Swot analysis for beyond meat

SIA1: Beyond Meat/Impossible Foods

As an aside – My personal belief is that concepts and theories are of little value to each us if we do not learn to apply them to the real world. For this reason, we will have applied activities as often as possible. We are always learning together, myself included. Please feel free to call or email me if you want to discuss further.

This SIA assignment requires you apply a concept or theory we have learned to a subject that is current in the ‘real’ world. The assigned topic for Application Assignment 1 is: Beyond Meat/Impossible Foods.

In Chapter 1, we examined the overall view of strategy and the role of the CEO, Board of Directors and other corporate leaders. In Chapter 2, we learned about the tools available to evaluate a company’s position, both internally and externally.
Your assignment: Select either Beyond Meat or Impossible Foods and evaluate their position using the Porter’s Five Forces Model. Document and discuss this analysis in depth and include at least 5 outside references with at least 2 pages of content. Next prepare a one page recommendation for the board of directors of the company you selected. Put these together in one document for a total of three pages (not including reference and title page).
*Remember, this is your ability to show off what you have learned as well as your ability to apply it to a real world situation.

Strategic Management: Theory and Practice

The External Environment: Political-Legal and Economic Forces

Contributors: By: John A. Parnell

Book Title: Strategic Management: Theory and Practice

Chapter Title: "The External Environment: Political-Legal and Economic Forces"

Pub. Date: 2014

Access Date: July 2, 2018

Publishing Company: SAGE Publications, Ltd

City: 55 City Road

Print ISBN: 9781452234984

Online ISBN: 9781506374598

DOI: http://dx.doi.org/10.4135/9781506374598.n3

Print pages: 52-77

©2014 SAGE Publications, Ltd. All Rights Reserved.

This PDF has been generated from SAGE Knowledge. Please note that the pagination of

the online version will vary from the pagination of the print book.

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The External Environment: Political-Legal and Economic Forces

Chapter Outline

Analysis of the External Environment

Political-Legal Forces Global Considerations

Economic Forces Gross Domestic Product

Inflation Rates

Interest Rates

Exchange Rates

Ecological Influences

Summary

Key Terms

Review Questions and Exercises

Practice Quiz

Student Study Site

Notes

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After the industry has been clearly defined and its potential profitability assessed, forces outside the industry should be considered. Constant changes in these external forces can present numerous challenges to strategic managers. It is important to understand how these forces collectively influence the industry in which a firm competes before strategic plans are developed. Although a number of individual companies are discussed, this chapter continues with an industrial organization (IO) perspective by emphasizing effects on entire industries, not just firms.

Analysis of the External Environment

Organizations and industries exist within a complex network of external forces. Together, these elements comprise the external environment, or macroenvironment There are four categories of macroenvironmental forces: (1) political-legal, (2) economic, (3) social, and (4) technological (see Figure 3.1). The analysis of external factors may be referenced as PEST— political-legal, economic, social, and technological—an acronym derived from the first letter of each of the four categories of forces. The effects of external environmental forces on a firm's industry should be well understood before strategic options are evaluated. Political-legal and economic forces are addressed in this chapter. Social and technological forces are addressed in the next chapter.

Firms operating in multiple, distinct geographical markets may be affected in different manners by external forces in each market. For example, wide roads and relatively modest fuel taxes (i.e., political/legal factors) and a high standard of living (i.e., an economic factor) suggest higher demand for moderate to (relatively) large vehicles in the United States. In contrast, increased environmental concerns (i.e., a social force) and advances in electric vehicle production (i.e., a technological force) suggest higher demand for small, more fuel- efficient vehicles. The environment is different in Latin America, where narrow roads, higher fuel taxes, and less disposable income suggest higher demand for smaller cars. Interpreting the complexities of the external environment is both important and challenging.

Figure 3.1 Macroenvironmental Forces

Although large organizations and trade associations often attempt to influence change in the macroenvironment, these forces are usually not under the direct control of business organizations. On occasion, a dominant firm like Wal-Mart may be able to exert some degree

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of influence over one or more aspects of the macroenvironment. However, this level of influence is not common to most organizations because strategic managers typically seek to enable a firm to operate effectively within largely uncontrollable environmental constraints while capitalizing on the opportunities provided by its environment.

