External Factors

General Economic Conditions

Marketers must be aware of the business cycle, and react appropriately according to which stage of the cycle the economy is in.

Learning Objectives

Illustrate how fluctuations in the economy influence consumers’ willingness and ability to buy products and services

Key Takeaways

Key Points

  • There are four phases of the business cycle: prosperity, recession, depression, and recovery.
  • During recession and depression, the economy is on a downward tilt. Consumers are spending less and saving more, making the job of marketers more difficult and more risky. During recovery and prosperity, consumers are spending once more. However, the job of marketers remains challenging.
  • Marketers must be aware of what stage of the business cycle the economy is in. This is very difficult to predict, but research and awareness can lead to calculated risks.

Key Terms

  • business cycle: A long-term fluctuation in economic activity between growth and recession
  • depression: A period of major economic contraction; officially, four consecutive quarters of negative, real GDP growth (according to NBER).

Economic Issues

Various economic forces influence an organization’s ability to compete and consumer’s willingness and ability to buy products and services. The state of the economy is always changing–interest rates rise and fall, inflation increases and decreases. Consumers’ ability and willingness to buy changes. Economic changes will affect the demand and supply sides of the market, meaning that the marketer must always be aware of the general economic environment.

The Business Cycle

Fluctuations in our economy follow a general pattern known as the business cycle. These fluctuations in economic conditions affect supply and demand, consumer buying power, consumer willingness to spend, and the intensity of competitive behavior. The four stages in the business cycle are: prosperity, recession, depression, and recovery (see and try to identify the different stages).

A graph with years on the X-axis and household income on the Y-axis. A dark blue line, representing "all households' starts at $47,527 and has various peaks and falls until getting to 50,054. A light blue line, representing "working age households" starts in the middle of the x axis and is a vertical shift up of the blue line.

Real Median Household Income, 1979-2011: The chart shows the change in household income over the last three decades. Shaded areas denote times of recession.

Prosperity

Prosperity represents a period of time during which the economy is growing. Unemployment is low, consumers’ buying power is high, and the demand for products is strong. During prosperity, consumer disposable incomes are high, and they try to improve their quality of life by purchasing products and services that are high in quality and price. The U.S. economy was in a period of prosperity from 1991 to 2000. For marketers, opportunities were plentiful during prosperity, and they attempted to expand product lines to take advantage of consumers’ increased willingness to buy.

Recession

Recession is characterized by a decrease in the rate of growth of the economy. Unemployment rises and consumer buying power declines. Recession tends to occur after periods of prosperity and inflation. During a recession, consumers’ spending power is low, as they are busy paying off debts incurred through credit purchases during more prosperous time. During recessions, marketing opportunities are reduced. Because of reduced buying power, consumers become more cautious, seeking products that are more basic and functional.

Depression

Depression represents the most serious economic downturn. Unemployment increases, buying power decreases, and all other economic indicators move downward. Consequently, consumers are unable or reluctant to purchase products, particularly big-ticket items. Also, consumers tend to delay replacement purchases. Although many marketers fail during this period, insightful marketers can gain market share.

Recovery

Recovery is a complicated economic pattern, in that some economic indicators increase while others may stay low or even decrease. Much of what happens during a recovery may be a result of intangibles, such as consumer confidence or the perception of businesses that things will get better. Tentative marketers take serious risks. Premature marketers may face dire consequences. For marketers, an important task is to attempt to determine how quickly the economy will move into a situation of prosperity. Improper forecasting can lead some firms to overextend themselves, as consumers may be slow to change purchase habits they have been accustomed to in the more difficult economic times.

How Should Marketers React?

The economy is cyclical in nature. We know that the cycles will occur. We just cannot predict exactly when or how severe the cycles will be. Assumptions must be made about money, people, and resources. For example, many organizations become less aggressive when they believe the economy is not going to grow. If they are right, they may do well. If they are wrong, those organizations that are more aggressive can perform very well often at the expense of the conservative organizations. Assumptions must also be made about such economic factors as interest rates, inflation, the nature and size of the workforce, and the availability of resources, such as energy and raw materials. For marketers, the job is to use the information available to make educated predictions about what part of the cycle the economy is in, and best to react to that.

