Pestel analysis of leather industry

Instructions for Report

The CEO has asked the task force to write a report with its findings and recommendations for how NBD should handle this situation. Specifically, the report needs to answer the following questions:

•Was the Chinese supplier ethical in shipping more than 300,000 cases made of real leather instead of the requested faux leather material, even though the supplier was not charging NBD anything extra for the higher cost of real leather? Explain why or why not using ethical theory and principles.

•When the manufacturing VP contacted the Chinese supplier to complain, the supplier could not understand why NBD was not pleased about receiving a real leather case, given that NBD was still paying for the less expensive faux leather one. Is there a cultural difference between customer expectations and business transactions in the West and in Asia? Explain.

•As an organization, what strategic errors did the task force observe in the decision making by various individuals in this situation? By the design VP? By the manufacturing VP? By the marketing VP?

•What is the appropriate strategy going forward? Conduct a SWOT analysis and PESTEL analysis to decipher what NBD should do in light of these strategic errors.

Using your outline and research notes write a report for the CEO. Be sure to meet the following requirements:

•Include APA-formatted in-text citations and an APA-formatted reference list (do not format the body of the report using APA style, just the reference list). See references and citations for details.

•Include a specific recommendation on what action, if any, the CEO should take based on your analysis and conclusions.

•Support your conclusion with references to cultural norms, strategy, and the principles of SWOT and PESTEL.

•The report should be no more than five pages (double spaced, 12-point font; the reference list does not count towards page limit).

Case

Colossal Corporation maintains a subsidiary in Serafini, a small country in Eastern Europe. This subsidiary is incorporated in the state of Delaware as New Brand Design, Inc. (NBD), a company that designs, brands, and manufactures innovative electronic products and markets and distributes them for resale across the globe. NBD has been admitted to conduct business in Serafini.

NBD’s executive board is composed of ten members from three different countries, including a vice president of design, a vice president of marketing, and a vice president of manufacturing. Due to recent conflicts among the board members, communication among them has been less than efficient, and they are regularly blaming each other for mistakes made by NBD.

The design vice president's staff originally proposed two alternative materials for laptop cases that are packaged and sold with certain high-end laptops manufactured by NBD, such as its best-selling product, the Dualplex 360: real leather (pig skin) and faux leather made from a synthetic material (polyurethane). Both laptop cases were very similar in appearance, although the real leather case was a little heavier than the faux leather case. Both cases could be sourced from an established supplier in China, with whom the design VP had a long-term relationship. The marketing VP evaluated the cost of the two cases from this Chinese supplier and decided that he would go with the faux leather case because it was available at a 20 percent lower cost in comparison to the real leather case.

An initial order of 500,000 faux leather cases was placed with the Chinese supplier, and within about a month, the shipment of cases arrived at NBD's South African facility, where the laptops were assembled and packaged for sale all over the world. When the newly delivered cases were inspected by NBD's product team in South Africa, they discovered that more than two-thirds of the cases were actually made of real leather. After NBD's VP of manufacturing contacted the Chinese supplier to complain about the cases being "out of spec," he was told that it was not an error—the supplier was aware of the fact that over 300,000 cases in the shipment were made out of real leather. After some persistent questioning, the supplier revealed that as a result of an order cancellation from another customer, they had suddenly found themselves overstocked with an inventory of pig leather. Rather than let this extra inventory go to waste, the Chinese supplier decided to use up that inventory toward fulfilling a major part of NBD's order!

The Chinese supplier was not willing to apologize for their decision to ship over 300,000 real leather cases to NBD without first obtaining approval for the switch. In fact, the supplier did not feel that NBD had any grounds to complain because the supplier was willing to accept the lower payment as per NBD's original order of faux leather cases. Instead of insisting that the supplier take back the 300,000 or so cases that were out of spec, the manufacturing VP accepted the entire shipment and then conveyed this news to the marketing VP in an internal company memo.

Upon receiving the memo, the marketing VP realized it was too late for the real leather cases to be returned to the supplier in China, and he would have to make the best of out of an undesirable situation. He made a decision that the faux leather cases would be packaged for laptops shipped to Europe and North America, given that they were lighter in weight. The real leather cases would be used for laptops packaged and sold in Africa and Asia. Previous marketing surveys conducted by NBD had revealed that consumers in the West preferred lighter laptop cases, while consumers in Africa and Asia equated heavier cases with better quality and longer life. Of course, the marketing VP forgot that the advertising materials and product inserts for the laptop had already been printed in multiple languages and all of this product literature stated that the laptop case was made of synthetic material.

