PEST Analysis of Starbuck in China - Coursework Example

work, Business Topic: PEST Analysis of Starbuck in china Starbucks is an American coffee company which is operating in many countries worldwide. It has the title of being the largest coffeehouse company with around 25,000 stores. It is renowned for providing hot as well as cold beverages, pastries as well as snacks. It was founded in the year 1971 and has since then, opened up stores in around 62 stores. It was opened by three students who were inclined to sell high quality coffee beans as well as coffee equipment. In 1996, Starbucks opened its first location outside North America in Tokyo, Japan. People`s republic of China is the most populous country of the world and is located in the East Asian region. With around 1.35 billion people in the country, China is now being considered as the fastest growing economy of the world. It has become the second largest economy in terms of nominal GDP and purchasing power parity, after the United States of America. The first Starbucks in china opened in Taiwan in March 1998. The increase in consumer interests and appreciation of coffee resulted in the opening up of new stores in Beijing, Hong Kong as well as Macau. In all, Starbucks has around 1000 stores in China (Starbucks in China, 2013). PEST analysis is a form of assessment of the macro-environmental factors affecting the management decision of an organization. This framework includes political, economic, social as well as technological factors which have a direct impact on the operations of a firm. PEST analysis of Starbucks in China has been done to explain the effects of these factors on its operations in the country (Starbucks in China, 2013). Political factors: Political factors involve the intervention of the government in the economy in terms of tax policies, policies of export as well as other environmental and legal laws. Overall, it also includes other influences which the government can have on an organization`s operations. With regards to the political factors in Hongkong, it has been under the rule of mainland China but it has been allowed to implement its own business laws in the economy. This has made it easier for Starbucks to operate in China. However, Starbucks is required to comply with all the laws and regulations of the country. The Chinese government has introduced positive policies to encourage FDI by protecting the interests as well as the legal rights of foreign companies. China also has a consistent political environment as well as lower labor costs which attract foreign companies to start operations in the country. The local government policies including free trade zones and loans have encouraged Starbucks and other multinational to start operations as well as expand its business in China (Business Environment In China: Economic, Political, And Cultural Factors 2013). Another important factor is that these favorable governmental polices do not change with changes in the governments. This makes it easier for the foreign companies to operate. However, it has been observed that these policies and laws are not implemented in the country which affects the sustainability of Chinese economy. Furthermore, the company has lower and inefficient transportation, communication as well as energy resources. The city of Hong Kong, for example, is known as the most tax-friendly economies of the world because of its low tax system as well as direct taxes only on profits, salaries and properties. The tax rates have remained constant showing the political stability in China, especially in Hong Kong (Starbucks in China, 2013; China Business News-Starbucks soars in China 2013). Economic factors: Economic factors include the inflation rate, interest rates, economic growth and exchange rates which have an impact on business operations. The factor of exchange rates, for example, has an impact on the costs and prices of exports and imports. Interest rates affect the cost of capital of firms which is further related to the growth and expansion of companies. Economic factors in China include high growth in the private economic sector of the country which has resulted in an economic boom as confirmed by a number of studies. Hong Kong has also been known as the top economy in the Index of economic freedom in 1995. FDI has also increased highly in China, which accounts for around 27% of the value added production. The foreign exchange reserves of China have also increased by huge amounts. In 2001, China joined WTO which gave a boost to its imports, exports as well as FDI. In 2009, the inflation rate in China dropped to 8.5% which encouraged higher consumer spending. Furthermore, even though China is the fastest growing economies of the world, there is huge gap between the incomes of citizens belonging to tier 1 and tier 2. Along with this, China is considered to be an important and famous commercial destination resulting in a huge influx of consumers in the country; affecting the demand for Starbucks` products (China Business News-Starbucks soars in China, 2013). Statistics show an increasing trend in GDP as well as GDP per capita which shows expected higher purchasing powers for the next five years, as shown in the graph below. Figure 1: Hong Kong GDP in US Dollars and GDP Growth Forecast from 2011 to 2018 (IMF 2013). Social factors: Social factors revolve around the cultural values being followed by the majority in the country. These include demographic factors, growth rate of population, safety practices and other such social factors. These social trends directly affect the demand for goods and services and therefore, are related to the operations of an organization. For example, Japan has an aging population, which is likely to affect the organizational policies, as it affects cost of labor in terms of a smaller workforce. Related to the social factors in China, the most important thing to consider is that its citizens have a strong habit of tea drinking while a really low preference for coffee. This is obvious from the fact which shows that on average people in the world consume 240 cups of coffee per year whereas Chinese have an average of only 3 cups of coffee per year. This provides a huge problem for Starbucks but the coffeehouse has been able to attract consumers by maintaining its competitive edge as well as its high experience in the coffee market. The World Bank figures for the years 2008-2012 show an increasing target market between the age of 15 and 64 for Starbucks. Furthermore, studies have shown that Chinese citizens do not plan their purchases beforehand and have a strong long term orientation resulting in high levels of brand loyalty for products. This provides a social opportunity for Starbucks in China (Starbucks In China-Starbucks China, 2013). Technological factors: Technological factors include the automation and other research and development activities which lead to innovation in the workplace. These technological factors have the ability to affect management decisions such as outsourcing decision etc. China is regarded as a technological savvy region and Chinese citizens are said to prefer online shopping which provides a huge opportunity for Starbucks. The Chinese consumers also give high importance to the factor of convenience and Starbucks can cater to this need of the population (Cultural factors influence business in China, ONLINE). China also has a reliable and effective telecommunication infrastructure and 3G network providing easy access for international businesses to reach their contacts (Starbucks In China-Starbucks China, 2013). The PEST analysis shows a favorable environment in the Chinese economy for foreign companies. The economic and political factors provide favorable incentives for multinationals however; Starbucks need to work around the technological and social characteristics of the population to gain a higher competitive edge over its competitors in the beverage industry in China. Works cited: 1. Starbucks In China-Starbucks China. 2013. Starbucks In China-Starbucks China. [ONLINE] Available at http://www.starbucks.com.cn/en/about/inchina.html 2. Asia Times Online: China Business News-Starbucks soars in China. 2013. Asia Times Online: China Business News-Starbucks soars in China. [ONLINE] Available at http://www.atimes.com/atimes/China_Business/HF15Cb06.html 3. Business Environment In China: Economic, Political, And Cultural Factors. [ONLINE] Available at http://business.usi.edu/abe/2010/Fogel-2010.pdf 4. Cultural Factors Influence Business in China. Angielaing49, 2013. [ONLINE] available at http://angieliang49.wordpress.com/cultural-factors-influence-business-in-china/ 5. International Monetary Fund (IMF) (2013) World Economic Outlook Database, October 2013 [Data] [Online]. Available from: http://www.imf.org/external/pubs/ft/weo/2013/ 02/weodata/weoselgr.aspx. [Accessed 06 November 2013, 9:15 p.m. (GMT + 0:00)] 6. Hong Kong-GDP- real growth rate- Historical Data Graphs per year. 2013. [ONLINE] Available at: http://www.indexmundi.com/g/g.aspx?c=hk&v=66 7. Hong Kong GDP Annual Growth Rate. Actual Date. Forecasts. Calendar, 2013 [ONLINE] Available at: http://www.tradingeconomics.com/hong-kong/gdp-growth-annual. [Accessed 15 December 2013]. 8. Thailand GDP Annual Growth Rate. Actual Data. Forecasts. Calendar. 2013. [ONLINE] Available at: http://www.tradingeconomics.com/thailand/gdp-growth-annual. [Accessed 15 December 2013]. Read More