Chapter 4

The Marketing Environment & Marketing Audit

4.1. Environmental analysis and scanning
An organization is a creature of its environment. Its very survival and all of its perspectives,
resources, problems, and opportunities are generated and conditioned by the environment. Thus, it is
important for an organization to monitor the relevant changes taking place in its environment and
formulate strategies to adapt to these changes. In other words, for an organization to survive and
prosper, the strategist must master the challenges of the profoundly changing political, economic,
technological, social, and regulatory environment. To achieve this broad perspective, the strategist
needs to develop and implement a systematic approach to environmental scanning. As the rate and
magnitude of change increase, this scanning activity must be intensified and directed by explicit
definitions of purpose, scope, and focus. The efforts of businesses to cope with these problems are
contributing to the development of systems for exploring alternatives with greater sensitivity to long-
run implications. This emerging science has the promise of providing a better framework for
maximizing opportunities and allocating resources in anticipation of environmental changes.

Without taking into account relevant environmental influences, a company cannot expect to develop
its strategy. It was the environmental influences emerging out of the energy crisis that were
responsible for the popularity of smaller, more fuel-efficient automobiles and that brought about the
demise of less efficient rotary engines. In brief, business derives its existence from the environment.
Thus, it should monitor its environment constructively. Business should scan the environment and
incorporate the impact of environmental trends on the organization by continually reviewing the
corporate strategy.
The underlying importance of environmental scanning is captured in Darwinian laws:
(a) The environment is ever-changing, (b) organisms have the ability to adapt to a changing
environment, and (c) organisms that do not adapt do not survive. We are indeed living in a rapidly
changing world.
Scanning improves an organization’s abilities to deal with a rapidly changing environment in a
number of ways:

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1. It helps an organization capitalize on early opportunities rather than lose these to competitors.
2. It provides an early signal of impending problems, which can be defused if recognized well in
advance.
3. It sensitizes an organization to the changing needs and wishes of its customers.
4. It provides a base of objective qualitative information about the environment that strategists
can utilize.
5. It provides intellectual stimulation to strategists in their decision making.
6. It improves the image of the organization with its publics by showing that it is sensitive to its
environment and responsive to it.
7. It is a means of continuing broad-based education for executives, especially for strategy
developers.
4.1.1. SWOT analysis
Although SWOT analysis is one of the best-known and most frequently used tools within the
marketing planning process, the quality of the outputs often suffer because of the relatively
superficial manner in which it is conducted. There are several ways in which SWOT analyses
can be made more rigorous, and therefore more strategically useful, and this is something to
which we will return at a later stage in this chapter. However, before we turn to the detail of the
SWOT, it is perhaps worth summarizing the key elements of the four dimensions.
Identifying opportunities and threats
Faced with a constantly changing environment, each business unit needs to develop a marketing
information system (MkIS) that is capable of tracking trends and developments within the
marketplace. Each trend or development can then be categorized as an opportunity or a threat,
and an assessment made of the feasibility and action needed if the organization is either to
capitalize upon the opportunity or minimize the impact of the threat.

SWOT analysis is therefore designed to achieve two principal objectives:

 To separate meaningful data from that which is merely interesting
 To discover what management must do to exploit its distinctive competencies within each
of the market segments both now and in the longer term.
However, in examining opportunities and threats, the reader needs to recognize that they can
never be viewed as ‘absolutes’. What might appear at first sight to be an opportunity may not be

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so when examined against the organization’s resources, its culture, the expectations of its
stakeholders, the strategies available, or the feasibility of implementing the strategy. At the risk
of oversimplification, however, the purpose of strategy formulation is to develop a strategy
which will take advantage of the opportunities and overcome or circumvent the threats. For our
purposes, an opportunity can be seen as any sector of the market in which the company would
enjoy a competitive advantage. These opportunities can then be assessed according to their
attractiveness and the organization’s probability of success in this area

The probability of success is influenced by several factors, but most obviously by the extent to
which the organization’s strengths, and in particular its distinctive competences, match the key
success requirements for operating effectively in the target market and exceed those of its
competitors. Competence by itself is rarely sufficient in anything more than the short term since,
given time, competitive forces will erode this competence. Because of this the strategist needs to
concentrate upon developing competitive advantages which are sustainable over time; the bases
of a sustainable competitive advantage. However, at the same time as generating opportunities,
the external environment also presents a series of threats (a threat being a challenge posed by an
unfavourable trend or development in the environment, which, in the absence of a distinct
organizational response, will lead to the erosion of the company’s market position). Threats can
be classified on the basis of their seriousness and the probability of their [Link] the
nature of these comments, it can be seen that by putting together a picture of the major
opportunities and threats facing the business the marketing planner is attempting to arrive at a
measure of the market’s overall attractiveness. In essence, four possibilities exist:
 An ideal business that is characterized by numerous opportunities but few, if any, threats
 Speculative business that is high both in opportunities and threats
 A mature business that is low both in opportunities and threats
 A troubled business that is low in opportunities but high in threats.
Identifying strengths and weaknesses
Although in many markets it is often a relatively simple process to identify a whole series of
environmental opportunities, few organizations have the ability or the competences needed to
capitalize upon more than a small number of these. Each business needs therefore to evaluate on
a regular basis its strengths and weaknesses. Having identified the organization’s weaknesses, the

