SWOT Analysis A situation analysis is often referred to by the acronym SWOT, which stands for strengths, weaknesses, opportunities, and threats. SWOT Analysis Essentially, a SWOT analysis is an examination of the internal and external factors that impact the organization and its strategies. The internal factors are strengths and weaknesses; the external factors are opportunities and threats. A SWOT analysis gives an organization a clear picture of the business situation in which it operates and helps it identify which strategies to pursue. Internal Factors  Strengths and weaknesses include the resources and capabilities within the organization now. Since the company has the most control over internal factors, it can craft strategies and objectives to exploit strengths and address weaknesses. Examples of internal factors include the following: · financial resources · technical resources and capabilities · human resources · product lines All of these are controlled by the organization. Competitive positioning can also be a strength or a weakness. While competitors’ strategies and tactics are external to the company, the company’s position relative to the competitors is something that it can control. External Factors  External factors include opportunities and threats that are outside of the organization. These are factors that the company may be able influence—or at least anticipate—but not fully control. Examples of external factors include the following: · technology innovations and changes · competition · economic trends · government policies and legislation · legal judgments · social trends While a company can control how it positions itself relative to the competition, it can’t control competitors’ actions or strategies. Benefits of a SWOT Analysis  Encourages Realistic Planning Imagine a growing company that is able to attract new customers more easily than the competition because it has a strong reputation and visible leader. These strengths should be considered and exploited in the strategy. Now imagine that the company also has a poor history of delivering on customer commitments. If this weakness is not addressed, it will not only make it difficult to retain customers but also likely damage the reputation of the company and its leader—which would eliminate key strengths. By conducting a situation analysis, the company is more likely to consider both of these factors in its planning. Improves Ability to Forecast Future Events What’s the worst thing that could happen to your business? Most organizations can answer this question because they have assessed the environment in which they operate. For instance, perhaps they know of pending legislation that might adversely affect them. Or perhaps they recognize legal risks, or unique challenges from past economic cycles. By considering threats and worst-case scenarios during the planning process, organizations can take steps to avoid them, or minimize the impact if they do they occur. SWOT A.

1. SWOT Analysis
A situation analysis is often referred to by the acronym SWOT,
which stands for strengths, weaknesses, opportunities, and
threats.
SWOT Analysis
Essentially, a SWOT analysis is an examination of the internal
and external factors that impact the organization and its
strategies. The internal factors are strengths and weaknesses;
the external factors are opportunities and threats. A SWOT
analysis gives an organization a clear picture of the business
situation in which it operates and helps it identify which
strategies to pursue.
Internal Factors
Strengths and weaknesses include the resources and capabilities
within the organization now. Since the company has the most
control over internal factors, it can craft strategies and
objectives to exploit strengths and address weaknesses.
Examples of internal factors include the following:
· financial resources
· technical resources and capabilities
· human resources
· product lines
All of these are controlled by the organization. Competitive
positioning can also be a strength or a weakness. While
competitors’ strategies and tactics are external to the company,
the company’s position relative to the competitors is something
that it can control.
External Factors
External factors include opportunities and threats that are
outside of the organization. These are factors that the company
may be able influence—or at least anticipate—but not fully
control. Examples of external factors include the following:
· technology innovations and changes

2. · competition
· economic trends
· government policies and legislation
· legal judgments
· social trends
While a company can control how it positions itself relative to
the competition, it can’t control competitors’ actions or
strategies.
Benefits of a SWOT Analysis
Encourages Realistic Planning
Imagine a growing company that is able to attract new
customers more easily than the competition because it has a
strong reputation and visible leader. These strengths should be
considered and exploited in the strategy. Now imagine that the
company also has a poor history of delivering on customer
commitments. If this weakness is not addressed, it will not only
make it difficult to retain customers but also likely damage the
reputation of the company and its leader—which would
eliminate key strengths. By conducting a situation analysis, the
company is more likely to consider both of these factors in its
planning.
Improves Ability to Forecast Future Events
What’s the worst thing that could happen to your business?
Most organizations can answer this question because they have
assessed the environment in which they operate. For instance,
perhaps they know of pending legislation that might adversely
affect them. Or perhaps they recognize legal risks, or unique
challenges from past economic cycles. By considering threats
and worst-case scenarios during the planning process,
organizations can take steps to avoid them, or minimize the
impact if they do they occur.
SWOT Analysis Example
A situation analysis can benefit any organization. The example
below shows the SWOT analysis for a fictional college.
SWOT Analysis Example

3. Even this rudimentary analysis highlights some strategic issues,
discussed below, which the college needs to consider.
Internal
The college has a number of strengths. Committed faculty and
trusted leaders have collaborated to build academic programs
that are showing high completion rates among students. The
student advising program is also contributing to that success.
Also, the college has excellent relationships with businesses in
the community.
Among the weaknesses, the technology infrastructure is
outdated. The college also employs a large number of part-time
faculty members, but doesn’t provide them with adequate
training or support. Nursing, one of the more expensive
programs at the college, is not attracting enough students to
keep it full. Also, the college has learned from some of its
recent graduates that students are not receiving transfer credit at
the local university for all of their courses taken at the college.
The students wonder if the college faculty and advisers really
understand their academic goals or the requirements of the four-
year degree programs at the university.
By completing a SWOT analysis, the college can shape its
strategies and objectives to align with both the internal
resources and capabilities it has, as well as the external factors
it faces.
External
The college leadership is feeling pulled by conflicting economic
factors. The region has been through an economic downturn,
which resulted in cuts to state funding. At the same time, an
economic recovery has just begun. During the previous
economic recovery, college enrollment dropped when students
who were pursuing additional education returned to the
workforce. How might the timing of those two funding issues
work out? The college is also being affected by a local
institution that is aggressively marketing to its students—
especially students in the nursing program.
Still, there are opportunities. Students have expressed interest

4. in more online courses and programs. That might also slow the
local competitor, though it would also require the college to
address its aging technology infrastructure. The college has
identified a number of innovative programs that would enable
students to earn degrees more quickly and at the same time
expand its partnership and collaboration with local businesses.
SWOT Examples for Organizations and Individuals
Chess master Bruce Pandolfini has noted the similarities
between business and chess. In both arenas, you must
understand your own abilities as well as your flaws. You must
also know your opponents, try to anticipate their moves, and
deal with considerable uncertainty. A very popular management
tool that incorporates the idea of understanding the elements
internal and external to the firm is SWOT (strengths,
weaknesses, opportunities, and threats) analysis. Strengths and
weaknesses are assessed by examining the firm, while
opportunities and threats refer to external events and trends.
These ideas can be applied to individuals too.
Porter’s five-forces analysis examines the situation faced by the
competitors in an industry. Strategic-groups analysis narrows
the focus by centering on subsets of these competitors whose
strategies are similar. SWOT analysis takes an even narrower
focus by centering on an individual firm. Specifically, SWOT
analysis is a tool that considers a firm’s strengths
and weaknesses along with the opportunities and threats that
exist in the firm’s environment, as represented in the table
below.
SWOT point
Organizational examples
Individual examples
Strengths
Having high-levels of cash flow gives firms discretion to
purchase new equipment if they wish to.
Strong technical and language skills, as well as previous work
experience, can help individuals rise above the competition.
Weaknesses

5. Dubious leadership and CEO scandals have plagued some
corporations in recent years.
Poor communication skills keep many job seekers from being
hired into sales and supervisory positions.
Opportunities
The high cost of gasoline creates opportunities for substitute
products based on alternative energy sources.
The U.S. economy is increasingly services based, suggesting
that individuals can enjoy more opportunities in service firms.
Threats
Concerns about worldwide pollution are a threat to petroleum-
based products.
A tight job market poses challenges to new graduates.
Executives using SWOT analysis compare these internal and
external factors to generate ideas about how their firm might
become more successful. In general, it is wise to focus on ideas
that allow a firm to leverage its strengths, steer clear of or
resolve its weaknesses, capitalize on opportunities, and protect
itself against threats. For example, untapped overseas markets
have presented potentially lucrative opportunities to Subway
and other restaurant chains such as McDonald’s and KFC.
Meanwhile, Subway’s strengths include a well-established
brand name and a simple business format that can easily be
adapted to other cultures. In considering the opportunities
offered by overseas markets and Subway’s strengths, it is not
surprising that entering and expanding in different countries has
been a key element of Subway’s strategy in recent years.
Indeed, Subway currently has operations in nearly 100 nations.
SWOT analysis is helpful to executives, and it is used within
most organizations. Important cautions need to be offered about
SWOT analysis, however. First, in laying out each of the four
elements of SWOT, internal and external factors should not be
confused with each other. It is important not to list strengths as
opportunities, for example, if executives are to succeed at
matching internal and external concerns during the idea
generation process.

6. Second, opportunities should not be confused with strategic
moves designed to capitalize on these opportunities. In the case
of Subway, it would be a mistake to list “entering new
countries” as an opportunity. Instead, untapped markets are the
opportunity presented to Subway, and entering those markets is
a way for Subway to exploit the opportunity. Finally, and
perhaps most important, the results of SWOT analysis should
not be overemphasized. SWOT analysis is a relatively simple
tool for understanding a firm’s situation. As a result, SWOT is
best viewed as a brainstorming technique for generating
creative ideas, not as a rigorous method for selecting strategies.
Thus the ideas produced by SWOT analysis offer a starting
point for executives’ efforts to craft strategies for their
organization, not an ending point.
In addition to organizations, individuals can benefit from
applying SWOT analysis to their personal situation. A college
student who is approaching graduation, for example, could lay
out her main strengths and weaknesses and the opportunities
and threats presented by the environment. Suppose, for instance,
that this person enjoys and is good at helping others (a strength)
but also has a rather short attention span (a weakness).
Meanwhile, opportunities to work at a rehabilitation center or to
pursue an advanced degree are available. Our hypothetical
student might be wise to pursue a job at the rehabilitation center
(where her strength at helping others would be a powerful asset)
rather than entering graduate school (where a lot of reading is
required and her short attention span could undermine her
studies).
Key Points
Executives using SWOT analysis compare internal strengths and
weaknesses with external opportunities and threats to generate
ideas about how their firm might become more successful. Ideas
that allow a firm to leverage its strengths, steer clear of or
resolve its weaknesses, capitalize on opportunities, and protect
itself against threats are particularly helpful.