Environmental Scanning

One technique used by organizations to monitor the environment is known as “environmental scanning,” which refers to activities directed toward obtaining information about events and trends that occur outside the organization and that can influence the organization’s decision making. In a sense, such data collection scanning acts as an early warning system for the organization. It allows marketers to understand the current state of the environment and to predict trends. A formal but simple strategic information scanning system can enhance the effectiveness of the organization’s environmental scanning efforts (see for the main internal and external factors). One element of environmental scanning is the general economic environment.

A diagram that shows situational analysis for the internal (financial resources, technical resources, competitive situation, human resources, and product line) and external (technology, competition, economic/political, ethical/legal, and social trends) environments in an organization.

Internal and External Factors: It is important to know the internal and external factors that impact an organization.

Consumer Income, Purchasing Power, and Confidence

The CPI and CCI are measures of the strength of the economy, and perceptions of businesses and individuals towards the economic future.

Learning Objectives

Illustrate the relationship between consumer purchasing power, pricing and the economy

Key Takeaways

Key Points

  • Purchasing power can change if the price of goods increases/decreases, or if inflation increases/decreases. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.
  • A CPI can be used to index the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
  • if the economy expands causing consumer confidence to be higher, consumers will be making more purchases. On the other hand, if the economy contracts or is in bad shape, confidence is lower, and consumers tend to save more and spend less.

Key Terms

  • purchasing power: The amount of goods and services that can be bought with a unit of currency or by consumers.
  • consumer price index: A statistical estimate of the level of prices of goods and services bought for consumption purposes by households.
  • consumer confidence: An economic indicator measuring the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.

Consumer Buying Power

A consumer’s buying power represents his or her ability to make purchases. The economy affects buying power. For example, if prices decline, consumers have greater buying power. If the value of the dollar increases relative to foreign currency, consumers have greater buying power. When inflation occurs, consumers have less buying power.

Purchasing Power

Purchasing power is the amount of goods or services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat currency, or free-floating market -valued currency like US dollars. As Adam Smith noted, having money gives one the ability to “command” others’ labor, so purchasing power to some extent is power over other people, to the extent that they are willing to trade their labor or goods for money or currency.

If one’s monetary income stays the same, but the price level increases, the purchasing power of that income falls. Inflation does not always imply falling purchasing power of one’s money income since it may rise faster than the price level. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.

Consumer Price Index (CPI)

A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values. In most countries, the CPI is one of the most closely watched national economic statistics.

Consumer Confidence

Consumer confidence is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy. In essence, if the economy expands, causing consumer confidence to be higher, consumers will be making more purchases. On the other hand, if the economy contracts or is in bad shape, confidence is lower, and consumers tend to save more and spend less. A month-to-month diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to find and retain good jobs.

The ability to predict major changes in consumer confidence allows businesses to gauge the willingness of consumers to make new purchases. As a result, businesses can adjust their operations and the government can prepare for changing tax revenue. If confidence is dropping and consumers are expected to reduce their spending, most producers will tend to reduce their production volumes accordingly. For example, if manufacturers anticipate that consumers will reduce retail purchases, especially for expensive and durable goods, they will cut down their inventories in advance and may delay investing in new projects and facilities. The government will get ready for the reduction in future tax revenues. On the other hand, if consumer confidence is improving, people are expected to increase their purchases of goods and services. In anticipation of that change, manufacturers can boost production and inventories. Large employers can increase hiring rates. Government can expect improved tax revenues based on the increase in consumer spending.

Consumer confidence is formally measured by the Consumer Confidence Index (CCI), a monthly release designed to assess the overall confidence, relative financial health and spending power of the US average consumer. The CCI is an important measure used by businesses, economic analysts, and the government in order to determine the overall health of the economy (see ).

a graph with Average Consumer Price Index and % change in average consumer price index on the y axis with the year on the x axis. A red line, representing % change in Average CPI has many peaks while the blue line, representing Average CPI, has a semi-steady increase.