Consider examples from rival retailers. Wal-Mart's political action committee usually contributes heavily to candidates of both major parties in the United States every election

year.1. Wal-Mart mobilized its store managers through the United States in 2008, warning that a win by the Democrats would likely make it easier for workers to unionize. In 2010, Target contributed $150,000 to Minnesota Forward, a political group in its home state that backs pro- business candidates. One such candidate also opposed same-sex marriage, sparking demonstrations of gay-rights supporters outside of Target stores across the United States and a petition signed by 240,000 consumers promising to boycott the retailer. The protest effort was organized by MoveOn.org and demonstrates the risks firms can face when they seek to

influence the political landscape.2.

As previously mentioned, strategic managers must first identify and analyze these national and global forces and understand how each force affects the industries in which they operate before addressing firm-specific strategy concerns. Hence, understanding a force's broad effects should precede understanding its specific effects. Applications of these forces that are unique or specific to the firm are considered as opportunities and threats later in the strategic management process.

Political-Legal Forces

Political-legal forces include such factors as the outcomes of elections, legislation, and judicial court decisions, as well as the decisions rendered by various commissions and agencies at every level of government. Some regulations affect many or all organizations. When the Massachusetts state legislature passed a bill in 2006 to require that businesses

provide health insurance for its workers, all firms operating in the state were affected.3. When the U.S. Supreme Court ruled in 2007 that the Clean Air Act applies to car and truck carbon dioxide emissions, carmakers knew immediately that higher federal fuel economy standards

were likely forthcoming.4. When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, financial institutions were faced with heightened federal regulation.

Government regulations—regardless of intent or justification—can be costly to some business enterprises. For example, guidelines revised in April 2010 by the U.S. Environmental Protection Agency (EPA) required businesses that repair or renovate older buildings to adhere to strict lead-safe work practices. The new regulations most directly affect homes, schools, day care centers, and other buildings built before lead-based paint was banned in 1978. Renovators now must invest in equipment and supplies such as lead-testing kits, plastic sheeting, respirators, and protective clothing. At least one worker involved in the project must have EPA certification. Michael Davis, CEO of Guardian Preservation Services, a Chicago mold-removal company, estimates compliance costs to his company to be between $160,000

and $300,000 annually. These costs must be passed along to customers.5.

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Regulations can be much more stringent in certain nations, such as in Venezuela where President Hugo Chavez has nationalized firms in the oil, telecommunications, and electricity industries following ascendency to power in 1998. The Venezuelan government typically compensates firms it nationalizes, but the extent to which they receive market value for their

assets is widely questioned.6.

Argentina's president Cristina Kirchner has also heavily regulated a number of industries, especially in areas controlled by global interests. In 2009, her administration crafted restrictive import-licensing requirements and imposed what is known as el impuestazo (“the big tax”), a doubling of the value-added tax (VAT) on imported electronics. At the same time, her

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administration cut taxes paid by electronics firms in Tierra del Fuego—the frigid and isolated southernmost part of the nation—in a protectionist attempt to create jobs. Kirchner's move in 2012 to nationalize the country's largest oil-and-gas producer, YPF SA, received sharp criticism from both majority owner Repsol YPF of Spain and the Spanish government. Kirchner declared the petroleum industry to be of “national public interest” and confiscated 51% ownership of the firm from Repsol YPF's 57% stake. The Argentine government did not pay the market price for the shares but instead appointed a federal tribunal to calculate a

“fairer” (lower) payment.7.

The automobile industry in the United States has been affected by a number of regulations in recent years. The U.S. National Highway Traffic Safety Administration constantly tests cars and trucks sold in the United States and pressures carmakers to improve safety

performance.8. Corporate average fuel economy (CAFE) standards can require that producers develop new vehicles or modify existing ones so that average fuel economy targets are met. This can be a cost ly venture. When President Bush signed the Energy Independence and Security Act of 2007, requiring automakers to increase average gas mileage to 35 miles per gallon by 2020, analysts estimated that the industry would spend

more than $6 billion to comply, adding $275 to the price tag of a large truck by 2011.9. When President Obama announced an additional increase in CAFE standards to 55 miles per gallon by 2025, some analysts estimated that production costs will rise by as much as $3,000 per vehicle. Proponents of the higher standards argue that fuel savings would more than

compensate for the additional costs if the target can be achieved.10.

