Macro environment and business operations
Macro environment and business operations
The macro-environment consists of larger societal forces that affect entire micro-environment. The six forces making up the company’s macro-environment include demographic, economic, natural, technological, political/legal, and social-cultural forces. Companies must constantly watch and adapt to the marketing environment in order to seek opportunities and ward off threats. “The marketing environment comprises all the actors and forces influencing the company’s ability to transact business effectively with its target market” (Armstrong and Kotler 2003, p.149). In this report, use PEST to analyze macro-environment forces how to impact on PepsiCo in China. As we know, the PepsiCo was the first U.S. company to distribute its products in China after China implement reform and opening up policy in 1979. Through many years business operation in China, the company fully understands their development worldwide must adapt China’s macro-environmental various forces and must put into practice their localization strategy “Think local, Act local”.
In this report, by serious study and literature review, with refer to relevant books, journals, search information from internet. First, the company’s background is being showed. Followed by macro-environment impact on marketing activities of PepsiCo in China and macro-environment forces on PepsiCo’s marketing activities, finally, one conclusion is presented.
Our conclusion that the best products and technology may fail to meet with acceptance in markets around the world because of lack of local macro-environmental awareness.
In economic globalization, all companies must identify, analyze, and monitor external environmental forces and assess their current and potential impact on their business activities. Jobber (2001) stated clearly that macro-environment consist of a number of broader forces that affect not only the company but also other actors in the microenvironment. These can be grouped under demographic, economic, social-cultural, political-legal, natural and technological forces.
According to Kotler and Keller (2005), in the demographic environment, marketers must be aware of worldwide population growth, changing mixes of age, ethnic composition, educational levels and the move to micromarketing and away from mass marketing. In the economic arena, marketers need to focus on income distribution and levels of savings, debt, and credit availability. In the social-cultural arena, marketers must understand people’s views of themselves, organizations, society, nature and the universe. They must market products that correspond to society’s core and secondary values, and address the needs of different subcultures within a society.
In the natural environment, marketers need to be aware of raw materials shortages, increased energy costs and pollution levels, and the changing role of governments in environmental protection. In the technological arena, marketers should take account of the accelerating pace of technological change for innovation, varying R&D budgets, and the increased governmental regulation brought about by technological change. Finally, in the political-legal environment, marketers must work within the many laws regulating business practices and with various special-interest groups.
In this report, use PEST to analyze macro-environment forces how to impact on PepsiCo in China will be presented. Through many years business operation in China, the company understands their development worldwide must adapt Chinese macro-environmental various forces and must put into practice their localization strategy “Think local, Act local”.
2.0 COMPANY PROFILE
“PepsiCo was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay. Tropicana was acquired in 1998 and PepsiCo merged with The Quaker Oats Company, including Gatorade, in 2001. PepsiCo is a world leader in convenient foods and beverages, with 2006 revenues of more than $35 billion and 168,000 employees.
PepsiCo presence in China dates back to the earlier days of the nation’s reforms. In 1981, Pepsi-Cola became one of the first American investors in China by signing an agreement with the Chinese government to build a bottling plant in Shenzhen. To date, PepsiCo has established more than 40 joint or wholly owned ventures in China with a total investment over US$1 billion, directly employing 10,000 staff” (Official website of PepsiCo).
MACRO-ENVIRONMENT IMPACT ON MARKETING ACTIVITIES OF PEPSICO
In analyzing the macro-environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs. A PEST analysis is one of them that is merely a framework that categorizes environmental influences as political/legal, economic, social/cultural and technological forces. Such external factors usually are beyond the firm’s control and sometimes present themselves as threats. Use PEST tool to analysis macro-environment influence on PepsiCo in China is necessary.
·The political-legal environment
Before you play the game, learn the rules. Some businesspeople exhibit a remarkable lack of knowledge about marketing’s political-legal environment. Ignorance of or noncompliance with laws, ordinances, and regulations can lead to fines, embarrassing negative publicity, and possibly expensive civil damage suits. As a foreign company, PepsiCo intend to invest in China’s beverage industry which is tightly controlled and subject to government approval. According to Chinese government’s regulation, a new bottling plant currently requires about three-year wait for government approval, and concentrate production volume must be re-authorized annually.
