Macroeconomic Performance of China - Term Paper Example

1. Macroeconomic performance of China China initiated economic reforms in the year 1978. These reforms ushered in rapid economic growth in the country. In the period between 1978 and 2006, the per capita income in China has quadrupled. Hundreds of millions of people have crossed the poverty line. The state's role in the economy has got reduced and nearly 2/3 rd of the Gross Domestic Product (GDP) in 2003 was contributed by the on-state sector. More labor is now employed in manufacturing and service sectors than in agriculture and this is a clear indication of economic development. The country's economic progress is visible in terms of all these factors - the huge jump in per capita incomes, the increased scope of activities for non - state sector enterprises, and its closer integration with the global economy. The Chinese economy grew at a healthy rate of 8% in the year 2000. The growth was stimulated by supportive macroeconomic policies, and a favorable external environment. PESTLE Analysis - an Introduction: The analysis is done using different models like PESTLE analysis and Porter's five forces model. PESTLE analysis: PESTLE analysis is a useful tool for understanding the "big picture" of the environment, in which you are operating, and the opportunities and threats that lie within it. By understanding the environment in which you operate (external to your company or department), you can take advantage of the opportunities and minimize the threats (RAPIDBI). Specifically the PEST or PESTLE analysis is a useful tool for understanding risks associated with market growth or decline, and as such the position, potential and direction for a business or organization. Political Environment: Political forces influence the legislations and government rules and regulations under which the firm operates. Every company faces political constraints in the form of antitrust laws, fair trade decisions, and tax programs, minimum usage legislations, pollution and pricing policies, administrative activities and many other actions, aimed at protecting the consumers and the local environment. These laws, rules and regulations affect a company's profits. However, there are other political actions such as patent laws, government subsidies and product research grants that support business activities. Thus, political forces influence the organization both positively and negatively. Political activity also influences three additional functions, viz. the supplier function, the customer function and the competitor function. The customer function is influenced by the political activity when government demand for products and services can create, sustain, enhance or eliminate many market opportunities. Economic Environment: Economic factors clearly indicate the nature and direction of the economy in which a firm operates. Every market is unique and consumption patterns change along with the wealth of the consumers in various market segments. For strategic planning all the economic trends at national and international levels have to be considered. Prime interest rates, inflation rates and trends in the growth of the Gross National Product (GNP), general availability of credit, the level of disposable income and the propensity of people to spend are the economic trends that have to be analyzed. The potential economic impact of international forces appeared to be severely restricted and was largely discounted until recently. The focus of economic environmental forecasting was changed by the new international power brokers. The European Economic Community (EEC), the Organization of Petroleum Exporting Countries (OPEC) and coalitions of lesser-developed countries (LDC) are three well known examples of influential international power brokers. Social Environment: The social environment is an important factor as changes in the values, beliefs, attitudes, opinions and lifestyles in society create potential opportunities for an organization. For a company to grow, it is necessary to take advantage of societal changes. The cultural, demographic, religious, educational and ethnic conditioning of individuals in society affects the social environment. Technological Environment: Technological environment means the trends and developments in the technological field that might: improve production, create new product opportunities, and render the existing ones. (Google) Legal Environment: Legal factors also have to be considered by any firms before stepping into another country. In recent years, the move toward deregulation, which involves the elimination of many legal restrictions, is significant trend. Due to this, entry barriers are minimized leading to enormous competition among the firms in an industry. Access to distribution channels - The product of a new entrant must replace the products of existing firms and occupy shelf space. A new entrant tries to ensure this through price breaks, promotions, intense salesmanship and other means. The task becomes more difficult if there are only a limited number of distribution channels. Bargaining Power of Buyers - Buyer power also acts to force prices down. Bargaining Power of Suppliers - The power of suppliers is the suppliers demanding that retailers pay a certain price for their goods. The rivalry among existing players - Degree of Rivalry is the central force, which involves all the other forces. Classical economics predicts that rivalry between companies should drive profits to zero. This is part of the threat of substitutes. 2. Service Quality The following paragraphs describe the variations involved in promoting or marketing of services. Most service providers seek to expand overseas when their domestic markets mature. There are certain characteristics of services which further have certain implications for international marketing. First and foremost is the intangibility factor. A service is intangible in nature. Consequently, marketing of something that cannot be seen, touched or felt is difficult. A service cannot be store or inventoried and has to be performed whenever the consumer demands it. Therefore, a service organization that plans to expand overseas, must transfer skilled employees overseas or train employees in the foreign country to perform the service. The next important characteristic that varies the marketing of service is the heterogeneity factor. Maintaining homogeneity in the delivery of services is a difficult task. Every time a service provider performs a service, there may be slight variations in it. But the service provider has to ensure that quality standards of the service are maintained and that it is delivered in accordance with the consumer's requirements. Different consumers in different cultures will have different needs. For example, a