7. SWOT and PESTEL
Professionals in the Field
What Are SWOT and PESTEL?
SWOT and PESTEL are analytical tools that help identify the
key external and internal factors that should be taken into
account in order to achieve success in a project or initiative.
They are usually used together, and are applied in a group
setting to support effective strategic planning, decision making
and action planning. SWOT and PESTEL are cost- and time-
efficient means for highlighting key issues relating to the
context of a project or initiative which, if not identified and
addressed, could critically affect the chances of success. They
also offer the benefit of framing these issues in a way that is
easy for participants to understand and discuss.;
Requirements for SWOT
· experienced facilitator
· rapporteur
· flip chart with plenty of paper and marker pens
· optional: Laptop and projector
· 8 to 12 participants representing diverse relevant roles and
ideally including decision- makers. (Alternatively, up to 40
participants if using subgroups; see Variations below.)
· one hour for quick SWOT; two hours for normal SWOT; up to
a half-day SWOT workshop for major initiatives; plus
preparation time.
Additional Requirements, if Adding PESTEL
· 1 to 6 people with good research and analysis skills to conduct
initial research on the six PESTEL domains before the meeting
and also participate at the meeting. (They do count against the
suggested limit of 12 participants.)
· one to two hours to review, expand, and rank PESTEL inputs
from research, before continuing with SWOT
When and Why to Use
SWOT: Turning Around the Order for Better Results
The term SWOT refers to strengths, weaknesses, opportunities,

8. and threats. Strengths and weaknesses are internal factors: they
exist inside the organization (or within the partnership, if
relevant to the project being analysed). Opportunities and
threats are external: they exist outside the organization. SWOT
is a widely used and fairly well-known tool. The method
described here incorporates a couple of changes from the
ordinary SWOT, intended to produce the strongest possible
results.
SWOT has often been done in the order implied by the name:
first examining strengths, then weaknesses, opportunities, and
finally threats. However, it is recommended instead to first
examine the external factors—opportunities and threats—and
then proceed to the internal ones. This method helps keep a
stronger focus on results and helps you identify which threats
are “critical threats” (i.e., those compounded by corresponding
weaknesses) and which opportunities are “promising
opportunities” (i.e., those that are matched by corresponding
strengths). Those who have changed the order of work in
SWOT, by examining opportunities and threats first, often
report being amazed at the improvement in the value of the
SWOT process (see Watkins, 2007).
Any project or initiative that is to be assessed using SWOT
must have clearly defined objectives that are well understood by
participants. Clear objectives are a kind of lens, through which
the various external and internal factors relevant to your project
can be identified as strengths or weaknesses, opportunities or
threats. If the objectives seem to be unclear, then have them
clarified and agreed before embarking on a SWOT.
The SWOT framework can be thought of as a matrix. Here it is
presented with external factors first.
SWOT Framework
Favourable for achieving the objectives
Unfavourable for achieving the objectives
External origin
Opportunities

9. Threats
Internal origin
Strengths
Weaknesses
PESTEL: A Powerful Complement to SWOT
PESTEL, a complementary tool to SWOT, expands on the
analysis of external context by looking in detail at specific
types of issues that frequently have an impact on
implementation of projects or initiatives. The term PESTEL
refers to the domains it considers: political, economic, social,
technological, environmental, and legal. PESTEL involves
identifying the factors in each of these six domains that are
relevant for the project being considered. A special focus of
PESTEL is identifying trends. Thus it is helpful for thinking
proactively and anticipating change, rather than being overtaken
by it.
It is recommended to use PESTEL and SWOT together. PESTEL
complements SWOT by identifying specific relevant factors
(such as economic trends, social attitudes, technological
developments, etc.) that are significant for the project being
considered, and SWOT then classifies them as either
opportunities or threats. The more complex your context or
operating environment is, the more value PESTEL can offer, by
identifying factors that would be missed by SWOT alone.
Applying PESTEL is fairly simple; of the nine steps to do a
SWOT described below, only steps 2 and 5 are done differently
when using PESTEL. An extensive set of PESTEL questions is
provided in Annex 2 (see below), to help participants identify
more quickly and easily the relevant factors in each of its six
domains. If you’re short of time, you can just do a SWOT. But
if time permits, then applying PESTEL and SWOT together
results in a stronger analysis, a better understanding of the
current situation, and the potential for improved decision
making.
Applications and Benefits
SWOT (and, where possible, PESTEL) can be applied for the

10. following purposes:
· Creating, or helping create, a strategic plan or an action plan
when launching a project or initiative. This is perhaps the most
common application of SWOT.
· Weighing the pros and cons of major decisions. For example,
use them to help decide whether to create or join in a new
initiative, to establish a significant new partnership, to
implement new methods or tools (technological or non-
technological), to help plan a reorganization, to assess use of
resources, to decide on how to improve operational efficiency,
etc.
· Reviewing positioning on an ongoing project or initiative at a
key moments of reflection, identifying needed change in the
approach or methods being used, and making adjustments.
SWOT and PESTEL are flexible; they can be applied for
planning or decision making concerning an entire project or
initiative, or alternatively they can be used to focus on specific
stages or components of a project. For example, if you are
working on an immunization campaign, you could address all
the various programmatic aspects (supply and cold chain, any
needed training of health workers, collaboration with
government and partners, public communication, etc.) in a
single SWOT, or you could break out the public communication
aspect and deal with that separately from the other aspects.
Similarly, SWOT and PESTEL can be applied to large or small
(but significant) projects or decisions. If time is very limited, or
for small projects, do a quick SWOT in an hour (remembering
to identify the opportunities and threats first, and then the
strengths and weaknesses). With more time, or for projects and
decisions with larger implications, do a full SWOT and PESTEL
in about three hours, plus preparation time. With even more
time, or for very significant projects, expand the time
accordingly, up to a full day workshop.
For a simple issue or question, SWOT and PESTEL may provide
sufficient basis for making final decisions or creating an action
plan. For complex questions, SWOT and PESTEL will at least

11. lay a solid foundation, at low cost, for any further in-depth
research and analysis that may be required. Prioritization of the
issues in a PESTEL and SWOT is typically quick and may need
to be refined when dealing with a really complex challenge.
SWOT and PESTEL are group processes that also offer the
following benefits:
· The breadth of perspectives in the group will make the
analysis broader and deeper than what an individual could
produce in the same time, and will help overcome individual
bias and limited viewpoints.
· The process will help get a team onto the same page by
creating a shared understanding of the project context and key
external and internal factors. SWOT participants often report
being surprised by the views of others on even simple issues
and challenges. It is best to surface those surprises early before
they can impede effective action.
· The process will also start the key conversations that are
needed to achieve project success. The connections and
conversations can continue as needed after the SWOT
concludes, throughout the duration of the project.
How to Apply
The following are the steps for a SWOT. The more time you
have for the SWOT, the more time you should spend on the
analysis and discussion steps (steps 5 through 9 below). If you
are doing PESTEL, a little additional preparatory research will
be needed before the session.
Prepare in Advance
1. Prepare a clear, brief draft statement of the project objectives
or the decision to be analysed in the SWOT. The statement
should consist of only a few sentences. If you already have a
project plan or proposal that is longer than one page, shorten it
for purposes of the SWOT. You don’t need to capture every
detail: include only the essence of the project objectives and
expected outcomes or of the decision that is under
consideration.
2. Invite participants (about 8 to 12 for a normal SWOT) who

12. will be directly involved in the project, or in the
implementation of the decision. Share with them, in advance,
the draft statement of the objectives and outcomes. Help the
participants prepare for the SWOT in one of the two following
ways:
· Assign some or all participants to conduct PESTEL research
and to share their findings with you a few days before the event.
Assign responsibility for surveying factors in each of the six
PESTEL domains: give each of the domains to one person, split
them among two to three people, or assign one person who is
very familiar with the context to cover them all. The output of
the PESTEL research is, for each domain, a simple list of the
key factors with just enough information to clearly define each
of them. This could be a sentence, or a brief paragraph. PESTEL
research for a single domain could run anywhere from half a
page to a few pages.
· Simply ask participants to think about threats, opportunities,
strengths, and weaknesses before the event. Although not as
powerful as PESTEL, this will still help the SWOT to be more
relevant.
When You Are Ready to Start
3. Convene the meeting and briefly describe the method. Ensure
the rapporteurs are ready; their notes will complement the flip
chart sheets that you will write during the meeting.
4. Confirm the group’s understanding of the objectives and
outcomes to be analyzed in the SWOT, and which team
(organization, partnership) would take action to implement
them.
5. Brainstorm the external categories (threats and
opportunities):
· If you used PESTEL, then its results should be the starting
point. Share the lists of PESTEL factors identified by those who
carried out the PESTEL analysis (political, economic, social,
etc.) by posting them all at once on flip chart sheets for all to
see, or displaying them on PowerPoint slides. Ask other
participants to complement the PESTEL research by suggesting