In addition, PepsiCo has a global strategy of TV advertising, PepsiCo has included everything from Chinese zodiac animals to Spring Festival couplets in its television commercials. This approach, combined with relatively long advertising history in the country has made Pepsi Cola the most recognized soft-drink brand in China. However, government’s policy and regulation can also impact on the company’s market strategy. Being a communist country, in China, although people now are very much free of expression in ordinary life, there is still no free media. The media is still very controlled by the government and there is always the risk of having more regulations especially to foreigners.
·The economic environment
The health of the economy influences how much consumers spend and what they buy. Consumer buying plays an important role in the economy’s health-indeed, consumer outlays make up some two-thirds of overall economic activity. According to Boone and Kurtz (n.d.), economic environment consists of those factors that influence consumer buying power and marketing strategies. They include the stage of business cycle, inflation, unemployment, resource availability, and income. As we know, China’s economy grew at an average rate of 10% per year during the period 1990-2006, the highest growth rate in the world. However, Chinese inflation ran at 5.3% for the second consecutive month in August in 2006, according to official figures. PepsiCo has already met great challenge because inflation is a general rise in price resulting in decreased purchasing power. Inflation will increase the company’s costs like expense to purchase materials for production, and may lead to declining sales.
Marketers of PepsiCo understood clearly that inflation will cause consumers to react in two ways:
1). Decrease their brand loyalty. In a recent research, most Chinese consumers are willing to use cheaper brand, and honesty, because it works just as well.
2). Stockup. “Many consumers take advantage of coupons and sales to stock up” (Hair et al. 1992, p.52).
In addition, income is another important factor in marketing’s economic environment because it influences consumer buying power. The price of the product has to be affordable however there should be a premium that consumers are willing to pay for the health benefit as well as for the modern and “higher status” image it will offer. The risk here is to fail in selling the value of the product and to set the premium to be higher than consumers are willing to pay.
·The social-cultural environment
Component of the marketing environment consisting of the relationship between the marketer, society, and its culture. Doing business in China successfully requires an understanding of China as a nation and of the culture of the Chinese people. “A society’s culture determines how it members communicate and interact with each other” (Griffin & Pustay 2003, p.85). A nation’s culture can impact on foreign country’s products and service. In China, many people are very interested in soft drinks. A result of this has been growing rates of obesity both Chinese adults and children. Due to Chinese culture, it is necessary that what they drink offers some benefits to their health. Nowadays, more and more Chinese people have already pay attention to “obesity” problem. If soft drinks can not consider healthy, although increasing their market share, this is the risk the PepsiCo have to face.
In addition, “an understanding of the cultural practices in both the business and social environments is essential for being successful when doing business with Chinese companies” (Patworks LLC. 2003). Initially when PepsiCo entered into Chinese market, the company has already lost some business opportunities in China because they expected the Chinese people “do it my way”. The Chinese culture is long established and does not adapt quickly. For example, doing any business in China will require negotiation of contracts, prices, and terms, etc. The negotiation process in China, compared to Western standards, will be very slow and deliberate. One difficulty in negotiation with Chinese companies is knowing what means “no”. Culturally, saying “no” directly is seen as rude and unacceptable. Many times when the company hears “we will consider it”, it really means “no”.
·The technological environment
The technological environment represents the application to marketing of knowledge based on discoveries in science, inventions, and innovations. Major developments in technology can have enormous marketing implications because they can drastically alter industries. Despite the technological promise of this new product, the development stage of such innovations is lengthy and complex. Company must often gamble on technology to attain success, and many companies have gambled and lost.
PepsiCo had spent millions of dollars working on growing salad vegetables market to fast food chain in China. Technically the venture was sound-the infrastructure was set and the product was of high quality. The company had even arranged a machine to process and packages the fresh vegetables to give them a shelf life of two weeks, therefore opening up the Chinese market. However, the quality of the company’s marketing did not match that of the technological planning stages. The fast food chain chosen not to buy the stock and the company had nowhere to off-land its vast quantity of ripe vegetables- it had lost its markets.
