PESTC analysis determines the key external environment that directly or indirectly affected the company (Jurevicius 2013). This helps the company to understanding situation of country and helps managers in decision-making either enter the country or not. PESTC analysis normally is the framework that will be selected as the tool to scan the issues of macro-environments (factors that are unable to control by the organisation) that affected the business environment (Vitez 2014). PESTC analysis is a useful strategic tool to understand market potential, business potential and direction for operations (Kotler 1998).
Manager can be making better decision if the PESTC analysis conducts first before completing with the SWOT analysis (Downey 2007). This is because conducts PESTC analysis can provides the evidence to support the threats and opportunities of SWOT analysis. However, market forces will continuous change through the times. Therefore, Babatunde and Adebisi (2012) mention companies should be proactive and conduct PESTC analysis to ahead the changes.
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Political refer to change of government influence that has large influence on companies. Law are always updated and amended by the government such as employment law and intellectual property law, etc. Therefore, an organisation should carefully understands and studies on the political of the targeted country and analyse the issues arise from political environment such as political stability, trade tariffs, tax policies, etc (Vitez 2014).
Government taxation policies on the sale of goods and services will affect the decision of foreign organisation to enter the country. If the country has a low or even zero taxes rate will be preferable by an organisation to enter rather than a high tax rate on good sales due to high tax rates cause the reduction of profitability (Klemm2009). According to Keegan and Green (2011), foreign organisation seen the opportunity to enter into China when the reduction of import duties due to the joined of World Trade Organisation (WTO).
Intellectual Property Rights (IPR)
IPR includes patents, copyrights, industrial designs and trademarks (MRC 2003). Organisation should ensure that patents and trademarks are registered in targeted country. According to Keegan and Green (2010), these intellectual properties that protected in home country may not protect in that countries. Therefore, organisation should clearly understand IPR in targeted country to avoid the future disputation when the problem arises.
Bribery means ‘dirty’ activities involved in business practice such as cash payment during the negotiation of cross-border deal. Different countries have different degree of corruption. Olken and Pande (2011) mention corruption activities are more popular in developing countries compare to developed countries. Basar and Zyck (2012) mention most of the investor prefers to enter a country that is low degree of corruption. This is because the capital use to corrupt maybe continuously as long as the business are located in the country and this expenditure will affected the profit of the organisation.
Economic conditions will affect the level of difficulty to be successful and profitability in a country because it direct affect capital availability, cost and demand of citizens (Koumparoulis 2013). An organisation normally will expand when the targeted country’s economic condition is favourable to them, such as low interest rate or high purchasing power parity. The others economic changes that are unable control by organisation include economic growth rate, unemployment trends, consumer’s disposable income and purchasing power parity, etc (Vitez 2014).
Economic system is means how a country governed their economic market, it can be categorised into pure market economy, command economy and mixed economy (Peng 2011). An organisation must studies clearly on the dominant method of resource allocation and the dominant form of resources ownership in a country before making the expansion decision.
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Social-cultural related to the pattern of behaviour, attitude, education, tastes and lifestyles of citizen in the targeted market (Vitez 2014). Organisation required studies into socio-cultural to adapt and suit in the target market. Additional, they also can forecast the future market situation of the country.
According to Churchill, Brown and Suter (2010), organisation can be assessing the demographic such as birth rates, population growth rate, education level, social classes, sex distribution, and family size of the country. Beside this, the attitude of the citizens toward the product categories, brands and retailers also should be identifies and learn by managers to easily shape the target people with favourable attitudes (Nguyen 2013).
Nowadays, technology is particularly important for an organisation, especially in communication technologies. The databases and electronic communication enable the information share easily and faster. Good technology enable provide organisation some benefits such as cutting cost and improve service, particular benefit for new entrant (Nguyen 2013).