13. additional factors, which helps take advantage of different
knowledge bases among participants. Next, brainstorm about
what opportunities each PESTEL factor offers and what threats
it carries. Record the results on flip chart sheets. At this stage
you are looking for lots of relevant ideas. Once all the PESTEL
inputs have been discussed, ask the group whether they can
identify any additional Threats, and then additional
Opportunities; you can prompt them using the questions in
Annex 1 below.
· If you did not use PESTEL, simply brainstorm the threats and
opportunities, prompting participants using the relevant
questions in Annex 1 below. Look for lots of ideas; don’t filter
for importance yet. Use a sheet of flip chart paper (or even more
than one) for each category
6. Next, brainstorm the internal categories (weaknesses and
strengths), using the corresponding questions in Annex 1 as
prompts, and looking for lots of relevant ideas.
7. Rank the factors (O, T, S, and W) by importance. Remind
participants that the importance is linked to the potential impact
of the factor on the objectives and outcomes of the project or
decision, and to the likelihood of such impact. Once all the
categories have been brainstormed, you will have four separate
lists. Post all sheets so that participants can see them. Then
discuss them to rank the ideas by importance and mark each
idea with symbols to indicate the group’s overall opinion (e.g.,
++ for very important factors, + for ones with some importance,
or 0 for unimportant factors). Keep the discussion informal; you
can ask for a show of hands, but don’t take written ballots for
ranking. Or give all participants sticky dots with three different
colors and have them assign their ratings to each of the ideas.
8. Discuss how the highly rated items in the categories relate to
each other. For example, a certain strength may relate to a
certain opportunity, or a certain threat may be made more
significant because of a certain weakness. This is easier if you
have used PESTEL and discussed threats and opportunities first
because those factors will make the impact of various strengths

14. and weaknesses more clear.
9. Optional but recommended: At the end of the session, if your
group has decision-making power, outline a short action plan
based on your analysis and on the objectives of the project or
decision. If your group is acting only in an advisory capacity,
suggest a few plausible options for action. Or if your objective
was to make a yes or no decision, summarize your
recommendation and reasons. Your action plan or
recommendation should:
· pursue opportunities
· overcome, prevent or avoid threats
· use or capitalize on strengths
· overcome, minimize or compensate for weaknesses
Follow-Up
10. After the SWOT, prepare a written summary with decisions
and recommendations based on the flip chart sheets and notes
from the notetaker, and distribute it to participants, decision
makers and other relevant recipients.
Tips for Success
SWOT
· Don’t make the subject of a SWOT too broad; for example,
don’t try to assess every aspect of an office’s or division’s
work. Instead focus on specific, significant projects and
decisions, and conduct separate analyses for each, as time
permits.
· Ensure you have diversity among participants in a SWOT. A
group composed of participants with diverse backgrounds and
different perspectives can identify more of the critical factors,
more quickly, than can a homogeneous group.
· For every project, some opportunities and threats are obvious,
but others are hard to see because they are still developing and
will have their full impact in the future. The latter kind of
opportunities and threats are more difficult to identify and
properly assess, but are potentially the most significant of all.
· Although SWOT is an analytical exercise, its success depends
on a flow of ideas from participants. Therefore try to establish a

15. relaxed and participatory tone; consider using an icebreaker if
team members don’t know each other well (see the Variations
section below).
· During the discussion, keep the focus on the objectives and
expected outcomes of the project/decision, and how the various
factors relate to the objectives.
· If you are doing a quick SWOT (less than one hour), then it is
OK for the statements of external factors and internal strengths
and weaknesses to be somewhat general (though they should
always be accurate), and for the final ranking of the factors
(step 7 above) to be done quickly and somewhat informally.
· If you are doing an in-depth SWOT (three hours or more,
including PESTEL) then get multiple perspectives by involving
participants from diverse, relevant backgrounds. Involve team
leaders and decision makers in the SWOT; without them, you
will run the risk of your analysis and recommendations being
ignored. Try to ensure that the statements of external factors
and internal strengths and weaknesses are both precise and
verifiable. Do the ranking exercise (step 7) thoroughly, so that
the most significant factors emerge clearly.
PESTEL
· When assigning persons to do PESTEL research before the
SWOT session, try to match the PESTEL domains with persons
who have knowledge of those domains. (See Annex 1 for details
of all six domains.) Thus a media expert would be strongest in
the social domain, a lawyer or someone with legal background
in the legal domain, etc. Those who do the PESTEL analysis
should also participate at the SWOT so that they can explain
and support their choice of factors.
· To help identify PESTEL factors and trends, make use of any
relevant and high-quality analyses that already exist from
internal or external sources.
· Give weight to the factors identified in PESTEL according to
your objectives; for example, if your objective involves
increasing birth registration, then legal factors are obviously of
prime importance; if your objective is community mobilization

16. for sanitation, then social factors are critical, and so forth.
Variations
Subgroups on the Same Issue
If your group is large (more than 10 people):
1. Convene the meeting as usual and confirm the understanding
of the objectives and expected outcomes. Then divide the group
into two to four subgroups of up to 8 to 10 people, each with a
facilitator, a notetaker, and a flip chart.
2. Have each group brainstorm each category (O, T, S, and W)
for the objective or decision being discussed, in parallel.
Encourage the small groups to be very informal and to generate
as many ideas as possible. Ensure that each subgroup uses the
same methods for recording the discussions (e.g., a flip chart,
computer-based notetaking, group members writing on cards,
etc.) This will greatly facilitate aggregating and/or comparing
the outputs of the various groups.
3. Reconvene in plenary and gather all ideas from all groups,
one group at a time for each of O, T, S and W. Through
discussion, rank the items in each category, discuss how they
related to each other, and if possible prepare an action plan or
recommendation.
Subgroups on Related Issues and Challenges
The following variations may be used for approaching several
related issues or challenges:
· Parallel SWOTs—If you have a few related key objectives,
you can do parallel SWOTs on each of them, followed by a
plenary session to summarize the key thinking from each. The
plenary session may identify commonalities across objectives—
actions relevant for each objective, threats to each, weaknesses
or strengths important for each, etc.—which can then be
priorities for action as a result of their cross-cutting
significance.
· Icebreaker SWOT—The simple and quick variant can be used
as an icebreaker among people who will be working together in
a planning session, but who may not know each other well. It is
also suitable for kicking off a strategic discussion that will

17. continue later, for example in other sessions of a longer event.
Do not mistake an icebreaker SWOT for a full analysis; it is at
most a very quick introduction to the issues. To implement it,
begin by simply introducing the objective under consideration
in one sentence at the event (no advance preparation required).
Brainstorm and discuss only briefly—perhaps only for 5 to 10
minutes each—the relevant threats, opportunities, strengths, and
weaknesses. To close the exercise, choose the top one to three
items in each category by group vote.
· Expanded PESTEL—You can amplify the power of the
PESTEL exercise in several ways:
· Assign additional persons to conduct research and identify the
relevant factors. You may even engage consultants to do such
work, if the project or initiative being considered is a major
organizational priority.
· Add an additional group work session dedicated only to
discussing and expanding on the PESTEL factors. This should
take place before the SWOT analysis, so that it can feed in to
the identification of threats and opportunities.
· Online SWOT—If your participants have adequate internet
connections, you can convene a SWOT in a web conferencing
tool (e.g. Skype for Business, Adobe Connect, GoToMeeting,
etc.). Use audio, not text chat, to gather inputs, but prefer no
video unless all participants have excellent bandwidth. Do not
exceed 10 to 12 participants. Check periodically with the
rapporteur to ensure that the discussions are being captured.
Online SWOTs are more challenging than the in-person version
but may sometimes be the only option.
Annex 1: Factors to Consider in PESTEL
These lists of factors are intended to help inspire and guide
your PESTEL analysis in each of the six domains: political,
economic, social, technological, environmental, and legal. Share
them with those who will be conducting the analysis, and ask
them to identify specific relevant examples in the operational
context of the project or initiative that you are considering.
Remember, all PESTEL factors have relevance only in the

18. specific operational context. Therefore, identify the ones that
could impact your project and focus your analysis on them.
Political
· government policies (national, state/provincial, local, other)
· government resource allocations
· stakeholder needs or demands
· lobbying/campaigning by interest groups (local, national,
international) and influence or pressure from international
actors (e.g., other governments, international organizations,
etc.)
· armed conflicts
· changes in power, influence, connectedness of key relevant
actors/groups
· expected direction of future political change: future policy
prospects; upcoming elections and possible change in
government (local, state, national) and its consequences; other
relevant political trends
Economic
· economic situation: local, national, regional, global
· economic situation of specific relevant communities or
population groups (including employment, taxation, mobility,
etc.)
· economic situation and prospects of any relevant industries
· infrastructure (local, national, other)
· financial situation of key partners or other relevant entities
· availability of private-sector resources relevant for the
project/initiative
· expected direction of economic change: prevailing economic
trends, trade and market cycles; expected economic
interventions by governments and their consequences; other
relevant economic trends
Social
· demographics and population trends
· health among populations
· education levels
· access to essential services

19. · public perceptions (of an issue, an initiative, an organization
or other actor)
· relevant customs, traditional beliefs, attitudes (e.g. towards
children, adolescents, gender, etc.)
· media views
· role models, celebrities, spokespersons
· knowledge, attitudes and practices of a particular population
group (with regard to a relevant issue)
· potential for knowledge exchange
· migration (which also has political, economic and legal
dimensions)
· major relevant events (upcoming or already happening) and
cultural trends
· history, to the extent that it affects social attitudes and
perceptions
· factors in social identity, e.g. religious, socio-ethnic, cultural,
etc.
· dynamics of how social change happens in the given context
· management style, staff attitudes, organizational culture
(within a major relevant organization)
· expected direction of social change: broad trends in change of
social attitudes (e.g. towards a relevant issue); other relevant
social trends
· credibility of information sources or communication channels
(e.g. media outlets, well-known individuals, etc.) among a
target population; reach of information sources/communication
channels among a target population
Technological
· population groups’ access to technologies
· patterns of use of existing technologies (which may be
changing; e.g., evolving use of mobile phones)
· new technologies that could impact the context significantly,
or that could be used to achieve objectives
· technologies and related infrastructure/manufacturing /
importing requirements for an initiative to succeed
· possible replacement/alternative technologies

