MACRO FACTORS AFFECTING BUSINESS ENVIRONMENT SUBMITTED BY: AAYUSH VERMA
INTRODUCTIONA business firm is an open system. It gets resources from the environment and supplies itsgoods and services to the environment. There are different levels of environmental forces.Some are close and internal forces whereas others are external forces. External forces may berelated to national level, regional level or international level. These environmental forcesprovide opportunities or threats to the business community. Every business organization triesto grasp the available opportunities and face the threats that emerge from the businessenvironment.The term business „typically‟ refers to the development and processing of economic values insociety. Normally, the term is applied to portion of economic activities whose primarypurpose is to provide goods and services for society in an effective manner. It is also appliedto economics and commercial activities of institutions which having other purposes.
Business may be defined as “the organised effort by individuals to produce goods andservices to sell these goods and services in a market place and to reap some reward for thiseffort.” Functionally, we may define business as “those human activities which involvesproduction or purchase of goods with the object of selling them at a profit margin”.Business organizations cannot change the external environment but they just react. Theychange their internal business components (internal environment) to grasp the externalopportunities and face the external environmental threats. It is, therefore, very important toanalyze business environment to survive and to get success for a business in its industry. It is,therefore, a vital role of managers to analyze business environment so that they could pursueeffective business strategy.A business firm gets human resources, capital, technology, information, energy, and rawmaterials from society. It follows government rules and regulations, social norms and culturalvalues, regional treaty and global alignment, economic rules and tax policies of thegovernment. Thus, a business organization is a dynamic entity because it operates in adynamic business environment.Systems Approach of Business EnvironmentAll the systems are subsystems of other system in the nature except the supra-system orcosmos. We individually are also the part of our family. Formal organization or business ismade of group of people for specific purpose. Very similar to the organization we personallyare the members of our family and that is a component of a broader society. The same societyis a component of a nation. Group of nation with similar interest are grouped in regionalalliances such as SAARC and EU. World economy is made of with all these regionalalliances and network.In this approach, nothing is in isolation. All are integrated and interlinked. Organizations areopen systems because they get resources from others and give output to others. A businessdeals with number of business environmental forces. These forces from where a business getsresources and supplies resources, forces that influence the business operation, and factor thatpresent opportunities and threats are taken as the business environment. In this sense, a
business can be viewed as an internal system or controllable system of a manager orstrategist.Managers can control their own businesses. Managers can collect resources such as capital,human, information, idea, land, and equipments. These components are controllable.Managers can operate their organization and use their decision to run it. Similarly, the outputof the organization is also under their control. But, other broader systems that cover thebusiness may not controllable.Group of similar organization becomes an industrial system that comprises businessorganizations as its subsystems. Industry level environment is common to all the businessesrunning within the industry. A country and its environment is broader system that coverseven the different sectors or industries such as banking, education, health, trade,manufacturing, and service industries. Therefore, it affects all the business operations insidethe nation. Regional alliances influence the national policy because a country is a subsystemof the regional alliances such as SAARC and BIMSTEC. Even such regional alliances arealso affected by the broader international systems such as WTO and United Nations. In caseof a business, it is a very small subsystem that should follow the industry norms, nationalpolicies, regional agreements, and global systems.It can be said that a business and its internal areas are controllable for a manager but otherbroader systems control the businesses. Therefore, the strategy for a manager is to controlinternal areas and react with the external forces to grasp the opportunity and face the threatspresented by the external environment. This system approach can be classified into threeenvironmental groups: uncontrollable, semi-controllable, and controllable.
Components of Business EnvironmentBusiness environment of the firms/company or organisation can be classified into two broadcategories:• Internal Environment• External Environment Component of Business EnvironmentA variety of factors can affect companys business. Such factors can be national level,regional level, and international level environmental forces. These factors are also known associetal factors or macro level business environment factors. In general, five forces aretaken as the general environmental factors namely economic, socio-cultural, political-legal,technological, and international. Some writers included natural environment as a distinctcomponent but the growing social awareness on natural environment shows that thiscomponent can be included into the socio-cultural environment.Set of these environmental factors is mostly referred by first four factors PEST (Political-legal, Economic, Socio-cultural, and Technological). The logic behind this is pervasivenessof the international environment because it affects all these four sectors. Fast growingtechnological development, outsourcing business, emergences of multinational companies,and global and regional alliances have made the world a global village.
In this context, effect of international environment in four major components of generalenvironmental factors is natural. Information Communication Technology (ICT) revolutionand globalization are to be considered very important effect in todays international businessenvironment. Growing multinational companies and their influence in one national economyis clearly evident. Use of automated technology and e-commerce has replaced many of themanual works and workplace. World Trade Organization and its growing membersincluding Nepalese 147th membership in Cancun summit has placed new opportunities andthreats to the developing countries like Nepal. South Asian Association for RegionalCooperation (SAARC) is active since twenty years and it recently declared South Asian FreeTrade Area (SAFTA) charter. Furthermore, Bay of Bengal Initiative for Multi-SectoralTechnical and Economic Cooperation (BIMSTEC) and its future potentialities presented newprospectus to the local and international business entities in this sector.
