Business environment types

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Corporations today, more than ever before, are profoundly sensitive to technological, political, economic, social, and regulatory changes. Although environmental changes may be felt throughout an organization, the impact most affects strategic perspectives. To cope with a changing and shifting environment, the marketing strategist must find new ways to forecast the shape of things to come and to analyze strategic alternatives and, at the same time, develop greater sensitivity to long-term implications. Various techniques that are especially relevant for projecting long-range trends are discussed in the appendix at the end of this article. Suffice it to say here that environmental scanning necessarily implies a forecasting perspective.

Technological Environment

Technological developments come out of the research effort. Two types of research can be distinguished: basic and applied. A company may engage in applied research only or may undertake both basic and applied research. In either case, a start must be made at the basic level, and from there the specific effect on a company’s product or process must be derived. A company may choose not to undertake any research on its own, accepting a secondary role as an imitator. The research efforts of imitators will be limited mainly to the adaptation of a particular technological change to its business. There are three different aspects of technology: type of technology, its process, and the impetus for its development. Technology itself can be grouped into five categories: energy, materials, transportation, communications and information, and genetic (includes agronomic and biomedical). The original impetus for technological breakthroughs can come from any or all of three sources: meeting defense needs, seeking the welfare of the masses, and making a mark commercially. The three stages in the process of technological development are invention, the creation of a new product or process; innovation, the introduction of that product or process into use; and diffusion, the spread of the product or process beyond first use. The type of technology a company prefers is dictated, of course, by the company’s

marketing strategy. One strategic consideration in determining marketing interests. Impetus points to the market for technological development, and the process of development shows the state of technological development and whether the company is in a position to interface with the technology in any stage. For example, the invention and innovation stages may call for basic research beyond the resources of a company. Diffusion, however, may require adaptation, which may not be as difficult as the other two stages. The point may be illustrated with reference to aluminum cans. Gone are the days when almost every soda and beer product on store shelves came in identical aluminum cans. Sure, Coke was red and Pepsi was blue, but underneath the paint was the same sturdy, flip-top container. Just as technical advances allowed the aluminum industry to seize the can business from steel in the 1960s, today innovations from plastic, glass, and even good old steel, are undermining aluminum’s hegemony.

That is a problem for Aluminum Co. of America and its competitors in the aluminum industry. Over the past 20 years, they have come to dominate the $11 billion beverage container market. Cans account for one-fifth of the aluminum sold in North America, which makes it the industry’s biggest business bigger than airplane parts or siding for houses. Moreover, the can business has been the key to growth for aluminum companies, which scurried to build mills in the 1980s. Now they find themselves swamped with capacity. Although the industry produces a staggering 100 billion cans a year, the number has been flat since 1994. From 1985–1996, glass increased its share of beer packaging from 31% to 37%, while aluminum’s portion shrank from 56% to 51%. Meanwhile, in soda, innovations such as Coke’s plastic contour bottle are muscling aluminum aside. Plastic bottles are even finding their way into vending machines, where aluminum was once invincible. Now plastic industry researchers are working to come up with a nonporous compound that could be used to hold beer. This materials war has forced aluminum to rethink the plain aluminum can and spend more on eye-catching shapes and textures. It will be interesting to see how far they succeed in dominating the beverage market. Consider another example: Startling things have been happening to the television set in the last few years. For example, Panasonic now offers a colorprojection system with a 60-inch screen. Toshiba Corp. of Japan has developed large, flat-screen television sets that are so slim that they can hang on the wall like paintings. Even traditional 19-inch sets aren’t just for looking at anymore; they are basic equipment on which to play video games, to learn how to spell, or to practice math. Videodisc players produce television images from discs; videocassette recorders tape television shows and play prerecorded videotapes. With two-way television, the viewer can respond to questions flashed on the screen. Teleprint enables the conversion of television sets into video-display tubes so that viewers can scan the contents of newspapers, magazines, catalogs, and the like and call up any sections of interest. Finally, cable television permits the viewer to call on the system’s library for a game, movie, or even a French lesson.