The laptop cases were shipped to retail outlets, and within a couple of weeks, the marketing VP had a potential crisis on his hands. Tech writers and product reviewers from two well-known South African and Kenyan newspapers had called and emailed to inquire about what they rightly suspected was a pig leather case and not the synthetic material that was specified in NBD's product literature. They informed the marketing VP that if they revealed the truth about the origins of the case material in their reviews, it would have a tremendously negative impact on NBD's sales in Africa and Asia, where a significant number of consumers opposed the use of pigskin in products on religious grounds. They wanted to know how the company was going to resolve this issue before they went to press.

The marketing VP contacted the manufacturing and design VPs to find out what they should do to get the company out of this potential crisis. After a lot of finger-pointing and talking past each other, the three individuals arranged a conference call with Colossal’s CEO and brought the CEO up to date. The CEO promised the three VPs that her international task force would research and address the issue. End of Case

Managing in a Global Environment

Managing in a global environment presents particularly difficult challenges as well as the potential for significant rewards. A manager must be acutely aware of all possible cultural, linguistic, legal, and ethical issues when managing a diversified workforce. There are many tools available to the international manager for engaging stakeholders, strategizing, and learning about how different cultures do business.

International Expansion and Global Market Opportunity Assessment

Choosing to expand internationally is rarely black and white. A wide variety of internationalization moves are available after choosing to expand. Moreover, some flatteners make global moves easier, while some make them more difficult. Indeed, even importing and outsourcing can be considered stealth, or at least early, steps in internationalization, because they involve doing business across borders. The first section of this resource discusses the rationale for international expansion and the planning and due diligence it requires.

In the second section of this resource, you will learn about PESTEL, the framework for analyzing the political, economic, sociocultural, technological, environmental, and legal aspects of different international markets.

Global Strategic Choices

The Why, Where, and How of International Expansion

The allure of global markets can be mesmerizing. Companies that operate in highly competitive or nearly saturated markets at home, for instance, are drawn to look overseas for expansion. But overseas expansion is not a decision to be made lightly, and managers must ask themselves whether the expansion will create real value for shareholders. Companies can easily underestimate the costs of entering new markets if they are not familiar with the new regions and the business practices common within the new regions. For some companies, a misstep in a foreign market can put their entire operations in jeopardy, this section explores the rationale for international expansion as well as how to analyze and evaluate markets for international expansion.

Flow chart with four boxes. The top box asks, Why? Positive economic logic? Supported by our differentiators? Strengthens our differentiators? If no, stop. If yes, proceed to the next box, Where? What new countries fit our differentiators? Which ones chan strengthen our differentiators? Where is the best business fit? This box proceeds to a box labeled How? Do it on our own? Do we need a local partner? How big and how fast? The bottom box, showing hard criteria, soft criteria, and fit proceeds to the Where box. Hard criteria include market size, future growth, parking levels, and competitive environment. Soft criteria include economic and political stability, restrictions on foreign ownership and freedom of capital flows. Fit includes human resources, geographic proximity, and cultural differences.

Analysis and Evaluation of Markets for International Expansion

Rationale for International Expansion

Companies embark on an expansion strategy for one or more of the following reasons:

•improve the cost-effectiveness of their operations

•expand into new markets for new customers

•follow global customers

For example, the US chemical firm DuPont, Brazilian aerospace conglomerate Embraer, and Finnish mobile phone maker Nokia are all investing in China to gain new customers. Schneider Logistics, in contrast, initially entered a new market, Germany, not to get new customers but to retain existing customers who needed a third-party logistics firm in Germany. Thus, Schneider followed its customers to Germany. Other companies, like the microprocessor maker Intel, are building manufacturing facilities in China to take advantage of the less costly and increasingly sophisticated production capabilities. For example, Intel built a semiconductor manufacturing plant in Dalian, China, for $2.5 billion, whereas a similar state-of-the-art microprocessor plant in the United States can cost $5 billion (“2011 Global R&D Funding Forecast, 2010). Intel has also built plants in Chengdu and Shanghai, China, and in other Asian countries (Vietnam and Malaysia) to take advantage of lower costs.

Planning for International Expansion

As companies look for growth in new areas of the world, they typically prioritize which countries to enter. Because many markets look appealing due to their market size or low-cost production, it is important for firms to prioritize which countries to enter first and to evaluate each country’s relative merits. For example, some markets may be smaller in size, but their strategic complexity is lower, which may make them easier to enter and easier from an operations point of view. Sometimes there are even substantial regional differences within a given country, so careful investigation, research, and planning are important to do before entry.

International Market Due Diligence

International market due diligence involves analyzing foreign markets for their potential size, accessibility, cost of operations, and buyer needs and practices to aid the company in deciding whether to invest in entering that market. Market due diligence relies on using not just published research on the markets but also interviews with potential customers and industry experts. A systematic analysis needs to be done, using tools like PESTEL.