Every Thing You Need to Know About Micro-environment!

Overview

The business world as we see it today is more intense and competitive than ever before. In other words, the stakes for businesses were never this high and competition only gets fiercer each day. In such a scenario, organizations’ effectiveness in terms of strategic planning becomes a critical success factor for them.

Speaking of strategic planning, there are various dimensions that businesses take into account while realizing their strategic goals and objectives. These strategic goals explain the long-term plans that organizations have to ensure swift advancement and dominance in the industry. While there are various major considerations with respect to strategic planning, environmental analysis is a key objective for companies.

To explain, a lucid understanding of the internal environment, as well as the external environment corresponding to a company or industry, aids in setting business objectives and realizing the future course of action. The fact of the matter is that the external environment factors define the overall scenario in a specific industry as influenced by the macro environment.

In this blog, we delve further into understanding the conceptualization of the micro environment, the factors that are a part of the micro environment, and how they affect businesses. The blog highlights all the intricacies of micro environment in business and micro environment in marketing. So, let us get started with micro environment definition and contextual understanding.

What is micro environment?

Micro environment is a business term that refers to the direct factors existing within the company that can directly impact the operations and decision-making of the company. These factors play a crucial role in the context of a firm's business strategies and the setting of strategic business goals.

When a business creates a favourable operating environment, this will highlight various business opportunities for a firm, on the other hand, an unfavourable operating environment will point at the prevailing threats that a business needs to mitigate.

To further explain, the micro environment of an enterprise is inclusive of five prominent factors that include the following:

• Competitors
• Customers
• Suppliers
• People
• Market intermediaries

As you can clearly identify, each of the above dimensions of micro-environment-factors is a crucial determinant in giving companies a clear direction with respect to strategic planning. Also, these factors directly affect the success and authority of a business in its corresponding industry.

This explains why organizations or business leaders associate such great significance with micro environment analysis to identify the immediate threats and opportunities in the operating environment. In fact, in this context, Porter’s Five Forces Analysis proves to be a highly effective and reliable strategic planning tool for the worthwhile assessment of the micro environment.

Probing further, the subsequent sections explain micro-environment-factors and sheds light on the influence of each micro environment factor on business strategies and business success.

Micro environment in business

For any business big or small, it is essential that the top management has great awareness of the operating environment. Any threat that a business does not identify in a timely manner can doom the business at a later stage. Similarly, any missed opportunity in the immediate environment could imply that the business missed out on scaling new heights. Having said that, for businesses, it is important to conduct a well-detailed micro environment analysis at regular intervals.

The bottom line is that an effective micro environment analysis facilitates strategic change management that could transform the destiny of an organization for the better. The role of the top management is not limited to realizing the threats and opportunities existing in the micro environment. The ultimate objective is to act upon those opportunities or threats to make a real difference in terms of business performance and success.

Now, let us comprehend how each dimension of micro-environment-factors can directly or indirectly impact an organization’s prospects of success. Besides, it also offers a lucid understanding of the reasons why organizations need to have their strategic goals and plans in alignment with the present state of micro environment factors.

Micro environment factors and their influence

Well, we already listed out the six verticals of micro environment that hold the key to micro environment analysis and subsequently, business planning. Now, let us find out in detail how each of these factors has a considerable influence.

1. Competitors

Competitor analysis not only helps companies to understand what is working well for their competitors but also helps them to realize the existing gaps in their own strategies. Having said that, for any firm, competitors make a vital part of the operating environment. Businesses can always learn from the strengths and weaknesses of their competitors.

Moreover, identifying and analyzing the competitors also helps companies to determine the degree of rivalry in the market. When the degree of competition or rivalry is high, the stakes are high too and there is no margin for error. For any firm, it is important to understand the magnitude of rivalry in the market or the operating environment so that they can set attainable goals for developing competitive advantages.

Moving forward, for a business, competition exists not only in the form of business rivals but also in terms of products and services. In a perfect competition market wherein all enterprises are offering identical products or services, consumers have readily available substitutes. Consumers can easily switch to new businesses or products when the threat of substitutes is high and consumer switching costs are low.

For instance, the degree of competition is high in the consumer goods market as all companies are equally placed and sell similar products. If you use the products of Unilever Global, making the switch to Procter & Gamble will not make much of a difference.