CHARACTERISTICS OF BUSINESS ENVIRONMENTBusiness environment characteristics will be indicated that major challenges, opportunities,threat and weakness of the business.Characteristics of Business EnvironmentEnvironment is ComplexBusiness environment principally consists of a number of factors, events conditions. Theseare influenced to different departmental source in the organisation. These conditions do notexist in isolation and create entirely new set of influences which interact with each other.This is difficult to influence to organisation. All these factors have to be considered asenvironment analysis is complex and rigid and totally very difficult to grasp by the functionalmanager and top level employees in the organisation.Environment is DynamicBusiness and company environment is constantly changing in different nature. Micro andmacro environment factors are influenced to business. It impact to change on the businessconditions. Dynamic environment is flexible and dynamic nature in company. This is causingdue to change, strategic manager can shape strategy and formulate short term and long termobjectives.Environment is Multi–facetedStrategic observer can shape and observe different characteristics of environment. Strategicobserver observes a particular change or latest development in the business. It may be viewedas different opinions from different observers in the organisation. These things are frequentlyseen when the development happens. All are happy to welcome it and think as an opportunityfor the company, even also as threat to company.
ENVIRONMENTAL INFLUENCES ON BUSINESSThe term Environmental analysis is defined as “the process by which strategists monitor theeconomic, governmental, legal, market, competitive, supplier, technological, geographic, andsocial cultural settings in order to determine opportunities and threats to theirfirms/company/organisation”.According to Barry M. Richman and Melvyn Copen“Environment factors of constraints are largely if not totally external and beyond the controlof individual industrial enterprises and their arrangements. These are essentially the „givers‟within which firms and their managements must operate in a specific country and they vary,often greatly from country to country.”According to Glueck and Jauch“The environment includes outside the firm which can lead to opportunities for or threats tothe firm. Although, there are many factors, the most important of the sectors are socio–economic, technical, supplier, competitors, and government.”These definitions clearly reveal the following important factors:• Strategist looks on the environmental changes while to analyse the threats of the businessalong with searching and offering immense opportunities to business enterprises in themarket.• A successful business enterprise has to identify, appraise and respond to the newdimensions of various opportunities and threats in its internal and external environment.• Successful businesses not only recognise activities but also the different elements in theenvironment.
Various Approaches of Identifying and Reporting EnvironmentComponentsThere are many distinct but similar approaches available in categorizing businessenvironment components. Jauch & Glueck (1988) identified business environmentcomponents into three sets namely general, industry level, and internal. This concept becamevery popular and holistic among the many academicians. They identified five majorcomponents including political-legal, socio-cultural, economic, technological, and climaticfactors of general business environment. Industrial and general level business environmentare grouped into external business environment.Many writers coined Political, Socio-cultural, Economic, and Technological factors as PEST.Political and legal components are sometimes separated and PESTEL is also used as anacronym. Some others address these external environment components as Social,Technological, Political, and Economic (STEP) factors. Including natural environmentalfactors into this set social, technological, economic, environmental and political (STEEP)model is presented. The same natural environment is also taken as a distinct component;therefore, it is sometimes addressed as Socio-cultural, political legal, Economic, Natural, andTechnological (SPENT). Cartwright identified an acronym SPECTACLES to address the setof ten external environment components such as Social, Political, Economic, Cultural,Technological, Aesthetic, Customer, Legal, Environmental, and Sectoral. External businessenvironment are grouped into remote environment for general and operating environment fortask or industry level business environment.However, it is important not to just list PESTEL factors because this does not in itself tellmanagers very much. What managers need to do is to think about which factors are mostlikely to change and which ones will have the greatest impact on them i.e. each firm mustidentify the key factors in their own environment. When analysing companies such as Sony,Chrysler, Coca Cola, BP and Disney it is important to remember that they have manydifferent parts to their overall business - they include many different divisions and in somecases many different brands. Whilst it may be useful to consider the whole business whenusing PESTEL in that it may highlight some important factors, managers may want to narrowit down to a particular part of the business (e.g. a specific division of Sony); this may be moreuseful because it will focus on the factors relevant to that part of the business. They may alsowant to differentiate between factors which are very local, other which are national and thosewhich are global.