The 1990s have been a period of technological change and true innovation. One of the areas of greatest impact is communications. Until now, electronic communication has largely been confined to the traditional definition of voice (telephone), pictures (television), and graphics (computer), three distinct kinds of communication devices. From now on, electronics will increasingly produce total communications. Today it is possible to make simultaneous and instantaneous electronic transmission of voice, pictures, and graphics. People scattered over the face of the globe can now talk to each other directly, see each other, and, if need be, share the same reports, documents, and graphs without leaving their own offices or homes. Consider the impact of this innovation on the airline industry. Business travel should diminish in importance, though its place may well be taken by travel for vacations and learning. The matrix should aid in choosing appropriate strategic options based on a business’s technological position. The matrix has two dimensions: technology and product. The technology dimension describes technologies in terms of their relationships to one another; the product dimension establishes competitive position. The interaction of these two dimensions suggests desirable strategic action. For example, if a business’s technology is superior to anything else on the market, the company should enhance its leadership by identifying and introducing new applications for the technology. On the other hand, if a business’s technology lags behind the competition, it should either make a technological leap to the competitive process, abandon the market, or identify and pursue those elements that are laggards in terms of adopting new technologies. Briefly, the rapid development and exploitation of new technologies are causing serious strategic headaches for companies in almost every type of industry. It has become vital for strategists to be able to recognize the limits of their core technologies, know which new technologies are emerging, and decide when to incorporate new technology in their products.

Political Environment

In stable governments, political trends may not be as important as in countries where governments are weak. Yet even in stable countries, political trends may have a significant impact on business. For example, in the United States one can typically expect greater emphasis on social programs and an increase in government spending when Democrats are in power in the White House. Therefore, companies in the business of providing social services may expect greater opportunities during Democratic administrations. More important, however, are political trends overseas because the U.S. economy is intimately connected with the global economy. Therefore, what goes on in the political spheres of other countries may be significant for U.S. corporations, particularly multinational corporations. The following are examples of political trends and events that could affect business planning and strategy:

    1.  An increase in geopolitical federations.
    a.  Economic interests: resource countries versus consumer countries.
    b.  Political interests: Third World versus the rest.
    2.  Rising nationalism versus world federalism.
    a.  Failure of the United Nations.
    b.  Trend toward world government or world law system.
    3.  Limited wars: Middle East, Serbia-Croatia.
    4.  Increase in political terrorism; revolutions.
    5.  Third-party gains in the United States; rise of socialism.
    6.  Decline of the major powers; rise of emerging nations (e.g., China, India,  Brazil).
    7.  Minority (female) president.
    8.  Rise in senior citizen power in developed nations.
    9.  Political turmoil in Saudi Arabia that threatens world oil supplies and peace  in
    the Middle East.
    10.  Revolutionary change in Indonesia, jeopardizing Japanese oil supplies.
    11.  Revolutionary change in South Africa, limiting Western access to important
    minerals and threatening huge  capital losses to the economies of Great Britain,
    the United States, and Germany.
    12.  Instability in other places where the economic consequences could be important,
    including Mexico, Turkey, Zaire,  Nigeria, South Korea, Brazil, Chile, and
    the People’s Republic of China.

Already in 1997–1998 we have seen the overwhelming impact that political shocks can have on the world economy. The value of the Indonesian rupiah is the perfect illustration: it was not just the product of an arbitrary monetary policy that was temporarily out of control but a rational response to problems that were fundamentally political. The Indonesian government in the 1990s continued to incur huge budget deficits and kept on borrowing, making itself dangerously dependent on the inflows of foreign capital. As the new government took over in 1998, inflation was high and the country became vulnerable to capital flight, leaving no choice for the government but to devalue the rupiah. The weakened Indonesian economy, staggered by the deep devaluation of the rupiah, had strong reverberations for the United States, with hundreds of thousands of jobs and billions of dollars of export business lost. Marketing strategy is deeply affected by political perspectives. For example, government decisions have significantly affected the U.S. automotive industry. Stringent requirements, such as fuel efficiency standards, have burdened the industry in several ways. The marketing strategist needs to study both domestic and foreign political happenings, reviewing selected published information to keep in touch with political trends and interpret the information as it relates to the particular company. Governments around the world help their domestic industries strengthen their competitiveness through various fiscal and monetary measures. Political support can play a key role in an industry’s search for markets abroad. Without it, an industry may face a difficult situation.

For instance, the U.S. auto industry would benefit from a U.S. government concession favoring U.S. automotive exports. European countries rely on value-added taxes to help their industries. Value-added taxes are applied to all levels of manufacturing transactions up to and including the final sale to the end user. However, if the final sale is for export, the value-added tax is rebated, thus effectively reducing the price of European goods in international commerce. Japan imposes a commodity tax on selected lines of products, including automobiles. In the event of export, the commodity tax is waived. The United States has no corresponding arrangement. Thus, when a new automobile is shipped from the United States to Japan, its U.S. taxes upon export are not rebated and the auto also must bear the cost of the Japanese commodity tax (15 or 20 percent, depending on the size of the vehicle) when it is sold in Japan. This illustrates how political decisions affect marketing strategy.

