Macro Enviroment vs Competitive Environment

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Charlie Hop
What are the main differences between the macro environment and the competitive environment? (...) Read more? Sign up for free

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  Treeske Kluck
 

Macro Environment vs Competitive Environment

The macro environment is a more general and overall view on the location that your company develops in; and how all the PESTLE factors influence your company.
The competitive environment deals with your main competitors that try to win customers in the same market. It is the segment of the industry that includes all immediate rivals.

  Warren Miller, CPA, CFA, United States
 

Macroenvironment versus Competitive Environment

I strongly disagree with Mr. Kluck's post.

In fact, the macroenvironment is to be considered a set of six risk-generating forces that circumscribe an industry or a strategic group within an industry. Those six forces are:

1. Economy
2. Politics
3. Innovation
4. Disasters
5. Lifestyles & Values
6. Demographics

In valuing or just analyzing an individual company, those six forces must also be analyzed. That is because they create risk for the industry, strategic group, or company. The magnitude of that risk will vary from industry to industry and from the strategic groups that constitute a given industry.

The purpose of macroenvironmental analysis is to understand--and, often, quantify--the magnitude of the risk that the macroenvironment creates for a given industry or for the strategic group of which a given company is a member. This is a nontrivial undertaking. The range of risk imposed on a company's cost of capital by macroenvironmental forces varies from -3 percentage points to +3 percentage points.

Analyzing the macroenvironment's effects on a given company is discussed in detail in Chapter 8 (pp. 141-154) of my book, 'Value Maps: Valuation Tools That Unlock Business Wealth" (Wiley, 2010).

As for the 'competitive environment,' I infer that Mr. Hop is talking about what is often called 'industry analysis'. When an entire industry is not being analyzed, but only a set of companies within it (i.e., a strategic group), the macroenvironment must be analyzed in terms of its quantified effect on the risk profile of the companies within that particular strategic group.

 
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