haircut in America will include hair wash, hair cut and hair drying but in a country like India, a haircut will includes an oil massage, hair wash and a haircut. Hence, it is required that a service provider must train his employees carefully to adapt to the customers' needs. The success of a service industry depends largely on consumer satisfaction. Next is the concept of inseparability. For a service, its production and consumption are simultaneous. Therefore, both the service provider and the customer need to be present for the delivery of the service. This makes exporting a service difficult. A service can only be exported to another country market through franchising, licensing, directly investing or by acquisition of similar foreign businesses. Using advanced technology is also helpful in expansion. Perishability is another factor which differentiates a service from a product. Services, unlike products, cannot be stored for future sales nor can they be carried over for consumption at a future date. This restricts the scope of the service provider. Services cannot be stored to be used at a later point of time like when the demand is high in the peak season. 3. Target Market - An understanding Germany is a wonderful target market for the tourist location of Hainan - the Oriental Hawaii, as primarily the people of Germany though have been depicted to be very serious in nature and are extremely left-brained; they are also a set of people who are extremely fun loving, with a high degree of inclination to explore new things. Though Germans have been known for their engineering excellence in the last half century or so and have been accredited to have hit upon the idea of pre-stressed concrete which has changed the way engineering structures have been built world over, they are also known for their fun-loving ways and means. Some of the outstanding examples of the fun indulgence of Germans is pretty evident from their indulgence during the "Oktober" festival (Munich) and the globally famous Beer, wine and theater festivals. Added to this the Germans also are peculiarly inclined to exploring new destinations. This fact is pretty evident from the statistics which was released which states that in the year 2001, the number of tourists from Germany who visited China were 253400 and this figure increased continuously on an average of 10% per year from then. This very fact justifies the selection of Germany as the target market fir Hainan and this was the reason for choice of this specific European country for being made the choice target market for the Oriental Hawaii - Hainan. 4. The aspect of Promotion When services are marketed internationally, different markets will have different rates of demand at different times. A service provided must try to forecast the future demand for his services for each market accurately, so that he can plan in advance to cater to the additional demand in the market. For example, for an events management company, Christmas will be the peak season for Europe where parties and events to organize, but in India, the peak season will be Diwali, as it is a major Indian Festival. So, during Diwali, the company can concentrate on its activities in India and can shift the focus to Europe during Christmas. There are certain challenges which the services need to face when they are attempted to market internationally at a global level. Due to the unique features of service, their marketing is difficult, and overseas expansion by a service provided is even more difficult. The service providers who intend to market their services across the globe should be able to adapt the particular services to the needs of the different country market and at the same time be able to preserve the quality and uniqueness of the services. The service providers need to differentiate their services from that of the other competitors in order to have an edge over them. When service organizations plan global marketing of their services, they may face the following challenges: Protectionism Cultural differences Difficulties in measuring customer satisfaction overseas. Protectionism - Most countries have a protective policy towards their service industries and would like to limit and control the entry of foreign companies in them. So a company that wants to market its services abroad may face restrictions and government interference. Some such challenges are discussed below. Restrictions on right of establishment - In many countries, a foreign company may not be allowed to own and establish a particular setup. Trade barriers - In some countries a foreign company may be allowed to serve only a limited market or may be subjected to discriminatory taxation. Government procurement barriers - Governments in a lot of countries follow the "buy national" policy and will only purchase the services of a domestic company; this makes the market less competitive for the Foreign Service organization. Foreign exchange control - Countries may enforce foreign exchange controls such as a limit on remitting profits from the service organization. Technical issues - To restrict foreign companies' entry into the domestic services industry, the government of a country may also demand high standards and certification conditions to be fulfilled, which all service providers may not be able to comply with. Tariff Barriers - In many countries a Foreign Service provider has to face tariff barriers such as high duties on its services or cannot operate on a "level playing field" because of factors such as government subsidies to domestic companies. Licensing regulations - A government may impose unreasonable terms of entry for foreign participants or insist on licensing as the only form of entry into their domestic markets. Restriction on professionals - To restrict Foreign Service providers, countries may also restrict or impose a ban on the entry of qualified personnel from abroad. Commercial counterfeiting - Some governments do not impose counterfeiting laws strictly, so a foreign company may have to tolerate infringement of trademarks or violation of copyrights by local firms. Cultural Differences - A service is different from a physical product because it requires more human contact between the buyer and the seller, who is also the producer of the goods. Services are performed, so they require a people-to-people contact. When services are being marketed in a different country, a great deal of attention must be paid to aligning the service with the cultural requirements of that country. Difficulties in measuring Customer Satisfaction Overseas - Achieving customer satisfaction is vital to the success of a service industry. A service provider must carefully monitor how efficiently services are being delivered in international markets. Monitoring can be done by measuring