20. · potential for innovation
· technology transfer, access, licensing issues, other issues
related to intellectual property rights
· foreseeable technological trends: economic and social impact
of adoption of existing technologies; rate of technological
change; other technological trends
Environmental
· contextually relevant environmental issues: global (e.g.,
climate change), regional (e.g., flooding, droughts, etc.) or local
(e.g., contamination of water supplies)
· relevant environmental regulations or requirements (e.g., for
assessing potential climate change impacts of specific activities,
conforming to national or international environmental regimes,
etc.)
· environmental impacts of planned or ongoing activities
· climate, seasonality, potential impacts of weather
· trends or expected future developments in the environment
· geographical location
Legal
· human rights (including but not limited to child rights and
gender rights)
· existing legislation having an impact on any relevant factors
(economic, social, technological, environmental or other factors
relevant to the issue), or affecting population groups relevant to
the issue, or impacting the work of the organization or its
partnerships
· pending or future legislation
· international treaties/agreements, either existing or in
preparation
· standards, oversight, regulation and regulatory bodies, and
expected changes in these
· ethical issues
Annex 2: Factors to Consider in SWOT
These lists of factors are intended to help inspire and guide
your SWOT discussion in each of the four categories:
opportunities, threats, strengths, and weaknesses. Share them

21. with participants at your SWOT session, and brainstorm for
examples relevant to the project or initiative you are
considering.
If you used PESTEL, then the review of the PESTEL outputs
will provide your first inputs into SWOT; in that case the lists
of SWOT factors given here are supplementary, and should be
used after the review of the PESTEL factors, to help identify
any SWOT factors that were not captured through PESTEL.
Opportunities
Opportunities are external factors: They are found in the
operational context within which the project, initiative, or
decision will be implemented.
· events or trends that offer opportunities: Political (government
policies, favorable changes in power/influence of relevant
actors, political agendas), economic (rising prosperity, new
economic opportunities or other favourable economic change),
social (behaviour patterns, demographic change), technological
(innovations, changes in technology use), environmental
(favourable climate/weather), legal (upcoming legislation or
treaties/international agreements)
· relationships or partnerships that can be applied or drawn
upon
· other actors that will likely play a role in the initiative/project
under consideration; if they could support you, they represent
potential opportunities
· new information that has become available
· practices adopted by other organizations/actors in addressing
similar challenges, which suggest opportunities
· potential funding sources
· possible efficiency gains from reallocation of resources
· other initiatives, actions, projects or products that relate to the
project/initiative under consideration
· include under opportunities the advantages, benefits or
probable results that are offered by the project/initiative that is
being considered in the SWOT
Threats

22. Just like opportunities, threats are external factors in the
operating context for the project, initiative, or decision.
· events or trends that could threaten the project/initiative or
that put progress at risk: political, economic, social,
technological, environmental, legal
· risks and disadvantages that would be incurred by a given
initiative/action under consideration: risks to staff and/or
partners, to populations, reputational risk, financial risk,
political risk, costs, additional responsibilities, etc. A complete
risk analysis cannot usually be completed in a SWOT, but basic
risks can be identified, or risks identified in a separate pre-
existing risk analysis can be mentioned. Alternatively a more
complete risk analysis could be called for at a later stage
· time, including disappearing opportunities, deadlines,
unrealistic timelines
· other actors (harmful competition, contrary interests)
· opportunities that would be foregone if a given
initiative/action is undertaken
· other obstacles
Strengths
Strengths are internal to the organization. Strengths include any
kinds of capabilities or resources that the organization (and
potentially any partners involved, and any stakeholders who are
active participants in a development effort) can bring to bear, in
order to achieve the desired result of the project, initiative,
proposal, etc.
· political (power, influence, connectedness, image and
reputation)
· access (to governments, partners, populations, etc.), reach,
awareness
· presence on the ground
· economic/financial resources
· capital assets, infrastructure, equipment
· cost/competitiveness advantages
· skills, experience, knowledge (including academic or
theoretical, and also know-how, i.e. practical or applied

23. knowledge)
· qualifications, accreditation
· data, especially if it is unique or hard-to-replicate
· allies, contacts
· dedication, leadership and drive
· cultural strengths
· geographical advantages (presence; other)
· comparative advantages (with regard to other actors in the
same context) in systems, processes, operational efficiency,
flexibility, quality standards, other areas
· things your team/organization/partnership does well
· other noteworthy capabilities (technical, scientific,
management, leadership, other) which the organization can
apply
Remember to take your operating context into account when
identifying strengths and weaknesses. A strength in one context
may be worth much less, or may even be a weakness, in another
context. For example, available budget at the beginning of a
budget cycle is worth more than the same amount of available
budget near the end of a cycle.
Weaknesses
Similar to strengths, weaknesses are internal factors within the
organization (or partnership) that would undertake the project
or initiative.
· existing gaps in capabilities or resources in the implementing
organizations; refer to the list given above under Strengths and
note anything both relevant and lacking
· weaknesses that will take effect in the future (e.g., departure
of key staff, expiry of funds, etc.)
· known vulnerabilities (i.e., things which the organization does
not do well or struggles with; every organization has such
vulnerabilities; the idea is to be aware of them during the
planning process)
· other competing priorities (which may be core activities),
pressures and internally imposed timelines that detract from
available capacity

24. · relevant areas where a need for improvement has been
identified (by management, by an audit, by an external
evaluation, etc.)
International Expansion and Global Market Opportunity
Assessment
Choosing to expand internationally is rarely black and white. A
wide variety of internationalization moves are available after
choosing to expand. Moreover, some flatteners make global
moves easier, while some make them more difficult. Indeed,
even importing and outsourcing can be considered stealth, or at
least early, steps in internationalization, because they involve
doing business across borders. The first section of this resource
discusses the rationale for international expansion and the
planning and due diligence it requires.
In the second section of this resource, you will learn about
PESTEL, the framework for analyzing the political, economic,
sociocultural, technological, environmental, and legal aspects of
different international markets.
Opening Case: The Invisible Global Retailer and Its Re-Entry
into US Markets
Which corporation owns 123 companies, operates in twenty-
seven countries, and has been in the mobile-phone business for
over a decade? If you don’t know, you’re not alone. Many
people haven’t heard of the Otto Group, the German retailing
giant that’s second only to Amazon in e-commerce and first in
the global mail-order business. The reason you’ve likely never
heard of the Otto Group is because the firm stays in the
background while giving its brands the spotlight. This strategy
has worked over the company’s almost eighty-year history, and
Otto continues to apply it to new moves, such as its social
media site, Two for Fashion. “They are talking about fashion,
not about Otto, unless it suits,” explained Andreas Frenkler, the
company’s division manager of new media and e-commerce,
about the site’s launch in 2008 (Dishman, 2010). The site is

25. now one of the top fashion blogs in Germany and is an integral
part of the retailer’s marketing strategy.
Leading through Passion, Vision, and Strategy
Today, the Otto Group consists of a large number of companies
that operate in the major economic zones of the world. The Otto
Group’s lines of business include financial services,
multichannel retail, and other services. The financial services
segment covers an international portfolio of commercial
services along the value chain of retail companies, such as
information, collection, and receivable management services.
The multichannel retail segment covers the Otto Group’s
worldwide range of retail offerings; goods are marketed across
three distribution channels—catalogs, e-commerce, and over-
the-counter (OTC) retail. The third segment combines the Otto
Group’s logistics, travel, and other service providers as well as
sourcing companies. Logistics service providers and sourcing
companies support both the Otto Group’s multichannel retail
activities and nongroup clients. Travel service providers offer
customers travel offerings across all sales channels. Unique to
the Otto Group is the combination of travel agencies, direct
marketing, and internet sites. The combined revenue of these
three ventures is growing rapidly, even during the global
economic downturn. The travel service revenues for 2010 were
10 billion euros, or about $12 billion (“Otto Group,” n.d.).
Even though it operates in a variety of market segments,
business ideas, and distribution channels—not to mention its
regional diversity—the Otto Group sees itself as a community
built on shared values. Otto’s passion for success is based on
four levels of performance, which together represent the true
strength of the Otto Group: “Passion for our customers, passion
for innovation, passion for sustainability, and passion for
integrated networking.” Each one of these performance levels is
an integral element of the Otto Group’s guiding principle and
self-image.
Future growth is guided by the Otto Group’s Vision 2020
strategy, which is based on achieving a strong presence in all

26. key markets of the three largest regions—Europe, North
America, and Asia. In doing so, the Otto Group relies on
innovative concepts in the multichannel business, on current
trends in e-commerce, on OTC retail, and on developments in
mobile commerce. In keeping with that vision, its focus for
near-term expansion is on expanding the group’s strong position
in Russia and increasing market share in other economic areas,
such as the Chinese and Brazilian markets. Investment options
in core European markets are continually being reviewed to
strengthen the multichannel strategy. As a global operating
group, Otto aims to have a presence in all major markets and
will continue to expand OTC retailing.
In 2010, for instance, the Otto Group continued to develop its
activities in the growth markets of Central and Eastern Europe.
Through takeovers and the acquisition of further shares in
various distance-selling concepts, including Quelle Russia, the
Otto Group has continued to build on its market leadership in
Russian mail order. A further major goal for the future is to
expand OTC retail within the multichannel retail segment,
making it one of the pillars of Otto alongside its e-commerce
and catalog businesses. The foundations of value-oriented
corporate management are reflected in the uncompromising
customer orientation evident in business activities with both end
consumers and corporate clients.
The strategy envisages targeted investments that provide the
Otto Group with “best in class” business models. Otto not only
draws on an excellent range of customer services as the basis
for its success in its core business of multichannel retailing but
also offers an array of retail-related services for its corporate
clients. In the future, the company is looking to expand these
services, moving beyond its core business. The buying
organization of the Otto Group has been repositioned under the
name Otto International and is now a firm fixture in the world’s
key sourcing markets. Otto International’s corporate clients
stand to benefit directly from the market power of the Otto
Group while providing the volumes to make their own

27. contribution to its growth.
The US Market Re-Entry Initiative
Germany remains the Otto Group’s most-important regional
sales market, followed by France, the rest of Europe, North
America, and Asia. In the United States, Otto set up a
greenfield division called Otto International and quietly
launched Field & Stream 1871, a brand of outdoor clothing,
outerwear, footwear, and accessories, in 2010. The products are
available only on the Field & Stream e-commerce site. As
always, the Otto name is almost nowhere on the site, being
visible only on the site’s privacy policy page.
Industry experts thought it surprising that Otto launched the
clothing line because it had previously left the US market after
its acquisition of Eddie Bauer’s parent company, Spiegel, failed
in 2009.
Still, the Otto Group has received much acclaim for its
innovations in the retail arena. For example, according to a
Microsoft case study, Otto was the first company (1) to use
telephone ordering, (2) to produce a CD-ROM version of its
catalog in the 1990s (to deal with slow dial-up connections),
and (3) to build one of the largest collections of online
merchandise (“Microsoft Case Studies,” n.d.).
So the Otto Group may have other innovations planned for Field
& Stream. But the US fashion market is saturated with
competitors. Otto may do better to focus on growing its own
retail brands and utilizing its impressive in-house
manufacturing and logistics divisions, which are now Otto’s
fastest-growing segment (Brenner, 2010). Otto could use these
divisions to build other retail operations—while keeping a low
profile, of course.
Ask Yourself
· How do non-German markets figure into the Otto Group’s
strategy?
· What do you think the firm has had to do to plan for this level
of international expansion?
· Which country entry modes does the firm appear to prefer?

