Market Environment – Economic Factor


The economic environment affects the demand structure of any industry/ product .In order to assess the impact of these forces, it is necessary that a marketer examines the following factors in a greater detail:

1. Gross national product
2. Per capita income.
3. Balance of payments position.
4. Industry life cycle and current phase through which the industry is passing .The different phases of this life cycle could be classified as recovery, boom, recession and depression.
5. Trends in the prices of goods and services –specifically , whether the inflationary or deflationary trends are visible.
6. Fiscal policies and prime rate of interest charged by commercial banks.

Each of these factors can be an opportunity or a threat to a firm. For example, if the prices of raw material , labor, and utilities like electricity are showing inflationary trends, the firm may have little option but to pass on this hike to the consumer in the form of increased prices .If the firm happens to be a in a monopolistic or an oligopolistic market, it might not face consumer resistance .But, if the firm is in a competitive industry, the consumer may resist or even shift his choice to the competing product. Inflationary trends in prices could pose a serious threat to a firm’s survival. However, a market driven company may use this as an opportunity to analyse all its cost drivers and plan their minimization or elimination .Cost drivers are all those activities that affect the cost structure of a firm. Michael Porter in his classical work on Competitive Advantage and Competitive Strategy spells out cost drivers as :

· Economies of scale
· Learning and spillover costs.
· Coordination among different activities.
· Pattern of capacity utilization
· Linkages with suppliers and channels,
· Inter-relationships with other business units within a firm.
· Vertical integration in a value activity.
· Timing of an activity
· Discretionary policies independent of other drivers like product policy, level of customer service provided, expenses on technology and marketing development activities , delivery time, served markets , channels used etc.,
· Location of the firm, and
· Institutional factors like government regulation , tax holiday/rebates, tariffs, etc.

A marketer needs to understand the impact of these economic forces on his company’s products and services.