External Micro Environment: Micro external forces have an important effect on business operations of a micro and macro economics notes pdf. However, all micro forces may not have the same effect on all firms in the industry. Micro external forces have an important effect on business operations of a firm.
For example, suppliers, an important element of micro level environment, are often willing to provide the materials at relatively lower prices to big business firms. They do not have the same attitude towards relatively small business firms. Similarly, a competitive firm will start a price war if its rival firm in the industry is relatively small. If the rival firm is a big one which is a capable of retaliating any adverse action from its rival, a competitive firm will hesitate to start a price war.
We explain below important factors or forces of micro-level external environment. An important factor in the external environment of a firm is the suppliers of its inputs such as raw materials and components. A smooth and efficient working of a business firm requires that it should have ensured supply of inputs such as raw materials. If supply of raw materials is uncertain, then a firm will have to keep a large stock of raw materials to continue its transformation process uninterrupted. This will unnecessarily raise its cost of production and reduce its profit margin. To ensure regular supply of inputs such as raw materials some firms adopt a strategy of backward integration and set up captive production plants for producing raw materials themselves.
Further, energy input is an important input in the manufacturing business. Many large firms such as Reliance industries have their own power generating plants so as to ensure regular supply of electricity for their manufacturing business. However, small firms cannot adopt this strategy of vertical integration and have to depend on outside sources for supply of needed inputs. Further, it is not a good strategy to depend on a single supplier of inputs. Therefore, to reduce risk and uncertainty business firms prefer to keep multiple suppliers of inputs. The people who buy and use a firm’s product and services are an important part of external micro-environment. Since sales of a product or service is critical for a firm’s survival and growth, it is necessary to keep the customers satisfied.
To take care of customer’s sensitivity is essential for the success of a business firm. A firm has different categories of customers. For example, a car manufacturing firm such as Maruti Udyog has individuals, companies, institutions, government as its customers. Maruti Udyog, therefore, has catered to the needs of all these types of customers by producing different varieties and models of cars. Besides, a business firm has to compete with rival firms to attract customers and thereby increase the demand and market for its product. In the present day of intense competition a firm has to spend a lot on advertisements to promote the sales of its product by creating new customers and retaining the old ones.
For this purpose, a business firm has also to launch new products or models. Therefore, to survive and succeed a firm has to make continuous efforts to improve the quality of its products. In a firm’s external environment marketing intermediaries play an essential role of selling and distributing its products to the final buyers. Marketing intermediaries include agents and merchants such as distribution firms, wholesalers, retailers.
There are marketing service agencies such as marketing research firms, consulting firms, advertising agencies which assist a business firms in targeting, promoting and selling its products to the right markets. Thus, marketing is an important link between a business firm and its ultimate buyers. A few years ago chemists and druggists in India declared a collective boycott of a leading pharma company because it was providing a low retail margin. They succeeded in raising this margin. This shows that a business firm must take care of its intermediaries if it has to succeed in this age of intense competition.