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strategist needs to return to and consider again the relative importance of these weaknesses.
There is often little to be gained from overcoming all of the organization’s weaknesses, since
some are unimportant and the amount of effort needed to convert them to a strength would quite
simply not be repaid. Equally, some strengths are of little real strategic value and to use them in
anything other than a peripheral way is likely to prove of little real value. Recognizing this, the
marketing planner should focus upon those areas of opportunity in which the firm currently has
major strengths or where, because of the size of the opportunity and the potential returns, it is
likely to prove cost-effective in acquiring or developing new areas of strength.
Table. 4.1 SWOT summary
STRENGTHS : Areas of (distinctive) Must always be looked at relative to the
competence that: competition If managed properly, are the basis for
competitive advantage Derive from the marketing
asset base
WEAKNESSES : Areas of relative Indicate priorities for marketing improvement
disadvantage that: Highlight the areas and strategies that the planner
should avoid
THREATS : Trends within the environment Increase the risks of a strategy Hinder the
with potentially negative impacts that: implementation of strategy Increase the resources
required Reduce performance expectations
OPPORTUNITIES : Environmental trends Highlight new areas for competitive advantage
with positive outcomes that offer scope for
higher levels of performance if pursued
effectively:

4.1.2. The political, economic, social and technological environment

Effective marketing planning is based on two important analytical ingredients. First, market
opportunity must be analysed and, second, the company’s ability to take advantage of these
opportunities and cope with threats must be assessed. Under the first heading, there are four
basic building blocks:

1. Customers must be analysed to determine how the market can be segmented and what the
requirements of each segment are
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 2. Competitors must be identified and their individual strategies understood
3. Environmental trends (social, economic, political, technological) affecting the market
must be isolated and forecasted
4. Market characteristics in terms of the evolution of supply and demand and their
interaction must be understood.

The political (and legal) environment

Marketing decisions are typically affected in a variety of ways by developments in the political
and legal environments. This part of the environment is composed of laws, pressure groups and
government agencies, all of which exert some sort of influence and constraint on organizations
and individuals in society. With regard to the legislative framework, the starting point involves
recognizing that the amount of legislation affecting business has increased steadily over the past
two decades. This legislation has been designed to achieve a number of purposes, including:

 Protecting companies from each other so that the size and power of one organization to
damage another is limited
 Protecting consumers from unfair business practice by ensuring that certain safety
standards are met, that advertising is honest, and that generally companies are not able to
take advantage of the possible ignorance, naivety and gullibility of consumers
 Protecting society at large from irresponsible business behavior.

It is important therefore that the marketing planner is aware not only of the current legislative
framework, but also of the ways in which it is likely to develop and how, by means of industry
pressure groups and lobbying of parliament, the direction of legislation might possibly be
influenced so that it benefits the company. At a broader level, the strategist should also be
familiar with the way in which legislation in other countries differs, and how this too might
provide opportunities and constraints.

The economic and physical environments

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Within the majority of small and medium-sized enterprises (SMEs), the economic environment
is typically seen as a constraint, since the ability of a company to exert any sort of influence on
this element of the environment is, to all intents and purposes, negligible. As a consequence, it is
argued, firms are typically put into the position of responding to the state of the economy.

The sorts of changes that are currently taking place in the economic environment can be
identified as:

 An increase in real income growth

 Continuing inflationary pressures
 Changes in the savings/debt ratio
 Concern over levels of Third World debt
 Different consumer expenditure patterns.

Concern with the physical environment has increased dramatically over the past few years,
The five major areas of concern expressed by pressure groups such as these are: An
impending shortage of raw materials, The increasing costs of energy , Increasing levels and
consequences of pollution , An increasing need for governments to become involved in the
management of natural resources ,The need for management teams to take a very much more
informed view of sustainable development.

The social, cultural and demographic environments

It should be apparent from what has been said so far that a broad perspective needs to be
adopted in looking at the economic environment. From the viewpoint of the marketing
planner, analysis of short-term and long-term economic patterns is of vital importance. In
doing this, arguably the most useful and indeed logical starting point is that of demography,
since not only is demographic change readily identifiable, but it is the size, structure and
trends of a population that ultimately exert the greatest influence on demand. There are
several reasons for this, the two most significant of which are, first, that there is a strong
relationship between population and economic growth and, second, that it is the absolute size
of the population that acts as the boundary condition determining potential or primary
demand. A detailed understanding of the size, structure, composition and trends of the
population is therefore of fundamental importance to the marketing planner.