4.0 MACRO-ENVIRONMENT FORCES ON PEPSICO’S MARKETING ACTIVITIES
As mentioned above, in business arena, one of the difficulties facing marketing managers is that environmental forces are generally beyond their control. Marketing organizations must try to adapt changing environmental conditions. “Not only can environmental opportunity become threat; environmental threat can also become opportunity” (1989, p.55). Marketers must overcome various macro-environmental clash and barriers between Chinese macro-environment and international business.
·The political-legal environment
Laws and regulations affect all aspect of marketing operation and decision making-designing, labeling, distributing, advertising, and promoting goods and services. The management of PepsiCo realized that major regulation has already impact on their marketing activities. To cope with the vast, complex, and changing nature of the political-legal environment, many larger companies maintain in-house legal department like PepsiCo. In addition, as a foreign company, marketers must comply with China’s laws and regulations, however, noncompliance can scar a company’s reputation and hurt profits.
Marketers should take steps to control forces in political-legal environment. PepsiCo has invested heavily into adapting its operations and business strategies to the local culture and practice. It currently has 24 bottling joint-ventures indirectly through two Hong Kong-based companies that it partly owns and maintains a strong market presence through partnerships with the Chinese government and domestic companies. PepsiCo has established its Asia-Pacific headquarters in Shanghai running its operations for many countries.
·The economic environment
Companies must scan, monitor, forecast, and assess the health of economies outside their host nation because nations are interconnected as a result of the global economy.
Inflation rate is currently reaching to 5% in China, inflation pressures consumers to make more economical purchases. PepsiCo should realize that despite what happens to the sell’s cost, the buyer is not going to pay more for a product than the value he or she places on it. When the economy is characterized by high inflation, a series of special pricing tactics are often necessary. Marketing managers should develop an effective cost-forecasting system and use anticipatory pricing. According to Hair et al. (1992), these tactics can be subdivided into cost-oriented and demand-oriented.
Cost-orientated tactics consist of delayed-quotation pricing and escalator pricing. Delay-quotation pricing is a very popular pricing tactic that price is not set on the product until item is either finished or delivered. Demand-orientated pricing methods include price shady and increasing demand through increasing selected demand, unique offering, and system selling.
As we know, the Chinese people are still to well-off life and their income are not very high. The pricing strategy is a very important part of the marketing mix, because it can affect both supply and demand for a company such as PepsiCo. Therefore the company’s pricing strategy must adapt economic environment. One of the most important price factors of PepsiCo is customer’s affordability. If the price is too high, consumers will spend their money on other goods. As a multinational company, it always must appeal to Chinese consumers, especially in the era of globalization. The company have had adapt to the local economic environment in order to success. Most Chinese can afford an occasional soft drink－a can of Coke cost RMB1.90($0.24) in Shanghai today. Due to rationality of Coke’s price, their products currently reach about 60% of China’s population.
·The social-cultural environment
The social-cultural environment is made up of institutions and other forces that affect a society’s basic value, perceptions, preferences, and behaviors. Product decisions are also affected by cultural variables. As mentioned onwards, increasingly Chinese people have already focused on “obesity” problem. If soft drinks can not consider healthy, this is the risk the PepsiCo have to face. So, PepsiCo decided to carry out a feasible solution that reduce calorie intake from soft drinks.
At the same time, PepsiCo’s decision-making for product and service should also consider local customer’s purchase habits. It will also reflect a nation’s culture. For instant, the Chinese like hot, noncarbonated soft drinks with nature ingredients or herbs that they believe are good to human health, in particular, they like hot teas. Tea is so popular in China that people call it “Tea Culture”. PepsiCo realized Chinese people’s drinking habits, then they introduced Lipton Tea quickly, a line of noncarbonated drinks through cooperate with local partner. PepsiCo’s long-term strategies of localizing production promote their market share.
In order to avoid lost opportunities and bring about misunderstandings, businesspeople have to realize another’s cultural background. Understanding manners and customs is especially important in negotiations. If the company expected the Chinese people “do it my way”, they will lose more chances. China has a unique culture that dates back to thousands of year, combined with the factor of about 60 years ruling of communist one-party totalitarianism. Foreign business people and companies should try to adapt quickly. Consequently, you need learn “do it their way”.