The effects of regulations can be complex, especially when enforcement is lax or inconsistent. Chipotle Mexican Grill discovered this in 2011 when U.S. Immigration and Customs Enforcement (ICE) inspected company records and identi f ied a large number of undocumented workers. Chipotle had to let go a large number of workers—more than half of its 900 employees in Minnesota alone. The fast-growing restaurant operated about 1,000 restaurants with 30,000 employees—about one-half Hispanic—in 2012 with plans to hire an additional 100,000 workers by 2015. Chipotle operates in a high turnover industry where illegal immigrants are frequently hired and enforcement is sporadic and unpredictable. The ICE raid prompted CEO Monty Moran to meet with several U.S. senators in an effort to reform

U.S. immigration policy.11.

Military conflicts can also influence how a number of industries operate—especially those with tight global ties. For example, during the 2003 war in Iraq, many firms modified their promotional strategies, fearing that their television advertisements might be considered insensitive if aired alongside breaking coverage of the war. At the same time, others began to plan for meeting the anticipated future needs in Iraq for such products as cell phones, refrigerators, and automobiles. After the previous regime was ousted in mid-2003, American

firms began to compete vigorously for lucrative reconstruction contracts.12.

Interestingly, some firms—particularly large ones—favor specific regulations because they erect barriers to newcomers in the industry. In some instances, firms welcome direct financial assistance from government entities. Following the sharp declines in air travel in the United States after the 9/11 tragedy, airlines on the verge of bankruptcy campaigned for and received

$15 billion in government support in 2002 and an additional $2.9 billion in 2003.13. In 2004, for example, Ford chief Bill Ford said he would support higher fuel taxes in exchange for

government incentives to produce more energy-efficient vehicles.14. In 2008, the Troubled

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Asset Relief Program (TARP) provided direct financial assistance to General Motors and a number of financial institutions in the United States. Most recipients welcomed the assistance although it was accompanied by increased oversight and scrutiny.

Some government intervention is specifically designed to benefit certain industries—at least in the short term. For example, in 2009, the Car Allowance Rebate System (CARS)—better known as “Cash for Clunkers”—was deployed in the United States. CARS sought to provide government rebates up to $4,500 to consumers who traded in their less fuel-efficient vehicles for more efficient new ones. The $3 billion program was designed to improve overall emissions by requiring that “clunkers” be destroyed, and to provide a boost for an automobile industry suffering in a recession. Although CARS resulted in a late summer increase in short-term

sales for carmakers as predicted.15.

The unintended consequences or side effects of such intervention should also be

considered.16. CARS likely prompted many consumers to purchase vehicles earlier than they otherwise would have, reducing demand the following year. Money spent on vehicles cannot be spent in other sectors of the economy, which may explain while retail sales in July 2009— the month CARS funds were made available—were the lowest since January. Sales at used car dealers also declined during this period and used car values rose because of the fewer number available for resale. Automobile parts retailers such as AutoZone and Pep Boys also

suffer when older vehicles are removed from the roads.17. Hence, as with any government action, the unintended consequences of market intervention designed to aid specific firms or industries must be considered.

In more cases than not, however, regulation can prove costly for firms in an industry. When mad-cow disease—a rare ailment of the brain transmitted through tainted meat—began to show up in the United Kingdom in early 2001, most of Europe responded by banning the

import of British beef. Financial losses for the industry were staggering.18. Since 2005, U.S. packaged food manufacturers have been required to disclose the amount of trans fats in the

products they distribute through grocery stores.19. Health advocates have also lobbied for governmental regulation of salt content in packaged foods, warning of the link between salt and high blood pressure. Deeply ingrained in the food production process, however, salt is all but impossible to eliminate because of its many benefits. Salt is inexpensive, enhances the

taste of myriad foods, and often extends the shelf life.20.

Additional examples of costly regulations abound. In 2006, the U.S. Food and Drug Administration (FDA) issued guidelines concerning when food companies can reference their products as “whole grain.” Food companies can use the label if their products are made of rye, oats, popcorn, and wild rice but not soybeans, chickpeas, and pearled barley. The use of terms such as good source and excellent source to describe the amount of whole grains

included in a product are also subject to debate and FDA rulings.21.