US Consumer Price Index, 1913-2006: Since 1980, due to specific targeting of inflation, the change in the US CPI has mostly stayed below 5% annually.

Political Environment

Companies doing business outside of the US should be aware that the political environment can differ greatly.

Learning Objectives

Give examples of how government policies can influence marketing programs

Key Takeaways

Key Points

  • Government regulations affecting business and marketing are often much more invasive abroad. Regulations on pricing, hiring, production, and environmental regulation will likely differ from those in the US.
  • Most Western countries have entered into regional trading agreements such as NAFTA, or those governing the EU. Companies doing business in these countries should expect to face regulations such as trade barriers, tariffs, etc. depending on where they are trading from and to.
  • Monetary and political stability are also key factors that multinationals should take into consideration. Political instablity carries a set of risks, such as expropriation.

Key Terms

  • tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
  • expropriation: The act of expropriating; the surrender of a claim to private property; the act of depriving of private propriety rights.
  • trading bloc: A type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

The Political Environment

The political environment in countries throughout Europe and Asia is quite different from that of the United States. In the U.S., government intervention in marketing tends to be relatively minimal compared to other countries.

The U.S. is capitalist society, it operates an economic system where both the government and private enterprise direct the economy. In other words, the U.S. government combines free enterprise with a progressive income tax, and at times, steps in to support and protect American industry from competition from overseas. For example in the 1980s the government sought to protect the automobile industry by “voluntary” export restrictions from Japan.

Nevertheless, governments outside the U.S. take this involvement one step further by influencing marketing programs within organizations in the following ways: contracts for the supply and delivery of goods and services; the registration and enforcement of trademarks, brand names, and labeling; patents; marketing communications; pricing; product safety; and environmental issues.

Political Stability

Business activity tends to grow and thrive when a nation is politically stable. Although multinational firms can still conduct business profitably, political instability within countries negatively affects marketing strategies.

Monetary Circumstances

The exchange rate of a particular nation’s currency represents the value of that currency in relation to that of another country. Governments set some exchange rates independently of the forces of supply and demand. If a country’s exchange rate is low compared to other countries, that country’s consumers must pay higher prices on imported goods. Exchange rates fluctuate widely and often create high risks for exporters and importers.

Trading Blocs and Agreements

US companies make one-third of their revenues from products marketed to countries in Asia and Latin America. The North American Free Trade Agreement (NAFTA) also boosts export sales by enabling companies to sell goods at lower prices due to reduced tariffs.

Regional trading blocs represent groups of nations that join together and formally agree to reduce trade barriers among themselves. NAFTA is such a bloc. Its members include the US, Canada, and Mexico. No tariffs exist on goods sold between NAFTA member nations. However, a uniform tariff is assessed on products from unaffiliated countries. In addition, NAFTA seeks common standards for labeling requirements, food additives, and package sizes.

One of the results of trade agreements like NAFTA is that many products previously restricted by dumping laws – laws designed to keep out foreign products – can be marketed. Dumping involves a company selling products in overseas markets at very low prices, with the intention to steal business from local competitors. These laws were designed to prevent pricing practices that could seriously harm local competition, as well as block large producers from gaining a monopoly by flooding markets with very low-priced products and raising those prices to very high levels.

Almost all the countries in the Western hemisphere have entered into one or more regional trade agreements. Such agreements are designed to facilitate trade through the establishment of a free trade area customs union or customs market. This eliminates trade barriers between member countries while maintaining trade barriers with non-member countries.

A timeline of European union treaties before the EU was formed

European Union Treaties : These treaties formed the political and economic bloc known as the “European Union.”

Tariffs

The most common form of restriction of trade is the tariff, a tax placed on imported goods. Customs unions maintain common tariffs and rates for non-member countries. A common market provides for harmonious fiscal and monetary policies while free trade areas and customs unions do not.

Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. Not surprisingly, US companies with a strong business ties in a foreign country may support tariffs to discourage entry by other US competitors.