·The technological environment
“Technological trends are critically important in identifying marketing opportunities. These trends include new directions in research and development (R&D) that might lead to new products or even to new industries” (Assael 1990, p.72). For the experience of failure in new product development the company remains undaunted, they plan to return to the fast food market with salad vegetables. This time, the company promises it will not forget the importance of inventory. PepsiCo fully understand that in the low-margin soft-drink business, one of the key competitive advantages lies on the efficiencies in every aspect of business process, from procurement of raw and semi-finished material to inventory management, from production planning to material requirements planning, from distribution to service, etc.
As the leader in this industry, PepsiCo knows how critical role information technology plays in its success. In fact, it has a long history of employing advanced information technology to support its direct-store-delivery business model and management. In China, PepsiCo China use Enterprise Resource Planning (ERP) implemented by UFIDA.
Moreover, PepsiCo’s ultimate weapon in maintaining its market leadership is Research and Development. Since product formulations are kept as trade secrets most of the patents are related to technology that supports beverage industry. PepsiCo will use its patents to increase its market share in each and every market it serves R &D delivers true value to coke consumers worldwide.
The key areas of technologies where most of the patents filed are Packaging, Vending Equipment, Fountain Equipment, Water Treatment and alternative refrigeration technologies. In China technologies related to water treatment and vending equipment will come handy in gaining market share. The company will also be forced to develop new technologies for China’s country specific use. Several new technologies will be used in designing and packing new products. Research and Development will also try to add local herbal products to add more energy to the drink and give a local flavor to the product. Research and Development will use a small-scale bottling system to test bottling runs of new product. It will make sure that the new drink can be produced and bottled in a massive scale. PepsiCo will also take its testing of new product on road and test it in various regions of China to make sure that it will be acceptable in all regions of China.
“Most films face external environment that are highly turbulent, complex, and global-conditions that make interpreting them increasingly difficult” (Ireland and Hitt 1999, p.43). In today’s complex and rapidly changing environment, marketing managers need use PEST analysis to make effective and timely decisions. Understanding one nation’s macro-environment diversity that could positively impact your business relationship is the key to success in this country. The PepsiCo is a good example in this report.
The PepsiCo entirely understands China’s various external environments, consumer’s behaviors and practices that localization is their long-term market strategy. As Porter (1985) stated the importance of analysis the macro-environment: every industry has an underlying structure or set of fundamental economic and technical characteristics. The strategist must learn what makes the environment tick. It can be concluded that the best products and technology may fail to meet with acceptance in markets around the world because of lack of local macro-environmental awareness.
LIST OF REFERENCE
Jobber D. 2001, _Principles and Practice of Marketing_, 3rd edn., McGraw-Hill Publishing Company.
Philip Kotler and Kevin Lane Keller 2006, _Marketing Management_, 12nd edn., Pearson Prentice Hall Company
PepsiCo 2006, viewed 26 July 2007, .
Louise E. Boone and David L. Kurtz n.d. _Contemporary Marketing: plus_, 8th edn., The Dryden Press.
Joseph F. Hair, Jr. and Charles W. Lamb, Jr. and Carl McDaniel 1992, _Principles of Marketing,_ South-Western Publishing Company, p.52.
Ricky W. Griffin and Michael W. Pustay 2003, _International Business: A managerial Perspective_, 3rd edn., Pearson Education Inc., p.85.
Patworks 2003, ‘Doing Business in China’, viewed 27 July 2007, .
‘Eight Ways to Avoid Marketing Shock’, _Sales & Marketing Management,_ April 1989, p.55.
Henry Assael 1990, _Marketing: Principles & Strategy_, The Dryden Press, p.72.
R. D. Ireland and M. A. Hitt 1999, ‘Achieving and Maintaining Strategic Competitiveness in the 21st Century: the Role of Strategic Leadership’, _Academy of Management Executive,_ p.43.
Michael E. Porter 1985, _Competitive Advantage: Creating and Sustaining Superior_ _Performance_, Free Press.
Gary Armstrong and Philip Kotler 2003, _Marketing: An Introduction_, 6th edn., Prentice-Hall Publishing Company, p.149.