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In 2010, Chesapeake Bay Candle decided to build its first production facility in the United States. The candlemaker had three plants in Asia but wanted to be closer to its primary customer base in the United States. Its founders projected a cost of $2.5 million over 9 months to build the facility but ended up spending more than $3.5 million and waiting an additional several months due to regulatory delays. Expensive upgrades required to meet local building codes, special oil containment rooms and drainage requirements, new sprinkler and air-handling systems, and handicapped-accessible bathrooms slowed progress and

raised costs dramatically.22.

All societies have laws and regulations that affect business operations, although the extent of government intervention varies across nations. A major shift in U.S. policy occurred in the late 1970s and the 1980s in favor of “deregulation,” eliminating a number of legal constraints in such industries as airlines, trucking, and banking; however, not all industries were deregulated. By 1990, a reversal of trade protectionism and strong governmental influence in

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business operations began to take place. New economic policies reduced governmental influence in business operations by deregulating certain industries, lowering corporate taxes, and relaxing rules against mergers and acquisitions. This trend continued into the twenty-first century but crested in the early 2000s. President Barack Obama's election in 2008—coupled with Democrat Party majorities in both houses of Congress—solidified a shift in the opposite

direction toward a greater federal government role in business affairs.23. The political winds can change frequently, however, as Republicans regained a majority in the House of Representatives in 2010, a balance of power that continued with Obama's reelection in 2012. Interestingly, share prices of U.S. coal firms rose before Election Day in anticipation of a possible win by challenger Mitt Romney. Prices declined sharply the day after the election as investors expected a continuation of anti-coal policies initiated in President Obama's first term.

Table 3.1 Selected Examples of Government Regulation of Business in the United States

Legislation Purpose

Sherman Antitrust Act (1890)

Prohibits monopoly or conspiracy in restraint of trade

Clayton Act (1914) Forbids contracts that tie the sale of one product to the sale of another

Federal Trade Commission Act (1914)

Stops unfair methods of competition, including deceptive advertising, selling practices, and pricing

Webb-Pomerene Export Trade Act (1918)

Permits selected American firms to form monopolies in order to compete with foreign firms

Fair Labor Standards Act (1938)

Sets minimum-wage rates, regulations for overtime pay, and child labor laws

Antimerger Act (1950) Makes the buying of competitors illegal when it lessens competition

Equal Pay (1963) Prohibits discrimination in wages on the basis of sex when males and females are performing jobs requiring equal skill, effort, and responsibility under similar working conditions

Clean Air Act (1970) Directs the Environmental Protection Agency (EPA) to create emission standards for potential pollutants

Occupational Safety and Health Act (1970)

Requires employers to provide a hazard-free working environment

Consumer Product Safety Act (1972)

Sets standards on selected products, requires warning labels, and orders product recalls

Equal Employment Opportunity Act (1972)

Forbids discrimination in all areas of employer–employee relations

Foreign Corrupt Practices Act (1978)

Outlaws direct payoffs and bribes of foreign governments or business officials

Americans with Disabilities Act (1992)

Protects the physically and mentally disabled from job discrimination

Family and Medical Leave Act (1993)

Offers workers up to 12 weeks of unpaid leave after childbirth or adoption or to care for a seriously ill child, spouse, or parent

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Food Quality Protection Act (1996)

Reduces the amount of carcinogenic pesticides allowed in foods

Pension Security Act (2002)

Gives workers more freedom to diversify their investments and greater access to quality investment advice concerning their 401(k) plans

Sarbanes-Oxley Act (2002)

Created more detailed reporting requirements for boards and executives in public U.S. companies and accounting firms

CAN SPAM Act (2003) Prescribes rules and penalties for e-mail spammers, although enforcement is difficult

Car Allowance Rebate System (2009)

Provided government rebates for consumers who traded in cars with low gas mileage for new, more efficient models; also called CARS or “Cash for Clunkers”

Patient Protection and Affordable Care Act (2010)

Increases regulation of health care providers and insurance companies in an effort to lower costs and expand coverage

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Outlines comprehensive regulation of U.S. financial markets and credit rating agencies

A plethora of government regulations abounds; Table 3.1 presents examples of some of the major ones in the United States.