Expropriation

Expropriation occurs when a foreign government takes ownership of plants and assets. Many of these facilities end up as private rather than government organizations. Because of the risk of expropriation, multinational firms are at the mercy of foreign governments, which are sometimes unstable and can change the laws they enforce at any point to meet their needs.

Applicable Legislation

Companies must abide by existing laws and regulations when doing business in a country; these laws may influence marketing activities.

Learning Objectives

Discuss the various legal issues that impact marketing decisions

Key Takeaways

Key Points

  • Product liability means that producers of products are held responsible for upholding the safety of that product for consumers. Lawsuits and settlements incentivize producers to ensure defects are minimized and safety is maintained.
  • Deregulation of the airline industry has lead to increased competition and service and decreased prices (see. Deregulation of electricity in California led to price hikes and was considered harmful.
  • Companies must also pay attention to existing state laws, government relationships, social legislation, federal legislation, and monetary and fiscal policies.

Key Terms

  • product liability: the idea that manufacturers of products are responsible for the safety of that product, which may be compromised due to defect or every day use.
  • legislation: Law which has been enacted by legislature or other governing body
  • deregulation: The process of removing constraints, especially government imposed economic regulation.

Every marketing organization’s activities are influenced by legal factors that establish the rules of the game. These laws, agencies, policies, and behavioral norms are established to ensure that marketers compete legally and ethically in their efforts to provide want- and need-satisfying products and services. The various US legal issues of which marketers must be knowledgeable include the following:

  • Monetary and fiscal policy: Marketing decisions are affected by factors like tax legislation, money supply, and the level of government spending. The tendency of a Republican Congress to spend on defense materials and not on the environment is an example.
  • Federal legislation: Federal legislation exists to ensure such things as fair competition, fair pricing practices, and honesty in marketing communications. Anti-tobacco legislation affects the tobacco and related industries, for example.
  • Government/industry relationships: Agriculture, railroads, shipbuilding, and other industries are subsidized by the government. Tariffs and import quotas imposed by the government affect certain industries (e.g.automobile). Other industries are regulated, or no longer regulated, by government (e.g. rail, trucking, and airlines). Deregulating the utilities industry had a tremendous negative effect on the Californian power industry in 2001.
  • Social legislation: Marketers’ activities are affected by broad social legislation, like the civil rights laws, programs to reduce unemployment, and legislation that affects the environment (e.g. water and air pollution). The meat processing industry has spent billions of dollars trying to comply with water pollution legislation.
  • State laws: State legislation affects marketers in different ways. For example, utilities in Oregon can spend only ½ per cent of their net income on advertising. California has enacted legislation to reduce the energy consumption of refrigerators and air conditioners. In New Jersey, nine dairies have paid the state over $2 million to settle a price-fixing lawsuit.
  • Regulatory agencies: State regulatory agencies, for example, the US Attorney General’s Office, actively pursue marketing violations of the law. Federal agencies like the US Federal Trade Commission and the Consumer Product Safety concern themselves with all facets of business.

Every facet of business is affected by one or more laws. We will briefly discuss the three areas receiving the most notice in marketing: product liability, deregulation, and consumer protection.

Product liability

The courts are increasingly holding sellers responsible for the safety of their products. The US courts generally hold that the producer of a product is liable for any defect that causes injury in the course of normal use. Liability can even result if a court or a jury decides that a product’s design, construction, or operating instructions and safety warnings make the product unreasonably dangerous to use.

Many feel that product liability law is now as it should be—in favor of the injured product user. Consumer advocates like Ralph Nader argue that for too long, product liability favored producers at the expense of the product user. Advocates claim that the threat of lawsuits and huge settlements and restitution force companies to make safe products.

Deregulation

Deregulation means the relaxation or removal of government controls over industries that were thought to be either “natural monopolies,” such as telephones, or essential public services like airlines and trucking. When regulated, industries received protection from renegade competition.

