Business Environment

Macro Environment – Demographic Environment

A macro-environment is a part of the external environment of an organization. This is beyond the control and influence of the enterprise but has a huge influence on its functions. Further, it consists of many aspects like people, organizations, etc. which influence the business of an organization. In this article, we will focus on the aspect of the demographic environment.

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Demographic Environment

demographic environment

Demographics is about the characteristics of the population in a specific area and includes multiple factors like age, race, income, etc. Further, most businesses find the data with respect to these factors within the targeted demographic variable of interest as it can affect the growth and success of a business.

For example, India has around sixteen percent of the world’s population and is second to China. Also, India has a relatively younger population compared to China. Therefore, many international companies are targeting India as a potential market for various products/services.

Every business can be concerned with different aspects or demographic characteristics of a population. While for some businesses, age can be an important factor, for some others it can be the geographical spread.

Let’s look at four major characteristics of the demographic environment that business strategists use to determine the competitiveness of the company.

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Population Size

Some businesses require a minimum volume of potential customers for the business model to make sense. Therefore, any changes in the population size can have a critical impact on the business. Some such changes in the population size are:

  • Increase/decrease in the population’s birth rate
  • Changes in the average family size
  • An overall increase/decrease in the population size
  • Impact of a fast-growing population on the natural resources/food

These changes can have important implications for businesses dependent on the population size as an important demographic characteristic.

Geographical Distribution

Over the years, an organization’s target population might shift from one region of a country to another for various reasons. Hence, it is important to consider the following issues:

  • The company’s location remains attractive to the population
  • If the population shift affects the quality of the available workforce, then the company must consider relocation
  • At all times, the organization must endeavour to adapt its functions to the geographical shifts of the population

Ethnic Mix

There are times when the ethnic mix of the population undergoes a change. This can affect the definition of the organization’s potential customers and also impact the workforce. These are some issues that need consideration:

  • Understanding the implications of changes in the ethnic mix of the target population on the design and delivery of products/services
  • Is the modification of existing products/services sufficient? Or, should the organization design new ones?
  • Are the current employees ready to accept a more culturally diverse workforce?
  • A strategic plan to help the organization take advantage of the increased heterogeneity in the workforce

Income Distribution

For any business, understanding the purchasing power of its target population is essential for designing products/services. Any changes in income distribution in the population usually leads to changes in saving and spending patterns.

Hence, organizations must track these changes to identify opportunities and use them to their benefit.

Solved Question on Demographic Environment

Q: What are the four major demographic characteristics of a population that interest most businesses?

Answer: The four demographic characteristics that most businesses are interested in are:

  1. The size of the population
  2. Geographical distribution of the population
  3. The ethnic mix and
  4. Income Distribution
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