External Environment Of A Business

Published Date: 02 Nov 2017

The external environment of a business consists of three levels that incorporate factors that affect the marketing strategy of a firm. The first includes all persons who manufacture, purchase, and consume products. These include manufacturers, suppliers, distributors and consumers. The second level consists of persons or groups such as financial organizations and competitors who have a direct impact on the business but do not necessarily purchase its products and services. According to Verburg (2005, p.107), "the third level consists of demographic, socio-cultural, physical and legal factors."

Socio-cultural factors that have a bearing on the marketing strategy of a firm include the likes, dislikes, cultural values and beliefs of the target and potential markets. These factors determine whether the target and potential markets will buy a firm’s products and services, and at the same time, which ones they will purchase. In the same regard, every business venture is accountable to the society in which it is operating, in terms of meeting their needs and wants as well as environmental conservation. Moreover, the firm has to consider which forms of technology to use and at the same time, keep abreast with technological advancements in order to improve its operations.

Distributors, on the other hand, could be generalized or specialized. The first category includes those firms that supply large quantities of products of different range to an identified market. The second group of distributors specializes in the supply of only a few products. (Gorchels, West, & Marien 2004, p.134). Consequently, if a business is dealing with a wide range of products or services or different brands, it is likely to choose the generalized distributors to supply these. On the other hand, a business dealing with specific products or services may go for the specialized group of distributors.

Among the available marketing strategies for a firm that enable it to remain competitive in the target market, is what Porter calls generic strategies. A firm using a cost leadership approach will focus on reducing its marketing costs through assuming that all members of the target market have similar needs and wants. In this case, the firm uses lower cost products to attract customers. Once it has made profit, it uses its revenue to improve the quality and brand of existing products, and therefore gain an edge above its competitors. At the same time, the firm can operate on low pricing to attract customers and gain competitive advantage. On the other hand, a firm using a differentiation generic approach emphasizes on a variety of product and service offers that will fit the needs and wants of different market segments. This way, the firm is able to satisfy its customers and gain an edge above its competitors.

For a firm using the focus approach, emphasis is either on one product, service, or target market. The key here is for the firm to specialize in its products or services or in the segments of the population, it is targeting. The firm can achieve competitive advantage by concentrating on one product or service and providing the best quality to its consumers. At the same time, it can concentrate on one section or group of the population, thereby gaining a larger market share among them than that of its competitors in the same business or serving the same group. These three strategies influence the approaches that the firm will use in choosing its target markets. A firm using cost leadership approach is likely to serve an undifferentiated market, while one employing a differentiation strategy will use a multisegment approach. On the other hand, a firm employing a focus strategy is likely to choose a concentrated approach in selecting its target market.

A business firm has to identify the population to which it will sell its products or services. In order to select the target market, the firm can use any of the following three strategies: "undifferentiated, concentrated, and multisegment." (Lamb, Hair, & McDaniel 2009, p246). In the first case, the firm considers the target population as one large market with the same needs; therefore, there is no need to divide it into sections or groups of consumers. This strategy is suitable for a firm that is the first to venture into a particular line of business, where there are no existing competitors. Since the target market in such a case does not have other brands to choose from the firm can use a single marketing mix. One of the benefits of this strategy is that it enables the firm cut costs on production and marketing because it is manufacturing only one product or product item. However, it limits creativity in the products and services the firm offers.

In the case of the concentrated approach of selecting target markets, a firm gears its products or services towards one section or niche of the population. Consequently, it focuses on learning the needs, wants of its niche, and therefore develops a particular marketing mix to suit its consumers. This strategy is suitable for small businesses that are in competition with larger ones. At the same time, businesses that want to achieve a strategic position in the targeted market use this approach. This strategy is advantageous in that it enables a firm reduce waste of resources because it concentrates on one segment of the population. However, it is likely to fail when the selected niche is very small or the number of consumers reduces, and this may have negative implications for the firm.