Insulated from competition, regulated industries in the past often had little reason to lower costs; they concentrated on influencing the regulators to make favorable decisions. There was an unhealthy tension and costs rose, industries sought price increases, and regulators resisted, often depressing industry profits. That, in turn, reduced new investment and perpetuated high costs and poor service.

Industries such as the airlines, banking railroads, communications, and trucking have long been subject to government regulation. A market place shock wave hit these industries as they were deregulated. Each of these industries saw the birth of many new competitors attempting to take advantage of market opportunities uncovered by deregulation. The result was that competition intensified, prices were lowered, and many once-stable organizations suffered huge financial losses.

As new competition was permitted, and rate regulation was loosened or abandoned, the vicious cycle began to reverse itself. For example, airlines, once freed of restrictions, organized “hub and spoke” systems–outing passengers via major transfer points that provided more connections. In 1978, about 14 per cent of all passengers had to change airlines to reach their destination; by 1995, this number fell to about 1 per cent.

Consumer protection

Since the beginning of the 20th century, there has been a concerted effort in the US to protect the consumer. Perhaps the most significant period in consumer protection was the 1960s, with the emergence of consumerism. This was a grassroots movement intended to increase the influence, power, and rights of consumers when dealing with institutions.

Marketers must always be aware of applicable legislation to avoid running foul of the law and incurring heavy fines, payouts and settlements.

a plane on the runway with grass in front of it

Airline Industry: Deregulation of the airline industry in the US led to many new airlines, new routes, lower prices, and decreased connections for passengers.

Cultural Values

Whether doing business abroad or locally, marketers must understand the cultures that govern customers’ buying habits and ethical norms.

Learning Objectives

Describe how cultural beliefs, values and customs influence marketing strategies

Key Takeaways

Key Points

  • Marketers must pay attention to the dominant culture of a society, but also to subcultures created by material cultures, belief systems, socio-economic groupings, and religious and political differences.
  • The sociocultural environment abroad can be very different, even if it appears similar. Even when countries share a language, they can differ greatly in how people eat, work, and do business. Taboos are often taken vary differently, and even simple things such as color can make a big difference.
  • Business decisions are not free of ethics. At the individual level, managers have ethical concerns, as do customers. Even at a societal level, businesses must make ethical decisions that may contradict with purely financial considerations.

Key Terms

  • subculture: A group of people who share a set of secondary values, such as hipsters.
  • culture: The beliefs, values, behavior and material objects that constitute a people’s way of life; the sum of learned beliefs, values, and customs that regulate the behavior of members of a particular society.
  • ethics: The set of moral principles or values that guide behavior.

Cultures and subcultures

Culture is the sum of learned beliefs, values, and customs that regulate the behavior of members of a particular society. Beliefs and values are guides of behavior and customs are acceptable ways of behaving. A belief is an opinion that reflects a person’s particular knowledge and assessment of an issue. Values are general statements that guide behavior and influence beliefs and attitudes. A value system helps people choose between alternatives in everyday life. Customs are overt modes of behavior that constitute culturally approved ways of behaving in specific situations. Customs vary among countries, regions, and even families. In Arab societies, for instance, usury (payment of interest) is prohibited, so special Islamic banks exist to accomodate this.

Dominant cultural values are referred to as core values; they tend to affect and reflect the core character of a particular society. Core values are slow and difficult to change. Consequently, marketing communication strategies must accurately portray and reflect these values.

Secondary values also exist in any culture. Secondary values are less permanent values that can sometimes be influenced by marketing communications. In addition, core values are held by virtually an entire culture, whereas secondary values are not.

A subculture is a group of people who share a set of secondary values, such as environmentalists. Many factors can place an individual in one or several subcultures. Five of the most important factors that create subcultures are:

  • Material culture – People with similar income may create a subculture. The poor, the affluent, and the white-collar middle class are examples of material subcultures.
  • Social institutions – Those who participate in a social institution may form a subculture. Examples include participation in marriage, parenthood, a retirement community, or the army.
  • Belief systems – People with shared beliefs may create a subculture, such as a religious group or political party. For example, traditional Amish do not use electricity and automobiles.
  • Aesthetics – Artistic people often form a subculture of their own associated with their common interests, such as art, music, dance, drama, and folklore.
  • Language – People with similar dialects, accents, and vocabulary can form a subculture. Southerners and northerners are two traditional categories in the US.