Macro/Remote EnvironmentMacro environment is largely external to the business enterprise. Macro environment factorsare uncontrollable factors and beyond the direct influence and control of the organisation. Itsfactors are powerfully influence to its functions. External environment consists ofindividuals, groups, agencies, organisations, events, conditions and forces. These arefrequently contacted by the organisation for its functions. It establishes good interaction andinterdependent relations in form of conducts business transitions. Proper designing andadministration of macro environment enable appropriate strategies and policies to cope withand make changes. Macro Environment ElementsThe macro/remote environment principally consists:• Economic environment• Political environment• Legal environment• Socio-cultural environment• Demographic environment• Natural environment• Physical and technological environment• Technological Environment• Global or International environment
PESTEL Analysis of the Macro Environmental Forces
ECONOMIC ENVIRONMENTThe economic environment constitutes of economic conditions, economic policies, and theeconomic system that is important to external factors of business.The economic conditions of the country include:• Nature of the economy of the country.• The general economic situation in the region, conditions in resource markets like money,material, market raw material components, services, supply markets and so on whichinfluence the supply of inputs to the organisation, their costs, quality, availability andreliability of supply of products and services.• It determines the economic strength and weakness in the market.• Purchasing power of the individual depends upon the economic factors like current income,price, savings, circulation of money, debt and credit availability.• People income distribution pattern analyses the market possibilities and impacts onenterprise.• Development process of the country.• Availability of economic resources of the country.• The level of the economic income of the country.• The distribution of income and assets of the country.• Public finance of the country.These are the very important determinants of business strategy in the organisation forformulating, implement and controlling of economic policies. Economic environment refersto the nature and direction of the economy within which business organisation are to operate.For instance, in developing country, the low income may be reason for the very high demandfor the product and services of the business.In countries where the investments and income are steadily and rapidly rising, businessprospects are generally bright and further investments are encouraged. In developedeconomics, replacement demand accounts for a considerable part of the total demand formany consumers durables where as the replacement demand is negligible in the developingcountries.
Money is the lifeblood of any business organisation and the economic system. The economyconsists of micro-economics and macroeconomics. Micro and macro elements are importantfrom the point view of strategic decisions. Strategist must scan, monitor, forecast, and assessthe following critical elements of the macro and micro economic environment:• Economic system• Nature of the country economy• The monetary and fiscal policies• Autonomy of the economy• Functions of economics• Factors of productions• Economic trends and structures• Economic policy statements and structure• Economic legislation• Economic problems• Import and export policy• Tax rates• Interest rates• Government budget deficit• Consumption pattern• Price fluctuations• Global movement of labour and capital• Stock market trends• Coalitions of countries and regional states• Availability of credits• Inflation trends in country• Unemployment trends• Foreign country economic conditions• Petroleum Exporting Countries (OPEC)) policies.Economic environment encourages liberalisation, privatization and globalization of theeconomic policies in the business environment. Every country‟s development is based on theeconomic environment activities that focus to the development process of the country.
POLITICAL-LEGAL ENVIRONMENTPolitical environment refers political and government and legal environment. It has closerelationship with the economic system and economic policy. For instance; the communistcountries had a centrally planned economic system. Communist government countries lawsare control investment and related matters.There are number of laws that regulate the conduct of the business. These laws cover mattersuch as standards of business and its production and service.• The democratic governments countries law‟s / act are passed in the parliament. Then theyare regulating rules and regulation of business according to the act.• Political stability, responsibility, political ideology and level of political morality, the lawand order situation, and practice of the ruling party and major purposefulness and efficiencyof the government agencies.• Political agency‟s nature, its influence to economic and industrial act ivies in the country.• Government policies like fiscal, monetary, industrial, labour, and export and import policieswhich are influenced to specific legal enactments and framework towards the businessorganisation political legal function and degree of the effectiveness which are influenced toformulate and implement policy in the legislature.The political environment is based on the uncertainty, therefore, demographic countriesconsist of number of political parties. Political parties aren‟t got clear majority to form agovernment. In this situation, industry and commerce collapsed their business activities dueto hung government. The political parties are unable to formulate stable government, it affectand fluctuate the government policies. Therefore, business organisation and public are neededto the stable government.
Elements of Political and legal EnvironmentThere are three important elements are associated with the political and legal environment aslisted below:• Government• Legal• PoliticalGovernment• Government policies, rules and regulation are controlling and monitoring the businessenterprises and its activities in the state.• Secondly, the type of government administration of the state and what is the business policyof state? These things should be evaluated by the strategist from point of view of business.• Strategist should study about the changes in the regulatory framework of the governmentand impact on the business.• Government tax policies are critical and affect to the business organisation in the state.Legal• Sound legal system is the basic requirement for running of the business operating within thestate.• Strategist should be aware of various business laws which are protecting consumers,competitors, and organisation.• Business organisation should aware of the laws which relevant to companies, competitors,intellectual property, foreign exchange, labor and so on.Political• Political system is also influenced to business and its activities.• Political pressure groups influence to government and in this way some extent to controland regulate business activities within the country.• Recently, special interest groups and political action committee put pressure to businessorganisation and to pay more attention towards consumer‟s rights, minority rights and womenrights.• Apart from the sporadic movements against certain products and services and somebusiness organisation in the state.
