses in the marketplace. They also affect the marketing strategies of competitors. As a consequence, decision makers must continually monitor competitors’ marketing activities - their products, channels, prices and promotions.
Few organizations enjoy monopoly positions in the marketplace. Utilities such as electricity, water and cooking gas accept considerable regulation from local authorities. Other firms, such as manufacturers of pharmaceutical products, sometimes achieve temporary monopolies as a result of patents. Marketers actually face three types of competition. Their most direct competition occurs among marketers of similar products, as when an insurance firm competes with other insurance firms.
The second type of competition involves products that users can substitute for one another. In the transportation industry, the no-frills, low-cost airliners compete with train and luxury bus services. A change such as a price increase or an improvement in a product’s capabilities can directly affect demand for substitute products.
The final type of competition occurs among all other organizations that compete for consumers’ purchases. Traditional economic analysis views competition as a battle among companies in a single industry or among firms that product substitute goods and services. Marketers must, however, accept the argument that all firms compete for a limited pool of discretionary buying power.
Because the competitive environment often determines the success or failure of a product, marketers must continually assess competitors’ marketing strategies. A firm must carefully monitor new product offerings with technological advances, price reductions, special promotions or other competitive variations, and the firm’s marketing mix may require adjustments to counter these changes.
Every firm’s marketers must develop an effective strategy for dealing with its competitive environment. One company may compete in a broad range of markets in many areas of the world. Another may specialize in particular market segments, such as those determined by customers’ geographic, age or income characteristics. Determining a competitive strategy involves answering three questions:
Should we compete?
The answer to this questions depends on the firm’s resources, objectives and expectations for the market’s profit potential. A firm may decide not to pursue or continue operating a potentially successful venture that does not mesh with its resources, objectives or profit expectations.
If so, in what markets should we compete?
The answer requires marketers to acknowledge their limited resources (sales personnel, advertising budgets, product development capabilities and so on). They must accept responsibility for allocating these resources to the areas of greatest opportunity.
How should we compete?
This requires marketers to make product, pricing, distribution and promotional decisions that give their firm a competitive advantage in the marketplace. Firms can compete on a wide variety of claims, including product quality, price and customer service. For example, a retailer may gain competitive advantage by providing superior customer service, while another retailer competes by providing low prices.
With increased international competition and rapid changes in technology, many firms are using time as a strategic competitive weapon. A time-based competition strategy seeks to develop and distribute goods and services more quickly than competitors. The flexibility and responsiveness of a time-based strategy enables the firm to improve product quality, reduce costs, respond to competition and expand the variety of its products to cover new market segments and enhance customer satisfaction.
The Political-Legal Environment
No one should start playing a new game without first understanding the rules, yet some businesses exhibit remarkably limited knowledge about marketing’s political-legal environment - the laws and their interpretations that require firms to operate under certain competitive conditions and to protect consumer rights. Ignorance of laws, ordinances and regulations or failure to comply with them can result in fines, embarrassing negative publicity and possibly expensive civil damage suits.
Businesses need considerable diligence to understand the legal framework for their marketing decisions. Numerous laws and regulations affect those decisions, many of them vaguely stated and inconsistently enforced by a multitude of different authorities. Regulations affect marketing practices, as do the actions of independent regulatory agencies.
These requirement and prohibitions touch on all aspects of marketing decision making - designing, labeling, packaging, distributing, advertising and promoting goods and services. To cope with the vast, complex and changing political-legal environment, many large firms have in-house legal department; small firms often seek professional advice from legal experts. All marketers, however, should be aware of the major regulations that affect their activities.