Adjusting to cultural differences is perhaps the most difficult task facing marketers who operate in other countries. Before entering a foreign market, a company must decide to what extent it is willing to customize its marketing efforts to accommodate each foreign market.

The Social and Cultural Environment

The cultural environment consists of the influence of religious, familial, educational, and social systems in the marketing system. Marketers who intend to market their products overseas may be very sensitive to foreign cultures. While the differences between our cultural background in the United States and those of foreign nations may seem small, failure to consider cultural differences is one of the primary reasons for marketing failures overseas. Cultural differences include language, color, customs, taboos, values, aesthetics, time, business norms, religion, and social structures.

Ethics

Ethics is generally referred to as the set of moral principles or values that guide behavior. There is a general recognition that many, if not most, business decisions involve some ethical judgement. For example, a company may have to decide whether to build a “sweatshop” in a developing country to lower costs.

Firms hope that a consideration of ethical issues during the decision-making process will be helpful in preventing or at least decreasing the frequency of unethical behavior. Having a corporate ethics policy also seems to facilitate the process of recovery after an ethical scandal—although firms may wish otherwise, unethical acts do occur and do not often go unnoticed (see and ).

A Business Week/ Harris Poll measuring various topics regarding Corporate America and business ethics

Business Ethics Survey: A survey carried out on perceptions of business ethics.

A table that shows common ethical issues in marketing (bribery, fairness, honesty, price, product, personnel, confidentiality, advertising, manipulation of data, and purchasing).

Ethical Issues: There are common ethical issues in marketing. Ethics come into account when the buyer and seller interact.

While ethics deal with the relationship between buyer and seller, there are also instances when the activities of marketing influence society as a whole. For example, when you purchase a new refrigerator, there is a need to discard your old refrigerator. If thrown in a trash dump, the old refrigerator may pose a safety risk, contaminate the soil, and contaminate the aesthetics of the countryside. Society is thus required to bear part of the cost of your purchase. The well-being of society at large should also be recognized in an organization’s marketing decisions. A definition for social marketing is provided by Alan Andreasen: “Social marketing is the adaptation of commercial marketing technologies to programs designed to influence the voluntary behavior of target audiences to improve their personal welfare and that of the society of which they are a part. ”

Demographics

Marketers must understand the different demographic groupings that exist and the demographic changes that are constantly occurring.

Learning Objectives

Identify common demographic traits used by marketers and demographic changes in the current marketplace

Key Takeaways

Key Points

  • The traditional demographic groupings identified by marketers are the baby boomers and Generation X. Each of these has its own characteristics, which forces marketers to act differently depending on who is their target market.
  • Demographic changes are occurring in different areas due to different external forces. Aging populations, more educated workers, and a changing market structure mean that people spend money in different ways and on different things. Marketers must be aware of this and react accordingly.
  • Generations Y and Z pose a new challenge to marketers, as their tastes and spending habits differ from previous generations. As this group discovers itself, so marketers will be able to discover them as well.

Key Terms

  • immigration: The act of immigrating; the passing or coming into a country for the purpose of permanent residence.
  • baby boomer: A person born in the postwar years (generally considered in the USA and other Allied countries as between 1945 and the early 1960s), when there was an increase in the birth rate following the return of servicemen at the end of World War II.
  • demographics: The observable characteristics of a population, such as physical traits, economic traits, occupational traits, and more.

Demographic Changes

Demographics describe the observable characteristics of individuals living in the culture. Demographics include our physical traits, such as gender, race, age, and height; our economic traits, such as income, savings, and net worth; our occupation-related traits, including education; our location-related traits; and our family-related traits, such as marital status and number and age of children.

