PEST Analysis with Respect to the Fast Food Industry - Essay Example

? PEST Analysis and Discussion on Financial Crisis As effecting the internationalization of the Fast Food Industry Course University Date of Submission PART 1: PEST analysis with respect to the Fast Food Industry 2.0 PEST Analysis Japan: 2.1 Political Conditions While Japan has been historically a constitutional Monarchy, the Emperor doesn’t have any power beyond the purely ceremonial as the country has a strong democratic influence and has a parliamentary government which has the power to create laws and legislations. The elected legislature is known as the Diet. From a democratic point of view Japan was ranked 20 amongst the 167 countries in the strength of democracy according to a survey conducted by Economics Intelligence Unit Index (2010). The democratic monarchy exists in relative harmony; according to Country Watch’s Political Stability Index (2010), the political situation in Japan is highly stable. It got 9.5 out of 10- one of the highest ranks. The government is supportive of business ventures initiated by foreign investors and has created incentives like a strong pool of educated workforce, impeccable infrastructure and consistent policies to attract investments. The peaceful conditions also provide security of business for startups or franchises which expand into the nation. There is low tolerance of hard corruption within the Japanese culture and that is reflected in their government so there will not be unnecessary hassles or hurdles for investors looking to develop the market. The Nikkei Keizai Newspaper reported in 2010 that government of Japan was going to introducing preferential tax rates from foreign companies investing in Japan as one of the incentives, they have also established FAZ (Foreign Access zones) as a measure towards creating convenience and value for these investors. A Fast food industry would benefit from these policies like any other industry or firm operated by foreigners; supply of equipment, raw material (for the actual food) and transport of necessary technology or resources will be easier as well. Some effect on the emerging industry practices will also be from the “Antimonopoly Act (AMA)” set by the government which includes the Act on prohibition of private Monopolization and Maintenance of Fair Trade and several other stator laws. The intended purpose of the law is to discourage any single firm to have a hold on the pricing and supply of an industry- hence the fast food industry would be better served if instead of a single franchise, different franchises entered the market together. Furthermore, the “system of labour law operating in Japan” which includes the ‘employment agreement’, ‘independent contractor agreement’ or ‘mandate agreement’ might make operations difficult for the franchises which run on the US based system of hiring workers without long term agreements. 2.2 Economic Conditions Japan is the third largest economy in the world and its economy depends on the international trade. According to 2011-2012 salary survey, the average annual income is about 3,611,556 JPY (48,000 USD).A lack of natural resources such as forests, agricultural plains, mineral deposits etc have forced Japan to build its economy on trade, to earn money to purchase the raw materials for the economy. Japan is the 5th largest importer and exporter in the world. It depends on importing certain commodities such as fuels, foodstuffs, chemicals, textiles and raw material from several countries for its industrial sectors. But Japan has also cultivated a mature industrial economy by reserving industrial leaders and technicians and a well-educated and industrious workforce, promoting a culture of high savings and investment rate and intensive promotion of industrial development and foreign trade, making it one of the major importers of technology and electronic devices in the world. Japan experienced the greatest rate of economic growth From 1960s to 1980s, known as the ‘post war economic miracle’ but by the 1990s, there was a dramatic drop in the rate of growth due to collapse in bubble economy. Efforts to revive the economy in the 200’s were sluggish because of a Global economic slowdown though by 2005 there were signs of recovery. In 2009, the growth rate of GDP of Japan was 6.3% but it decreased to 3.9% by the following year and was greatly hindered In 2011, due to the earthquake and tsunami which the country suffered through. Economic forecaster believed that the GDP declined as much as 1% for the year. But strong policies and a determined nation has led forecasts that about 2015, the GDP in Japan would be 3.28 % of the world total GDP. For foreign investors there is indication that the economy would continue to grow allowing increasing disposable income for the population. Fast food is generally considered a convenience food but people would be more inclined to try out new kinds of franchises, if they have extra income and in that regard the economic indicators are good. The firms can advantage of the JETRO Services (JAPANESE EXTERNAL TRADE ORGANIZATION) which was established to help individual or organizational foreign investors in navigating the legal and legislative requirements to establish a business in Japan, in getting the incentives like tax reductions and getting help in communicating with necessary supporting industries. 