Some of potential issues from the political-legal environment to affect businesses include:
- The national foreign policy can dominate the international business decisions of the local firms
- The political ideology of the Government can affect the international brands wanting to enter a market
- The competitors who work closely with the government can help erect trade barriers for a firm
- Global trade organizations can enforce trade barriers when their regulations and guidelines are not observed
- A host nation may levy anti-dumping duties on a foreign firm and such a decision may be dominated by the local businesses lobbying with the government
- Copyright infringements, trademark and intellectual property rights violations
- Direct comparative advertisements may not be allowed in few countries
- Use of children is advertising and advertising to children are banned in certain countries
- Price regulations preempt any pricing strategy of a firm
- A detailed displaying of the ingredients in product labels is mandatory in most countries
- The channel members are given the additional responsibility of verifying the eligibility of the prospective buyers for certain products
- Use of certain raw materials or methods of manufacturing are prohibited in certain countries
- Industry watch dogs and consumer groups are always on the prowl for any unethical trade practices
Each one of the above issues has serious implications for the marketer in his marketing decision making. Ignorance of the law is no excuse and breaking of the law is an offence.
The Economic Environment
The overall health of the economy influences how much consumers spend and what they buy. This relationship also works the other way. Consumer buying plays an important role in the economy’s health. Indeed, consumer outlays perennially make up around two-thirds of overall economic activity. Since all marketing activity is directed toward satisfying consumer wants and needs, marketers must understand how economic conditions influence consumer buying decisions.
Marketing’s economic environment consists of forces that influence consumer buying power and marketing strategies. They include the stage of the business cycle, inflation, unemployment, resource availability and income.
Historically, a nation’s economy tends to follow a cyclical pattern consisting of four stages: prosperity, recession, depression and recovery. Consume buying differs in each stage of the business cycle and marketers must adjust their strategies accordingly. In times of prosperity, consumer spending maintains a brisk pace. Marketers respond by expanding product lines, increasing promotional efforts and expanding distribution in order to raise market share and raising prices to widen their profit margins.
During recessions, consumers frequently shift their buying patterns to emphasize basic, functional products that carry low price tags. During such times, marketers should consider lowering prices, eliminating marginal products, improving customer service, and increasing promotional outlays to stimulate demand. Consumer spending sinks to its lowest during a depression. In the recovery stage of the business cycle, the economy emerges from recession and consumer purchasing power increases. While consumers’ ability to buy increases, caution often restrains their willingness to buy.
They may prefer to save than to spend or buy on credit. Business cycles, like other aspects of the economy, are complex phenomena that seem to defy the control of marketers. Success depends on flexible plans that can be adjusted to satisfy consumer demands during the various business cycle stages.
Inflation devalues money by reducing the products it can buy through persistent price increases. It would restrict purchases less severely if income were to keep pace with rising prices, but often it does not. Inflation increases marketers’ costs such as expenditures for wages and raw materials and the resultant higher prices may therefore negatively affect sales. Inflation makes consumers conscious of prices, especially during periods of high inflation. This influence can lead to three possible outcomes, all of them are important to marketers.
- consumers can elect to buy now, in the belief that prices will rise later,
- they can decide to alter their purchasing patterns
- they can postpone certain purchases.
Unemployment is defined as the proportion of people in the economy who do not have jobs and are actively looking for work. It rises during recessions and declines in the recovery and prosperity stages of the business cycle. Like inflation, unemployment affects marketing by modifying consumer behaviour. Instead of buying, consumers may choose to build their savings.
Income is another important determinant of marketing’s economic environment, because it influences consumer buying power. By studying income statistics and trends, marketers can estimate market potential and develop plans for targeting specific market segments. For marketers, a rise in income represents a potential for increasing overall sales. But they are most interested in the disposable income, which is the amount of money that people have to spend after they have paid for necessities. Consumers’ disposable income varies greatly by demographic variables such as age group and educational levels.
Resources are not unlimited. Brisk demand may bring in orders that exceed manufacturing capacity or outpace the response time required to gear up a production line. A shortage may also reflect a lack of raw materials, component parts, energy or labour. Regardless of the cause, shortages require marketers to reorient their thinking. One reaction is demarketing, the process of reducing consumer demand for a product to a level that the firm can reasonably supply. A resource shortage presents marketers with a unique set of challenges. They may have to allocate limited supplies which is a sharply different activity from marketing’s traditional objective of expanding sales volume.