All in all, an analysis of competitors helps companies to recognize their competitive positioning in the market, the degree of rivalry, and the threat of substitutes from other companies or products. In accordance with the same, businesses formulate their strategies for expansion and growth. Lastly, with respect to assessing the competition in the market, realizing the threat posed by new players or emerging businesses is also vital.

2. Consumers

Let’s start with a simple question, can a business advance without consumers? Can a business scale new heights without acquiring new customers at all times? Certainly, the answer to both these questions is well known to all of us.

One of the most important objectives of any business is to create incremental consumer demand. As it is often said, “consumers are the king” and this fact will stay forever. With respect to the analysis of micro-environment-factors, it is not only important to realize consumer preferences and needs but also to recognize the bargaining power of consumers. If we look at the state of affairs in the contemporary business world, everything revolves around consumer experiences. Businesses are paying more heed to consumer feedback than ever before in the bid to acquire and retain customers with exceptional experiences.

However, in the context of micro-environment-factors specifically, the primary objective of an enterprise is to analyze the bargaining power of consumers. To explain, the bargaining power of consumers is a direct measure of the kind of influence that consumers can have on a company’s product quality, pricing strategies, and functional efficiency.

When consumers assume enormous bargaining power, they can exert massive influence on companies to offer the highest quality at the lowest possible price. But the real question is, under what conditions is the bargaining power of consumers high? What are the substantial determinants of the bargaining power of buyers?

The factors that influence the bargaining power of buyers are listed below:

1. The number of buyers

When there is a large number of buyers in the market, the bargaining power of buyers is low. However, when there are only a few buyers and each buyer holds a substantial market share, the bargaining power of buyers is very high.

2. Switching costs

Consumer switching cost simply refers to the additional costs that consumers will have to incur when they switch to a new brand or product. For consumers, switching costs is a major consideration. Having said that, if the switching cost is low, consumers assume a greater bargaining power as they can switch to a new brand or product easily. On the contrary, if switching costs are too high, the bargaining power of consumers reduces significantly.

For instance, the switching costs for buyers are almost negligible in the consumer goods and grocery market. However, in the automobile market or the consumer electronics market, the switching costs can be too overwhelming for consumers.

3. The threat of backward integration

The bargaining power of consumers is high when buyers can exert great influence in terms of forcing backward integration. To explain, backward integration is the process by which companies buy suppliers or vendors in the supply chain.

4. Nature of commodities

In a market with standardized products, the bargaining power of buyers is high as the switching costs are low. However, in a market with large scale product differentiation, the consumer switching costs are high and hence the bargaining power is low.

3. Suppliers

Every business has a large magnitude of dependence on supply chain management and this is where the relationship between businesses and suppliers holds immense significance. Further, in the operational environment of a given firm, the bargaining power of suppliers can largely affect business operations and strategic planning for a sustainable future.

To explain, the bargaining power of suppliers in micro environment explains the extent to which suppliers in an industry can influence product quality, supply chain operations, and prices of firms. In contemporary times, we often hear about a global supply chain crisis that is affecting supply chains and production across all industries. In times like these where companies are at a disadvantage, suppliers assume massive bargaining power.

However, that is just one aspect of the various factors that determine the bargaining power of suppliers. These factors are listed below:

1. Availability of substitutes

The bargaining power of suppliers will be next to negligible if there is a large number of suppliers in the industry and replacements are easily available. However, when there are only a few suppliers and substitutes are not easily available, suppliers will have a much greater influence on companies

2. Reliance of suppliers on the industry

In case the suppliers rely solely on one industry for their profitability, their bargaining power will be low while the bargaining power of companies in the industry will be very high. On the flip side, the suppliers get revenue from various industries and are not entirely dependent on one market, the bargaining power of the suppliers will be high.

3. Switching costs for enterprises

Switching cost is not only a consideration for consumers but also for businesses. For enterprises, switching costs exist in terms of the additional costs to be incurred when they switch from one supplier to another. Having said that, if the switching costs are too high for companies, suppliers will assume greater bargaining power. Alternatively, if the switching costs are low and there are plenty of suppliers to choose from, the bargaining power of the suppliers will be low.

4. The threat of forwarding integration

Another major consideration with respect to the analysis of suppliers is whether they can exert the risk of forward integration or not. To explain, forward integration is the process through which companies look to reduce operational costs by purchasing supplier firms. By doing so, companies can eliminate third-party reliance on suppliers for distribution.

