When a firm operates in an economy and a society, there are factors in its environment that it has no control over. These are elements of its macro environment or its general external environment. Let us take a look at these elements.
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Macro Environment
Macro environment is the remote environment of the firm, i.e the external environment in which it exists. As a rule this environment is not controllable by the firm, it is to huge and to unpredictable to control.
Hence the success of the company, to a large extent will depend on the company’s ability to adapt and react to the changes in the macro environment.
Primarily the company has to closely monitor the various elements of macro environment. This will help them understand the dynamic nature of the macro environment. It also helps them adapt to the constant changes in the environment.
Let us look at most important factors of the macro environment. A simple mnemonic to remember these factors is STEEP.
(Source: KeyDifferences)
1] Socio-Cultural Environment
The social values and culture of an environment play a huge role in the functioning of the company. So when the social environment changes it can have a direct or indirect effect on the company.
For example in recent time society has seen a shift, and people no longer retire at 60. They work five to ten years more after sixty. So this has had a huge impact on companies.
Cultural forces also have a significant impact on the success of a company in the long run. Especially in a country like India where the cultural influences are strong and complicated.
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2] Technological Environment
In the times we live in, technology is constantly changing it is important that the business can keep up with the changes. Technology does not only confine to computers and IT services. It includes products, manufacturing processes, techniques etc.
The technological developments can be a huge advantage for a firm. But at the same time of the technology used by the firm becomes obsolete due to such developments, then it can also be a threat to the firm.
3] Economic Conditions of the Market
The economic conditions of the economy and the performance of a business have a very close relationship. A business depends on the economy for all its inputs and factors of production. It also sells its products and services in the same market.
A market is never in one stable condition. It is always in a flux. If there is a boom in the market then all businesses will benefit from the favorable conditions. The income will be higher, rate of interests will be low, new capital will be available etc. Also, the opposite is also true in case of a bust.
4] Ecology and Physical Environment
Ecology and physical environment play a huge part in the performance of any business. This is especially true for manufacturing/production companies. Let us take the example for global warming.
This change in our physical environment has started affecting the rainfall in certain regions. This in turn may affect the crops and cause a shortage in raw materials such as jute, cotton, rubber etc.
Weather conditions, topographical elements, geographical location, climate changes and other ecological factors are a very important element in the macro environment of a business.
5] Political and Legal Factors
The political environment of a country is the combination of three branches of the government – legislature, executive and the judiciary. The political environment of a country will mainly depend on the political beliefs and ideologies of the party in power at the state and central levels.
The legal environment refers to the rules, laws, regulations, and judgments etc. that affect the functioning of a business. And this will also include the taxation laws and the Budget for the given year. So stable legal and political government is really important if the business and the economy as a whole has to succeed.
Solved Question on Macro Environment
Q: The banks are offering credit at low interest rates. This is a factor of which of the following elements of macro environment?
- Economic
- Political
- Legal
- Technological
Ans: The correct option is A. Economic environment is the sum of all economic factors of a market such as interest rate, disposable income, percentage increase in GDP, exchange rate etc.
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