The Impact of Macro and Micro Environmental Factors on International Business Activities - Case Study Example

The Impact of Macro and Micro Environmental Factors on International Business Activities of Inditex in Spain and the UK TABLE OF CONTENTS 1.0Introduction 1.1 Overview of the company’s activities Inditex 2.0 The PESTLE Framework 2.1 How Political Factors affect Inditex Activities in UK and Spain 2.2 How Economic Factors affect Inditex Activities in UK and Spain 2.3 How Socio-Cultural Factors affect Inditex Activities in the UK and Spain 2.4 How Technological Factors affect Inditex Activities in the UK and Spain 2.5 How Legal Factors affect Inditex Activities in the UK and Spain 2.6 How Environmental Factors affect Inditex Activities in UK and Spain 3.0 Conclusion and Recommendation 1.0Introduction In business, environmental analysis is an appreciation of an organizations activities vis-à-vis its environment (Lin& Lee 2006). Such analysis has become imperatively necessary in the light of increase competition as present, subsequent operations and strategies direction will be dependent on the result (Lin& Lee 2006). According to Johnson et al (2007), it is a process by which a business gathers information from the environment to achieve a sustainable competitive advantage. In analysing how micro and macro environmental factors affect the activities of Inditex focus will be placed on the PESTLE framework. Macro environmental influences can better be explained by the use of the PESTEL framework. According to Johnson et al (2006) the PESTEL framework is a framework that can be used to categorise the factors that influence the business environment of an organisation into six main types including: Political Influences, Economic influences, Technological influences, Socio-cultural Influences, Environmental influences, and Legal influences. The business environment of Inditex is indifferent as Inditex is affected by governmental laws, international laws, competition from other fashion distribution companies, change in interest rate, politics, technology (Dixon 2007) etc. 1.1 Overview of the company’s activities Inditex Industria de Diseno Textil S.A (Inditex) together with its subsidiaries operates as a fashion distribution worldwide (Inditex Review 2008). The company’s operations include various phases of the fashion process, such as design, manufacture, logistics and distribution to its own managed stores (Inditex Review 2008). The company offers eight commercial concept including Zara, Pull, Bear, Massimo Dolti, Besishka, Stradivarius etc. The company remains a strategic and a key player in the European fashion and distribution market. For example, despite the global economic crisis, the company announced flat same stores sales for 2008 (Inditex Review 2008). However, as part of the mega environment in which the company depends on to effectively carry out it activities, the creator of the Zara fashion chain are not impervious to the global recession (Inditex Review 2008). 2.0 The PESTLE Framework According to Dixon (2007), the PESTLE framework is a way to understand the industry’s external environment, which includes Political, Economic, and Social and Technological analysis. These factors will influence company long-term decisions in an industry. Today’s business environment is increasingly becoming more turbulent, chaotic and challenging than ever before and to survive, it is vital that a firm can do something better than its competitors ( Wonglimpiyarat 2004:1). Globalization has not only altered the nature and the intensity of competition but has had to dictate and shape organisations in terms of what consumers wants, how and when they want it and what they are prepared to pay for it (Hagan 1996:1). Kanter (1995:71) on his work of “Mastering Change” argues that success in the present day business is not for those companies that re-engineer the way they do things, or for those fixing the past. According to Kanter (1995) such an action will not constitute an adequate response. This is so because success is based on an organization’s ability to create, rather than predict the future by developing those products that will literally transform the way the world thinks and view it self and the needs (Kanter 1995:71). This paper examines the influence of Micro and Macro environmental factors on the activities of Inditex Plc. Figure:1 THE PESTEL FRAMEWORK (Johnson et al 2007) According to Dicken (2007), the PESTEL framework can only be used to look at the future impact of environmental factors and that this impact might be different from the past. Thus an understanding of how the factors in the above framework may drive change is only a starting point (Johnson et al 2005).There is a need for an understanding of the key change drivers. 2.1 How Political Factors affect Inditex Activities in UK and Spain According to Dixon (2007), political factors have a big influence on industry’s operation, Inditex is part of the environment in which its operates and is therefore affected by government regulations and legal issues (Dixon 2007). Firstly, in the political aspect, Spain and the United Kingdom are two political independent countries having their own governments and being members of the European. Inditex is affected by all the political factors outlined in the above framework. An unstable government in any of these countries will affect the activities of the company negatively. Dixon (2007) stipulates that, the political climate of a country will affect the states of its business activities. For example, a decision by the government in power, to reduce or increase is taxes on income will mean more or less disposable income for the citizens to spend on inditex products. Therefore, favourable political situation in the two countries and laws may motivate more International fashion companies to enter these markets. For example, the recent decision