4. People

In the context of the operating environment of a company, the micro environment factor of people pertains to the local public, consumer rights groups, environmentalists, and other segments of the general public that can potentially affect a business and its success metrics.

Having said that, it is important for companies to maintain a positive relationship with the segments of the general public for positive public perception and to manage business reputation effectively. When businesses have a positive reputation among the general public inclusive of various interest groups, it is likely to attract new customers.

On the contrary, a negative public perception can dent the business and it may end up losing investors’ and customers’ trust. For instance, Starbucks has drawn a lot of flak in the past from environmental groups for its disposable plastic cups adding immensely to pollution. The criticism of Starbucks majorly led by environmentalist groups compelled the eco-friendly customers to switch to other brands. Hence, the company had to address the ethical issues pertaining to environmental neglect with immediate effect and introduce reusable paper cups.

5. Marketing intermediaries

Marketing intermediaries include middlemen or intermediary agencies that assist businesses in terms of promotion, selling, and distribution of their products. To further elaborate, marketing intermediaries include sellers, resellers, wholesalers, and other agents in the distribution channel.

Now, it is a well-known fact that businesses need to maintain an extensive network of sellers and wholesalers to ensure smooth distribution channels that are vital for revenue generation. Hence, companies need to analyze the marketing intermediaries and the value drawn from them on a regular basis to remain competitive. Also, they need to review their relationship with the marketing intermediaries at regular intervals to plug the gaps in the best interest of business objectives.

Now you will definitely have a crystal clear idea of the significance and impact of each factor that is taken into account while analyzing micro-environment-factors. In addition to the macro environment in business, it is equally important for businesses to analyze the micro environment that gives a clear picture of the immediate operating environment.

Proceeding further, the purpose of analyzing the micro environment is not limited to refining or developing operational strategies. Even from the marketing perspective, the analysis of the micro environment is imperative. Having said that, the ensuing section sheds light on all that you need to know about the micro environment in marketing.

What is micro environment in marketing?

The 4 Ps of Marketing also called the marketing mix include Product, Price, Place, and Promotion. Having said that, from the marketing perspective, each marketing strategy is centered around these 4 Ps. What we need to acknowledge is that the micro-environment factors mentioned above also have a huge impact on the 4Ps of marketing.

Needless to say, marketing is one of the core functionalities of every business. If we look around, the most successful business organizations in contemporary times also have the most innovative marketing strategies. The bottom line is that irrespective of whether it is a highly established brand like Nike or an emerging startup, effective marketing is indispensable.

For businesses to acquire new leads and convert customers at a swift pace, they need to work consistently on marketing objectives that include enhanced market share, increased brand awareness, product launch, market penetration, and so on. These marketing SMART Goals are directly linked with greater business success in terms of customer acquisition, revenue generation, and profitability.

What we need to understand is how the micro environment factors influence the product or service being offered by a business, the pricing strategies linked to the product, the places where the product is promoted, and the promotional strategies implemented by a company. So, let us comprehend in detail how each factor can have a substantial influence on a brand’s marketing.

1. Competitors

The product quality of competitors and how competitors promote their products directly impact the marketing strategies of a company. Also, competitors’ pricing strategies influence a company’s pricing strategies.

Hence, in the formulation of marketing plans, companies undertake the objective of competitor analysis to identify the marketing channels that competitor firms are using. In fact, companies analyze the 4 Ps marketing mix of competitor firms on a regular basis to constantly optimize their marketing.

In contemporary marketing, companies are very watchful of each other’s digital marketing strategies and promotional offers. For instance, when one major firm in the industry runs discount campaigns, other companies also come up with special promotional offers for customers. For instance, when Zara is selling its products at discounted rates, the likes of H&M will follow the same strategy along with other apparel brands. This is how competitor firms influence each other’s marketing strategies and brand positioning.

2. Consumers

As discussed above, consumers directly influence the product quality and pricing strategies of a firm. For any brand, it is important to not only analyze the bargaining power of customers but also to identify the changing consumer needs and offer them the best-fit products or services.

Having said that, as per the bargaining power of the customers, companies decide their pricing strategies. Companies are less likely to introduce products or services with premium pricing where the bargaining power of customers is too high. Moreover, subject to the changing preferences of the consumer and their expectations of quality, companies change their product development strategies.