SOCIO–CULTURAL ENVIRONMENTSocio-cultural environment is an important factor that should be analyzed while formulatingcompany business strategies. If company is ignoring the customs, traditions, tastes andpreferences and education. it can affect the business. It consists of factors which are related tohuman relationships and the impact of social attitudes and cultural values. These are bearingon the business of the organisation.Business organisation is a successful due to appropriate strategies effective utilization ofsocio-cultural environmental factors. Social cultural environment is an important for MNC.Therefore, MNC should study of the social cultural activities of the region, where there areintroducing their own business. Socio-cultural factors are beliefs, values, norms andtraditions of the society determine how individuals and organisations should be interrelated.The difference in language sometimes poses a serious problem, even necessitating a changein the brand name. The value and beliefs associated with colour vary significantly betweendifferent cultures. For instance, white indication death and mourning in china and Korea; butsome country it expresses happiness and is the colour of the wedding dress of the bride.Some of the socio-cultural factories are influenced to operating environment oforganisation as outlined:• Social issues like the role of the business in the society, environment pollution, corruption,use of mass media and consumption of products and services which are offered by thecompany.• Social attitudes and values issues like social customs, beliefs, rituals and practices, changinglife style patterns and materialism are expectations of society from the business.• Family structure, values and attitudes towards the family and these changes also influenceto business and its operation.• Role of the women, position, nature of responsibilities in society is also influenced tobusiness and its operation in market.• Educational levels, awareness and consciousness of rights and work ethics of the societycan be influenced to business and its operation.Social practice, beliefs and associated factors are helpful for promotion of the certainproducts, services or ideas, the success of marketing depends to a very large extent, on thesuccess in terms of changing social attitudes or value systems.
DEMOGRAPHIC ENVIRONMENTDemography refers to study of the population. Demographic factors are as below:• The population size• Growth rate of population• Age composition of the population• Family size• Economic stratification of the population• Education levels• Language• Caste• Religion• Race• Age• Income• Educational attainment• Asset ownership• Home ownership• Employment status and locationThese factors are the relevant to the business for formulating and implementing of strategyfor controlling and accomplishment of the objectives of the organisation. Demographicfactors like size of the population, population growth, rate, age, composition, life expectancy,family size, spatial dispersal, occupational status, employment pattern etc., affect the demandfor goods and service.The growth of population and income result increases demand for goods and services. Arapidly increasing population indicates that a growing demand for many products. Forinstance, developing countries like India, Pakistan, etc; high population growth rate indicatesan enormous increase in labor supply. The occupational and spatial nobilities of populationhave implications for business. Labor is easily mobility between different occupations andregions. Its supply will be relatively smooth and this will be relatively and this will affect thewage rate. If a labor is highly heterogeneous in respect of language, caste and religion,ethnicity, etc., personal management is likely to become a more complex task. The
heterogeneous population with its varied tastes, preferences, beliefs, temperaments, etc, givesrise to different demand patterns and calls for different marketing strategies.Business organisation needs to study different demographic issues which particularly addressthe following issues as listed below:• What democratic trends which will affect the market size of the different typesof industry?• What democratic trends will represent opportunities or threats?Domestic Environment Factors of BusinessWe shall briefly discuss a few demographic factors which are interest of business:• Population Size• Geographic Distribution• Ethnic Mix• Income DistributionPopulation SizeSize of population is important either small or large to business organisation. Companies usepopulation size for critical assessment for customer behavior and changes of the customerbehavior and its impact on business. Important issues are outlined which are related withpopulation:• It studies the changes in a nation‟s birth rate and family size.• It studies the increase and decrease in the total population.• It also studies the changes effects in terms of rapid population growth on natural resourcesor food supplies.• It also studies the life expectancy of infants, youth and old age people.These issues are very important to company for analysis of demand and supply of productsand services. Healthcare companies role is needful for assessment of the product requirementfor infants, youth, middle age and old age people.
Geographic DistributionIt refers to geographic region and population that shifts from one region of a nation toanother or from village/rural areas to urban areas. This is may be an impact on a company‟sstrategic competitiveness in market.Geographic Distribution issues are outlined:• Location advantage and government support is also very important to company.• In the case, population is shifted from one region to another region. This is the significantimpact on company‟s qualified workforce and company consider relocation of its skilledhuman resources.• Today, working at home concept and electronically on the information highway have alsobegun in India in an very small level.Ethnic MixEthnic mix is also important to company and know eager know changes in ethnic mix inpopulation. Assessment and implications of ethnic mix is useful for company and its worksforce.Ethnic issues are outlined:• Company should know the changes in the ethnic mix and its impact to company‟s productand services.• Company should know the new products demand or existing products and services from thedifferent ethnic groups.• Company ready to face challenges, treats from ethnic and try to make solutions for theseethnic challenges and treats.Income DistributionIncome distribution is also one of the important factors of demographic environment.Company is planning to measure changes in incoming distribution, savings patterns fordifferent level of individual. This purpose, company can forecast and assess the changes inincome patterns and ready to identify new opportunities for companies.