to reduce interest rates to encourage borrowings is a positive sign for the two countries. In addition, the two countries have strong Intellectual property rights that protect materials created by companies including business information that consist of copyright, designs, patents, confidential information and trade marks. In Spain for example were the head office of the company is base, the activities will be exposed to exchange rate fluctuation. Spain belongs to the common currency in the European area, while the UKuses the pound sterling. This exposes the activities of INDITEX to exchange rate fluctuations in the UK, through translation and transactions exposure. The EU today operates as a common country, with action in one country affecting the other countries. Because of the global shift in Textile and clothing manufacturers towards developing countries, Inditex have had to redefined their operations to be more flexible, with fast turn around clothing operations with over 2000 outlets in 52 countries. Today, because of a common political environment defined by the common EU laws governing the two countries, INDITEX, have had to adjust its operations in relation to this. For example, Dickens (2007) stipulates that, Inditex has been affected by the political environment in which its operates both positively and negatively. For example because of the EU common law and political system governing businesses within the two areas, trade barriers previous existing have become blurred. The UK and the Spanish political environment have pushed the management of Inditex to reshape their operations. For example, Inditex today has created a highly differentiated outcome in its activities and products. The company make use of no force labour, employs nobody below the legal employment age, no discrimination, respect freedom of association and collective bargaining. The company, following its political and environmental awareness principle has had to redefined its operations around four core principles. The corporate social responsibilities emphasized this. 2.2 How Economic Factors affect Inditex Activities in UK and Spain Bodie et al (2002), Dicken (2007), state that the international economic environment might affect a firm’s export prospects, the price competition it faces from competitors, or the profits it makes on investments abroad. Although economies are linked to each other in a global macro economy, there exist considerable differences in the economic performance across countries. (Bodie et al, 2002). It is therefore necessary for an investment or security analyst to consider these differences before providing investment advice. According to the IMF World Economic Outlook (2008), the global economy remains on track for continued robust growth in 2007 and 2007 although only at a moderate rate than in 2007. The 2007 outlook also reports that downside risk to the outlook seems less threatening that at the time of the September 2006 outlook. This is because oil price declines since last august and generally benign global financial conditions have helped to limit spillovers from the corrections in the US housing market and to contain inflation pressures. (IMF World Economic Outlook, 2008). The UK pounds sterling is presently falling at an increasing rate, this will mean increase in currency exposure of INDITEX operations in the UK. In the advanced economies, following a drop in fuel costs the inflation rates as measured by the consumer price index (CPI) dropped quite sharply after the summer. (World Economic Outlook, 2008). Core inflation in the United States in the US fell sharply although prices for food and energy remained high. (World Economic Outlook, 2008). However, the rate remained higher above the comfort zone of the Federal Reserve. (World Economic Outlook, 2008). The oil price declines from August largely reflected some easing of security tensions in the Middle East, improved supply-demand balance in oil markets, and favourable weather conditions in the second half of 2006. (World Economic Outlook, 2008). The US dollar continued depreciating against the pound and the euro. The yen on its part also loose value against many currencies because prospects for continued low interest rates have encouraged capital outflows. (IMF World Economic Outlook, 2008). The Chinese renminbi despite appreciation against the dollar has depreciated in real effective terms. (IMF World Economic Outlook, 2008). The US current account deficit continues to rise recording 6.25% of GDP in 2006. (IMF World Economic Outlook, 2008). However, the non-oil trade deficit declined as a percentage of GDP as exports accelerated. Japan, China and the Middle Eastern oil-exporting countries witnessed increased surpluses in their current accounts. (IMF World Economic Outlook, 2008). All the economic factors can be regarded to have an impact on Inditex in both UK and Spanish markets. For example, high unemployment rate, high inflation rates, low GNP trends and slumps in the business cycle will imply low disposable income, more dependence by the citizens on credit facilities, borrowed funds and thus alternative sources of finance. An increase in the general price level in the UK will mean Inditex products becoming more expensive, if the increase in prices is not back by a corresponding increase in consumer’s disposable income, therefore the demand for Inditex products will fall, turnover will be slow and the company will have to downsize its work force. The US dollars is currently increasing at an increasing rate when compared to the British pounds, this will mean an increase in the currency exposure with respect to companies doing business in the two countries. Transaction and translation cost will be high in the UK, value of credit facilities if granted in UK pounds will fall. The value of Inditex’s assets in the UK will increase when doing reporting in the parent company