In business analysis we tend to pay less attention to the macro environment. But what is macro environment, and its factors? 2 examples to help you understand.
In business analysis, we tend to focus our research on individual markets and industries, without paying attention to the greater, so-called macro environment. But what exactly is the macro environment, and why should you care?
The macro environment is the broader business environment across all markets and industries. It takes into account the size and nature of entire national (or even international) economies and societies. Understanding the macro environment is crucial in measuring and strategizing for a business' success.
9 Crucial Macro Environmental Factors to Include in Your Analysis
The macro environment refers to the broader business environment as a whole. While this can include political, technological, and other factors, the most relevant ones are all economic. In this section, we'll dive into some of the core, mostly economic factors affecting the macro environment. If you think about it, you'll see how each of these factors can influence a business regardless of its industry or geography.
Gross Domestic Product
The gross domestic product, referred to in short as GDP, is a measure of the total monetary value of goods sold or services enacted within a given quarter or year. GDP is typically measured on a national basis, and gives an insight into the strength of the local economy in terms of the value exchanged. A high GDP represents a strong economy, which is often what business wants to see in the macro environment.
Gross domestic product is an economic macro environment factor. This single number represents the total value of goods and services exchanged across the span of a year, often within a single country. Another very related measure is gross domestic product per capita, which refers to the average value of goods and services exchanged across the span of a year, per each individual in the country.
As far as single numbers go, gross domestic product is one of the most effective tools for quickly and easily measuring a nation's economy. A high gross domestic product signals a healthy economy (and a strong business environment) while a low gross domestic product signals a weak economy (and a poor business environment). Trends in gross domestic product may explain an increase or decline in your organization's performance.
Demography
The word demography refers to the statistical breakdown of a population. As a single number, population on its own — i.e. the number of people living in a given area — doesn't tell you a lot. However, the wider concept of demography, which also accounts for, for example, the breakdown of a population by age or gender, can tell you a lot about the macro environment.
Let's look at an example. If your product targets over-60s individuals, you'll be happy to know that there's a trend of an aging population across the globe, which means people are living longer.
One specific demographic factor which we've looked at before is the ethnic breakdown in a country. If your organization targets people of a specific ethnicity, there probably isn't a single more meaningful number for you than this one!
Employment
Next up is employment, which is the fraction of the local or global population that is or isn't employed. The employment rate is another factor which gives powerful insight into the state of an economy. Again, for most cases: the higher the employment, the better.
Taxes
Taxes are typically set on a national basis. Of course, taxes need no explanation — they're the cut of your sweet business proceeds taken away by the government. The size of taxes can help you understand your jurisdiction's monetary policy, and how that relates to the economy as a whole.
Consumer Spending
Consumer spending refers to the amount of goods and services end consumers are purchasing every year. While it's also an economic factor, consumer spending is partially a socio-cultural factor as far as the macro environment is concerned. This is because some cultures are simply more or less prone to buying consumer products, and it might also relate to changes in cultures across time.
If your business targets end consumers with goods or services, then consumer spending can be an extremely powerful factor for understanding the spending habits of a chosen geographic region. For example, Apple, the premium electronics manufacturer, specifically targets nations with high consumer spending — such as the United States — because of just how expensive their branded products are.
Politics
Politics can also be an important factor in the macro environment, especially as related to international trade policies. A country's political state can give you a lot of insight into its socio-cultural values, too.
Again, let's look at an example. If a chosen geographic market doesn't have trade agreements with your organization's home nation, then your products might be subject to import taxes, which could affect the viability of your business model. In some cases, the political environment might even make it impossible for you to do business in a certain country.
Technology
Needless to say, technology is a crucial factor in today's macro environment. Specifically, the technological infrastructure of a nation can be an important element of the macro environment. This may refer to the nation's technological preferences, the widespreadness of certain technologies, or other such factors.
As an example, let's imagine you're a mobile software house. Before deciding whether to translate your applications into a chosen language, you can look at the technological advancement in the associated country as part of macro environment analysis. If there are few users of mobile phones in that country, you may decide not to bother.