NATURAL ENVIRONMENTNatural environment is the study of an important component of the nature i.e., naturalenvironment.Natural environment includes geographical and ecological factors areas as below:• Natural resource endowments,• Weather• Climate conditions• Topographical factors• Location aspects in the global context• Port facilities are relevant to business.Difference in geographical conditions between markets may sometimes call for changes inthe marketing mix. Geographical and ecological factors also influence industries which helpmaterial index tend to be located near the raw material sources.Climate and weather conditions affect the location of certain industries like the often textileindustry. Ecological factors have recently assumed great importance. The depletion of naturalresources, environmental pollution and the disturbance of the ecological balance has causedgreat concern. Government policies aimed at presentation of environmental purity andecological balance, conservation of non replevisable resources etc., have resulted inadditional responsibilities and problems for business, and some of these have to affect ofincreasing the cost of production and marketing, externalities also become an importantproblem of the business has to confront with.TECHNOLOGICAL ENVIRONMENTTechnological factors sometimes pose serious problems. A firm that unable to cope withtechnological changes may not be survived. Further, the differing technological environmentof different markets or countries may be called for product modifications.Technology is the most important elements of the macro environment. Technology is thehuman being innovation and it literally wonder. Technology helps to human being go tomoon, travelling the spaceships, other side of the globe with few hours. Advances in thetechnologies have facilitated product improvements and introduction of new products andhave considerably improved the marketability of the products.
Internet and telecom system is the part of technological development in the world. Thesethings today changed whole world. It changes people and business operation. It leads to manynew business opportunities apart from the many existing systems.Technological environment characteristics are outlined:• The find of technological change• Opportunities are arising out of technological developments.• Risk and uncertain is the major feature of the technological developments.• Research and development role to countryTechnology and business activities are to be highly considerable, interrelated andinterdependent. Technology output/fruit‟s available to society through business activities inthis way improve the quality of life in the society. Therefore, technology nurtured bybusiness.Technologies issues relating with companies are listed below:• Access to the internet communication facilities which is enable to connect large numbers ofemployees to work from one place/ home to another place in the globe. • It helps to businessfor sales and exchange of goods and services.• It provide opportunity to customers with accessing to online shopping through the internettechnology.Key Issues of Technology• Strategist should know what of type technology used by company?• Strategist should know which type of technologies are used in the companies, business,products and its services?• To know the critical issues in technology and know the operating skills in technologyrelated products and services.• To know the availability of technology to organisation. And also its procedure to getexternal technology for its operations.• To know the cost of technology, alternative technology, competitors, design structure of thetechnology and production implementation services of the company.• To know the company‟s business applications that are relating to technology.• Technology helps the business for formulation of strategy, implementation of strategy andcontrol of the company performance.
Technological Environment of the CompanyGLOBAL ENVIRONMENTGlobal environment is one of the important elements to macro environment of the business.Today competitive scenario changes rapidly and its impact on business of company. For this,reasons, strategist should understand the global environment, its characteristics, functions andmerit and demerit to company. Global environment treated as whole world just as village andhas changed how individuals and organisations relate to each other. These are influenced toorganisation to get project from global clients.Assessments of the global environment factors are outlined:• To know the potential positive and negative impact of significant international events like asport meet or a terrorist attack.• To identify both emerging global markets and global market which are ensuring changing.It includes newly industrialized countries like in Asia. In developing countries that imply theopening of new markets for new products, that‟s result is to be increased competition fromemerging globally competitive companies in India and South Korea and China.• To know the difference between in cultural and institutional attributes of individual globalmarkets.
Globalization of markets refers to the process of integrating and merging of the distinct worldmarkets into a single market. This process involves the identification of some common norm,value, taste, preference and convenience and slowly enables the cultural shift towards the useof a common product or service.A number of consumer products have global acceptance. For example, Coca–Cola,Pepsi, McDonald‟s Music of Madonna, MTV, Sony Walkmans, Levis jeans, Indian masaladosa, Indian Hyderabadi biryani, Citicorp credit cards etc.Nature of Globalization• It indicates the several things for several people in the world.• It is a new concept that is based on the set of fresh beliefs, working methods, economic,political and socio-cultural relatives in business.• It integrates with the world economy and opens itself for new and potential huge market fordeveloping and developed countries in the global.• It intends to remove all trade barriers among countries in the world.Characteristics of a Global CompanyGlobal company refers to operating in more than one country in the world and gains its R&D,production, marketing and financial advantages in terms of costs and reputations that are notavailable to domestic competitors. Global company is one that has the world market.Minimizes the importance of national boundaries, sources, raises capital and market in thisway it will be done the best job.Global company major characteristics are outlined• Global company is a firm which having multiple units that are located in different parts ofthe world but all linked by common ownership umbrella.• Global multiple units draw on a common pool of resources like money, credit information,patents, trade names and control systems.• Global company can be follow common strategy for sell its products in most countries andmanufactures in many. Another important fact is that its shareholders and human resourcesare also based on different nations.