Companies look to consistently optimize their products or introduce new products in the market to stay ahead of the changing consumer preferences. This explains why automotive companies introduce facelifts of their best-performing cars after every two to three years to cater to the changing consumer preferences.

Moreover, based on consumer behavior, companies decide their promotional strategies. For instance, if a substantial proportion of consumer interactions start online or through social media, companies will lay greater emphasis on SEO, social media marketing, and other digital marketing strategies for customer acquisition. To gain further insights into optimizing your social media marketing efforts, you can read more about the services offered by a reputable social media marketing agency.

3. Suppliers

Like consumers, suppliers can also have a direct influence on product quality and pricing strategies. In a market where suppliers have enormous bargaining power, they can exploit the pricing strategies of companies.

Let us try to understand this by taking the example of the current scenario in the automotive industry. As most of us know, the global automotive industry is facing unprecedented losses because of supply chain bottlenecks primarily related to semiconductor shortages. In times when the industry is largely hit by semiconductor shortages, suppliers are assuming greater power and are exploiting the input costs for companies. Consequently, there is a price hike in the industry and hence a downfall in sales.

Through this example, we can clearly comprehend how suppliers can make a massive difference in the marketing micro environment. If suppliers choose to hoard back the supplies, it will put immense pressure on the supply chain operations of a firm. Consequently, it will directly impact product strategies and pricing strategies.

4. People

In the modern era, most companies want to position themselves as a sustainable brand that cares for the environment. Marketing on the lines of being a purpose driven brand has become the need of the hour for companies. This is for the simple reason that brands’ public perception is directly linked to their growth and the sustenance of their competitive advantages.

When brands promote their products along the lines of sustainability, they try to set a positive narrative among the general public and environmentalist groups. The preferences of the modern consumers are changing and they are being more watchful of brand perceptions than in the past. To substantiate, as per Business Wire, almost 80 percent of modern consumers want to buy from brands that are perceived as environment-friendly.

This explains why most brands and businesses are now promoting greater transparency in their sustainable approaches. Almost every business now provides a sustainability report in the public domain and has set targets for carbon neutrality. In fact, sustainability or CSR initiatives are now at the epicenter of marketing campaigns for most businesses.

To cite an example, big brands like Adidas are running exclusive sustainability campaigns for proactive marketing. Brands are now using sustainability as a unique selling proposition and to maintain a positive brand image among the general public and environmental activists. They realize that not doing so may harm the perception of their business and they may begin to lose customers to relatively more sustainable brands.

To cite another example, in recent times, PETA, a globally renowned animal rights organization, launched a campaign against Gucci for exploiting animals and treating them unethically for their exotic skins. Given the fact that PETA enjoys global recognition and influence, the campaign dented the public image of Gucci, the consequences of which would have surely been felt in terms of customer attrition. Again, very recently, Gucci was under criticism one more time as PETA called out the brand for using wild animals for its advertising campaigns.

Hence, while setting marketing objectives and formulating marketing plans, companies need to be considerate of the public view as that may have a significant impact on the achievement of marketing goals. Marketing dashboards examples can provide valuable insights into public perception and help companies make informed decisions.

5. Marketing intermediaries

As discussed above, marketing intermediaries have a direct correlation with the promotion and distribution of products. Companies’ relationship with the network of wholesalers, sellers, distributors and retailers is a key determinant of marketing and related operations. Also, the marketing intermediaries may have a substantial influence on the product and pricing strategies.

To explain, if a company is selling inferior products with an overpriced strategy, most wholesalers, distributors, or retailers would not want to deal with the company. On the other hand, if a company is selling a high-quality product with a penetration pricing strategy, most retailers and wholesalers will happily associate with that product.

For wholesalers, retailers, and distributors, the sole purpose of collaboration will be their own profitability rather than the company’s profitability. Having said that, they will only be interested in qualities that have substantial demand in the market for their quality and unique features.

Recommended Readings

What is macro environment?

Change management models businesses should know

To encapsulate, while macro environment factors offer an in-depth understanding of the overall industrial environment with respect to a country or market, the micro environment factors explain the immediate operating environment that surrounds a firm. For effective strategic planning, substantial analysis of both macro environment and micro environment is necessary. The findings of environmental analysis help the companies not only identify the threats or opportunities but also to chart a course of action for the future.

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