It is important that marketers understand the demographic segment that they are focusing on. One differentiation is by generation–two of the biggest demographic groups are the baby boomers and generation X. These historically have been of great importance and focus to marketers. More recently, generations Y and Z have emerged, and marketers must ensure they understand how to target them most effectively. One challenge with the younger generations is that many of them are yet to understand their own tastes and desires.

Demographic trait compositions are constantly changing, and no American, Japanese, or Brazilian is “typical” anymore. There is no average family, no ordinary worker, no everyday wage and no traditional middle class. Still, marketing managers must understand consumers intimately. As we see next, some trends are old, others are new. For instance, the aging of the population has been going on for several decades, but births and birth rates in recent years have been much higher than expected. Immigration is also greater than predicted, and so is the backlash against it. In the US, interstate migration to the south and west are old trends. What is new is heavier movement in the US from the northeast rather than from the midwest and rapid growth in the mountain states.

Consider the following demographic changes and how they affect marketing:

  • Households are growing more slowly and getting older. About half of all households are aged 45 and older and growing at an annual rate of one percent compared with nearly two percent in the 1980s. Marketing communicators must plan for a greater number of middle-aged households, consumers who are experienced and have a better understanding of price and value. These consumers have an interest in high-quality household goods and in-home health care.
  • The traditional family barely exists now. Married couples are a slim majority of US households. Only one-third of households have children under 18, and nearly one-fourth of households are people who live alone. However, married couples dominate the affluent market, as the vast majority of very high-income households are married couples. The long-term trend of high growth in nontraditional types of households and lack of growth among married couples can only mean further segmentation of an already segmented marketplace.
  • The continued increase in education. Most adults in the United States still have not completed college (approximately 67 percent), but that number continues to decline. An increasing number of people have attended some college or have an associate or technical degree. More skilled workers mean more knowledgeable and sophisticated consumers who expect more information about product attributes and benefits before making a purchase.
Alumni Hall at Saint Anslem College Goffstown, New Hampshire.

Higher Education: The level of education in society is a demographic that impacts producers and consumers.

  • Jobs that do not require physical strength keep growing in number. Also, the extremely high cost of employee benefits suggests that the use of temporary workers and independent contractors will continue to grow. Marketing managers must assess whether consumers who do not have corporate benefits will become more risk-averse because they lack the safety net of company-provided pension plans and medical insurance (related: see ).
  • People in the US are moving south. More than half (54 percent) of US residents live in the ten largest states, and more than half of US population growth between 1990 and 1999 occurred in these ten states. New York had the largest population of all states in 1950, but in the 1990s, fast-growing Texas pushed the barely growing New York to number three. Why? More than half of the four million immigrants that located in the United States between 1990 and 1995 moved to California, Texas, or Florida.
  • The share of aggregate household income earned by the middle 60 percent of households has shrunk from 52 percent in 1973 to 49 percent 25 years later. Meanwhile, the share of such income earned by the top 20 percent (average income USD 98,600) increased from 44 percent to 48 percent. In other words, the total purchasing power of the top 20 percent of US households now equals that of the middle 60 percent.

Trends

Marketers must be able to anticipate and adapt to future trends and technological advancements in order to stay ahead of the competition.

Learning Objectives

Explain the different types of external factors or trends used in creating marketing strategies.

Key Takeaways

Key Points

  • Marketing managers must stay informed of technology trends so they can be part of the next big thing, rather than becoming outdated and suffering the consequences financially.
  • Marketing managers must watch factors in the micro environment, such as supply availability, and other trends dealing with suppliers to ensure that product will be delivered to customers in the time frame required in order to maintain a strong customer relationship.
  • Forecasting new trends has become increasingly important as Marketers try to understand Americans by analyzing major life events and their need to be connected to their peers through social media outlets.

Key Terms

  • micro environment: refers to the forces that are close to the company and affect its ability to serve its customers; it includes the company itself, its suppliers, marketing intermediaries, customer markets, competitors, and publics.
  • macro environment: Major external and uncontrollable factors that influence an organization’s decision making, and affect its performance and strategies. These factors include the economic, demographics, legal, political, and social conditions, technological changes, and natural forces.

