In an ever-evolving global landscape, change is the only constant. Businesses must remain cognizant of the broader external factors that can affect their operations and strategies. Macro Environment Analysis is a way to understand these overarching influences. By examining various facets of the larger environment and maneuvering the in's and out's of the zeitgeist, businesses can anticipate potential challenges and harness emerging opportunities.
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Follow along as we dive into a variety of factors that impact businesses and their corresponding frameworks for macro environment analysis. We will examine all components of PESTEL (or sometimes also spelled PESTLE), value chain analysis, risk management, and scenario planning. And if any of these terms sound foreign to you, there will also be real-life case studies to make them make sense.
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To demonstrate just how businesses ebb and flow, let's first take a look at a company that's been going through it all. We already know that, as the pioneer of film photography, Kodak faced major hurdles at the dawn of the digital age. Its dominant market position in the film industry made it difficult to shift gears and shortly turned this pioneer into a late adopter, to the point where it filed bankruptcy back in 2012. So what's been going on since then?
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To stay afloat after bankruptcy, the company chose to step away from the consumer camera market and instead focus on commercial printing and imaging. But its big resurgence moment came around 2017, a period when younger millennials developed a newfound nostalgia for pre-digital technology. This was also when vinyl record sales hit a 25-year high, and the first year that spending on vinyl outstripped spending on digital downloads.
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Kodak caught onto the trend and decided to reintroduce its beloved Ektachrome filmstock. "Sales of professional photographic films have been steadily rising over the last few years, with professionals and enthusiasts rediscovering the artistic control offered by manual processes and the creative satisfaction of a physical end product," the company announced. This trend had since continued to blossom as Gen Z just can't get enough of all things "retro" amidst the instability and chaos of the past few years, to the point that the company struggled to keep up with 35mm film production in 2022 and had to go through a major hiring push. Previously, the company's film finishing area had a five-day, single-shift operation. In 2021, the workload had increased to three shifts a day. Then in just another year, a 24/7 operation.
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But that's not even the full story. In July 2020, Kodak's shares skyrocketed due to a government loan for the production of Covid-19 drug ingredients. In fact, by this point, the company has tried various avenues for resurgence, which even included cryptocurrencies. All this is to prove the point that the macro environment can easily dictate the direction of any business and spare no one in the process. Depending on the industry, there's a time and place where every business will be confronted by external factors outside their control.
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Micro trend cycles have gotten exponentially shorter in recent years as our attention span became a fragile thing of the past. For businesses, especially consumer goods businesses, keeping up with micro trends usually entails being in sync with the latest lingo and aesthetics, basically nothing that a marketing campaign can't tackle. But when it comes to macro trends, the stake is a lot higher and the influence spreads farther. Macro trends can sometimes force companies to do a full pivot and re-envision its business operations and product strategies entirely.
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Because trends can be hard to quantify, it helps to have a framework that organizes them into categories. And this is where the PESTEL analysis comes in, or sometimes its also spelled as PESTLE or simply PEST. PESTEL is an acronym that stands for Political, Economic, Social, Technological, Environmental, and Legal. This suggests a more structured way to break down and assess the vast spectrum of macro environmental factors. Now, let's go through each of these components.
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Political factors encompass the role and influence of governmental entities on a business. These can include aspects like government policies, tax regimes, political stability, and trade restrictions. For instance, a change in government or international sanctions can directly influence a business's market access or operational costs.
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Since the invasion of Ukraine, the European Union has imposed 11 rounds of stringent sanctions on Russia. Despite leveraging its oil and gas revenues as a buffer, Russia is set to erase 15 years of economic gains by end of 2023. Manufacturing, which was on an upward trajectory before the invasion, fell by 6% by end of 2022.
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Other sectors like motor vehicle production and retail trade also suffered significant downturns. Key chip manufacturers like Intel and Samsung have halted business with Russia. This impacted productions of cars, electronics, and even military equipment. Sanctions on "dual use" tech affected telecommunications and cloud computing. While the country tried to shift reliance to domestic tech companies, the quality and availability of their products are problematic. The sanctions have further strained Russia's budding cloud computing market and hampered mobile operators' expansion plans, potentially causing a shift to outdated technology.
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Economic factors relate to the overall economic health of the markets where a business operates. Interest rates, inflation, unemployment levels, and economic growth rates are just a few considerations. A downturn in the economy might mean reduced consumer spending, while robust growth could signify an expanding market.
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With that said, some sectors are inherently more recession proof than others. For example, utilities, essential goods and services, healthcare. On the other hand, some sectors are more vulnerable to economic changes; When it's good it's a boom, when it's bad it's a total bust. Real estate is a prime example of that.
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Social elements refer to the cultural, demographic, and societal dynamics of a market. Changing societal values, shifts in consumer behavior, and population demographics can reshape demand patterns, and these demand patterns typically get reflected by changes in businesses' value propositions and marketing strategies. The social component is something that companies love to take advantage of these days, especially because it usually doesn't entail a complete costly overhaul of the business operation. Rather, it's more about how well they can "frame" a story.
