Introduction
International strategic management is a process through which companies develop and implement expansion plans that enables them to join and compete in overseas markets. Domestic strategic management, on the other hand, enables businesses to expand their operations in the local market.
Joining overseas markets is often challenging since companies must understand the macro-environments of the markets that they intend to join (Sadler & Craig 2003, p. 56). The company is likely to face the risk of operating under high uncertainty if it fails to conduct an environmental audit in the country that it intends to join.
It is against this backdrop that this paper discusses the premise that international strategic management is more complex than domestic strategic management. The discussion will focus on the model that is used to carryout macro-environmental audits and its application.
Macro-environmental Audits: PEST Analysis
Conducting a comprehensive macro-environmental audit is one of the major challenges that companies which are pursuing global strategies often grapple with. The difficulty in conducting an informative macro-environmental audit is two fold. First, there is a dearth of information concerning the various elements of the macro-environment in most countries, especially, in the developing world.
Second, the models that are commonly used to conduct the audit have weaknesses that often compromise the results. Generally, the audit involves scanning the macro-environment in order to identify the environmental factors that are likely to affect the business (Sadler & Craig 2003, p. 71).
These factors must be monitored and their trends are often used to predict future changes in the external business environment. Traditionally, most companies use the PEST analysis to study the macro-environment of the countries that they intend to operate in.
PEST refers to the political, economic, social and technological aspects of a country. PEST analysis focuses on identifying the influence of these factors on the performance of businesses. Political factors refer to the policies which are being pursued by the government and their effects on the economy.
These factors include the level of government involvement in the economy, government’s support for businesses and trade policies (Wilkinson, McAlister & Widmier 2007, pp. 17-37). Political decisions such as offering free education and healthcare have positive impacts on the development of the country’s workforce. This benefits foreign companies that join the country.
Economic factors include macro-economic variables such as interest rates, tax rate, inflation, GDP growth and unemployment rate. These variables are often used as indicators of the favorability of a country as an investment destination (Wilkinson, McAlister & Widmier 2007, pp. 17-37). For example, low interest rate indicates that cheap capital is available in the country.
Similarly, labor is likely to be cheap if the unemployment rate is very high. Social factors refer to the norms, values, beliefs, attitudes and the citizens’ level of education. These factors often determine the citizens’ preferences for particular goods and services.
Technological factors refer to the extent to which modern technology is accessible in the country. High access to modern technology is often desirable to most organizations since it facilitates high productivity.
Application of PEST Analysis
Wal-Mart which is the leading retailer in the US adopted the PEST analysis to assess the Chinese market before joining it. The political factors that attracted the company to China included the strong political and economic ties that exist between America and China.
Wal-Mart is able to import most of its supplies from China due to the free trade agreements between the United States and China (Wal-Mart 2012). Following the adoption a free market system, the government of China has focused on implementing policies that encourage foreign direct investments in the country.
Additionally, the political stability in China is conducive for retail business activities. Rapid expansion of China’s GDP was one of the major economic factors that attracted Wal-Mart. The rapid economic growth facilitated the creation and distribution of wealth in the economy.
Most of the citizens have a high purchasing power. Thus, the demand for Wal-Mart’s products has always been high in China. Low interest rate in China has enabled Wal-Mart to access cheap capital to finance its expansion in the country.
Socially, China has abundant supply of cheap labor due to its large population. Since the retail industry is labor intensive, Wal-Mart has been able to reduce its operating costs by joining the Chinese market. Wal-Mart’s strategy of selling goods at the lowest possible price reflects the Chinese value system which promotes prudent use of scarce resources (Wal-Mart 2012).
However, Wal-Mart’s executives have found it difficult to adopt the Chinese business culture. Cultural conflicts have often led to misunderstandings between the company’s executives and its Chinese associates. Finally, Wal-Mart joined the Chinese market due to the country’s technological advancements.
In the last two decades, China has significantly increased its investments in information and communication technology. Consequently, the country has not only succeeded in supplying new technologies, but has also managed to lower the cost of accessing such technologies.
Critical Evaluation of the PEST Model
The rationale of using PEST analysis to conduct a macro-environmental audit can be illustrated by its strengths. The main strengths of the model include the following. To begin with, the model facilitates an understanding of the external business environment (Sadler & Craig 2003, p. 78).
For example, it enabled Wal-Mart to understand the economic, political and technological aspects of the Chinese market. This explains the company’s success in the Chinese market. PEST analysis also facilitates the execution of global strategies. In this context, the model enables companies to identify the threats and opportunities that are available in the markets that they intend to join.
Wal-Mart joined the Chinese market since it was able to identify opportunities such as cheap labor, low interest rates and a high demand for its products. Similarly, the company was able to identify threats such as cultural conflicts among its employees. Thus, Wal-Mart was able to implement diversity programs in good time in order to promote cohesion in its multicultural workforce in China.
Even though PEST analysis is associated with the aforementioned strengths, its application is often limited due to the following weaknesses. First, the model simply presents a list of factors that are likely to affect a business. It does not involve the use of quantitative techniques that can help in evaluating the impact of these factors on businesses.
In this regard, the model can be misleading, especially, if the user is not able to infer the likely effects of the macro-environmental factors. For example, Wal-Mart’s executives assumed that diversity programs will help them to integrate the American employees with their Chinese counterparts. In the contrary, cultural conflict is still a major problem in the company’s Chinese subsidiary.
Second, the environmental factors often change rapidly (Sadler & Craig 2003, p. 121). Thus, it can be difficult to predict how they will affect the business in future. For example, the model can hardly predict the social or political changes that will take place in the future and how such changes will affect businesses.
This implies that most of the model’s conclusions are based on unrealistic assumptions. Using the model often requires a lot of information which might be very difficult to access. For example, information about social factors can be very difficult to get.
This might necessitate collection of new data through surveys which can be very expensive. Finally, the model focuses only on the external aspect of the business environment. It ignores the internal environment which must be taken into account in order to implement any strategic policy.
Conclusion
International strategic management helps businesses to expand their operations by joining overseas markets. However, executing this expansion plan is usually challenging due to the difficulty that is associated with understanding the macro-environment of the overseas market. The PEST model is commonly used by companies to audit the macro-environment before they make a decision to join new markets.
The rationale of using this model is that it gives insights on the factors that are likely to affect businesses in a given economy (Sadler & Craig 2003, p. 81). However, the model has limited ability to accurately forecast future trends in the macro-environment. This makes it difficult to understand the international market. Consequently, international strategic management is more complex than domestic strategic management
References
Sadler, P & Craig, J 2003, Strategic Management, McGraw-Hill, New York.
Wal-Mart. 2012, About Us. Web.
Wilkinson, T, McAlister, A & Widmier, S 2007, ‘reaching the International Consumer: an Assessment of the International Direct Marketing Environment’, International Journal of Direct Marketing, vol. 1 no. 1, pp. 17-37.