28. Does it vary these modes?
· After the Otto Group failed in its first effort to enter the US
market with Spiegel, why would it try again?
· How does this latest effort to enter the US market differ from
its prior attempt?
Global Strategic Choices
The Why, Where, and How of International Expansion
The allure of global markets can be mesmerizing. Companies
that operate in highly competitive or nearly saturated markets at
home, for instance, are drawn to look overseas for expansion.
But overseas expansion is not a decision to be made lightly, and
managers must ask themselves whether the expansion will
create real value for shareholders. Companies can easily
underestimate the costs of entering new markets if they are not
familiar with the new regions and the business practices
common within the new regions. For some companies, a misstep
in a foreign market can put their entire operations in jeopardy,
this section explores the rationale for international expansion as
well as how to analyze and evaluate markets for international
expansion.
Analysis and Evaluation of Markets for International Expansion
Rationale for International Expansion
Companies embark on an expansion strategy for one or more of
the following reasons:
· improve the cost-effectiveness of their operations
· expand into new markets for new customers
· follow global customers
For example, the US chemical firm DuPont, Brazilian aerospace
conglomerate Embraer, and Finnish mobile phone maker Nokia
are all investing in China to gain new customers. Schneider
Logistics, in contrast, initially entered a new market, Germany,
not to get new customers but to retain existing customers who
needed a third-party logistics firm in Germany. Thus, Schneider
followed its customers to Germany. Other companies, like the
microprocessor maker Intel, are building manufacturing

29. facilities in China to take advantage of the less costly and
increasingly sophisticated production capabilities. For example,
Intel built a semiconductor manufacturing plant in Dalian,
China, for $2.5 billion, whereas a similar state-of-the-art
microprocessor plant in the United States can cost $5 billion
(“2011 Global R&D Funding Forecast, 2010). Intel has also
built plants in Chengdu and Shanghai, China, and in other Asian
countries (Vietnam and Malaysia) to take advantage of lower
costs.
Planning for International Expansion
As companies look for growth in new areas of the world, they
typically prioritize which countries to enter. Because many
markets look appealing due to their market size or low-cost
production, it is important for firms to prioritize which
countries to enter first and to evaluate each country’s relative
merits. For example, some markets may be smaller in size, but
their strategic complexity is lower, which may make them easier
to enter and easier from an operations point of view. Sometimes
there are even substantial regional differences within a given
country, so careful investigation, research, and planning are
important to do before entry.
International Market Due Diligence
International market due diligence involves analyzing foreign
markets for their potential size, accessibility, cost of operations,
and buyer needs and practices to aid the company in deciding
whether to invest in entering that market. Market due diligence
relies on using not just published research on the markets but
also interviews with potential customers and industry experts. A
systematic analysis needs to be done, using tools like PESTEL.
Evaluating whether to enter a new market is like peeling an
onion—there are many layers. For example, when evaluating
whether to enter China, the advantage most people see
immediately is its large market size. Further analysis shows that
the majority of people in that market can’t afford US products,
however. But even deeper analysis shows that while many
Chinese are poor, the number of people who can afford

30. consumer products is increasing (Kleiner, 2010).
Regional Differences
The next part of due diligence is to understand the regional
differences within the country and to not view the country as a
monolith. For example, although companies are dazzled by
China’s large market size, deeper analysis shows that 70 percent
of the population lives in rural areas. This presents distribution
challenges given China’s vast distances. In addition, consumers
in different regions speak different dialects and have different
tastes in food. Finally, the purchasing power of consumers
varies in the different cities. City dwellers in Shanghai and
Tianjin can afford higher prices than villagers in a western
province.
Let’s look at a specific example. To achieve the dual goals of
reducing operations costs and being closer to a new market of
customers, for instance, numerous high-tech companies identify
Malaysia as an attractive country to enter. Malaysia is a
relatively inexpensive country, and the population’s English
skills are good, which makes it attractive both for finding local
labor and for selling products. But even in a small country like
Malaysia, there are regional differences. Companies may be
tempted to set up operations in the capital city, Kuala Lumpur,
but thorough due diligence reveals that the costs in Kuala
Lumpur are rising rapidly. If current trends continue, Kuala
Lumpur will be as expensive as London in five years. Therefore,
firms seeking primarily a lower-cost advantage would do better
to locate to another city in Malaysia, such as Penang, which has
many of the same advantages as Kuala Lumpur but does not
have its rising costs (Chamania, Mehta, & Sehgal, 2001).
Understanding Local Consumers
Entering a market means understanding the local consumers and
what they look for when making a purchase decision. In some
markets, price is an important issue. In other markets, such as
Japan, consumers pay more attention to details—such as the
quality of products and the design and presentation of the
product or retail surroundings—than they do to price. The

31. Japanese demand for perfect products means that firms entering
Japan might have to spend a lot on quality management.
Moreover, real-estate costs are high in Japan, as are freight
costs such as fuel and highway charges. In addition, space is
limited at retail stores and stockyards, which means that stores
can’t hold much inventory, making replenishment of products a
challenge. Therefore, when entering a new market, it’s vital for
firms to perform full, detailed market research in order to
understand the market conditions and take measures to account
for them.
How to Learn the Needs of a New Foreign Market
The best way for a company to learn the needs of a new foreign
market is to deploy people to immerse themselves in that
market. Larger companies, like Intel, employ ethnographers and
sociologists to spend months in emerging markets, living in
local communities and seeking to understand the latent,
unarticulated needs of local consumers. For example, Dr.
Genevieve Bell, one of Intel’s anthropologists, traveled
extensively across China, observing people in their homes to
find out how they use technology and what they want from it.
Intel then used her insights to shape its pricing strategies and its
partnership plans for the Chinese consumer market (Radjou,
2009).
Differentiation and Capability
When entering a new market, companies also need to think
critically about how their products and services will be different
from what competitors are already offering in the market so that
the new offering provides customers value. Companies trying to
penetrate a new market must be sure to have some proof that
they can deliver to the new market; this proof could be evidence
that they have spoken with potential customers and are
connected to the market (“How We Do It,” 2011).
Related to firm capability, another factor for firms to consider
when evaluating which country to enter is corporate fit, the
degree to which the company’s existing practices, resources and
capabilities fit the new market. For example, a company

32. accustomed to operating within a detailed, unbiased legal
environment would not find a good corporate fit in China
because of the current vagaries of Chinese contract law
(Wingard, 2002). While a low corporate fit doesn’t preclude
expanding into that country, it does signal that additional
resources or caution may be necessary. Two typical dimensions
of corporate fit are human resources practices and the firm’s
risk tolerance.
Industry Dynamics
In some cases, the decision to enter a new market will depend
on the specific circumstances of the industry in which the
company operates. For example, companies that help build
infrastructure need to enter countries where the government or
large companies have a lot of capital, because infrastructure
projects are so expensive. The president of the Spanish
infrastructure company Fomento de Construcciones y Contratas
said, “We focus on those countries where there is more money
and there is a gap in the infrastructure,” such as China,
Singapore, the United States, and Algeria (“Practical Advice,”
2011).
Political stability, legal security, and the “rule of law”—the
presence of and adherence to laws related to business contracts,
for example—are important considerations prior to market entry
regardless of which industry a company is in. Fomento de
Construcciones y Contratas learned this the hard way and ended
up leaving some countries it had entered. The company’s
president, Baldomero Falcones, explained, “When you decide
whether or not to invest, one factor to take into account is the
rule of law. Our ethical code was considered hard to understand
in some countries, so we decided to leave during the early
stages of the investment” (“Practical Advice,” 2011).
Ethics in Action
Companies based in China are entering Australia and Africa,
primarily to gain access to raw materials. Trade between China
and Africa grew an average of 30 percent in the decade up to
2010, reaching $115 billion that year (Redfern, 2011). Chinese