Economic Environment

Economic trends and events affecting businesses include the following possibilities:

• Depression; worldwide economic collapse

• Increasing foreign ownership of the U.S. economy

• Increasing regulation and management of national economies

• Several developing nations become superpowers (e.g., Brazil, India, China)

• World food production: famine relief versus holistic management

• Decline in real world growth or stable growth

• Collapse of world monetary system

• High inflation

• Significant employee-union ownership of U.S. businesses

• Worldwide free trade It is not unrealistic to say that all companies, small or large, that are engaged in strategic planning examine the economic environment.

Relevant published information is usually gathered, analyzed, and interpreted for use in planning. In some corporations, the entire process of dealing with economic information may be manual and intuitive. The large corporations, however, not only buy specific and detailed economic information from private sources, over and above what may be available from government sources, but they analyze the information for meaningful conclusions by constructing econometric models. For example, one large corporation with nine divisions has developed 26 econometric models of its different businesses. The data used for these models are stored in a database and are regularly updated. The information is available online to all divisions for further analysis at any time. Other companies may occasionally buy information from outside and selectively undertake modeling. Usually the economic environment is analyzed with reference to the following key economic indicators: employment, consumer price index, housing starts, auto sales, weekly unemployment claims, real GNP, industrial production, personal income, savings rate, capacity utilization, productivity, money supply (weekly M1: currency and checking accounts), retail sales, inventories, and durable goods orders. Information on these indicators is available from government sources. These indicators are adequate for short-run analysis and decision making because, by and large, they track developments over the business cycle reasonably well. However, companies that try to base strategic plans on these indicators alone can run into serious trouble. Deficiencies in the data prove most dangerous when the government moves to take a more interventionist role in the economy. Further, when the ability of statistical agencies to respond has been hampered by unprecedented budget stri

ngency, rapid changes in the structure of the economy cause a gradual deterioration in the quality of many of the economic statistics that the government publishes. The problem of government-supplied data begins with a recondite document called the Standard Industrial Classification (SIC) Manual, which divides all economic activity into 12 divisions and 84 major groups of industries. The SIC Manual dictates the organization of and the amount of data available about production, income, employment, and other vital economic indicators. Each major group has a two-digit numerical code. The economy is then subdivided into hundreds of secondary groups, each with a three-digit code, and is further subdivided into thousands of industries, each with four-digit codes. But detail in most government statistical series is available only at the major group level; data at the three-digit level are scarce; at the four-digit level, almost nonexistent. Thus, information available from public sources may not suffice. To illustrate the effect of economic climate on strategy, consider the following trends. In the more elderly capitalist countries, it is expected that old markets will become saturated much faster than new markets will take their place. Staple consumer goods, such as cars, radios, and television sets, already outnumber households in North America and in much of Western Europe; other products are fast approaching the same fate.

The slow growth of populations in most of these countries means that the number of households is likely to grow at only about 2 percent annually to the year 2000 and that demand for consumer goods is unlikely to grow any faster. Furthermore, while demand in these markets decreases, supply will increase, leading to intensified price competition and pressure on profit margins. For example, as we enter the new century, the auto industry is likely to suffer from overcapacity. It is expected that there will be three buyers for every four cars. Already the market concentration in many consumer sectors has fallen significantly, mainly because of increased foreign competition. And the expansion of production capacity in such primary industries as metals and chemicals, especially in developing countries, may bring some kind of increased competition to producer goods. These trends indicate the kind of economic issues that marketing strategists must take into account to determine their strategies.

Social Environment

The ultimate test of a business is its social relevance. This is particularly true in a society where survival needs are already being met. It therefore behooves the strategic planner to be familiar with emerging social trends and concerns. The relevance of the social environment to a particular business will, of course, vary depending on the nature of the business. For a technology-oriented business, scanning the social environment may be limited to aspects of pollution control and environmental safety. For a consumer-products company, however, the impact of the social environment may go much further. An important aspect of the social environment concerns the values consumers hold. Observers have noted many value shifts that directly or indirectly influence business. Values mainly revolve around a number of fundamental concerns regarding time, quality, health, environment, home, personal finance, and diversity.