2.3 Socio-Cultural environment As of the most recent census (October 2010), Japan's population is 128,057,352 and for March 2012 the estimated population is 127,650,000. There has been a decline in the growth rate of the population with the birth rate slowing down in comparison to the death rate. 1989, only 11.6% of the population was 65 years or older, but by 2007, that figure had risen to 21.2%, The age structures of the country in 2011 were: 0-14 years: 13.1% (male: 8,521,571/ female: 8,076,173). 15-64 years: 64% (male: 40,815,840 / 40,128,235). 65 years and over: 22.9% (male: 12,275,829/ female: 16,658,016). The population growth rate in 2011 was 0.278%. The aging Population has led to some significant changes in the lifestyle of the Japanese population which is aspiring towards higher standards of living afforded by a longer employment. For this population the inclination is towards traditional Japanese food consisting of largely vegetables, fish and rice which is a healthier and more comforting choice for them. While convenience food is a need for the elderly the appeal of fast food may not be for them. In contrast is the youth of Japan which has been greatly influenced by the western culture and cuisine is seen as being more open and receptive towards new food and foreign franchise, their changing lifestyles and attitudes toward work is also a factor in this. As the concept of the nuclear family unit is dissolving in urban areas, the young working men and women are often single and in need of a fast serving meal purchased from local or international fast food ventures. They would be the core consumers for any new fast food franchise which enters the market. The total food and drink market in Japan is huge, valued at around US$635 billion, when the food retail sector and the food service sector are combined and a fast food industry will be able to divert a portion of this spending towards their outlets. 2.4 Technological Factors Japan is the hub of technology and technological advances in areas like electronics and electronic components like semiconductors. Much of their focus is on producing capable scientists and researchers who can continue to support Japanese imports. The annual expenditure spent on research and development is $310 billion and the country has over 677,731 researchers. Its electronic equipment and products have a large percentage in the market of the world as compared to the other countries there has be significant advances made in scientific research, machinery and medical research. These technologies make communication in Japan a very efficient process along with possession of topnotch equipment and trained professionals. The facilities available would make it easier for the Fast food industry to acquire the equipment they need which would comply with the high standards of quality and hygiene. But besides this the technological factors will not have much of an effect on the industry. 3.0 PEST Analysis India Situated in the South eastern subcontinent of Asia, India has recently emerged as a strong contender for the economic powerhouse. With a population of 1.2 Billion people it is the world’s second most populous country and the implementation of market based economic reforms of 1991 gave a major boost to India’s economy, even as it struggles to overcome social and civil problems. 3.1 Political Conditions The political system in place is electoral with Democracy well entrenched in India, but it is complicated by tensions over religion, ethnicity and a deep-rooted patronage system which has in its stead festered a strong system of corruption. Tensions over political power persisted in the 1990’s but these were largely brought under control after the 1999 elections and currently the situation can be called somewhat stable with the government in power expected to complete its mandate in 2014. India is a federal state, so states enjoy significant autonomy and the legislative environment can vary considerably between states which might be a complication for businesses moving into the country. Besides political upheavals in recent years India had to deal with several terrorist attacks and threats of terrorist activity- occurring even in 2011. There is an ongoing insurgency operation across large swaths of rural states known as the Maoist (Naxalite) insurgency which the government is trying to control. It can be an astute assumption that any business looking to operate in the country should be aware of expected civil problems or problems in the formal processes which are largely influenced by bribes, back handed dealings and other corrupt activities. While incentives such as tax exemptions and tax holidays are offered by both the central government and the government of the state in which the unit is located, foreign direct investors may face problems such as lack of facilities, infrastructure or a systemic processing system. Existing businesses are protected by the Competition Act, 2002 objectives of which are to promote and sustain competition in the market, protect the interests of consumers. And Ensure freedom of trade carried on by other participants in markets in India. 