33. companies operate in Zambia (mining coal), the Democratic
Republic of the Congo (mining cobalt), and Angola (drilling for
oil). To get countries to agree to the deals, China had to agree
to build new infrastructure, such as roads, railways, hospitals,
and schools. Some economists, such as Dambisa Moyo, who
wrote Dead Aid: Why Aid Is Not Working and How There Is a
Better Way for Africa, believe that the way to help developing
countries like those in Africa is not through aid but through
trade. Moyo argues that long-term charity is degrading. She
advocates business investments and setting up enterprises that
employ local workers. Ecobank CEO Arnold Ekpe (whose bank
employs 11,000 people in twenty-six African states) says the
Chinese look at Africa differently than the West does: “[The
Chinese] are not setting out to do good,” he says. “They are
setting out to do business. It’s actually much less demeaning”
(Perry, 2009). Deborah Brautigam, associate professor at the
American University’s International Development Program,
agrees. In her book, The Dragon’s Gift: The Real Story of China
in Africa, she says, “The Chinese understand something very
fundamental about state building: new states need to build
buildings and dignity, not simply strive to end poverty”
(Bloomfield, 2010).
Steps and Missteps in International Expansion
Let’s look at an example of the steps—as well as the missteps—
in international expansion. American retailers entered the
Chilean market in the mid- to late 1990s. They chose Chile
because of the country’s strong economy, the advanced level of
the Chilean retail sector, and the free trade agreements signed
by Chile. From that standpoint, their due diligence was
accurate, but it didn’t go far enough, as we’ll see.
Retailer J. C. Penney entered Chile in 1995, opening two stores.
The French retailer Carrefour also entered Chile, in 1998.
Neither company entered through an alliance with a local
retailer, and both companies were forced to close their Chilean
operations due to the losses they were incurring. Analysis by
the Aldolfo Ibáñez University in Chile explained the reasons

34. behind the failures: the managers of these companies were not
able to connect with the local market, nor did they understand
the variables that affected their businesses in Chile (“The
Globalization of Chilean Retailing,” 2007). Specifically, the
Chilean retailing market was advanced, but it was also very
competitive. The new entrants (J. C. Penney and Carrefour)
didn’t realize that the existing major local retailers had their
own banks and offered banking services at their retail stores,
which was a major reason for their profitability. The outsiders
assumed that profitability in this sector was based solely on
retail sales. They missed the importance of the bank ties.
Another typical mistake that companies make is to assume that a
new market has no competition just because the company’s
traditional competitors aren’t in that market.
The Chilean retailers were successful in their own markets but
wanted to expand beyond their borders in order to get new
customers in new markets. The Chilean retailers chose to enter
Peru, which had the same language.
The Peruvian retailing market was not advanced, and it did not
offer credit to customers. The Chileans entered the market
through a partnership with local Peruvian firms and introduced
the concept of credit cards, which was an innovation in the
poorly developed Peruvian market. Entering through a domestic
partner helped the Chileans because it eliminated hostility and
made the investment process easier. Offering the innovation of
credit cards made the Chilean retailers distinctive and offered
an advantage over the local offerings (“The Globalization of
Chilean Retailing,” 2007).
PESTEL, Globalization, and Importing
Know the Components of PESTEL Analysis
PESTEL analysis is an important and widely used tool that
helps show the big picture of a firm’s external environment,
particularly as related to foreign markets. PESTEL is an
acronym for the political, economic, sociocultural,
technological, environmental, and legal contexts in which a firm
operates. A PESTEL analysis helps managers gain a better

35. understanding of the opportunities and threats they face;
consequently, the analysis aids in building a better vision of the
future business landscape and how the firm might compete
profitably. This useful tool analyzes for market growth or
decline and, therefore, the position, potential, and direction for
a business. When a firm is considering entry into new markets,
these factors are of considerable importance. Moreover,
PESTEL analysis provides insight into the status of key market
flatteners, both in terms of their present state and future trends.
Firms need to understand the macro environment to ensure that
their strategy is aligned with the powerful forces of change
affecting their business landscape. When firms exploit a change
in the environment—rather than simply survive or oppose the
change—they are more likely to be successful. A solid
understanding of PESTEL also helps managers avoid strategies
that may be doomed to fail given the circumstances of the
environment. J. C. Penney’s failed entry into Chile is a case in
point.
Finally, understanding PESTEL is critical prior to entry into a
new country or region. The fact that a strategy is congruent with
PESTEL in the home environment gives no assurance that it will
also align in other countries. For example, when Lands’ End,
the online clothier, sought to expand its operations into
Germany, it ran into local laws prohibiting it from offering
unconditional guarantees on its products. In the United States,
Lands’ End had built a reputation for quality on its no-
questions-asked money-back guarantee. However, this was
considered illegal under Germany’s regulations governing
incentive offers and price discounts. The political skirmish
between Lands’ End and the German government finally ended
when the regulations banning unconditional guarantees were
abolished. While the restrictive regulations didn’t put Lands’
End out of business in Germany, they did inhibit its growth
there until the laws were abolished.
There are three steps in the PESTEL analysis.
1. Consider the relevance of each of the PESTEL factors to your

36. context.
2. Identify and categorize the information that applies to these
factors.
3. Analyze the data and draw conclusions.
Common mistakes in this analysis include stopping at the
second step or assuming that the initial analysis and conclusions
are correct without testing the assumptions and investigating
alternative scenarios.
The framework for PESTEL analysis is presented below. It’s
composed of six sections—one for each of the PESTEL
headings (Carpenter, 2009). The framework includes sample
questions or prompts, the answers to which can help determine
the nature of opportunities and threats in the macroenvironment.
These questions are examples of the types of issues that can
arise in a PESTEL analysis.
PESTEL Analysis
1. Political
a. How stable is the political environment in the prospective
country?
b. What are the local taxation policies? How do these affect
your business?
c. Is the government involved in trading agreements, such as the
European Union (EU), the North American Free Trade
Agreement (NAFTA), or the Association of Southeast Asian
Nations (ASEAN)?
d. What are the country’s foreign-trade regulations?
e. What are the country’s social welfare policies?
2. Economic
a. What are the current and forecast interest rates?
b. What is the current level of inflation in the prospective
country? What is it forecast to be? How does this affect the
possible growth of your market?
c. What are local employment levels per capita, and how are
they changing?
d. What are the long-term prospects for the country’s economy,
gross domestic product (GDP) per capita, and other economic

37. factors?
e. What are the current exchange rates between critical markets,
and how will they affect production and distribution of your
goods?
3. Sociocultural
a. What are the local lifestyle trends?
b. What are the country’s current demographics, and how are
they changing?
c. What is the level and distribution of education and income?
d. What are the dominant local religions, and what influence do
they have on consumer attitudes and opinions?
e. What is the level of consumerism, and what are the popular
attitudes toward it?
f. What pending legislation could affect corporate social
policies (e.g., domestic partner benefits or maternity and
paternity leave)?
g. What are the attitudes toward work and leisure?
4. Technological
a. To what level do the local government and industry fund
research, and are those levels changing?
b. What is the local government’s and industry’s level of
interest and focus on technology?
c. How mature is the technology?
d. What is the status of intellectual property issues in the local
environment?
e. Are potentially disruptive technologies in adjacent industries
creeping in at the edges of the focal industry?
5. Environmental
a. What are the local environmental issues?
b. Are there any pending ecological or environmental issues
relevant to your industry?
c. How do the activities of international activist groups (e.g.,
Greenpeace, Earth First!, and People for the Ethical Treatment
of Animals [PETA]) affect your business?
d. Are there environmental-protection laws?
e. What are the regulations regarding waste disposal and energy

38. consumption?
6. Legal
a. What are the local government’s regulations regarding
monopolies and private property?
b. Does intellectual property have legal protections?
c. Are there relevant consumer laws?
d. What is the status of employment, health and safety, and
product safety laws?
Political Factors
The political environment can have a significant influence on
businesses. In addition, political factors affect consumer
confidence and consumer and business spending. For instance,
how stable is the political environment? This is particularly
important for companies entering new markets. Government
policies on regulation and taxation can vary from state to state
and across national boundaries. Political considerations also
encompass trade treaties, such as NAFTA, ASEAN, and EU.
Such treaties tend to favor trade among the member countries
but impose penalties or less favorable trade terms on
nonmembers.
Economic Factors
Managers also need to consider macroeconomic factors that will
have near-term and long-term effects on the success of their
strategy. Inflation rates, interest rates, tariffs, the growth of the
local and foreign national economies, and exchange rates are
critical. Unemployment, availability of critical labor, and the
local cost of labor also have a strong bearing on strategy,
particularly as related to the location of disparate business
functions and facilities.
Sociocultural Factors
The social and cultural influences on business vary from
country to country. Depending on the type of business, factors
such as the local languages, the dominant religions, the cultural
views toward leisure time, and the age and lifespan
demographics may be critical. Local sociocultural
characteristics also include attitudes toward consumerism,

39. environmentalism, and the roles of men and women in society.
Making assumptions about local norms derived from
experiences in your home market is a common cause for early
failure when entering new markets. However, even home market
norms can change over time, often caused by shifting
demographics due to immigration or aging populations.
Technological Factors
Ttechnological factors have a major bearing on the threats and
opportunities firms encounter. For example, new technology
may make it possible for products and services to be made more
cheaply and to a better standard of quality. New technology may
also provide the opportunity for more innovative products and
services, such as online stock trading and remote working. Such
changes have the potential to change the face of the business
landscape.
Environmental Factors
The environment has long been a factor in firm strategy,
primarily from the standpoint of access to raw materials.
Increasingly, this factor is best viewed as both a direct and
indirect cost for the firm.
Environmental factors are also evaluated on the footprint left by
a firm on its respective surroundings. For consumer product
companies like PepsiCo, for instance, this can encompass the
waste management and organic farming practices used in the
countries where raw materials are obtained. Similarly, in
consumer markets, it may refer to the degree to which
packaging is biodegradable or recyclable.
Legal Factors
Finally, legal factors reflect the laws and regulations relevant to
the region and the organization. Legal factors can include
whether the rule of law is well established, how easily or
quickly laws and regulations may change, and what the costs of
regulatory compliance are. For example, Coca-Cola’s market
share in Europe is greater than 50 percent; as a result,
regulators have asked that the company give shelf space in its
coolers to competitive products in order to provide greater

