The Global Service Sector Enterprises - Case Study Example

The Global Service Sector Enterprises Table of Contents Table of Contents 2 Introduction 3 PESTLE Analysis 3 POLITICAL FACTORS 4 ECONOMIC FACTORS 5 SOCIAL FACTORS 8 TECHNOLOGICAL FACTORS 9 LEGAL FACTORS 9 ENVIRONMENTAL FACTORS 10 Drivers and challenges affecting SMEs in Australia 10 Conclusion 13 References 14 Introduction Australia is located in the Southern hemisphere of the earth, in the Oceania, surrounded by the Indian Ocean on one side and the Pacific Ocean on the other. Australia ranks the lowest in terms of land area of continents but is the sixth largest country in the world. (CIA, 2013). In the eighteenth and nineteenth century six colonies were established in Australian island, which in 1901 merged to become “the Commonwealth of Australia” (CIA, 2013). There was rapid agricultural and industrial development which was facilitated by the rich reserve of natural resources in the country. In the past few decades, Australia has established itself as an advanced economy and a strong competitor in the international market for goods and services. In the last century, Australia has been named one of the fastest developing economies among the OECD countries. The economic reforms made in the country during the 1980s are a major reason behind such brilliant performance by the economy. It ranks high in the international standards in the indices measuring human development, life expectancy, public literacy level and preservation of fundamental rights of the people. Australia has a non-permanent membership in the United Nations for the year 2013-2014 and is a member of the World Trade Organization since 1995 (Security Council Report, 2012). PESTLE Analysis Several factors originate and exist in the macro scenario of an economy that affects the operations of the business organizations of the economy. Changes in tax structures, trade barriers, change in government policy, demographic changes and a multitude of new laws implemented as a result of all these changes form parts of the macro-environmental change (Morrison, 2011). We shall use the PESTEL model to analyse these changes in the context of Australia and determine the factors that act as drivers of small and medium enterprises within the country. POLITICAL FACTORS Political factors relates to the extent to which the government interferes into the matters of the economy. The government of Australia is also known as “the Commonwealth Government” or “the federal government” (Australia, n.d.). The government body has three divisions; the legislature, the executive and the judiciary. The constitution makes no reference to any political party so as to allow the legislature to operate smoothly. Although government policies are a very practical method of affecting business practices directly, they are not always appropriate or effective (The Allen Consulting Group, 2008). Government intervention The Australian Government launches programs from time to time which are aimed at improving the environment for SMEs, promoting their growth and increasing employment levels (The Allen Consulting Group, 2008). It provides grants to the enterprises for developing employee skill and provides support in project planning. It provides advisory support to entrepreneurs for the starting of home-based business and expanding them. However, there are several government policies and regulations which are acting as barriers to business development of the SMEs. The government is taking steps to reduce such regulations and encouraging local governments to help small firms in reducing compliance costs (The Allen Consulting Group, 2008). Consumer protection Rights of the consumers in Australia are protected with utmost sincerity. There is a single consumer law applicable for the entire nation. “The Australian Competition and Consumer Commission” (Australian government, n.d.) formed in 1995 has the responsibility to look after trade practices, prices and overall consumer benefit. The provision of consumer security makes Australia a safe ground for business activities since all commerce ultimately depends on the consumers’ demand. Political stability and markets Markets are a highly vulnerable entity in the economy and depend on the political condition of the economy in which they operate as well as that of the entire world. The economy of Australia is growing rapidly; the stable political environment acting as a foreground to this phenomenon. The stable business environment inspires entrepreneurs to make investments in the country. It acts as a strong motivating factor for innovation and implementation of sophisticated technology. Stable political condition in Australia enables the development of a well educated and skilled work force that creates a welcome environment for both national and foreign entrepreneurs to start business activities in the country (Australian government, n.d.). ECONOMIC FACTORS Growth of capital Growth of capital depends on the region and type of asset in which investment is being made. However, on an average, investment in housing property in Australia gives excellent returns such as doubling of the value of property in places like Sydney and Melbourne (Propertyinvestment, 2012). Cost of commercial property Commercial property in Australia is available at very reasonable rates which makes this country a favourable destination of foreign entrepreneurs for building business headquarters. Australia is successful in drawing the attention of investors, particularly from developed nations, to build up the base for their business operations at a low cost in this country (Propertyinvestmnet, 2012). Currency exchange Exchange rates also favour the Australian dollar against euro and US dollar. Hence when entrepreneurs invest in Australia they save a bulk amount of money from getting wasted as transaction cost due to the low exchange rates. This also enables them to make greater amounts of purchases in Australia than in their home country (FTMS, 2011). Cost of living Another factor that is favours Australia’s investment climate is the low cost of living. Australia displays an exceptionally good performance across all the eleven