Many regulations, such as those listed in Table 3.1, affect multiple industries. Others, however, are designed specifically for a single industry, category of firms, or even a particular company. For example, a 1992 U.S. Supreme Court ruling requires retailers to collect state sales taxes only if they have a physical presence—typically a store—in the state where the customer initiates the purchase. Large and small retailers alike have since argued that the ruling enables online merchants like Amazon.com to effectively discount their goods at the expense of government coffers. Amid severe state budget crises in the early 2010s, big-box stores like Wal-Mart, Target, Best Buy, Home Depot, and others backed the efforts of a coalition called the Alliance for Main Street Fairness to change state laws to require online merchants to collect taxes across state lines. Online sales accounted for 4.4% of retail activity

in 2010, a figure projected to increase to 14.6% by 2020.24.

In 2005, 18 U.S. states implemented the Streamlined Sales Tax Project in an effort to remove obstacles preventing retailers from collecting sales taxes with online sales. Estimated uncollected taxes associated with Internet sales was between $10 billion and $11 billion in the United States in 2011. A Credit Suisse 2011 study estimated that if Internet retailers were required to collect state sales tax, Amazon alone would lose $653 million in sales in 2011,

approximately 1.4% of an estimated $46 billion in revenue.25.

Consider a second example. In 2006, a U.S. federal court ruled that cigarette manufacturers cannot use the adjectives light or low tar to describe their products. This ruling not only requires firms to rename some of their products but it requires them to reposition them and hope that smokers do not assume that other aspects of the cigarettes have been changed as well. Hence, familiar brands like Altria's Marlboro Lights and Reynolds American's Camel

Lights must be changed to accommodate the ruling.26.

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Industry- and firm-specific regulations often follow a safety crisis. After Kam Air Flight 904 crashed and killed all 104 people on board in 2005, the European Union placed Phoenix Aviation—the company that leased the plane to the small, private Afghan carrier—on its backlist of carriers considered too dangerous to fly within the European Union. The U.S. FDA instituted stricter food safety regulations for an entire industry in 2008 following a salmonella

outbreak linked to lettuce, peanut butter, and even pet food.27.

Other regulations represent a response to public demand. Debates over public bans on smoking, for example, have pitted smokers and defenders of their rights against those concerned about the effects of smoking on the health of nonsmokers. A prominent study in Scotland found that hospital admissions for heart attacks and coronary problems fell 14% for smokers and 20% for nonsmokers in the year after Scotland banned smoking in public. Such findings have fueled calls for greater limits, resulting in varying degrees of government regulation in various locales in the United States. Not only have such bans affected the cigarette industry but smoking bans also affect other establishments, including restaurants,

hotels, and retailers.28.

In late 2010, the San Francisco board of supervisors voted to disallow restaurants from including toys as part of a meal unless the accompanying food complied with prescribed limits of calories, sugar, sodium, and fat content. Ostensibly aimed at curbing childhood obesity, the measure targeted McDonald's Happy Meals. The new rule was scheduled to take effect in December 2011. Shortly after the San Francisco vote, the advocacy group Center for Science in the Public Interest—on behalf of a 41-year-old mother of two—filed a lawsuit against McDonald's accusing the chain of employing deceptive advertising practices to attract children to their restaurants. The center alleges that Happy Meals contain amounts of fat, sodium, and calories much higher than government recommended levels. Responding to the attacks, CEO Jim Skinner attacked the “food police,” charging the legislation “takes personal choice away from families who are more than capable of making their own decisions … We've seen many years of someone trying to dictate behavior through legislation. … We sell choices on the

menu that make our customers feel better about their lifestyle.”29.

