CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Meaning and Elements of Macro Environment

Meaning and Elements of Macro Environment

Macro environment refers to the general environment or remote environment within which a business firm and forces in its micro environment operate. A company does not directly or regularly interact with the macro environment. Therefore, macro environment is also known as Indirect Action Environment. Forces in the macro environment, however, create opportunities for and pose threats to the company. The macro environment forces are less controllable than the micro forces. Therefore, success of an enterprise depends on its ability to adapt to the macro environment. For example, when there is a substantial increase in the cost of imported raw materials due to depreciation of the Rupee, production of such materials within the country may become necessary.

Macro environment consists of the following components:

  1. Demographic environment
  2. Political and legal environment
  3. Social and cultural environment
  4. Economic environment
  5. Technological environment
  6. Natural environment
  7. Global environment.

1. Demographic Environment: Demographic environment means various dimensions of country’s population. The demographic environment is important to business because people constitute the market for a business. Moreover, business management involves management of people and the efficiency of business depends largely on the competence and motivation of its people. Business firms often use demographic factors (e.g., age, sex, family size, occupation, family life cycle, education, social class, income distribution) as the basis of market segmentation. The demographic environment differs from country to country and from one place to another within a country. The demographic factors which have very significant implications for business are as follows:

  • Size and growth rate of population,
  • Age and sex composition of population,
  • Life expectancy,
  • Rate of employment,
  • Density of population,
  • Rural urban distribution,
  • Family size,
  • Ethnic composition,
  • Literacy levels, and
  • Income levels.

2. Economic Environment – The economic environment comprises all those economic forces which influence the functioning of business enterprises, e.g., the nature and structure of the economy, the stage of economic development, economic resources, the level of income, economic policies, distribution of income, etc. The main components of economic environment are as follows:

  • The nature of economic system-capitalist, socialist or mixed economy.
  • Economic structure-occupational distribution of labour force, structure of national output, capital formation, investment pattern, composition of trade, balance/imbalance between different sectors, five year plans.
  • Economic policies-industrial policy, export-import policy, monetary policy, fiscal policy, foreign investment and technology policy.
  • Organisation and development of the capital market-banking system, securities markets, etc.
  • Economic indices-gross national product, per capita income, rate of savings and investment, price level, balance of payments position, interest rates, etc.
  • Economic infrastructure and stage of development of the economy.
  • Product markets and factor markets-degree of competition, market size, etc.

3. Political and Legal Environment – Political environment comprises the elements relating to Government affairs. It serves as the regulatory framework of business. The main constituents of a country’s political and legal environment are as follows:

  • The constitution of the country.
  • Political organisation-organisation and philosophy of political parties, ideology of the Government, nature and extent of bureaucracy, influence of primary groups, business donations to political parties, political consciousness, etc.
  • Political stability-structure of military and police force, election system, law and order situation, President’s Rule, foreign infiltrations, secessionist activities, etc.
  • Image of the country and its leaders.
  • Foreign policy-alignment or non-alignment, relations with neighbouring countries.
  • Defence and military policy.
  • Laws governing business, and legal system.
  • Flexibility and adaptability of laws-constitutional amendments and direction of public policies.
  • The judicial system-implementation and effectiveness of laws.

4. Social and Cultural Environment – Social environment refers to the characteristics of the society in which a business firm exists. Social and cultural environment consists of the following:

  • Social institutions and groups.
  • Caste structure and family organisation.
  • Educational system and literacy rates.
  • Customs, attitudes, beliefs, values and life styles.
  • Tastes, preferences of people, and their buying behaviour.
  • Religions, etc.

Family, marriage, education, religion, attitudes to work and wealth and ethics are some examples of socio-cultural factors.

Fig: Elements of Macro Environment

5. Technological and Physical Environment – The main elements of technological and physical environment are the following:

  • Sources and types of technology.
  • Rate of technological change.
  • Approaches to production of goods and services.
  • New processes and equipment.
  • Research and Development (R&D) systems.

6. Natural Environment – The main natural forces are as follows:

  • Climatic and geographical conditions.
  • Agricultural, commercial and other natural resources.
  • Ecological system.
  • Levels of pollution.

7. Global Environment – International agencies (World Bank, IMF, WTO, EEC, etc.), international conventions, treaties and agreements, economic and business conditions in other countries, etc. Certain developments such as a hike in the crude oil price have global impact. Developments in information and communication technologies facilitate rapid spread of culture across countries. Economic conditions abroad affect Indian firms. For example, exports increase when markets expand abroad. International political factors can also affect business. For example, improvements in relations between India and Pakistan has led to higher trade between the two countries. WTO regulations have far reaching impact on business in India. Import and investment liberalisation by WTO has led to greater competition in India. The main determinants of international environment are as follows:

  • The state of the world economy and distribution of world output.
  • International economic cooperation.
  • International market structure and competition.
  • Barriers to international trade and investment.
  • National economic policies of different countries.
  • Role of multilateral economic institutions.
  • International economic laws, treaties, agreements, codes and practices.
  • Political system and conditions in different countries.
  • Cultural factors in different countries.
  • Growth and transfer of technology.
  • Growth and spread of multinationals.