The Technological Environment
The technological environment represents the application to marketing of discoveries in science, inventions and innovations. New technology results in new goods and services for consumers; it also improves existing products, strengthens customer service and often reduces prices through new, cost-efficient production and distribution methods. Technology can quickly make products obsolete, but it can just as quickly open up new marketing opportunities.
Technology is revolutionizing the marketing environment. Technological innovations not just create new products but also whole new industries. Recently, the Internet has been transforming the way companies collaborate with different stakeholders to create more value for the customers. Technology can sometimes address social and environmental concerns by offering a cheap, non-polluting, energy-conserving, safe product and also create parity among consumers by providing equal access and opportunity.
Marketers must closely monitor the technological environment for a number of reasons. Creative applications of new technologies give a firm a definite competitive advantage. Marketers who monitor new technology and successfully apply it may also enhance customer service.
The Social-Cultural Environment
The social-cultural environment of marketing describes the relationship between marketing and society and its culture. Marketers must cultivate sensitivity to society’s changing values and to demographic shifts such as population growth and age distribution changes. These changing variables affect consumers’ reactions to different products and marketing practices.
The social-cultural context often exerts a more pronounced influence on marketing decision making in the international arena than in the domestic arena. Learning about cultural and social differences among countries prove a paramount condition for a firm’s success abroad. Marketing strategies that work in one country often fail when directly applied in other countries. In many cases, marketers must redesign packages and modify products and advertising messages to suit the tastes and preferences of different cultures.
Changing social values have led to the consumerism movement which is a social force within the environment designed to aid and protect buyers by exerting legal, moral and economic pressures on business. Consumerism also advocates the rights of the consumers such as:
- The right to choose freely - consumers should be able to choose among a range of goods and services
- The right to be informed - consumers should have access to enough education and product information to make responsible buying decisions
- The right to be heard - consumers should be able to express legitimate complaints to appropriate parties - be it manufacturers, sellers, consumer assistance groups and consumer courts.
- The right to be safe - consumers should feel assured that the goods and services they purchase will not cause injuries in normal use. Product designs should allow average consumers to use them safely.
The social-cultural environment for marketing decisions at home and abroad is expanding in scope and importance. Today no marketer can initiate a strategic decision without taking into account the society’s norms, values, culture and demographics. Marketers must understand how these variables affect their decisions. The constant influx of social input requires that marketing managers focus on addressing these questions instead of concerning themselves only with the standard marketing tools.
Choose an industry. Search from recent business news to look for examples of influences of competitors, economy, politics, law, technology, society and culture on marketing decision making.
- Economic Environment
- Political-Legal Environment
- Technological Environment
- Social-Cultural Environment
Case study: EuroDisney - managing the marketing environmental challenges
Michael Eisner joined the Walt Disney company as the chairman of the board in 1984, after his successes at the ABC television network and Paramount. The same year, Tokyo Disney was completing its first year of operations after five years of planning and construction, when the Walt Disney Co. entered into an agreement with Oriental Land Company in Japan. More than 10 million people visited the park that year, spending $355 million.
This was $155 million more than had been expected and was partially attributed to the average expenditure per visitor being $35, rather than the estimated $21. The timing of the Tokyo Disneyland opening coincided with a rise in income and leisure time among the Japanese. Tokyo Disneyland thus became quickly profitable.
Growth continued, and by 1990 more than 14 million people visited the park, a figure slightly higher than the attendance at Disneyland in California and about half the attendance at Walt Disney World in Florida. Though, Disney was not a financial partner in the Tokyo venture, it was reaping the profit from its franchise (10% royalty from admission and 5% from merchandise and food sales).
