Economic forces

Through its effect on supply and demand the economic environment can have a crucial effect on the success of companies. Companies must choose those economic influences that are relevant to their business and monitor them. We shall now examine three major economic influences on the marketing environment of companies: economic growth and unemployment; the development and implications of the single European market; and the economic changes that are accompanying the transition to market economies of Eastern bloc countries.

Economic growth and unemployment

The general state of both national and international economies can have a profound effect on an individual company's prosperity. Economies tend to fluctuate according to the 'business cycle'. Most of the world's economies went through a period of significant growth from the mid-1990s, driven mainly by productivity gains brought about by recent developments in computing and tele­communications technologies. The fortunes of many sectors such as retailing, services and consumer durables closely mirror this economic pattern. In Ireland, which had very strong growth during the late 1990s, new car sales rose from a level of about 70,000 per year in the early part of the decade to over 200,000 in 2000. A major marketing problem is predicting the next boom or slump. Investments made during periods of high growth can become massive cash drains if customer spending falls suddenly. The problems facing most of the world's leading technology firms such as Cisco Systems, Compaq and Intel in 2001 were partly caused by this trap.

Low growth rates are reflected in high unemployment levels, which in turn affect consumer spending power. Unemployment levels throughout the European Union (EU) are currently relatively low, ranging from 2.3 per cent in Luxembourg to 11.3 per cent in Italy. In times of economic recession, consumers tend to postpone spending and/or become more cost-conscious, shifting more of their spending to discount stores.

Development of the single European market

The advent in 1986 of the Single European Act was the launch-pad for a free-flowing internal market in the EU. The intention was to create a massive deregulated market of 320 million consumers by abolishing barriers to the free flow of products, services, capital and people among the then 12 member states. More recently, the Maastricht Treaty (1992), the Nice Treaty (2000) and the introduction of the Euro (2002) are all further steps towards the development of full economic union. Clearly these developments have the potential for creating opportunities and threats, and the changes they bring need to be monitored closely by marketers.

Although their full impact is far from clear, there are a number of emerging implications for this single market: scale building, reorganization, pan-European marketing, and foreign direct investment by Japanese and US companies.

Scale building

For Europe, the birth of the single market created an internal zone of 320 million consumers, compared with 220 million in the United States and 120 million in Japan.⁴ This offered European industry the opportunity to organize itself on a scale large enough to enable it to compete with its main rivals in the USA and Japan. Many European high-tech industries suffer from a fragmented structure, making it difficult for them to keep pace with the research and development expenditures of their foreign competitors. For example, in 1990 there were 11 companies battling for the US$8-billion European market for central office telephone exchanges compared with only 4 in the USA.⁵ In order to compete, European companies are forming strategic alliances to reduce the effects of fragmentation. Olivetti, for example, acquired Telecom Italia in 2001 in a deal worth almost US$12 billion.