40. consumer choice (“EU Curbs Coca-Cola,” 2005).
Many of the PESTEL factors are interrelated. For instance, the
legal environment is often related to the political environment,
where laws and regulations can only change when they’re
consistent with the political will.
PESTEL and Globalization
Over the past decade, new markets have been opened to foreign
competitors, whole industries have been deregulated, and state-
run enterprises have been privatized. So, globalization has
become a fact of life in almost every industry (Yip, 1989). This
entails much more than companies simply exporting products to
another country. Some industries that aren’t normally
considered global do, in fact, have strictly domestic players.
But these companies often compete alongside firms with
operations in multiple countries; in many cases, both sets of
firms are doing equally well. In contrast, in a truly global
industry, the core product is standardized, the marketing
approach is relatively uniform, and competitive strategies are
integrated in different international markets (Porter, 1986; Yip,
1989). In these industries, competitive advantage clearly
belongs to the firms that can compete globally.
A number of factors reveal whether an industry has globalized
or is in the process of globalizing. The box below groups
globalization factors into four categories: markets, costs,
governments, and competition. These dimensions correspond
well to Thomas Friedman’s (2005) “flatteners” (as described in
his book The World Is Flat), though they are not exhaustive.
Factors Favoring Industry Globalization
1. Markets
a. Homogeneous customer needs
b. Global customer needs
c. Global channels
d. Transferable marketing approaches
2. Costs
a. Large-scale and large-scope economies
b. Learning and experience

41. c. Sourcing efficiencies
d. Favorable logistics
e. Arbitrage opportunities
f. High research-and-development (R&D) costs
3. Governments
a. Favorable trade policies
b. Common technological standards
c. Common manufacturing and marketing regulations
4. Competition
a. Interdependent countries
b. Global competitors
Markets
The more similar markets in different regions are, the greater
the pressure for an industry to globalize. Coca-Cola and
PepsiCo, for example, are fairly uniform around the world
because the demand for soft drinks is largely the same in every
country. The airframe manufacturing industry, dominated by
Boeing and Airbus, also has a highly uniform market for its
products; airlines all over the world have the same needs when
it comes to large commercial jets.
Costs
In both of these industries, costs favor globalization. Coca-Cola
and PepsiCo realize economies of scope and scale because they
make such huge investments in marketing and promotion. Since
they’re promoting coherent images and brands, they can
leverage their marketing dollars around the world. Similarly,
Boeing and Airbus can invest millions in new-product R&D
only because the global market for their products is so large.
Governments and Competition
Obviously, favorable trade policies encourage the globalization
of markets and industries. Governments, however, can also play
a critical role in globalization by determining and regulating
technological standards. Railroad gauge—the distance between
the two steel tracks—would seem to favor a simple
technological standard. In Spain, however, the gauge is wider
than in France. Why? Because back in the 1850s, when Spain

42. and neighboring France were hostile to one another, the Spanish
government decided that making Spanish railways incompatible
with French railways would hinder any French invasion.
These are a few key drivers of industry change. However, there
are particular implications of technological and business-model
breakthroughs for both the pace and extent of industry change.
The rate of change may vary significantly from one industry to
the next; for instance, the computing industry changes much
faster than the steel industry. Nevertheless, change in both
fields has prompted complete reconfigurations of industry
structure and the competitive positions of various players. The
idea that all industries change over time and that business
environments are in a constant state of flux is relatively
intuitive. As a strategic decision maker, you need to ask
yourself this question: how accurately does current industry
structure (which is relatively easy to identify) predict future
industry conditions?
Country Cultural Differences
In workplaces, as in communities and nations, people spending
time together are likely to share certain values, attitudes, and
beliefs. Because of this established culture, people at work may
have developed certain preferences or orientations in the
following situations:
· interacting and communicating with others
· working in teams
· making decisions
· responding to and evaluating risks and opportunities
· managing or attempting to resolve disagreements and conflicts
· interacting with those at different levels in the organization
· engaging in numerous other workplace activities
Those who have studied and compared societal cultures and
their possible implications for the workplace have identified
some differences that can be important for success.
Perhaps the leading expert on cultural differences and their

43. potential implications for business is Geert Hofstede, a Dutch
scholar who worked for IBM in the late 1960s. Hofstede's early
research (1980) examined, compared, and categorized the
culturally derived preferences of IBM employees in many
countries. He, and other scholars who have followed in his path,
created a classification scheme that differentiates country
cultures across what were originally four dimensions, though
they have since been expanded to include six.
In what is probably his best-known book, Cultures and
Organizations: Software of the Mind (published first in 1991
and revised and republished in 2010 with his son Gert Jan and
Michael Minkov), Hofstede presents a careful explanation of his
work and its implications. Hofstede reminds his readers that
"culture is learned, not innate" (p.6), and introduces the analogy
of culture as "software of the mind."
Hofstede uses the layers of an onion to help convey the way
culture manifests itself. Values are deep at the core or center of
the onion and are very slow to change compared with the other
manifestations of culture. Examples of common core values in
US businesses include integrity, accountability, fairness, and
excellence. Other layers of culture include our rituals (e.g.,
greeting with a firm handshake and direct eye contact),
the heroes we honor (examples include Warren Buffett and
Steve Jobs), and on the outside of the onion, the symbols that
have special meaning for societal members.
Examples of U.S. Business Cultural Manifestations
Created by Christina Hannah
Using an analogy of culture as mental programming, Hofstede
explains that we are each conditioned (or programmed) by
multiple societal levels: national, regional, ethnic, religious,
linguistic, gender-oriented, generational, socioeconomic, and
professional. Values associated with these levels may or may
not be in harmony. One consequence of these multiple sources
of programming is that it can be difficult to predict what will
influence a person's response or behavior in particular

44. situations.
Our present interest is not in delving deeply into the causes and
consequences of individual differences in values, attitudes, and
beliefs, but rather to learn about those shared at a societal level.
Hofstede explains that his extensive research, and that of others
who have studied culture, make it possible to differentiate
between and among national cultures using a set of dimensions.
He originally proposed the first four dimensions in the list
below, then added a fifth—long-term orientation (Moskowitz,
2009)—and later added indulgence as a result of further
research by and insights from collaborators.
Here is a simple explanation of Hofstede's current six
dimensions:
· Power distance (PDI)—In countries with a high power
distance dimension score, we can expect those in lower level
positions to respect or defer to those who outrank them. In other
words, power is thought to come with position. In such cultures,
employees may expect managers and leaders to make decisions
and might be surprised or uncomfortable when asked for input.
In countries with a low power distance score, we are likely to
find that employees treat those they report to more as
colleagues and hold the view that respect must be earned. There
may, of course, be exceptions to this model (for example in
military and paramilitary organizations). Not surprisingly, the
United States's score on this dimension is relatively low at 40.
The score for France is is 69. In comparison, the scores for
Malaysia, Slovakia, Guatemala, Panama, the Philippines, and
Russia are all above 93 (Hofstede, Hofstede, & Minkov, 2010,
pp. 57-58). This means that, in general, we can expect
employees in the United States to expect a more egalitarian
workplace than may be true in other societies.
· Individualism or collectivism (IDV)—In countries with high
scores for individualism (like the United States), you are likely
to find a shared belief in developing strong individuals who are
comfortable working and making decisions on their own. In
such workplaces, you will probably find an emphasis on the

45. importance of developing, recognizing, and rewarding
individual contributions. In countries that score low on the
individualism dimension, you are likely to find an emphasis on
the community, team, group, or department (i.e., the collective).
People may be embarrassed if they are singled out publicly for
praise or recognition, because they strongly believe their
success depends upon the support and work of others. For this
dimension, the US score is the highest, at 91. The score for
France is 71. The country with the lowest score is Guatemala,
with a score of 6 (Hofstede, Hofstede, & Minkov, 2010, pp. 95-
97).
· Masculinity and femininity (MAS)—The label used for this
dimension may not be the best. The basic idea is that some
country cultures place a relatively high value on
competitiveness, assertiveness, achievement, etc. Such countries
are given a high score for masculinity because these preferences
and traits were historically associated with men more than
women. Other country cultures place greater value on caring for
others, cooperation, quality of life, etc. Such countries are
given a high score for femininity on this dimension. Despite the
problems with these unfortunate gender-based labels, when you
step back and compare countries you will probably recognize
that there are some where businesses seem to value competition
over cooperation, achievement and success over quality of life,
and so on. Japan has a masculinity (MAS) score of 95. The US
score is moderate at 62. The score for France is 43. Sweden has
the lowest score for this dimension, with a 5 (Hofstede,
Hofstede, & Minkov, 20110, pp. 141-143).
· Uncertainty avoidance (UAI)—This dimension recognizes that
there are differences among countries, which results in
differences among the leaders of businesses that operate therein
and the extent to which they are willing to take risks. In
countries that are low in the uncertainty avoidance dimension,
business leaders might be very comfortable exploring new
opportunities and see this as the likely path to success. In other
countries, this may not be the case. Sometimes those in country

46. cultures that are highly risk averse (with high uncertainty
avoidance scores) have a very good reason for their responses.
There may be, for example, significant legal penalties for
failure, including the possibility of being sent to jail in the
event of bankruptcy or reneging on debts. The country with the
highest score for uncertainty avoidance (UAI) is Greece at 112.
France is relatively high, with a score of 86, and the US score is
46, indicating a tolerance for uncertainty and acceptance of
risk-taking to achieve success (Hofstede, Hofstede, & Minkov,
2010, pp. 192-194).
· Long-term versus short-term orientation (LTO)—In countries
with a high long-term orientation score, shared work values
emphasize learning, accountability, and self-discipline. Patience
and waiting to make a profit are acceptable. Creating and
nurturing lifelong networks is valued. In contrast, those
favoring a shorter-term orientation tend to focus on "the bottom
line" and value achievement, freedom, and independent
thinking. Quarterly and annual profitability are important.
Korea, Japan, and China have high long-term orientation scores
(100, 88, and 87, respectively). France has a moderate score of
63. In contrast, the US LTO score is low, at 26 (Hofstede,
Hofstede, & Minkov, 2010, pp. 255-257).
· Indulgence versus restraint (IVR)—In countries with high
scores on indulgence, you are likely to find people who value
having fun and enjoying life. In the United States, for example,
it is common to find that employees emphasize the importance
of a good work-life balance and quality of life. The IVR score
for the United States is relatively high (68) and for France is
moderate (48). Pakistan has the lowest score (0) among the
countries studied. Territories with the highest indulgence scores
are Venezuela (100), Mexico (97), and Puerto Rico (90)
(Hofstede, Hofstede, & Minkov, 2010, pp. 282 - 285).
A very important caveat when reading and thinking about
Hofstede's work is to remember that the comparisons are at the
societal level, rather than the individual level. In other words,
in any country you will find individuals who are different from