The Micro Environment and Trends

The micro environment refers to the forces that are close to the company and affect its ability to serve its customers. It includes the company itself, its suppliers, marketing intermediaries, customer markets, competitors, and publics. The technological environment is perhaps one of the fastest changing factors in the macro environment. This includes technological developments in areas ranging from antibiotics and medicine, to nuclear and chemical weaponry, and credit cards.

How the Micro Environment Applies to Organizations

The corporate aspect of the micro environment refers to the internal environment of a company. This includes all departments, such as management, finance, research and development, purchasing, operations, and accounting. Each of these departments has an impact on marketing decisions. For example, research and development have input as to the features a product can perform. Accounting approves the financial side of marketing plans and budgets.

The suppliers of a company are also an important aspect of the micro environment. For instance, delivering supplies late can result in customer dissatisfaction. Marketing managers must watch supply availability and other trends involving with suppliers to ensure that product will be delivered to customers within the time frame required to maintain a strong customer relationship.

Technology Trends and Marketing

As industries such as pharmaceuticals and national defense expand, they create new markets and new uses for products. Such advances require companies to compete effectively, stay abreast of the latest trends, and update their product technologies as they become outdated.

Technology is the knowledge of how to accomplish tasks and goals. Technology affects marketers in several ways. First, aggressively advancing technology is spawning new products and processes at an accelerating rate that threatens almost every existing product.

Second, competition continues to intensify between old and new organizations as many substitute technologies compete with established products. Third, product innovations that result in superior performance or cost advantages are the best means for protecting and building market position without sacrificing profit margins. This is especially true in today’s world, when many markets are experiencing flat or slow growth when excess capacity is commonplace.

History provides many examples of companies that have lost their competitive advantage because a competitor came into the market with a product that had superior cost advantage or performance characteristics. These examples are not limited to small or weak companies. Even industrial giants including AT&T, General Electric, and IBM have seen parts of their markets eroded by competition with a distinctly superior product.

A "smart" car, which is small, and white and green

‘Smart’ Electric Car: The electric car has not been as popular as marketers predicted. Hybrid cars have become increasingly popular.

Forecasting New Trends

There are thousands of forecasters who claim to be able to predict or at least determine the direction of future markets. One that has an excellent track record is Roper Starch, a research firm that has been looking at trends for over 50 years. The 2000 Roper Report identified four concepts that may help marketers understand Americans in the next decades:

  • “High Pace/High Peace”: Americans’ high-speed lifestyles create new goals and needs”: As the pace of life is picking up, there is growing desire and demand for peace. The shift to “High Pace/High Peace” is evident in the marketplace. Increasingly, brands seem to be “high-pace” (efficiency-oriented, intense brands like Apple) or “high-peace” (relaxing, spa-pace brands like Banana Republic, and personalities like the Dalai Lama). Data suggest that there are opportunities for marketers to become a bridge to get people to both their high pace and high peace goals.
  • “Kinnections”: The movement to connection in technology, relationships, and brands”: In a whole host of areas—from communications and computing to attitudes towards family and community—connections are up. This sense of connection is apparent in the marketplace as well in cause-related marketing and a greater desire for brands to go beyond the basics like quality and value to connect in new ways with consumers. Companies like Facebook, Twitter and LinkedIn are now synonymous with the new, ultra-connected society.
  • “Diversity/Destiny”: The US increasingly is “the world’s nation”: our foreign-born population has almost tripled in the past 30 years. African-Americans, Hispanics, and other minorities make up the majority of the nation’s population growth in the past decade—and will account for an even larger proportion of the nation’s growth in the decade to come. To succeed, marketers must be culturally aware.
  • “Marketing by life stage”: Marketers have traditionally relied on standard demographics to understand and predict consumer behavior. Research shows, however, that life stage can be a more powerful predictor of consumer attitudes and behavior than traditional demographic analysis. Classifying Americans by the life events they have experienced, rather than by demographic traits, can yield insights and understanding into a market that might otherwise have been overlooked.