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This summer's box office hit, the Barbie movie, took $145 million to make, but $150 million to market. Mattel's willingness to shell out a generous marketing budget was intended to set the movie up for success so it can pave the way for a Mattel cinematic universe in the future, featuring all of the company's iconic toys, from Polly Pocket to Hot Wheels. What's more, a lot of effort went into making sure that the message of the Barbie movie strongly resonates with today's social and cultural ethos. While many member of the audience embraced and praised the message, critics also pointed out that "the picture ultimately serves a brand."
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New technologies can disrupt or create opportunities, necessitating businesses to innovate or adapt. We recently made a whole separate video about the future of work automation in the age of AI, so feel free to check that out for a comprehensive rundown on what some of today's biggest tech developments can mean for companies and also their workers.
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This is not the same "environmental" in the term "macro environment". Here, the word refers to the literal environment. With growing awareness of environmental issues, businesses are increasingly held accountable for their ecological footprint. This factor examines sustainability practices, environmental regulations, and the push towards green initiatives. The transition to renewable energy sources in various industries, which is often supported by government regulations, exemplifies this shift.
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Now, much like the Social component, the Environmental component can also be twisted for the sake of business profit. Greenwashing refers to the act of misleading consumers about the environmental practices of a company or the environmental benefits of a product or service.
The practice is especially rampant in fashion retail. For example, a screening in the EU suggests that 39% sustainability claims in the textile, garment, and shoe sector could be deceptive. A watchdog group recently exposed retailer H&M for publishing misleading data on the environmental impact of its products, with some data inaccuracies up to 30%.
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A few months ago, in an attempt to subvert ethical concerns, fast fashion giant Shein organized a brand trip for TikTok influencers that turned out to be a disaster. The public was quick to observe that footage from the brand trip was staged and did not reflect the actual manufacturing process or working conditions at all. Consumers are more and more discerning about the validity of sustainability claims nowadays, so in order for companies to truly have a winning edge in that arena, real, tangible work is the only way to go.
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Legal considerations entail understanding the regulatory framework governing business operations. From employment laws to data protection regulations, staying compliant is crucial to avoid penalties and maintain a company's reputation. Unfortunately for most consumers, regulatory frameworks often come only after there had already been noticeable consequences.
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Now that we've covered what constitute the macro environment, here are some tools to bolster the analyses. Let's start with value chain analysis. At its core, value chain analysis is about understanding the activities through which firms can create value for its customers. This tool breaks down the process by which businesses receive raw materials, add value to these materials through various processes, and sell finished products to customers.
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When integrated into macro environment analysis, the value chain provides insight into where in the process external forces may exert influence. For instance, geopolitical tensions could disrupt the supply of essential raw materials, while technological advancements might render certain production processes obsolete. By dissecting the value chain, businesses can pinpoint vulnerabilities and strengths within their operations in relation to the broader environment.
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Greenwashing aside, Zara's "fast fashion" model is a testament to effective value chain management. With rapid design-to-store processes, they can adapt to fashion trends quickly. Their tight control over manufacturing and distribution allows them to respond in real-time to shifting consumer demands.
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In the context of macro environment analysis, risk analysis delves into the possible negative ramifications of external factors such as political instability, economic downturns, cultural shifts, or technological disruptions. After all, changes are exciting, but can also be devastating if you don't play the cards right.
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By assessing the likelihood and potential impact of these risks, companies can develop mitigation strategies. This proactive approach means that instead of being blindsided by external macro changes, businesses can foresee challenges and prepare accordingly, ensuring continuity and sustainability.
Whereas risk analysis often focuses on known threats, scenario planning delves into the realm of the unknown. It involves hypothesizing a range of plausible future situations and developing strategies to address them. Scenario planning provides businesses the flexibility to adapt to any future environment. For instance, how would a business operate in a post-pandemic world? Or how would stricter environmental regulations impact production? By developing multiple scenarios, businesses can anticipate changes, seize emerging opportunities, and safeguard against potential threats. This ensures resilience in the face of uncertainty.
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Faced with a sudden and massive drop in bookings during the pandemic, Airbnb rapidly shifted its strategy. They anticipated a variety of different pandemic scenarios, such as prolonged lockdowns and changing traveler preferences. As a result, they pivoted towards promoting local travel experiences and longer-term stays, allowing them to recover faster than other competitors in the travel and hospitality sector.
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Macro Environment Analysis serves as a compass for businesses to navigate the vast external landscape. In fact, even on an individual level, we also experience the benefits or repercussions of changes in the world around us. Whether it's recognizing the potential ramifications of political decisions with PESTEL, or anticipating market shifts through trends analysis, a good understanding of these macro factors can at the very least help us be prepared, even when certain events are always outside of any person or business's control.
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Plus, with tools like value chain analysis, risk analysis, and scenario planning, businesses can not only mitigate challenges but also seize emergent opportunities. In an unpredictable global economy, staying attuned to these macro influences is the key to uninterrupted growth.