Ecology
We're entering an age where the environment is more precious then ever, with depleting amounts of natural resources and growing pollution. As far as macro environment analysis is concerned, ecology is the category of all-important factors that account for this. Other examples of individual ecological factors include weather, terrain flatness, or even soil fertility.
Undoubtedly, the most significant factor on the world's ecological playing field is global warming. Regardless of your target markets (in terms of their geography), global warming will affect your organization if you let it. Also, it's probably a good time to start manufacturing parasols and sun lotion!
Law/Regulation
Bundled together as the last macro environment factor, we have law and regulation. If you're going to operate in a certain nation, it's imperative that you comply with the local laws and rules. There's quite a disparity in regulation across the globe, so you might be surprised to hear what is or isn't legal in some places.
Take the emerging market of cryptocurrencies. Cryptocurrencies are a new class of financial asset, for which specific rules and regulations haven't yet been laid out in most countries. A select few countries, however, like Malta or Switzerland, have been quick to regulate the space, and may be a good choice of macro environment for your digital asset business.
As you can see, there are loads of potential factors which you could include in your own macro environment analysis. The most important thing to take away from these paragraphs is that you don't have to include everything — and you shouldn't! Choose the economic, political, social, legal, technological, and environmental factors you want to use for your macro environment analysis based on how relevant they are to your business.
What is Macro Environmental Analysis?
Macro environmental analysis can be a powerful tool for businesses who use it in conjunction with smaller-scale market analysis. Together, these two modes of business analysis paint a full picture of the business environment.
If you're familiar with PEST or PESTLE analysis, which takes into account the Political, Economic, Social, Technological, and sometimes Legal or Environmental factors affecting a target market, you may have noticed how these analysis tools can equally be applied to the macro environment.
That's right, if you want to conduct macro environment analysis, you can simply apply the PEST(LE) toolset to the wider business environment.
PEST assists macro environment analysis
To do macro environment analysis, it’s wise to utilize accurate tools which are built for this specific study. In this case, it’s PEST analysis.
PEST analysis examines the influences of political, economic, social, and technological factors of a business. These factors can’t be controlled by firms directly. Yet each factor affects any and every business, no matter their industry.
Political factors may be related to the government. They consist of legislative bills, tax policies, health and safety laws, and government stability. The average businessman can’t lower taxes or introduce new legislation that’ll affect the entire economy. They must instead understand these factors on a grand level and ensure their business aligns to laws, regulations, and policies.
Economic factors, as discussed above, are related to inflation, taxes, unemployment, and the recession. While people in business can track trends and implement planning, many businesses are not recession proof.
Social factors consist of people (or consumers). They buy products based on many different factors. This includes their demographic location, ethnic background, social status, immediate needs, lifestyle changes and trends.
Look how organic foods are exploding all over the country. More and more consumers are becoming health conscious. Fast food restaurants are adopting ‘healthy alternatives’ to cater to this crowd. At one time, fast food places could ignore the needs of these consumers. But now, that isn’t the case.
They can’t convince these consumers that unhealthy foods are the correct purchasing decision for them. The customers choose this. It’s important to listen to consumers, on a macro level, than waste efforts attempting to change their mind. There’s always another business they can go to, after all.
Technological factors are often referred to advancements in technology. Not only technology used to develop and deliver products to consumers. But also the technology used to run businesses efficiently. The company who is fastest, with the best agile technology, can easily out beat the competition in any market. Keeping an eye out on which technology is used in the industry can mean life or death for the firm.
We utilize PEST analysis to perform a macro environmental analysis. Understanding how macro factors influence corporations are necessary when building or expanding a business.
By examining how outside influences, uncontrollable by the average person, are connected to a business, it’ll reflect how to keep ahead of the competition. And reduce risks as they arrive.
Why Conduct Macro Environmental Analysis?
You may be wondering why you conduct an analysis of the macro environment — and that's a great question! After all, any business analysis takes lots of time, and very often equal amounts of money.