The Tokyo park was in some ways a paradox. Tokyo Disneyland is nearly a replica of the two parks in US. Signs are in English, and most food is American style. The management of the Oriental Land Company demanded this because they wanted visitors to feel they were getting the real thing and because they had noted that such franchises as McDonald’s have enormous success in Japan, as Japanese youth embraced American-style culture.
Yet, a few changes were necessary, such as the addition of a Japanese restaurant. The product was readily accepted by the Japanese, an acceptance attributed by some to the enthusiastic assimilation of the Japanese to Western ways. The success of the Tokyo Disneyland led the company to consider expansion into Europe.
In 1984, a few months after his arrival at Disney, Eisner decided to create a Disney resort in Europe. In 1985, Disney announced that it had narrowed its locational choice to two countries, Spain and France. The park was scheduled to open in 1992 at either location. Since the park was estimated to provide about 40,000 permanent jobs and would draw large numbers of tourists, the two countries openly courted Disney.
If Disney opted for a Spanish location, the park would have to be like the ones in the U.S, where the visitors are outside for almost all amusements. However, Disney had learnt from the Tokyo experience that the cold weather does not necessarily impede attendance. But the colder climate in Paris area would require more indoor shows. Furthermore, France would require more focus on technology and historical themes.
After three years of discussions, the search culminated with the selection of a site at the heart of Europe: Marna-la-Vallee, France. Euro Disney was officially born. The total investment by 1992 was estimated at between $2.4 to 3 billion. Disney opted for a 49% stake. France was in full economic crisis and Disney was taking advantage of this crisis.
In a real estate coup, the French Government sold Disney some very expensive land at a bargain price and. In spite of the economic benefits the park was expected to bring, many people in France feared that the Park would be one more step toward the replacement of the French culture with that of the US. Critics called EuroDisney “a cultural Chernobyl”.
Disney headed off the criticism by explaining in the French press that Walt Disney was of French Huguenot descent, with an original name of D’Isigny rather than Disney. Disney also agreed to make French the first language in the park, although relying heavily on visual symbols.
Disney would build an attraction, Discovery Land, based on the science fiction of France’s Jules Verne; and a movie theater featuring European history. Many concessions were made to soothe the French resistance. Disney admitted that it may have to alter its no-alcohol policy for this park, but it didn’t. The park also emphasized that Pinocchio was Italian, Cinderalla was French and Peter Pan flew in London.
The marketing campaign began in October, 1991. The sales division began ambitious programs to inspire European families to mark the Euro Disney resort on their vacation agendas. The Sales division established a strong presence in all the major markets through special partnerships with leading companies in the travel industry. On April 12, 1992, Euro Disney hosted the biggest event in Disney history, the official opening of the Euro Disney resort.
Looking at the future, Euro Disney had two primary objectives : to achieve profitability as quickly as possible and to better integrate Euro Disney into its European environment while reinforcing its greatest asset - Disney heritage. Disney announced plans to add a second theme park, the Disney MGM Studios- Europe and a water park. Disney was so optimistic that it was negotiating the possibility of creation of creating a third theme park at the beginning of the new millennium.
The Park admission fee cost US $45 for an adult and $30 for a child under 11, a price about 50% higher than the corresponding Disney World price. The US Disney park’s formula in terms of inelasticity of demand did not apply and the demand fell sharply (a 15% decrease in attendance for a 10% increase in price.) Attendance figures were kept secret, but this attitude reinforced the idea that even in terms of attendance, the objectives were not reached. The financial results were not as strong as hoped and the very difficult economic environment contributed to not meeting the ambitious objectives.
As Eisner started an interview with Larry King, he quipped, “Everybody is giving us 42 reasons why we’ve made a mistake, because we have financial problems... We are not either responsible for the real estate crisis nor the high French interest rate, which are dreadfully penalizing us. Not a single manager, whomever he be, could manage so many uncontrollable forces.”
Questions: Describe the importance of environmental scanning for Disney in its EuroDisney venture. How does the marketing environment affect Disney’s marketing? Single out each of these environmental variables and suggest ways for Disney to manage them.