47. what you see suggested as the norm for the country culture. In
fact, for any given dimension you may find yourself thinking
"but this isn't what I'm like" or "this doesn't explain what
happens in my organization." Those who have studied and
compared country cultures ask you to suspend these responses
temporarily and to try instead to look at a country as a whole,
and then consider how it compares on these dimensions with
other countries. When you adjust your imaginary lens to
consider cultural differences from a broader perspective, you
are able to discover things that may be helpful when explaining
what happens when companies do business abroad, when people
work together on country teams, and when they work together in
multicultural, multinational organizations.
One challenge is that we are often less knowledgeable about our
own shared country culture than we are about the cultures of
others (Hofstede, 1980). This is because our culturally derived
values and preferences are so deeply embedded that we may not
be aware of how they influence our decisions and behaviors.
Those who have worked or studied in a country other than their
own are likely to have developed higher levels of cultural
intelligence than those who have not had this experience.
The United States has traditionally tended to place strong
emphasis on equality, individualism, risk-taking, assertiveness,
achievement, and the opportunity to enjoy life (pursuit of
happiness).
This brief introduction to the comparative work on country
cultures and their potential consequences for individuals and
their organizations, along with the Resources below, should
help you understand the possible sources of confusion or
conflict that could, if not anticipated and well-managed, result
when multinational and multicultural team members work
together. These issues may include training, coaching,
mentoring, and effective leadership. Remember to consider as
well the possible advantages associated with building and using
teams with members who bring different country cultural
perspectives to their work (Chakrabarti, Gupta-Mukherjee, &

48. Jayaraman, 2009).
Ethical and Cross-Cultural Negotiations
Are hardball tactics OK to use? Sometimes a course of action is
legal but is ethically questionable. A good rule of thumb is that
hardball tactics should not be used because the negotiation is
likely not to be the last time you will interact with the other
party. Therefore, finding a way to make a deal that works for
both sides is preferable. Otherwise, if you have the complete
upper hand and use it to dominate negotiations, it's likely that at
a future date the other party will have the upper hand and will
use it to retaliate against you. What's more, your reputation as a
negotiator will suffer. As the famed industrialist J. Paul Getty
said, quoting his father, "You must never try to make all the
money that's in a deal. Let the other fellow make some money
too, because if you have a reputation for always making all the
money, you won't have many deals."
Ethics establish a way of doing what is right, fair, and honest. If
your counterpart feels you are being unfair or dishonest, he or
she is less likely to make any concessions or even to negotiate
with you in the first place.
Here are some tips for ethical negotiations (Stark & Flaherty,
2003):
· Be honest.
· Keep your promises.
· Follow the platinum rule. The golden rule tells us to treat
others the way we want to be treated. Author Tony Alessandra
goes a step further with the platinum rule: "Treat people the
way they want to be treated." Caring about others enough to
treat them the way they want to be treated helps build long-term
relationships based on ethics and trust.
Negotiation around the Globe
Not understanding cultural differences is another common
mistake. Some cultures have a higher or lower threshold for
conflict. For example, in countries such as Japan or Korea, the

49. preference is for harmony (called wa in Japan) rather than overt
conflict (Lebra, 1976). Americans and Germans have a much
higher tolerance for conflict as a way of working through
issues. In a study of Japanese, German, and American cultures,
it was found that almost half of the preference for different
conflict management styles was related to the country in which
participants were raised (Tinsley, 1998).
In Japan, much like Pakistan, the tendency is not to trust what is
heard from the other party until a strong relationship is formed.
Similarly, in China, conversations start out with innocuous
topics to set a mood of friendliness. This differs a great deal
from American negotiators who tend to like to "get down to
business" and heavily weigh first offers as reference points that
anchor the process as both sides make demands and later offers.
Nemawashi
Another example of how decision-making styles may differ
across cultures is the style used in Japan, called nemawashi.
Nemawashi refers to building consensus within a group before a
decision is made. Japanese decision makers talk to parties
whose support is needed beforehand, explain the subject,
address their concerns, and build their support. Using this
method clearly takes time and may lead to slower decision
making. However, because all parties important to the decision
will give their stamp of approval before the decision is made,
this technique leads to a quicker implementation of the final
decision once it is decided.
There are also differences in how individuals from different
cultures use information and offers during the negotiation
process. Observations show that Japanese negotiators tend to
use offers as an information exchange process (Adair, Weingart,
& Brett, 2007). Research has found that American negotiators
tend to reveal more information than their Japanese counterparts
(Adair, Okumua, & Brett, 2001). Japanese negotiators might
learn little from a single offer, but patterns of offers over time
are interpreted and factored into their negotiations. Since Japan
is a high-context culture, information is learned from what is

50. not said as well as from what is said.
Even the way that negotiations are viewed can differ across
cultures. For example, Western cultures tend to think of
negotiations as a business activity rather than a social activity,
but in other cultures, the first step in negotiations is to develop
a trusting relationship. Negotiators in Brazil, for example,
seriously damaged relationships when they tried to push
negotiations to continue during the Carnival festival. "The local
guys took that as a disrespectful action," said Oscar Lopez,
commercial director for Hexaprint, SA De CV in Mexico. "It
took several weeks to restore confidence and move on" (Teague,
2006).
Also keep in mind what agreement means in different cultures.
For example, in China, nodding of the head does not mean that
the Chinese counterpart is agreeing to what you are proposing,
merely that they are listening and following what you are
saying. "Culturally, Chinese companies and workers do not like
to say no," said a buyer at a manufacturer based in the United
States. Here's how to overcome the problem. Instead of phrasing
a question as, "Can you do this for us?" which would put the
Chinese official in an uncomfortable position of saying no
(which they likely would not do), rephrase the question as,
"How will you do this for us and when will it be done?"
(Hannon, 2006).
Each country has its own rules in negotiation. Before
negotiation overseas, you will want to consider the norms of
that culture.
Colossal Corporation maintains a subsidiary in Serafini, a small
country in Eastern Europe. This subsidiary is incorporated in
the state of Delaware as New Brand Design, Inc. (NBD), a
company that designs, brands, and manufactures innovative
electronic products and markets and distributes them for resale
across the globe. NBD has been admitted to conduct business in
Serafini.

51. NBD’s executive board is composed of ten members from three
different countries, including a vice president of design, a vice
president of marketing, and a vice president of manufacturing.
Due to recent conflicts among the board members,
communication among them has been less than efficient, and
they are regularly blaming each other for mistakes made by
NBD.
The design vice president's staff originally proposed two
alternative materials for laptop cases that are packaged and sold
with certain high-end laptops manufactured by NBD, such as its
best-selling product, the Dualplex 360: real leather (pig skin)
and faux leather made from a synthetic material (polyurethane).
Both laptop cases were very similar in appearance, although the
real leather case was a little heavier than the faux leather case.
Both cases could be sourced from an established supplier in
China, with whom the design VP had a long-term relationship.
The marketing VP evaluated the cost of the two cases from this
Chinese supplier and decided that he would go with the faux
leather case because it was available at a 20 percent lower cost
in comparison to the real leather case.
An initial order of 500,000 faux leather cases was placed with
the Chinese supplier, and within about a month, the shipment of
cases arrived at NBD's South African facility, where the laptops
were assembled and packaged for sale all over the world. When
the newly delivered cases were inspected by NBD's product
team in South Africa, they discovered that more than two-thirds
of the cases were actually made of real leather. After NBD's VP
of manufacturing contacted the Chinese supplier to complain
about the cases being "out of spec," he was told that it was not
an error—the supplier was aware of the fact that over 300,000
cases in the shipment were made out of real leather. After some
persistent questioning, the supplier revealed that as a result of
an order cancellation from another customer, they had suddenly
found themselves overstocked with an inventory of pig leather.

52. Rather than let this extra inventory go to waste, the Chinese
supplier decided to use up that inventory toward fulfilling a
major part of NBD's order!
The Chinese supplier was not willing to apologize for their
decision to ship over 300,000 real leather cases to NBD without
first obtaining approval for the switch. In fact, the supplier did
not feel that NBD had any grounds to complain because the
supplier was willing to accept the lower payment as per NBD's
original order of faux leather cases. Instead of insisting that the
supplier take back the 300,000 or so cases that were out of spec,
the manufacturing VP accepted the entire shipment and then
conveyed this news to the marketing VP in an internal company
memo.
Upon receiving the memo, the marketing VP realized it was too
late for the real leather cases to be returned to the supplier in
China, and he would have to make the best of out of an
undesirable situation. He made a decision that the faux leather
cases would be packaged for laptops shipped to Europe and
North America, given that they were lighter in weight. The real
leather cases would be used for laptops packaged and sold in
Africa and Asia. Previous marketing surveys conducted by NBD
had revealed that consumers in the West preferred lighter laptop
cases, while consumers in Africa and Asia equated heavier cases
with better quality and longer life. Of course, the marketing VP
forgot that the advertising materials and product inserts for the
laptop had already been printed in multiple languages and all of
this product literature stated that the laptop case was made of
synthetic material.
The laptop cases were shipped to retail outlets, and within a
couple of weeks, the marketing VP had a potential crisis on his
hands. Tech writers and product reviewers from two well-known
South African and Kenyan newspapers had called and emailed
to inquire about what they rightly suspected was a pig leather