well being indicators mentioned in OECD’s “Your Better Life Index” (Denton, 2011). This includes aspects of housing facilities, income patterns, and wealth accumulation to personal and professional livelihood. According to reports, Australians are very satisfied with their livelihood and enjoy living in the country. This factor points towards the debate on cost of living, indicating that the cost of living in the country is better than many other developed countries. Tax systems Government policies represent a direct avenue that can influence business in a country (The Allen Consulting Group, 2008). Tax incentives can allow employment creation, make a more equitable employment of men and women and also lead to initiatives taken by entrepreneurs to follow sustainable development processes of growth. Owners of small business are subjected to various types of tax, like, income tax, corporate tax, property tax and payroll tax. However, they have the opportunity to tax non-compliance since they are self-reporting to the government authorities on money flows. It requires them to possess substantial knowledge on taxation procedures so as to understand the rules comprehensively and make decisions. While the perceived situation for tax noncompliance for business owners is high, it depends on several factors, such as, cultural differences, fairness perceptions, age or personality of the business owners (Kamleitner, Korunka and Kirchler, 2010). Bureaucracy Small business organizations run their operations in small scale and these are less complicated than larger organizations. Due to their simple proceedings lesser number of incidences of red tape is found in SMEs of Australia (Wong and Aspinwall, 2004). Their systems are flexible and centred around close group of people in the organizations. The structure of small firms makes implementation of new initiatives easy and allows them to abandon unhelpful practices easily. Inflation Small entrepreneurs do not have the market power to negotiate with suppliers or clients like larger businesses. Hence the inflation rate affects them significantly. Currently consumer price inflation rate in Australia is 2.2% (RBA, 2013). Since inflation rate is low in the economy, it provides a stable ground for the growth of small businesses. Economic stability The growth rate in Australia is stronger than that in most other OECD countries. The Gross Domestic Product or GDP serves as the standard indicator of the value of products and services produced within the domestic territory of a country during a given time period. Australia follows the 2008 “System of National Accounts” (OECD-ilibrary, 2012) which makes its GDP comparable to other countries’ GDP. Australia is among the six OECD members that have had a per capita GDP of more than 40,000 USD in the year 2010, the other countries being the United States, Luxembourg, Switzerland, Norway and the Netherlands (OECD-ilibrary, 2012). In 2012 the GDP of Australia was $1.57 trillion with per capita income of $42,400 (2012 estimate) (CIA, 2013). Agriculture contributes 4 percent to the GDP, industry 26.6 percent and services 69.4 percent (CIA, 2013). Along with a strong projected growth of the GDP Australia also offers investors a low risk economy. SOCIAL FACTORS Australia has a total population of 22,015, 576 according to the estimate of July 2012 with an overall median age of population of 37.9 years (CIA, 2013). In this country social factors play a dominating role in the determination of demand for the produces by firms and the availability of willing labour for the production process. If level of employment is high and the factors like unemployment and retirement are taken care of by the government, people become choosy about the kind of work they are willing to do to earn a livelihood. Average level of education is high in Australia and the government has adopted the responsibility to provide funds to universities and other institutions’ that impart technical education. Therefore skilled labour is available in adequate amount to assume responsible job roles in business organizations. TECHNOLOGICAL FACTORS Technology is a very important factor in determining the economic performance by a nation. Technological innovations taking place in Australia have allowed the business enterprises to reduce costs and offer improved product quality at lower prices. These factors benefit the business environment of the country and allow entrepreneurial activities to flourish. There are two organizations in Australia that support research and developmental activities in country. “The Commonwealth Scientific and Industrial Research Organization (CSIRO)” (CSIRO, n.d.) is the natural science agency of Australia and “The Defence Science and Technology Organization (DSTO)” (Australian Government, 2004) is the lead agency of the Australian government making researches in the field of defence and national security. LEGAL FACTORS Australia has “a high standard of corporate governance” (Cowan, 2005). It is a provocative factor for promoting entrepreneurship activities in the country by Australian citizens as well as foreign investors. It encourages huge capital inflow into the nation. Legal environment of a country pertaining to the corporate sector affects the cost incurred by the firm and also regulates the demand for products by the consumers. Australia has put up good response in terms of the five doctrines proposed by the OECD for practising good governance over commercial activities running in the member countries. The principles followed by the enterprises in Australia for a good corporate culture are preserving the rights of company’s shareholders, equitable treatment of the shareholders, justification of the role played by each stakeholder, transparency in business activities and responsible decisions taken by the Board of Directors (Cowan, 2005). Besides maintaining good corporate governance the Australian Government has laid down that the companies operating in the country would require to make a thorough check on the credentials of its off-shore business partners and customers. ENVIRONMENTAL FACTORS Environmental factors refer to the environmental situations of the