Organisation should be identifying the availability of internet technology and penetration level of targeted country before the expansion. According to Hit, Ireland and Hoskisson (2007), advance technology in targeted country will allow the organisation learn and maintain their competitive advantages. Organisation that fails to catch up with technological trend will loss the opportunities to enter the market or even affected their status in current market (FME 2013). When enter into underdeveloped country, in turn, organisation should think the other way to solve such problem if the market attractiveness is big enough.
- SWOT analysis
SWOT is acronym headings of strengths, weaknesses, opportunities, and threats. According to Sluismans, Lommelen, and den Hertog (2010), SWOT analysis is situational analysis that used to access organisation’s internal and external environment in strategic planning (Downey 2007). Strengths and weaknesses (such as operation) are the internal aspect of the organisation which they have more control over these factors (ProQuest 2010a). While Lee and Andrew (2000) noted that the opportunities and threats (such as political factors) consider as external factors (either positive or negative market situation) that are out of the organisational control.
SWOT analysis helping in evaluating the factors that influence your operation and giving valuable guidance in decision-making (Mayhew 2014). SWOT analysis can analyse and identify the vital areas of the organisation either to emphasize or do some improvement on that particular area (Johnston 2014). According to Ferrell and Hartline (2011), SWOT analysis is the simple framework to evaluating an organisation’s strategic position during or even before proceeds to the planning stage.
During SWOT analysis, the team should be realistic otherwise they are wasting their times to do the meaningless data collection. Solely list down the SWOT only do not provide useful analysis (Johnston 2014). Therefore, SWOT Matrix should apply to support this analysis.
According to Ferrell and Hartline (2011), strengths of organisation exist because of resources that possessed by organisation or the good relationship with the customers, employees and/or outsiders. The internal factors can be categorizes in terms of cash flow, products, reputation, profitability and workforce, etc (Mayhew 2014). For example, workforce can be the strength of an organisation if they able create the best product to sales and/or providing high level of customer service to customers.
Determine the Strengths
An organisation should list down all the strengths of the organisation and compare with the key competitors (Suttle 2014). If the organisation’s vital areas are more competitive than their key competitors, it will be the strength of the organisation. However, in turn, if the key competitors’ expert in that area than the organisation, it will not be consider as strength for the organisation anymore and will become the weaknesses. If both parties have the high level of expertise in such area, it also can not consider as strength, yet necessity for the organisation.
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Action of Manager
The identified strengths will become the organisation’s capability. Duncan, Ginter and Swayne (1998) mention the manager can leverage these benefits to achieve the competitive advantages during development of strategies. The other way round, identified weaknesses will try to be overcome or minimize the negative effect by the manager throughout the stages.
Weaknesses are the areas that are not doing well or less efficient compare with others (Reichwein 2014). This means that the organisation is perform worse compare with other key competitors in particular area. Dix, Lee and Mathews (2002) mention organisation’s probability of success will increase if the weaknesses have been improved. The organisation must be remembered that the strengths will become disappear or even change to weaknesses over the times.
Action of Manager
The most obvious weaknesses must be come first and then start to do some improvement over it (Suttle 2014). For example, manager identified the areas or functions that cost the organisation in an unnecessary way. Therefore, the organisation can remove the task or cut down the expenditure for the areas and make the plan to profit the organisation (Johnston 2014).
Beside the internal factors, the trends and situations of the external environment should be concern by managers as well. Opportunities are the external factors or situation that organisations can take advantages (Mayhew 2014). In turn, threats are the external factors that will harm the business activities of organisation. According to Ferrell and Hartline (2011), external factors may enhance or restraint organisation’s ability to serve the needs of its customers. Dix, Lee and Mathews (2002) mention the examples of opportunity are regional growth trends, new distribution model needed, growth through market segmentation, etc.
Dix, Lee and Mathews (2002) notes that the threat means the obstacles of company that prevent them to accomplish their mission and vision. Organisation should clearly identify the threats that have direct impact on your business currently or the period does not longer than 5 years (Johnston 2014). This is because not all the identify threats are likely to happen, especially more than 5 years. Examples of threat are decrease of customer demand toward organisation’s products, price wars with competitors or the increase in competition (Suttle 2014).