3.2 Economic Conditions In 2011, the Indian economy was valued at nominally worth US$1.676 trillion; it is the eleventh-largest economy by market exchange rates, and is, at US$4.457 trillion, the third-largest by purchasing power parity, or PPP. An average annual growth rate of GDP of 5.8% in past two decades has made the economy one of the fastest growing ones. According to country report, GDP growth was 8.8 in 2010 but in 2011 declined to 8.6. Then, it estimates to increase to 8.9 in 2013, in 2013, it will be 8.7 until it reaches 8.8 in 2015. However, the spoils of this growth are not equally distributed across the population instead giving rise to the divide between the super wealth and those below poverty line. Despite India’s foreign investment policy that allows 100% foreign ownership in most sectors, India has failed to reach its full potential as an FDI destination. Government attempts to increase FDI inflows have been slowed by the opposition, pervasive corruption, uncertain regulations and a critical infrastructure deficit. (EDC economics, 2012) The biggest issue has been regulatory uncertainty with regards to trade and business policies and the rampant corruption in both the public and private sectors which makes it hard for foreign investors to correctly gauge the situation they will be facing and increases the risk of expansion . (EDC economics, 2012). The increasing incomes of a certain portion of the population and government interest in bolstering the economy may be enough of an incentive to launch a thriving fast food industry; all the supporting industries like low wages, unskilled labor supply, agricultural raw material and developing transportation facilities are already available (EDC economics, 2012). 3.3 Socio-Cultural environment The large Indian population is largely youth based. According to CIA Report 2011, the age structure of the population is as follows: 0 to 14 years is 29.7% (male 187,450, 635 and female 165,415, 758), 15- 64 years is 64.9% (male 398, 757, 331 and female 372,719,379) and 65 years and over was 5.5 (male 30, 831, 190 and female 33,998, 613). The population growth rate was estimated in 2011 as 1.344 %. While Indian culture is many faceted, influenced by the different ethnicities living in the country- each with its own dialect of language, traditions and cuisine- the modern population is exposed to the international culture and local and international cuisines mix together to provide the modern Indian environment especially in the urban centers. Their youth as the major demographic of the country is increasingly becoming well educated and informed and willing to experiment with their lifestyle choices. Western style fast food chains would greatly appeal to this demographic and the economic classes of ‘aspirers’ and ‘achievers’ who may not have the necessary income to indulge in luxuries but the ycan afford to enjoy upgraded fast food. In urban areas, the busy routine also calls for convenient food and fast food franchises can readily cater to this need (EDC economics, 2012). Though religious trends such as vegetarianism will have to be closely considered by the fast food outlets in designing their menus and offerings, there is enough diversity in the population that all kinds of menus can be modified to suit their needs 3.4 Technological Factors India’s strength is their Information technology and telecommunication sectors which are fast growing and contributing greatly to the GDP. Trained professionals are highly sught by other countries while technology allows for jobs to be outsourced directly to Indians living in the country. Research and development is regulated by the ministry of Science and Technology in India which provides incentives for local industries to invest in R&D, while government investment in 2010 was reported to be 0.9% of the GDP and under the current government is expected to increase to 2%. An interesting factor is the growth in internet networks and users in India many of whom fall in the age bracket of 16-64, the revenue generated from this sector was $3.6 Million in 2010. This implies a boom in e-commerce across the country with even food businesses getting in the act. A fast food franchise will be able to utilize the social media to generate awareness, interest consumers and run marketing campaigns. Beside this the technology available in the country will make it easier for the fast food industry in areas such as communications, operations and quality control factors. But otherwise there will not be much direct impact. 