Reasons for Globalisation• Large-scale industrialisation enabled mass production. Consequently, the companies foundthat the size of the domestic market is very small to suffice the production output and thusopted for foreign markets.• Companies in order to reduce the risk diversity of portfolio of countries.• Companies globalise markets in order to increase their profits and achieve goals.• The adverse business environment in the home country pushed the companies to globalisetheir markets.• To cater to the demand for their products in the foreign markets.• The failure of the domestic companies in catering the needs of their customers pulled theforeign countries to market their products.International environment is the very important from the point of view of certain categoriesof business. It is particularly important to industries which are directly depending on importsor exports and import competing industries.Advantages of Globalisation• Free flow of capital and increase in the total capital employed• Free flow of technology from developed countries to developing countries• Increase in industrialisation• Spread production facilities throughout the global• Balanced development of world economies• Increased in production and consumption of outputs• Commodities available at lower price with high quality• Cultural exchange and demand for a variety of products in foreign market• Increased in jobs opportunities and income• Balanced in welfare and prosperity of the country‟s economicDisadvantages of Globalisation• Globalisation kills domestic small business firms• Exploits human resources in global firms• Leads to unemployed and underemployment in developing countries• The customer demand decline in domestic products• Decline the income because of unemployment• Widening gap between rich and poor
• National sovereignty at stake• Leads to commercial and potential colonialism to poor countriesWhy do companies go global?Reasons for companies going global as outlined:To Gain Access to New CustomersThis is the first reason to companies expand into foreign market. It offers potential forincreased revenues, profits and long-term growth and becomes an especially attractive optionwhen a company„s home markets is mature. Mature industries plan to enter new market,therefore, to access to new customer for their products and service.To Achieve Lower Cost Enhance the Firms CompetitivenessThis is the second reason to domestic companies opt to be expanding their market in outsidecountries. Many companies are driven to sell their products and service in more than countrybecause the sales volume achieved in their own domestic markets is not large enough to fullycapture manufacturing economies of scale and experience curve effects and therebysubstantially improve a firm‟s cost competitiveness.To Capitalise on it’s Core CompetenciesThis is the third factor to companies expand their domestic market into international market.A company with competitively valuable competencies and capabilities may be able toleverage them into a position of competitive advantage in foreign market as well as justdomestic markets.To spread its Business Risk across a Wider Market baseThis is the last reason opt companies to expand their domestic market into internationalmarket. A company spreads its business risk by operating in a number of different foreigncountries rather than depending entirely on operations in its own domestic market.Except in a few cases, companies in natural resource – based industries such as oil and gas,minerals, rubber and lumber often to find it necessary to operate in the international arenabecause of attractive raw material suppliers are located in foreign countries.
Speed and Faster Communication NetworkGlobe thanks to faster communication, speedier transportation, growing financial flows andrapid technological changes due to advanced communication network development.Reduce transportation costsCompanies often set up overseas plants and machinery to reduce transportation costs. Thefollowing development is also responsible for transportation operation of companies:• • Globalisation of firms and industries• The rise of the services sector. It constitutes the one of the largest single sector in the worldeconomy.• Rapidly changing technologies which are transforming in the originate nature, organisation,and location of international production.Manifestation of Globalization
Typical PESTEL factors to consider include:Factor Could include:Political e.g. EU enlargement, the euro, international trade, taxation policyEconomic e.g. interest rates, exchange rates, national income, inflation, unemployment, Stock MarketSocial e.g. ageing population, attitudes to work, income distributionTechnological e.g. innovation, new product development, rate of technological obsolescenceEnvironmental e.g. global warming, environmental issuesLegal e.g. competition law, health and safety, employment law
PESTEL ANALYSISTOYOTA BACKGROUNDToyota Motor Corporation is a famous Japanese multinational corporation, and is consideredthe world‟s second largest automaker of automobiles, trucks, buses, robots, and providingfinancial services ( 2007). Its founder is Kiichiro Toyoda, born in 1894, and the son ofSakichi Toyoda, who became popular as the inventor of the automatic loom. Kiichiroinherited the spirit of research and creation from his father, and devoted his entire life to themanufacture of cars. After many years of hard work, Kiichiro finally succeeded in hiscompletion of the A1 prototype vehicle in 1935, which marked the beginning of the history ofthe Toyota Motor Corporation ( 2007).The first Type A Engine produced in 1934 was used in the first Model A1 passenger car inMay 1935 and the G1 truck in August 1935, and led to the production of the ModelAA passenger car in 1936. In addition to being famous with its cars, it still participates in thetextile business and makes automatic looms that are now fully computerised, andelectric sewing machines that are available in different parts of the world. It has severalfactories around the world, which serve to manufacture and assemble vehicles for localmarkets. The corporation‟s factories are located in countries such as the United States,Australia, Canada, Poland, France, Czech Republic, United Kingdom, Turkey, South Africa,Brazil, Argentina, Venezuela, Mexico, Japan, Indonesia, Pakistan, India, Mexico, Malaysia,Thailand, China, Vietnam, and the Philippines. Despite the many locations of its factories, itsheadquarters is located in Toyota, Aichi, Japan (2007).It invests a great deal of time and effort in its research into cleaner-burning vehicles, such aspromoting a Hybrid Synergy Drive and running a Hydrogen fuel cell in its vehicles (2007). Ithas significant market shares in developed countries, such as the United States, Europe,Africa and Australia, and has significant markets in South East Asian countries. Its brandsinclude the Scion, its division in the United States, Guam and Puerto Rico, and the Lexus,which is Toyota‟s luxury vehicle brand ( 2007).Aside from producing cars and other types of automobiles, such as SUVs and coasters,Toyota also, participate in rallying or racing. The company‟s presence in Motorsport can betraced to the early 1970s, when Ove Andersson, a Swedish driver, drove for Toyota during