currency, the Euros. What is the income distribution? What are the shopping habits, what is it that other mobile operators offer that, others don’t? The future budget situation of the UK government? Is the government striving at a surplus, deficit, or balance? All these are combined economic factors with huge impact on the activities of Inditex in both countries. A fall in minimum wages in either Spain or the UK will mean, cheaper labour for Inditex operations. At the same time this will mean lower income for the customers to spend on Inditex activities all things being equal. A favorable economic environment, with falling interest rate, government subsidies, lower taxes, will mean lower operating cost by Inditex operations. Inditex, is part of the mega environment in which its operates, rising inflation, unemployment, lower income, will affects its operations in any of the two markets. 2.3 How Socio-Cultural Factors affect Inditex Activities in the UK and Spain Under socio political factors the Inditex is affected by both taxation and social welfare policies. Given the fact that consumer’s income is dependent on government taxation policies, it is evident that take home income might either increase or reduce depending on the taxation policies adopted by the government of the two countries at anyone time. In addition, government spending is greatly affected by its taxation policy. Though, the political situation of the UK and Spain is a stable and unique one, their over dependence through support of the US egoistic policies under the pretext of democracy, the war on terror, the teeth for tat with Iran makes the country looks unstable; with the present republican party in the US having loosed election because of the war in Iraq, current faith of world politics depends on the US and the United Kingdom (UK) with the two countries likely to be targets of terrorism attack. This institute a great fear especially in the minds of Inditex investors who are risk averse. In this situation Inditex will cut down on capital expenditures and investments in these areas. The UK for example is prone to terror attack, one of Inditex stores in the high street can likely be a target. Increasing population, changing culture and consumer’s preference in any of the two markets will mean the company will change its design to suit this direction. No wonder, Inditex constantly depends on its local stores for information to create and launch new design. A country’s culture is quite important in international business, where a company has to adapt with respect to the local cultures. For example, in the UK warm clothing is preferred to cold clothing because of the people choice of red and black as their preferred colours. In Spain, blue and pink is more common. Thus, in the two markets, the management of Inditex must take these in to consideration when developing new strategies. A country’s culture is very important and we can consider one fundamental element “the culture shock” where there are several stages in the difference of the country’ culture: the honeymoon stage here we are aware that it is a new culture and we want to be there), the irritation-hostility stage, the gradual adjustment and the bi-culturalism, at this stage, the company gets a comfortable way in the settlement of the new culture (Johnson et al 2007, Dicken 2007). Our recommendation here to the management of Inditex in doing business with the UK and Spain, Inditex has to pay attention to the culture and the communication because the communication can be interpreted in different meanings and can provoke some mistakes, misunderstanding and also some troubles. So, the firm has to be careful with the context where it decides to set up its business, the choice of colours, logos and advertisement slogans (Dicken 2007). In addition, in The UK and Spain, women care more about fashion than men. Therefore more women tailored fashion items should be distributed than those targeting men. Moreover, Spanish and British women, no matter what age, really value their appearances such as clothing, beauty and cosmetics etc. Therefore, there are many popular fashion/beauty female shops such as H&M, Marks and Spencer etc. The management, of Inditex must pay attention to details as to any of these factors, because failure to comply will be a catastrophe. 2.4 How Technological Factors affect Inditex Activities in the UK and Spain According to Dixon (2007), all businesses are affected by technology, the way they do things, they way they serve their customers are changing and the processes are changing too. The United Kingdom, like most other western countries invest a lot on research and development. This investment is affecting the rate of technological change that industries are undergoing. For example, forecasts for electronic commerce over the next few years are in the trillions. In the United States, Forester Research forecasts US$2.7 trillion in sales from electronic commerce in 2004. International electronic commerce is also expected to experience explosive growth in the future (Bodkin & Perry 2001). Businesses in general and retailers in particular are experiencing varying degrees of success as they strive to incorporate Internet technology into traditional retail formats (Little et al. 2002). E-marketing is the antithesis of bricks and mortar of retailing. Hoffman & Novak (1996:51) described the internet as a “phenomenal marketing opportunity”. Inditex has not been left out in the phase of technological change. As a distribution and fashion company, the company’s website provides information about its products, internet sales opportunities in the two countries. According to Dixon (2007), technology is the order of the day in the current state of things supermarkets and other retail outlets must operate with the latest technology. For example, today, companies must dance to the tune of changing technology. Inditex global shift of production defined within 15days in Spain is a good example. Under technological factors, I consider government spending on research and development, Government spending on research and technological focus efforts, new discoveries and developments, speed of technological transfer as having an impact on the activities of Inditex in both countries not leaving out Rates of technological obsolescence. The UK provides fertile grounds for technological development due to huge government spending on research and development. 