4.0 Comparison India and Japan From the PEST analysis conducted we see some major issues which an aspiring fast food industry would in either Japan or India. Technological environment can be excluded as a major factor, firstly because it has low direct implications for the industry and secondly because while Japan is ahead in the technological facilities available, the same can also be acquired relatively easily in India. The real factors which will decide whether the industry is successful or not are the economical and social factors. The decision to establish the industry would still fall in the favor of India because of the simple reason that the expected consumer base is greater in the country and there is a lot of room for economic growth as the young generations enter into the workforce and embrace new types of lifestyle. Japan is an already established food market and an aging population might not take too kindly towards new establishments but in India many people have just gotten access to extra money and they will be ready to spend it on the new and interesting consumables. PART 2: Global financial Crisis and the effects on the Fast Food industry 1.0 Introduction The Global financial crisis of 2008 is considered to the worst financial crisis to hit the global economy since the great depression with effects which were felt throughout the countries. “The global economy went through two years (2007–09) of dire economic and financial upheaval – the worst in seven decades” (Das, 2012) which was marked by the rapid fallout of stock markets and the collapse of some of the major financial institutions of the world. The crisis was a major cause in failure of established businesses, decrease in the average household incomes and a global economic recession which eventually contributed to the European Sovereign Debt crisis ” (Das, 2012). 2.0 Overall changes which occurred in the Global Arena The increase in commodity prices further send the economy into recession, specifically oil prices nearly tripled from 2007-2008 because of speculation on part of consumers or as a precautionary measure, but it increased the pressure on the economies of the oil importing countries. According to the report of UNCTAD, ‘global flows in foreign direct investment (FDI) fell by close to 40% in 2009, to US$1.0 trillion, from $1.7 trillion in 2008.’1 In the third quarter of 2009 the widespread crises continued to be responsible for low FDI flow with the developing countries bearing the brunt of the decreasing investment by almost 39% which decreased their economic growth. International trade slowed down and did not pick up until the crises had been dealt with by the start of 2009 through rigorous response by the US government including unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. But after effects of the crises continue to be seen. 3.0 Impact on Japan According to OECD Economic Surveys (2009) 'IMF estimate in April 2009, Japanese banks and other financial institutions will lose $ 149 billion in total due to the crisis (2% of their outstanding loans and securities), compared with $ 1.2 trillion (5%) in Europe and $ 2.7 trillion (10%) in United States'. However compared to other countries Japan escaped relatively unscathed because of its isolation from the global banking system. After their own recession in the 1990s the Japanese had become much more cautious with regards to credit and loan systems. 4.0 Impact on India India was not as lucky as Japan. In India the stock market was heavily impacted by the global economy recession and declined from 2,000 to around 8,000 points pne of the reasons behind which was that Indian banks and cooperates had largely been using overseas financing. The economy of India had been boosted up by many foreign institutional investments (FII), external commercial borrowing (ECP) and trade credits. Its spillovers became visible in September- October 2008 with overseas investors pulling out record US 13.3 billion and the fall in the value of the rupee from Rs 40.36 per US Dollar in March 2008 to Rs 51.23 per US Dollar in March 2009, reflecting at 21.2 % depreciation during the fiscal year 2008-2009. The economic growth slowed down, unemployment increased and the general optimism faded because of the crisis. Even in 2012 the aftershocks can be felt "Domestic business environment continues to be plagued by challenges such as high inflation, sluggish policymaking environment, rising input costs, high interest rates and heightened uncertainty in the global economy," said Kaushal Sampat, president & CEO - India, Dun & Bradstreet. (ET bureau, 2012) 5.0 Relevance for the new industry During the recession the demand for fast food went up and conversely as the recession has been losing ground, in US and other recovering economies the demand for fast food is being replaced by that for ‘fast casual’ dining centers. The same is the case in Japan- as their economy was never affected that much and it is again showing signs of growth the lifestyle changes preferred involve higher standards of cuisine with a focus on health. 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