the RAC Rally in Great Britain, and in succeeding years, Toyota Team Europe was formed (2007). Up to the present, Toyota cars are still being used in a variety of racing events indifferent countries around the world. These events include the CART in Vancouver, the LeMans, the Indy Racing League, the NASCAR, and the Toyota F1 Series (2007).As the leader in the industry of automobile manufacture and production, the company adoptsa philosophy in terms of its production system, which is named The Toyota Way. Thecompany‟s philosophy in production involves a list of fourteen principles that areimplemented in the company, and serve as guides to the operation of the company. Thisincludes the following principles: Base the company‟s management decisions on a long-term philosophy, even at the expense of short-term goals; Foster a continuous process flow to sight problems; Utilise “pull” systems to prevent over-production; Level out the workload of the workforce; Build a culture that stops to fix problems, in order to get quality perfect at the first try; Standardised tasks are the company‟s foundation for its continuous improvement and the development of the employees; Use visual control to let problems surface; Use reliable and tested technology, which serves both the people and the company‟s processes; Train leaders who understand the company‟s work, live its philosophies, and share it to others; Train and develop a workforce who follow the company‟s philosophy; Respect the work and responsibilities of partners and suppliers by challenging them and helping them improve; Actually immersing one‟s self to understand the situation; Slow but sure decision-making through consensus, through considering a variety of options, and to implement decisions effectively and efficiently; and, Becoming a learning business organisation through expression and continuous improvement
With these principles, the company is guided in terms of its operations and production.Through these principles and philosophies, it can become efficient and effective inmanufacturing its products, keeping in mind the welfare of its employees, the image andbrand of the company, and the satisfaction of its employees.PESTLE AnalysisCurrently, Toyota faces a need for accelerated investment, in order to deploy the newtechnologies, for pressing geo-political, economic, environmental and societal reasons. Political: Observers will see a continuing progression in the ruinous steps which have forced the industry into a socio-politico-economic corner. Whether this is related to flat demand or to the company‟s creation of an ever-wider range of vehicles that many buyers seem to care little about, there is a problem. The company is likewise linked closely to the policies of governments, the earnings of banks. Little wonder then that so many emerging countries are keen to develop an auto sector or that there is such a political pressure to protect it in the developed countries. Toyota Company is currently dominated by little more than a handful of firms, each wielding colossal financial, emotional and political power. The company‟s approach to dealing with political institutions has not always been brilliant. It tends to be good on technical issues, although it has not always fully presented the longer-term options, in order to make the choices and their implications clear. Economic. For much of the developed world, and increasingly for the developing world, Toyota Company is a pillar company in auto mobile business, a flag of economic progress. Without Toyota Company in automotive industry, it is impossible to develop an efficient steel business, a plastic industry or a glass sector – other central foundations of economic progress. The Toyota Company has been a core company, a unique economic phenomenon, which has dominated the twentieth century (2007). However, the automobile industry including the Toyota Company now suffers from a series of structural schisms and has become riddled with contradictions and economic discontinuities. For the capital markets and the finance sector, it has lost a lot of its significance, as a result of ever declining profits and stagnant sales. The proliferation of products means that it has become hopelessly
wasteful of economic resources. While all these and more sound like a very gloomyassessment of such a vast economic phenomenon, the industry is not in the enddespondent. A different future is possible for the industry, a highly desirable one.Social: As part of the development in automotive industry, the Toyota Companyactually affects the society as a whole. It employs millions of people directly, tens ofmillions indirectly. Its products have transformed society, bringing undreamed-oflevels of mobility, changing the ways people live and work (2007). The social valueof the additional mobility that this industry brings involves the value of the peoplebeing able to commute over longer distances easily, among many others. For most ofits existence the Toyota Company has been a model of social discipline and controland it is not just that the auto sector offers a „pillar‟ of something else. There are, onthe other hand, particular social issues to address in many developing countries, oftenthose that are the result of an undertone of religious faith. Toyota company has therole to play in helping develop the mobility of such countries and it can be achievedat an acceptable social cost of the country.Technological: The Toyota Company works on a scale so awesome and has aninfluence so vast that it is often difficult to see. The level and diversity oftechnologies that it must deploy are increasing, which imposes both new investmentburdens and new uncertainties and risks (2007). Roughly a million new cars andtrucks are built around the world each week – they are easily the most complexproducts of their kind to be mass-produced in such volumes. The industry usesmanufacturing technology that is the cutting edge of science. But still, the potentialfor developing coordination skills, intellectual capabilities and emotional sensitivitiesthrough electronic technologies remain far from fully exploited. There are numerousadditional near-term technological opportunities to adapt the company to changingenergy availability. The possibilities suggest that automotive technology isunexpectedly robust and provides a powerful defence against energy starvation evenif the real price of oil climbs steadily during the next couple of decades.