2.5 How Legal Factors affect Inditex Activities in the UK and Spain Under legal factors, Inditex is affected by all the environmental laws in the two countries. Laws pertaining to waste disposal minimum wages, competition law, health and safety not leaving out product laws relating to quality and products certification (Dicken 2007). Inditex management must comply at anyone time to these laws or face government penalty. In addition, retail participants in the UK retail industry must comply with industry standards and norms as the UK population is an informed one. Complying with industry standard means becoming more socially responsible. For example, if Inditex could come up with a recycling program for its old fashion wear it will be a big break through. Other major participants such as Morrison supermarket and Mark and Spencer have started community tailored programs. (See their 2008 Company’s Review Report). For inditex, this will mean being at the forefront of being socially responsible with these laws through compliance and quality standards. For example, while the minimum wage in Spain is 5.6Euros in the United Kingdom it is 5.56pounds. The company adheres to these in the two markets. 2.6 How Environmental Factors affect Inditex Activities in UK and Spain Today with increasing call and consumer’s preference for green marketing, companies must develop environmental friendly products, products that are environmentally certified. Facilities and provision to collect old clothings, recycling facilities must be put in place to scrap off these items. In the absence of these options, companies will be considered socially irresponsible. Under environmental factors I consider waste disposal, energy consumption and environmental protection laws in the UK and the Spanish market to have a great impact on the activities of Inditex. Today, it is popular to hear words like “I am not a plastic bag”, Tesco opening its first energy efficient store. This factor is pushing major players in the industry to be more environmentally friendly in their activities, respect industry standards and norms as failure to comply will be interpreted as irresponsibility (Dicken 2007). 3.0 Conclusion and Recommendation An organisation does not exist in isolation. Under the resource based view, it is thanks to the environment that new resources are sourced out; stakeholders interactions are facilitated, new partnership develop and created. Through and understanding of the external environment, firms take advantage of the resources available in its environment; define the nature and structure of its activities. In order to maintain service, quality and logistic standards, companies periodically audit their environment and compared to overall corporate performance through benchmarking. Companies that, fail to take advantage of its environment will lag behind. Today, the requirements of an organisation’s stakeholders including, customers, employees, suppliers, shareholders, government, etc are on a continuous rise. It is only through an environmental assessment that companies understand and take advantage of this. In addition, , to providing an annual report to the company’s shareholders organisations are expected to provide alongside a corporate social responsibility report that details how they interact with society and the environment in which they operate. Failure would be interpreted as irresponsibility. Environment analysis has become an important way and method in analyzing a firm position. Through an environmental analysis we understand how a firm’s competitive position is affected by different forces. More and more companies are engaging in corporate social responsibility reporting, which helps major stakeholders to better understand how the company interacts with its society. (Sacconi, 2004). It is only through environmental scanning and analysis that we can portray this better. From the foregoing caption, the Inditex is affected by all the factors outlined in the framework. One can conclude that major stakeholders of an organisation have increased their concern on how the activities of the organisation affect the social and environmental setting in which they operate. As a result there has been an increase in the requirements from companies. References Hagan, M. C., (1996).The core competence organisation. Implication for Human Resource Practices. Human Resource Management Review Vol.6, No 2. 1996, Pp. 147-164 Dicken, P., (2007), Global Shift. Mapping the Changing Contours of the World Economy 5th edition. Prentice Hall Financial Times Johnson, G., Scholes, K., & Whittington (2007). Exploring Corporate Strategy, Prentice-Hall, Europe Kanter, R. M. 1995. “Mastering Change.” Pp. 71-83 in Learning Organizations: Developing Cultures for Tomorrow’s Workplace, edited by Chawla and Renesch.Portland, OR: Productivity Press Sacconi, L. (2004). A Social Account for CSR as Extended Model of Corporate Governance (Part II): Compliance, Reputation and Reciprocity. Journal of Business Ethics, No. 11, pages 77-96. Wonglimpiyarat, J. (2004). Amex’s strategies for launching the smart card innovation. Technovation 24 (2004) 773–777 Wu, S. & Chien, F. C. (2006). Building Core competences through operational Excellence. International Journal of Production Economics special issue on ‘‘Building Core-competence through Operational Excellence’’ Read More