customer satisfaction in a country. Consumer Behavior - Porter's five forces Model - an introduction: The effective formulation of a strategy needs a clear understanding of competition. Competition in an industry is determined not only by existing competitors but also by other market forces such as customers, suppliers, potential entrants, and the existence of substitute products. Understanding the level of competition is important because the level of profits depends to a large extent upon the level of competition. The strategist's goal then is to position the firm in such a way that it is not vulnerable to the attacks of competitors. The position should give the firm enough space to defend itself confidently. Given this, the need to study the underlying sources of competitive pressure is obvious. Understanding the sources of competition can help the firm to gauge its own strengths and weaknesses, and to perceive the trends in the industry so that it can position itself optimally for the best returns. Michael E. Porter of the Harvard Business School has developed a framework known as the 'Five forces Model' to help analyze the business environment. According to Porter, the five forces, namely, the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the rivalry among existing players, and the threat of substitute products, play a vital role in shaping the company's future. Threat of New Entrants - New entrants to an industry bring in new capacity, and capture market share from the existing players. The threat of new entrants rises as the barrier to entry is reduced in a marketplace. (Mallon) As more firms enter a market, you will see rivalry increase, and profitability will fall to the point where there is no incentive for new firms to enter the industry. The willingness and ability of firms to enter a particular industry takes into account the barriers of entry. Some such entry barriers are discussed as under ((ICMR)). Economies of scale - Economies of scale can be realized as the output of manufacturing units' increases. Firms manufacture goods at a lower average cost compared to other manufacturers with lower output levels. These economies of scale act as a barrier to firms, which want to enter the industry with a smaller capacity. Economies of scale realized in several functions can act as barriers. For example, Xerox and GE were unable to enter the mainframe computer industry mainly because they lacked scale economies in production, marketing, research and service. Similarly, economies of scale create barriers in distribution, utilization of sales forces and financing. Product/Service differentiation - Firms differentiate their products or services by establishing brand identification and customer loyalty. These can be built through advertising, customer service, product or service differences and first mover advantage. Product of service differentiation forces the new entrant to spend huge amounts of money to overcome the cost disadvantage. In soft drinks, over-the-counter drugs, cosmetics, investment banking and public accounting, differentiation is the crucial barrier protecting existing firms. Brewing companies employ differentiation along with economies of scale in distribution, production, and marketing to create barriers, which are almost impenetrable. Capital requirements - A firm needs capital not only for advertising and R & D, but also for customer credit, inventory, and to absorb start-up losses. These factors limit the number of players in industries like computer manufacturing and mineral extraction. Cost disadvantage independent of size - Existing firms in an industry enjoy advantages that are not available to new entrants. These advantages spring from the learning curve and the experience curve. Similarly, proprietary technology, access to the good sources of raw material, assets purchased at lower prices, government subsidies and favorable locations can give a competitive advantage to existing firms in an industry. 5. Plog's typology & Doxey's Irridex - Impact on Hainan According to Plog's Typography, most tourists fall between the two extremes of Psychocentrics of Allocentrics. If the tourists are Psychocentrics, they seek to reduce the risk by repeatedly visiting the known destinations alone. For such kind of tourists, even the local populace would feel comfortable inviting them and mingling well with them. If the tourists are Allocentrics, then hey seek adventure and are driven by excitement and the desire to discover the new and experience the unknown. This factor coincides well with Hainan becoming the test case for the liberalizations of China's tourism laws. The Island was believed to be the first region in the entire country to instituted freedom of the skies which is in turn expected to increase the flow of tourists and boos the economy of Hainan. According to the Doxey's Irridex, the attitudes of the local resident of a particular tourist destination towards the tourists and also tourism development coming to their locality go through a process of certain stages. The local residents of a particular tourist locality undergo a process from euphoria through apathy and irritation to antagonism (Linsheng Zhonga). Hainan's tourism potential being just explored, has its natural cycle of Doxey's Irridex - the first stage being euphoria where the local populace is excited about increase in earnings due to increase in tourist influx. Typical tourist influx creates its own set of natural problems for the local communities who over a period of time would turn to apathy which would transform naturally into irritation when the local community starts feeling a lap of privacy or loss of their culture. The next obvious step would be antagonism probably even violence against tourists. To overcome this, the local governing bodies (if they exist) can create a framework which draws a line to which tourists can intrude into the local community and similarly a set of prescriptive behavioural standards for the local community to set in, sustain and enhance the tourist revenues. Bibliography 1. (ICMR), ICFAI Center for Management Research. Marketing Management. Hyderabad: ICMR, 2004. 2. Bagozzi, R.P. "Relationship Marketing: Theory, Methods and Applications." Interactions in Small Groups 24 May 1994: 47-69. 3. Barlett, Phillip. Business Case from Strategic Management Concepts and Cases. 2001. 4. biz/ed. 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Hyderabad: ICMR, 2003. 15. Bank, BHF. Fxstreet.com. 25 05 2007. 03 01 2008 . 16. Events Management. Premier Events Management. 15 May 2002. 03 01 2008 . 17. Google. Google. 5 December 2007 . 18. Mallon, Chris. Porter's Five forces Analysis. 19. Online, Times. Times Online. 18 October 2004. 5 December 2007 . 20. RAPIDBI. RAPIDBI. 2 December 2001. 5 December 2007 . Read More