Industry regulation can arise when consumers express confusion about a specific category of products or services. For example, in 2011, the U.S. FDA issued labeling requirements for sunscreens. Many consumers did not understand the different types of protection offered and simply relied on the ultraviolet B (UVB) sun protection factor (SPF) provided on the label. While UVB rays primarily cause sunburn, ultraviolet A (UVA) rays can also contribute to wrinkles and skin cancer. The new rules required sunscreens labeled broad spectrum t o protect against both UVA and UVB rays. Only those with an SPF rating of 15 or higher will be allowed to state that they reduce the risks of premature aging and cancer; those with SPF ratings below 15 were required to carry a warning. Moreover, manufacturers were prohibited from using the terms waterproof or sweat-proof, and only those that pass a test can claim to

be water-resistant.30.

Sometimes political-legal forces target specific firms, especially when they are dominant in

their industries.31. Environmental suits ostensibly funded by grassroots organizations slowed or prevented Wal-Mart's expansion into a number of communities in the 2000s. In 2010, the Wall Street Journal reported that competitors Safeway, Supervalu, and Ahold were secretly funding hundreds of lawsuits against the industry leader. In late 2010, Wal-Mart began fighting back against what it saw as an ongoing corporate-sabotage campaign sponsored by its rivals. Wal-Mart petitioned judges to require its opponents to disclose individuals and

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organizations funding the suits.32.

The threat of government regulation can have a significant affect on an industry as well. For example, a number of states passed laws prohibiting the use of talking and/or texting on cell phones while driving in the early 2010s. With other states and the National Highway Traffic Safety Administration considering additional regulations, many automobile and cell phone manufacturers joined in an effort called the Car Connectivity Consortium to develop and promote functionality standards for smartphones. The idea is to develop phones and apps that utilize hands-free technology and create fewer distractions for drivers. Surveys also suggest that most consumers consider texting while driving to be a major safety threat and favor government bans. Hence, social pressure—a topic discussed in the next chapter—is

also prompting industry change.33.

Government action can also emanate from litigation. In 2008, for example, the U.S. Justice Department reached a settlement with the National Association of Realtors in an antitrust case involving the trade group's control of home listings displayed on the Internet. Association rules had previously allowed brokers to block their listings of homes for sale from being displayed on the websites of other brokers. The settlement disallowed such activity aimed as restricting equal access of “online brokers” to the same database accessible by traditional, full-

commission brokers.34.

Sometimes the threat of government action can result in negotiated solutions that affect how business is transacted. For years, retailers in the United States were prohibited from charging fees to their customers who used credit cards. Some wanted to pass the so-called swipe fees — typically around 3% of a sale—to customers who chose to pay with a card. In 2012, a settlement of a lawsuit against Visa, MasterCard, and bank credit-card issuers was reached allowing retailers to charge additional fees at their discretion. The decision to charge a swipe fee is not an easy one, however, as some consumers might resist paying it, especially on big

ticket items.35.

Global Considerations

It is interesting to consider broad global trends toward regulation in recent decades. The period from World War II to the late 1980s was marked by increased trade protection. Many countries protected their industries by imposing tariffs, import duties, and other restrictions. Import duties in many Latin American countries ranged from less than 40% to more than

100%.36. However, this trend was not limited to developing nations. Countries in Europe and Asia—and even the United States—imposed import fees on a variety of products, including food, steel, and cars. In the 1980s, the United States also convinced Japanese manufacturers to voluntarily restrict exports of cars to the United States in lieu of a tariff. Interestingly, this particular tariff may be largely responsible for Japanese automobile manufacturers establishing a large number of production facilities in the United States, thereby blurring the concept of the “foreign car.”

During this time, however, leaders from many nations recognized that all countries would likely benefit if trade barriers could be reduced across the board. After the end of World War II, 23 countries entered into the cooperative General Agreement on Tariffs and Trade (GATT), working to relax quota and import license requirements, introduce fairer customs evaluation methods, and establish a common mechanism to resolve trade disputes. The World Trade

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Organization (WTO) and the International Monetary Fund (IMF) were also established. By 1994, GATT membership had expanded to more than 110 nations when it was replaced by a new WTO. Today, the WTO contains 153 members and continues to negotiate global trade agreements. Of course, member nations must ratify the agreements before they become effective.

The move toward free marketing has also been seen in Europe, where a number of nations banded together to develop a trade-free European Community. Today, the European Union represents a market of about 500 million consumers. The European Economic Area, as it is called, is the largest trading bloc on Earth, accounting for more than 40% of the world's gross

domestic product (GDP).37. The shift toward a united and ostensibly stronger Europe—with a common currency—has not been easy, as debt crises in the early 2010s in Spain, Portugal, Greece, Italy, and other member nations illustrate.