- SWOT Matrix (Figure 1)
SWOT Matrix means the matching of internal and external factors. The four combinations are Maxi-Maxi (Strengths/Opportunities), Maxi-Mini (Strengths/Threats), Mini-Maxi (Weaknesses/Opportunities), and Mini-Mini (Weaknesses / Threats).
Figure 1: SWOT Matrix
Source: Lee, SF & Andrew, SOK 2000, ‘Building Balanced scorecard with SWOT analysis, and implementing “Sun Tzu’s The Art of Business Management Strategies” on QFD methodology’, Managerial Auditing Journal, vol. 15, no. , pp.68-76, viewed 3 March 2014. (Emerald Insight)
- Maxi-Maxi (Strengths/Opportunities)
The organisation strives to maximize firm’s strengths to capitalize on new opportunities that found in SWOT analysis.
- Maxi-Mini (Strengths/Threats)
Organisation strives to utilize their strengths to minimize the threats that faced in the targeted markets.
- Mini-Maxi (Weaknesses/Opportunities)
Organisation strives to overcome and improve their weaknesses to achieve and gain the new opportunities from the targeted markets.
- Mini-Mini (Weaknesses / Threats)
Normally, this matching is called defensive strategy. Organisation strives to improve their weaknesses and minimize or avoid the external threats of the environment.
- OLI Paradigm (Dunning’s Eclectic Paradigm)
‘OLI’ is the acronym heading of Ownership, Location, and Internationalization. This framework is developed by John Dunning. MNEs suggest to transfer O advantages at home country to specific countries (possess L advantages) which allow the MNE to internalise the O advantages (Rugman 2010). According to Zhao and Decker (), the organisation will adopt the entry mode with high control level such as wholly owned subsidiary if they possess more OLI advantages.
OLI theory using to determines the accommodation of FDI and the foreign activities of multinational enterprises in a country (Dunning 2000). The major reason of organisation becomes MNEs or engaging FDI is due to economic gains. That means the organisation will pursue FDI activities when the gains have be significantly more than the costs of FDI (Peng 2011).
Ownership advantage means the organisation possess the valuable and hard-to-imitate assets overseas (Peng 2011). Ownership advantages normally use to address the question why some organisation go abroad but not others (Neary XXXX). Some MNE has firm-specific advantages which allow it to offset the cost and liability to operate overseas (Nottingham 2005). For example, most productive firm is willing to pay the high cost of engaging FDI but not the low productive firm.
According to Zhao and Decker (), ownership advantages can be management know-how, production differentiation or even the owning the property technology that can help the organisation to compete with overseas competitors. The organisation possess vital equity ownership position allows them to have huge management control rights (Peng 2011). Normally, FDI more prefer than the licensing because the organisation can reduces the dissemination risks and can tight control over foreign operations.
Location advantage means those benefits that are enjoyed by the organisation due to firm do business in that particular place (Peng 2011). In other words, the uniqueness of the country that provide benefits to the organisation that doing business over there. L advantages help to exploit the potential created by the O advantages, which means combining the O advantages with the availability of complementary assets in targeted country (Nottingham 2005).The L advantages in a country include big market size, natural resources, aspects of the infrastructure, education system, and other aspects of external environmental (Rugman 2010).
There is a close relationship between O and I advantages, which O advantages of home country normally will be internalised overseas (Rugman 2010). Internalization normally is the reaction to imperfect rules of foreign government toward the international transactions (Peng 2011). For example, the organisation realizes the uncertainty IPR of targeted country will internalize the organisation rather than just issuing the license to local citizens. I enable organisation to exploit their ‘O’ advantages internally rather than to sell or license it to present the technology diffusion by competitors (Nottingham 2005).