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 The technological environment

The fourth and final strand of the environment considered here is that of technology. Seen by
many people as the single most dramatic force shaping our lives, technological advance
needs to be seen as a force for ‘creative destruction’ in that the development of new products
or concepts has an often fatal knockout effect on an existing product. The creation of the
xerography photocopying process, for example, destroyed the market for carbon paper, while
the development of cars damaged the demand for railways. The implications for the existing
industry are often straightforward: change or die. Technology does, therefore, provide both
opportunities and threats, some of which are direct while others are far less direct in their
impact.

4.2. Marketing audit

The marketing audit is in a number of ways the true starting point for the strategic marketing
planning process, since it is through the audit that the strategist arrives at a measure both of
environmental opportunities and threats and of the organization’s marketing capability. The
thinking that underpins the concept of the audit is therefore straightforward: it is that corporate
objectives and strategy can only be developed effectively against the background of a detailed
and objective understanding both of corporate capability and environmental opportunity.

The audit is, therefore, as McDonald (1995, p. 28) has suggested: “The means by which a
company can identify its own strengths and weaknesses as they relate to external opportunities
and threats. It is thus a way of helping management to select a position in that environment based
on known factors.”

Definitions of the audit have also been proposed by a variety of authors, all of whom highlight
the need for the audit to be a systematic, critical and impartial review of the total marketing
operation. In essence, therefore, the audit must embrace the marketing environment in which the
organization – or the business unit – is operating in, together with the objectives, strategies and
activities being pursued. In doing this, the planner needs to take an objective view of the
organization and its market and not be affected by preconceived beliefs. It follows from this that
the audit must be comprehensive, systematic, independent and conducted on a regular basis.

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Given this, the three major elements and potential benefits of the marketing audit can be seen to
be:

 The detailed analysis of the external environment and internal situation

 The objective evaluation of past performance and present activities
 The clearer identification of future opportunities and threats.

These three elements can then usefully be viewed against the background of comments made by
Ansoff (1968), who has suggested that ‘irrespective of the size of the organization, corporate
decisions have to be made within the constraint of a limited total resource’. Recognizing this, the
strategist is then faced with the task of producing ‘a resource allocation pattern which will offer
the best potential for meeting the firm’s objectives’. The marketing audit can therefore be seen in
terms of providing a sound basis for this process of resource allocation. In this way, any strategy
that is then developed should be far more consistent both with the demands of the environment
and the organization’s true capabilities and strengths.

The rationale for the audit is therefore straightforward and in a number of ways can be seen to
derive from the more commonly known and widely-accepted idea of the financial audit which,
together with audits of other functional areas, is part of the overall management audit.

The structure and focus of the audit

In terms of its structure, the marketing audit consists of three major and detailed diagnostic steps.
These involve a review of:

 The organization’s environment (opportunities and threats)

 Its marketing systems (strengths and weaknesses)
 Its marketing activities.

The first of these is designed to establish the various dimensions of the marketing environment,
the ways in which it is likely to change and the probable impact of these changes upon the
organization. The second stage is concerned with an assessment of the extent to which the
organization’s marketing systems are capable of dealing with the demands of the environment.
The final stage involves a review of the individual components of the marketing mix.

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It should be apparent from this that, in conducting an audit, the strategist is concerned with two
types of variable. First, there are the environmental or market variables, over which the strategist
has little or no direct control. Second, there are the operational variables, which can be controlled
to a greater or lesser extent. This distinction can also be expressed in terms of the macro-
environmental forces (political/legal, economic/demographic, social/cultural, and technological)
that affect the business, and micro-environmental actors (customers, competitors, distributors
and suppliers) who subsequently influence the organization’s ability to operate profitably in the
marketplace. Regardless of which approach to categorization is used, the process and purpose of
the audit is the same. It begins with an external audit covering the macro-environmental forces
referred to above and the markets and competitors that are of particular interest to the company.
The internal audit then builds upon this by assessing the extent to which the organization, its
structure and resources relate to the environment and have the capability of operating effectively
within the constraints that the environment imposes.

4.3. The stages of the audit

In conducting a marketing audit, the majority of planners adopt a stepwise procedure. In this
way, it is argued; the approach ensures a degree of consistency that allows for a comparison from
one period to another. In discussing this, Grashof (1975) advocated the following steps:

1. Pre-audit activities in which the auditor decides upon the precise breadth and focus of the
audit
2. The assembly of information on the areas which affect the organization’s marketing
performance – these would typically include the industry, the market, the firm and each
of the elements of the marketing mix
3. Information analysis
4. The formulation of recommendations
5. The development of an implementation programme.