Meanwhile, the United States, Canada, and Mexico established the North American Free Trade Agreement (NAFTA) to create its own strategic trading bloc. Many analysts believe that world business will eventually be divided into several such blocs, each providing preferred trading status to other nations within the bloc.

The global trend toward less regulation extended to the former communist countries as well. Nations of the former Soviet bloc in Eastern Europe overturned their governments in the

1990s and began to open markets and to invite foreign investment.38. Markets have become freer in much of Africa as well but not in all nations. Nestle's milk business has been under constant threat in Zimbabwe, where regulations require that 51% of foreign companies

operating there be owned by local, black-owned entities.39.

China is an interesting case to consider. Although China is officially ruled by the Communist party, its economic development policies have shifted toward a free market approach since the late 1990s. McDonald's awarded its first franchise in China in 2004. The number of franchises awarded in China by McDonald's, Yum Brands (which includes KFC and Pizza Hut), and others began to increase dramatically in early 2005 after Chinese officials introduced new guidelines concerning such issues as recruitment of entrepreneurs and property rights, a move required before China's entry into the WTO. Previously, Western companies feared a

loss of trade secrets and brands by offering franchises in China.40. Regulation—or the lack thereof—always seems to be a key political and business issue, as has also been seen recently in copyrighted products distributed electronically such as software, music, and

movies.41.

In 2004, U.S. chemical maker SI Group opened a tire production factory in China. After SI plant manager Xu Jie left the firm and joined Chinese competitor Sino Legend Chemical, the Chinese rival developed a rubber-bonding resin remarkably similar to the signature resin used by SI. Sino Legend executives claimed the product was developed independently, but SI officials are not convinced. By 2011 SI had spent over $1 million pursuing legal action against Sino Legend, but CEO Steven J. Large alleged that Chinese authorities have thwarted his efforts. This case is but one of many intellectual property disputes in China. Almost 43,000

such cases were filed in China in 2010.42.

The case of China highlights the fact that political considerations and regulations are often inconsistent across borders and can require coordination. For example, China has lagged behind other nations in vehicle emissions regulations. In 2007, China's State Environmental

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Protection Agency postponed new standards originally slated for implementation that year

because oil refineries would have been unable to meet the demand for cleaner fuel.43.

Following a rash of toy recalls across the globe, Chinese and U.S. officials worked together in

2007 to ban lead paint in toys produced in China and exported to the United States.44. The new nations have also worked together to facilitate the export of Chinese pharmaceuticals to

the United States.45.

It is difficult to overstate the complex influence of political-legal forces on industries, especially when firms operate across borders. For example, Internet search firms Yahoo and Google must negotiate Chinese regulations in order to operate in China. The Chinese government believes that the Internet must be controlled to maintain social stability and thereby imposes strict censorship and security laws. This control represents a distinct challenge for the search engines, whose purpose is to enable users to access the full spectrum of information

available, not just what governments prefer users to see.46.

Pollution is also becoming more of a challenge every day in China's capital, Beijing, where nearly 1,000 new cars are added to the congestion every day. This is expected to change markedly, however, with some analysts predicting an increase to more than 130 million by

2020.47. Hence, automakers should anticipate increased regulations in the coming years to combat this growing problem.

The notion that globalization tends to benefit skilled more than unskilled workers, coupled with greater awareness of the social costs it engenders, has led many to conclude that some

forms of protectionism may be appropriate.48. In 2008, the U.S. housing and financial crises resulted in a cacophony of calls for greater government intervention into business affairs as

some Americans attributed the primary cause to lax regulation.49. The recession of the late 2000s also raised the specter of protectionist policies as governments sought measures that promoted their own firms without regard to global trade. The economic stimulus package passed by the Obama administration in 2009 included consumer incentives that favored troubled U.S. automakers. Of course, protectionist battles are waged outside of the United States as well.

