The overall, broader economy and the forces affecting it
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A macro environment refers to the overall, broader economy and the forces affecting it versus a microenvironment, which focuses on a specific sector or region’s economy. There are macroeconomic conditions or factors that affect how all businesses operate, which, in turn, affect the economy as a whole. In general, macroeconomics deals with:
Macroeconomic factors affect companies that are more dependent on the overall health of the economy. Industries involving the production and distribution of staple goods and services tend to function more independently. It is cyclical industries – which largely involve luxury goods and travel – that are more heavily affected by macroeconomic factors.
A macro environment involves forces that affect the larger economy.
A company should regularly perform a DEPEST analysis in order to best serve customers and the economy as a whole.
DEPEST refers to the six broad factors affecting the macroeconomy – Demographic, Ecological, Political, Economic, Socio-cultural, and Technological.
Analyzing a Macro Environment
In order to strategically manage a company, analysts often perform a DEPEST analysis, which identifies the demographical, ecological, political, economic, socio-cultural, and technological factors in the macro environment that can affect how companies operate.
It is important to break down what each of the factors entails to get a better idea of the factors that shape how companies operate, and, therefore, shape the macro environment.
Demographic forces ultimately involve human populations that patronize businesses and contribute to the economy. There are a variety of statistics that must be analyzed when it comes to demography, including age, gender, size, occupation, and need.
Ultimately, fulfilling the needs of any demographic is the reason that businesses operate in the first place and why they are ultimately successful. Demographics, then, ultimately drive how a company chooses to operate and how broader markets develop.
Population growth and resulting changes to demographics are important areas of study for any business. A company needs to understand exactly who is patronizing it to best be of service, and thereby, generate a profit.
Marketing, for any business, depends heavily on paying close attention to changes in demographics. Knowing how to target new or emerging demographics is critical. Changes also must be passed on to operations and production to make sure the company continually meets its clients’ needs.
Ecological factors are natural forces that shape a macro environment. It is largely shaped by the ease of access to natural resources used in the production and distribution of a company’s goods and services.
Environmental concerns affect both access to natural resources and the supply of natural resources a company can utilize. As populations expand, access to natural resources increases, which tends to lead to a depletion of said resources. Pollution increases resulting from population growth also shape the environment.
For years, there’s been a growing shortage of raw materials, and a heavier emphasis is being placed on changing business practices to utilize more sustainable materials. The hope is that placing less burden on the environment will help to regenerate ecological cycles and make materials both more plentiful and more accessible.
Businesses are always limited by the political environment in which they exist. Laws and governments regularly shape how a company can operate and even have sway over the markets that companies can serve.
The primary instance where political factors play a critical influence is when a company tries to move into a new market – specifically one in a different country. The company must understand the laws and regulations that dictate both the industry it operates in and any specific rules it may be subjected to. It may affect whether it’s financially responsible for the company to enter the new market at all.
It’s also important to keep abreast of new legislation in the works or tabled for passage. Understanding shifting political forces can help a company change directions to skirt any serious impact should new regulations or rules be passed.
Economic factors affecting the macro environment relate to forces that affect how consumers spend and their purchasing power. It is important to understand a variety of metrics and data, including:
Every business should closely monitor data regularly and be fully aware of such numbers before moving into new markets in different countries.
Socio-cultural factors relate to demographics in a sense but are more related to populations and how they behave based on preference and values. Different societies and cultural groups are characterized by different needs, which are often based on different core values and preferences.
Cultures often develop a group mentality, which passes along core values and general beliefs. It shapes how the individuals in such cultures shop and what they choose to spend their money on. A business needs to pay attention to socio-cultural variances, especially when moving into new markets.
Technological factors refer to the creation of new technologies and how they shape products, product development, and access to new market opportunities. A perfect example of a strong technological force today is wireless communication.
Nearly everyone in the world owns a smartphone, tablet, or laptop that can quickly and easily be connected to the internet. It exerts a serious impact on individuals and societies and their ability to patronize companies freely.
Mobile technology is also shaping the development of new technological devices and replacing ones that have become outdated. A company needs to continually use the most up-to-date technology in order to operate at its highest capacity and be aware of how technological applications can better serve customers.
Thank you for reading CFI’s guide to Macro Environment. In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:
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