Legal: Toyota Company is subject to numerous technical directives and regulations, as well as legislation of a more legal nature. The legislation covers areas such as competition law, intellectual property law, consumer protection and taxation, and emissions (air quality and fuels). When the auto parts industry reached full development, accelerated technological efforts were made to create a web of local suppliers that would make it possible to meet the growing legal requirements for the national integration of production. Environmental: Other than the vehicles themselves, and the roads and fuel needed to run them; the business is intricately tied to the manufacture of a wide range of components and the extraction of precious raw materials. Indirectly, it brings people road congestion, too many fatalities and a wave of other environmental troubles. The effect to the Toyota Company is that they needed to establish R&D centres to take advantage of research infrastructure and human capital, so that they can develop vehicle products locally to satisfy the requirements of the environmental and safety regulations more effectively. VODAFONE: An Analysis of a Multi National Telecommunication CompanyBACKGROUNDA Multi-National Company named Vodafone is one the leading companies inTelecommunication Industry. To determine the factor that became their key to success is agood implication that all the company can be as successful as Vodafone, although theyengaged in different kind of industry. The study also includes the company’s briefhistory,vision, and different challenges that leads the company in making formulas to trap thesuccess on their side.HistoryVodafone was formed in 1984 as a subsidiary of Racal Electronics Plc. Then known asRacal Telecom Limited, approximately 20% of the companys capital was offered to thepublic in October 1988. It was fully demerged from Racal Electronics Plc and became anindependent company in September 1991, at which time it changed its name to VodafoneGroup Plc. It also merged with AirTouch Communications, Inc. (‘AirTouch’), the company
changed its name to Vodafone AirTouch Plc, following the approval by the shareholders inGeneral Meeting, reverted to its former name, Vodafone Group Plc.Company Strategy Review In May 2006, the company formulated a five point strategy which served well for more than two years. And broadly maintained or improved share against our largest or reference competitors in most of our markets and delivered on our key cost targets. They increased the share in revenue successfully increased the exposure to higher growth markets. However, a number of challenges have evolved. Elasticity on core voice and messaging services remains below one, competitive and regulatory pressures continue to be strong, and meeting the expectations in some market is hardly attainable. Those factors which affects the continuous growth of the company, undergone into on-going company strategy review.PEST Analysis Political – political factors involved the tax policy, labor law, environmental law, trade restrictions, tariff, and political stability. Due to the customer relationships that the company value most, Vodafone is willing to shift their approach away from unit pricing and unit based tariffs to propositions that deliver much more value to customers in return for greater commitment, incremental penetration of the account or more balanced commercial costs. This will require a more disciplined approach to commercial costs to ensure our investment is focused on those customers with higher lifetime value. In essence, we are confident that by targeting our offers, we can deliver more value to our customers and have a better financial outcome for Vodafone. Economic – economic factors includes the economic growth, interest rates, exchange rates and the inflation rate. The pricing factors the company usually do is giving the consumers a right and justly cost so that, everybody can avail or purchase their product in a broad sense. Social – social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and
emphasis on safety. The need for an equipment that can be a good device for every age range is available, since everybody are fully oriented in the use of the mobile technologies. Technological – technological factors includes ecological and environmental aspects, like R&D (Research and Development) activity, automation, technology incentives and the rate of technological change. The technology is the thing that Vodafone is very proud of. The technological advancement enables the company to make a customer relationships stronger because of their customers trust that built over the years.The PEST factors have major impacts on how businesses operate and make decisions. Withthe help of PEST analysis, the business can penetrate to the market with readiness. Thedetermination of its four keys, the business will answer the common questions that revolvearound the business society. These basic questions are what to produce, how to produce,when to produce and for whom to produce. No matter how many times a business answerthese questions, the needs from the market will remain constant and unchanged.It is an advantage of the company to know the scope and limitation of their business. It isdone so that the company is prepared enough to face a future and ready to give solutions aspossible when the demand for the products are satiated or already diminished.
PEST Analysis of PepsiThe PEST analysis method has been successfully applied by Pepsi, which has obtainedeconomic advantage in its industry. The PEST analysis method and examples specific toPepsi are seen in the following factors: Political: The manufacture, delivery, and use of numerous Pepsi products are subject to many federal regulations, like the Food, Drug and Cosmetic Act. The business is also governed by government and foreign rules. The international business is subjected to the political stability. Economic: The products of Pepsi are influenced by the raw material yield being used in the soft drinks, juices, etc. All distribution is affected by the cost of fuel. Operations in international markets involve the study of unpredictable changes in foreign exchange rate. The economic impacts of such movements are serious because these affect the growth. Pepsi is also subjected to availability of energy, supply of money, business cycles, etc. Social: Lifestyle has great influence on the use of Pepsi products, and their advertisements are designed accordingly. Introduction of Pepsi products in the international market requires an in depth study of the local social structure. Technology: Pepsi is influenced by the modern manufacturing techniques applicable to their business divisions of soft drinks, juices, and snack food. Pepsi has to focus on the latest distribution techniques, and other technological advances in their industry.