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In 2009, the Chinese government disallowed Coca-Cola's proposed $2.4 billion acquisition of Huiyuan Juice, expressing concern that Coke might not buy its fruit from Chinese farmers and that the Huiyuan brand name might be changed. Hence, policy makers often shift their economic focus to immediate concerns in challenging economic times. The benefits free trade

creates are more apparent over the long term.50.

The notion of “free trade” is relative, as trade across borders is never completely unabated. Some trade restrictions across borders will always exist, especially in politically sensitive areas. For example, the United States and other Western countries have banned the export of advanced technology in certain circumstances. The United States prohibits the export of certain electronic, nuclear, and defense-related products to many countries, particularly those believed to be involved in international terrorism. Many of these restrictions were revised and

strengthened following the 9/11 terrorist attacks51. (see Case Analysis 3.1).

Step 5: What Political-Legal Forces Affect the Industry?

The answer to this question depends on the industry but should include the effects

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1.

2.

3.

4.

5.

6.

7.

8.

9.

that political and legal events will likely have on the industry in which the organization operates. Some key issues include (but are not limited to) the following:

Legislation at all levels

Court judgments, as well as decisions rendered by various federal, state, and local agencies

Environmental regulations and enforcement of antitrust regulations

Tax laws

Consumer lending regulations

Outcomes of elections

International trade regulations and tariffs

Laws on hiring, firing, promotion, and pay

Political stability

The focus at this point should be on the industry, not a specific firm. The application of the firm in question is discussed in the strengths, weaknesses, opportunities, and threats (SWOT) analysis in Chapter 9.

As with economic, social, and technological forces, some political-legal forces affect different firms in the same industry in different manners. However, one should identify the key external factors affecting the industry and explain how they affect the overall industry. For example, stating that a particular industry will be affected by changes in tax laws is not sufficient. One should elaborate by discussing specific changes, such as an increase in the investment tax credit, and elaborate on how this change affects the industry as a whole. Although referencing individual firms in this section is acceptable, emphasis should be placed on the effects of political-legal and other environmental forces on the entire industry. Specifics concerning how these factors affect a particular organization should be elaborated in the section on opportunities and threats, which is later in the analysis.

Researching political-legal forces, as well as other environmental forces, requires some digging and intuition and a lot of reading. Rarely will one find a website that provides a comprehensive “macroenvironmental report” for a given firm or industry. When one is conducting research, it is often helpful to create four charts—one for each element in the macroenvironment—and add to it throughout the research process. One may locate direct and indirect references at the company home page and in various articles, but trade journals are often the best single source of information for reports on relevant issues in the external environment. As many as two dozen (or more) different sources may be required to complete the analysis of the four macroenvironmental forces. It is rare that complete and thorough information can be found in only one or two sources.

If a company competes in multiple industries (with multiple business units), one needs to analyze the major business units and industries. What constitutes “major” depends on the firm. For example, Ford Motor Company receives the majority of its revenues

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from automobile sales, but it also has a business unit that provides customer financing. With Ford, it would make the most sense to analyze its automobile business unit and not spend considerable time on the financial business unit. With other companies, however, determining which business unit or units are “major” may be more difficult. The key is to consider the relative contribution of each business unit to corporate revenues and profits. If questions remain, it is a good idea to present the professor with a list of the company's business units and each one's proportion of company revenues and profits, along with a proposal on how to proceed, and ask for guidance.

Economic Forces

Economic forces significantly influence business operations, including growth or decline in GDP and increases or decreases in economic indicators such as inflation, interest rates, and exchange rates. Other factors such as hikes in energy prices and health care costs and access to labor can also play a role.

Although the focus here is on the effects of economic changes on an industry, some competitors may be hurt more than others. Increases in fuel prices in mid-2005, for example, did not have the same effect on all airlines, although specific effects are difficult to determine because of other simultaneous environmental and competitive changes in the industry. Initially, weak players like Delta Air Lines seem to have been hit the hardest, while budget carriers like Southwest Airlines and Ryanair may have been able to experience some mild gains. As prices continued to rise, however, it became apparent that low-cost airlines were not going to suffer less than their traditional counterparts because fuel represents a higher percentage of running costs on short-haul flights such as those championed by budget carriers. While low-cost airlines hoped to spread these increased costs over more customers with higher occupancy rates, this became more difficult because traditional airlines began to