country. Rich reserves of minerals are found in the eastern coast line of the country. This area is thickly populated, which has led to conflicts over natural resources since the 19th century (Mercer, 2000). However, a resolution can be found for every type of dispute. Resolution is not only limited to the concept of “successful or unsuccessful” (Moore, 1996). A third concept describes ‘conditional success’ which is highly relevant to the situation of environmental conflicts in Australia. Each jurisdiction in the country has a particular Environmental Impact Assessment procedure. “The Environment Protection and Biodiversity Conservation Act 1999” (Thomas, 2005) was enacted in 1999 to protect the environment and look after those issues relating to affairs of national significance. As Moore explained it, conditional success would depend on four factors, political scenario, interest and responsibilities of the entrepreneur and relationship with stakeholders. Drivers and challenges affecting SMEs in Australia The Global Entrepreneurship Monitor (GEM) for the year 2011 shows that entrepreneurship in Australia is quite alive and is prospering. According to the report, “10.5 percent of the adult population” (Global Entrepreneurship Monitor, 2011) in the country is starting a new business or own a newly established business. However, more than 50% of the SMEs are struggling to retain their customers (FTMS, 2011). According to a 2011 study, 65% of the businesses found it difficult to bring new customers (FTMS, 2011). Approximately 70% of the workforce is employed in the SMEs and there has been a 2.7% increase in the Total Early-Stage Entrepreneurial Activity between 2010 and 2011 (Global Entrepreneurship Monitor, 2011). Globalization plays a significant role in the employment level in Australia, particularly in the SMEs. Till the middle of 1900s SMEs were less globalized compared to those in other OECD members (Organisation for Economic Co-operation and Development, 1997). Only 1 percent of all manufacturing SMEs in Australia were globalized to a major extent. However, towards the end of 1900s the number of SMEs seeking international opportunities increased. Globalization has contributed to almost 30 percent of the workforce of the SMEs (Organisation for Economic Co-operation and Development, 1997). Recently, contribution to employment level in Australia made by SMEs has been more than large firms. The knowledge asset in Australia is rich, which the entrepreneurs exploit for the growth of their business. The well educated adult population between the age of 18 years and 64 years are entering into entrepreneurial activity. Due to this, compared to the past one year, retention of employees has become a difficult task for the management of the SMEs (FTMS, 2011). Technological advancement, legal transparency, skilled workforce, stable political environment and last but not the least, good environmental situations act as key factors pushing the growth of SMEs in Australia. The use of the Internet has brought a technological revolution in the business sphere. The mobile technology, including mobile devices, applications and networks, would allow organizations to reach their customers more efficiently unhindered by time and space (Omogbadegun, 2010). Hence this provides excellent opportunity to the SMEs in the country to modify customer relationship and manage their operations for more efficient functioning. (Source: Global Entrepreneurship Monitor, 2011) The figure given above shows the pattern of growth of SMEs in the country over a period of ten years between 2001 and 2011. The growing market and reduction of cost of production are helping the small and medium-sized enterprises to develop their business activities in the country (OECD, 2009). Since the demand for products of the SMEs is rising domestically as well as internationally, it pushes the development process of these enterprises. Expansion opportunity in the international market is a key stimulus for SMEs since it increases profitability and growth and establishes a stronger market position for the firm. The development of early stage entrepreneurial activity is becoming possible due to the stable social condition in the country. Good supply chain links are a strong positive factor opening up new export channels for the firms. The export activity of the firms is boosted by the strong social ties that exist since there are a large number of foreign investors in the country. Their immigrant background allows them to exploit their long range of connections for expanding business activities (OECD, 2009). Introduction of various programmes by the government for the improvement of small and medium enterprises imparts training to potential managers and starters. They are provided training on the advanced techniques of production that helps them to implement these technological knowhow in their businesses and reap higher profits. SMEs are also not restricted to daily financial activities but are shifting focus to the larger macro-economic matters such as exchange rate and performance of the economy as a whole. In this aspect, government regulation affects their growth process. Regulations create a barrier for almost 54% of the SMEs in the country (FTMS, 2011). While the government can provide support in the leadership front, the regulations and legislations create barriers at national, state and local levels (The Allen Consulting Group, 2008). Conclusion Different development pathways can be adopted by the SMEs depending on the financial condition of the entrepreneur and the region in which the enterprise is to be established. Strategies adopted for sustainable development can create synergistic effect among the SMEs that choose to work collaboratively (Moore and Manring, 2009). Advancement of technology is a huge step forward for the SMEs in the country. SMEs need to grab this opportunity to expand their business within as well as beyond geographical boundaries. Again, in this discussion, the matter of financial condition of the entrepreneur crops up. This leads to diverse levels of commercial development for these businesses. 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