There are a number of reasons you might conduct this kind of analysis; for example, you represent a cross-industry enterprise or government that wishes to understand and plan for the future business environment as a whole. However, the most common application for macro environment analysis is in small and medium-sized enterprises (SMEs), who use the analysis together with individual market analysis to get the full view on their business environment.
For example, consider that your organization is a consumer electronics manufacturer. Your market analysis of the consumer electronics space may have generated some interesting results, like a growing number of television purchases. Further analysis of the market finds no explanation for this change. However, when you conduct macro environment analysis, you see that the economy is rapidly growing as a whole — and with it, consumer spending — which explains that households are buying more televisions simply because they can!
This is just one example of when you might look at the macro environment, but the general rule is that it completes the otherwise-missing piece of the puzzle.
Who Should Conduct Macro Environment Analysis?
As we alluded to above, there are quite a number of uses for macro environment analysis — and with that, there are quite a number of individuals and organizations who could benefit from it. So how do you know if you should conduct macro environment analysis?
As a general rule of thumb, if you conduct analysis for individual markets and industries, you should probably also conduct at least some macro environment analysis. There are exceptions to this rule, but they typically refer to large scale, transnational organizations or government bodies.
When to Conduct Macro Environment Analysis
After reading the last two sections, you may be seeing a pattern here: macro environmental analysis is most often used together with market analysis. If you're wondering when to conduct this analysis, the answer lies in that same pattern.
If you're a small or medium-sized enterprise conducting market analysis to get the full picture of your business environment, you should conduct macro environmental analysis at the same time. If you've already conducted a market analysis before, and you're not planning to do so again any time soon, you should go ahead and carry the analysis as soon as possible to see whether there's anything you missed in your market analysis.
Real Examples of Macro Environments
Now it's time to dive into some real examples of macro environments. For the purpose of this article, we're going to look at the macro environments in the United States and China.
Just like with any business analysis tool, the factors you choose to look at in your own macro environment analysis will depend on the information you consider to be most valuable. For this article, we'll do a general overview of each macro environment — but bear in mind the weird and wonderful data that applies to your industry when you conduct your own macro environment analysis.
Macro Environment Example 1: United States
The United States is one of the world's biggest economies, which makes it a favorable macro environment for almost any business. In 2017, the United States clocked a gross domestic product of over $19 trillion — the highest of any country in the world. Although it's hard to measure, consumer spending is also extremely high in the United States.
Aside from that, the United States has a registered population of about 325 million people. Of these many million people, the population is split relatively evenly among the different age groups.
As far as ethnicities are concerned, there is quite a range. This includes a predominant portion of White Americans, as well as African, Hispanic, Native and Asian Americans.
Macro Environment Example 2: China
China is also an economic powerhouse on the global stage. China has a GDP of over $12 trillion, with a huge population of just under 1.4 billion people. As such, you can see that the average Chinese person gets a smaller slice of the pie, and the reduced consumer spending (in comparison to the US) reflects this.
In terms of ethnicities, the macro environment in China is almost entirely Asian, with a small handful of Caucasians present too.
The Scale of the Macro Environment
With those two examples behind us, it's worth mentioning that the macro environment doesn't just have to refer to a single country. In fact, you can look at a business' macro environment on a local or global level.
The macro environment in a single city or region, although being a very narrow tool, can help a lot for smaller business. For example, if you run a restaurant, understanding the macro environment of your surrounding area can help you decide whether to opt for cheaper or more expensive menu options.
On the other hand, looking at the global macro environment can be a useful tool for enterprises big and small. If the global economy is in a recession, that might explain declining sales in your business however big it is. This is why macro environment analysis is so powerful — it captures data that other business analysis completely disregards!
Final Thoughts
The macro environment is the broader business environment which affects businesses across industries and geographies. It refers to the national or international business climate as a whole, which is usually dependent on regional economies and societies. Macro environmental analysis can be a fantastic tool for your business if you're looking to complete the business analysis puzzle, and you can get started right away by applying the same PEST principles you've come to know and love!
Photos by Vlad Busuioc on Unsplash, Paul Calescu and Natee Meepian/Shutterstock.com