The third strategy involves targeting products or services to several segments of a population. In this case, a firm develops different marketing mixes for each segment it is targeting. This approach is suitable for firms dealing with several brands and those targeting different age groups through a number of shop outlets. This approach is advantageous in that it can increase the sales volume of products or services, thereby raising profits and the market share of the firm. However, one disadvantage is that the sales of existing and new products or services may clash with each other.

Acquisition involves strategies geared towards attracting new customers while retaining the current ones. (Keith 2007, p171). To acquire customers, most firms maximize on the marketing mix that is aspects of the product, price, promotions, and place. For example, the firm can offer a wide range of products or services to meet the needs and wants of different segments of the target market. In pricing, the firm can set its prices at levels suitable for the incomes of members of the target market. To support the sale of its products or services, the firm can use a variety of promotional strategies depending on the segment of the market it is targeting. Regarding the aspect of place, a firm can focus on attaining a large market share of its target population before opening new branches in other locations. At the same time, the firm selects the locations where it is likely to find the consumers it is targeting. Another approach is to use lead products to attract customers. Once the firm has acquired customers, it sells to them other brands or products and services. Consequently, the initial product or service leads the consumer to buy others and at the same time, helps the firm to acquire more customers. For their lead products or services, firms can use those that will be most attractive to customers or those that have a low price tag.

It is important for a firm to create a customer database that will serve as a measure of its capacities for customer retention. This is essential because the success of new products and services in the market depends in part on the number of current consumers who purchase from the firm. (McCorkell 1997, p.72). At the same time, the firm cannot expect to attract potential markets if it does not have an established clientele to show its successes in the past. Consequently, the firm has to create a customer marketing approach that aims at getting the most business out of each customer. This will differ from one customer to another and from one target market segment to another. The customer database will therefore show the progress the firm is making in retaining its customers. The emphasis here will be on creating a good working relationship with customers. Strategies may include keeping a data file with records of the customer as well as being able to retrieve it instantly. Others include being warm and friendly to customers, as well as listening to their needs, noting their complaints and handling them promptly and with patience. It is at the same time important to keep communication lines open with customers, hence the need for contact centers operating on a 24-hour basis in order to attend to complaints and suggestions from customers.

Database marketing involves collecting and retaining data on existing customers and helps a firm to choose which consumers to target and which strategies to use. Another option is to create good relationships between a brand and its consumers. This promotes the customer’s loyalty to a product or service as well as enhancing the possibility that the customer will recommend it to others. A firm can achieve this through creating a helpline or portal on its website through which customers can make queries, give suggestions and recommendations on a product. This enables the firm not only to get feedback on its products and services from customers, but also to add consumer contact information and build their loyalty to the brand, product, service, and organization.

Database marketing strategies should focus on increasing the number of customers who remain loyal to the firm as well as raising the number of customers who refer others and encourage them to buy the firm’s products or services. The firm should seek customers who are interested in good service, that is, rather than those who are only after buying a product or service. At the same time, it can cultivate loyalty in customers by focusing on the services it offers rather than pricing. Moreover, the firm should control the data it keeps in the customer database. Too much data will cost the organization money and lower its profits. It should therefore review the data and keep only that which will be profitable during marketing for a period of two years. In addition, the firm should follow up on the sources of new buyers and identify which ones bring in customers who remain loyal to the firm for a longer period. The emphasis here should be on sources that bring the firm long-term consumers.

It is evident that the firm will incur some costs related to creating and keeping the database running as well as the media for retaining customers. Costs here would include expenses in database software installation, web hosting, creation and maintenance costs for customer service centers. The media that the firm can use to acquire and retain customers include the Internet, e-mail, and online help portals, telephone, press articles, newspapers, business journals, brochures, and magazines, television and radio broadcasts, and door-to-door promotional activities. Costs will depend on the types of media that the firm uses, but include expenses in buying advertising space, printing and publication costs. At the same time, the firm will incur expenses in transport of human capital and material resources, as well as in recruitment of personnel to do voice-overs in the case of radio and television broadcasts. Another expense would be design of promotional material that requires personnel with special skills and training.