PESTEL analysis and diamond theory of Cambodia

As a result of a worldwide competition being global is becoming more important for the companies. One good cause for the endless competition according to Daniels & Radebaugh (1998) is that the global market is not large enough for all the companies. Anderson et al (1998) argue that the internationalisation is being more important due to borderless world.

According to Daniels and Radebaugh (1998), there are several reasons for organisations to enter the global market today. The very first reason for going global is to expand sales. Sales dependent on two major factors: consumer’s interest in goods and services and the willingness or ability to buy those products. If there’s a match of those two factors outside their home country, companies can get higher sale going global. Second factor is to acquire resources, when there is lack or inadequate resource in the home country; companies tend to move into global arena where they can seek out resources which can also help them reduce cost and getting competitive advantage. Third but not the least is for minimising the risk, diversifying sources of sales and suppliers by operating in different countries and different business cycles, helps businesses to reduce swings in sales and profit. Sales always decrease or don’t grow much in a country that is in recession and sales increases in one that is economically expanding. Example of Nestle in early 2000 shows that their sales was sluggish in Western Europe and United States but the growth in Asian, Eastern European and Latin American market was quite fast.

Being in Apparel Industry of USA, it is very essential to do some research and study for finding out which country to select or which country is much better for the industry to operate smoothly and can give good returns. There are two known environmental factors which can affect the company, Internal and External. Internal environmental factor, to some extent can be controlled by the company being a internal one whereas the external environmental factors can’t be controlled by the company itself. Such factors under external environment are Political, Economic, Socio-Cultural, Technological and Legal. So before selecting any country, it is necessary for conducting study on the various external environmental factors that may affect the company or can make negative impact. We have been proposed two different countries Turkey and Cambodia, where the Apparel Industry wants to expand its footprint. In order to get a clear picture for selecting the best country that is much suitable for expansion, PESTLE analysis and Diamond Analysis are more helpful strategic management tools we have that provides useful framework to analyze the environmental pressure on business.

PEST Analysis of Cambodia

POLITICAL & LEGAL: Cambodia is one the developing countries of South East Asia, having constitutional monarchy with a multi party democracy and an elected government. No party got the proper majority in the elections held in July 2008, hence formed a coalition government. The constitution written in 1993 helped the country for a stable political environment in comparison of past decades of war and internal strife. Diplomatic relations with most countries have been established including the US. Cambodia has a membership of most major international organisations like UN, ASEAN, ADB, IMF, The World Bank and WTO. US-Cambodian bilateral relations have been deepened and broadened in past years. US has helped the country nearly $62 million through various USAID mission welfare programs.

Economic: Cambodia has a GDP (2009) of $10.8 billion, Per Capita GDP (2009) of $731 and inflation (2009) of 4.5%. Garment, Textile and shoe manufacturing, rice milling, tobacco, fisheries and fishing, wood and wood products, cement, rubber, papers and food processing are major industrial sector of the country which hold 21.7% of GDP (2009 est.). Country has been able to export worth $3.9 billion in 2009 to its major partners like US, UK, Germany, Singapore, Japan etc. and has imported fuel, cigarette, vehicles, consumer goods, machinery worth $5.4 billion (2009).Sound macroeconomic policies, political stability, regional economic growth and government openness (100% share holding FDIs allowed) towards the investment has attracted growing number of investors, due to which FDI has increased 12 fold since 2004. Garment and tourism are the key industry which drove the country’s economy having sustainable 10% growth during 2004-2007. In 2009 during global recession, it was near zero, but is considered that it will gain the momentum again in 2010. Infrastructure are not adequate, however road networks are improving rapidly. Corruption and lack of legal protection for investors are the two main reasons which may hamper economic opportunity and competitiveness.

Socio-Cultural: Population of Cambodia (2008 census) is 13.4 million and 95% of those have faith in Theravada Buddhism and rest Islam, Christian etc. Country is a mixture of 90% Cambodians, 5% Vietnamese, 1% Chinese and others 4% ethnic groups. Cambodia has a literacy rate (2007) of 75.1% and Khmer is a first language spoken by 95% of population and English is increasing as a second language. Cambodians mainly eat rice and fish and they are known for silk and cotton weaving, silver work, silver and gold jewellery and basketry. Garment industries mostly comprise of female employees and the labour cost is very low $ 50 – 80 per month (NPRS PRF article). Turkey has the labour force (2003 est) of 7 million. Police and judicial systems are believed to be corrupt.

Technology: Cambodia is way behind in their technological sector. As most of the FDIs have entered the country, they have also brought their own technology with them, so possibility of spill-over of the technological knowledge to the country can be seen.

PEST Analysis of Turkey

Political & Legal: Turkey is a large and republic country having democratic, secular and parliamentary government system. Its first constitution was written in 1982 and was amended in 1987, 1995, 2001 and 2007. Referendum of October 2007 has made president more strong and powerful and the president is elected directly by voting. The politics and government of Turkey is considered to be stable.

Economic: Turkey has a GDP (2009 est.) of $608 billion and GDP per capita (2009 est.) of $8,456. Inflation rate (2009 November) is 5.53%. Turkey had exported (2009 September) of $73.1 billion which comprises of textiles & apparel industry, machinery, electronics, motor vehicles etc. and imported (2009 September) worth $99.9 billion of petroleum, machinery, vehicles, electronics, iron, steel, plastic and precious metals. Turkey’s economy is moving from agricultural & industrial to large and globalised services sector. It has opened its economy in 1980s and also signed customs union agreement with the European Union in 1995, and Turkey is also working hard to get the membership in EU. Instead of economic downturn, high unemployment rate and high inflation during 1990s, in the year 2001 it started recovering faster since then with an average of 6% per year due to the help and support from IMF and The World Bank. Turkey’s economy has already attracted $18.3 billion net FDIs in 2008. However there are several disputes with the investors regarding high taxation, it has a number of bilateral investment and tax treaties as well with many countries including the US, which has guaranteed free repatriation of capital in convertible currencies and eliminate double transaction.

Socio-Cultural: Turkey has a population of 76.8 million. Turkish, Kurdish are the major ethnic groups of which 99% are Muslims and rest of them are Christian, Bahai and Jewish. People in Turkey speak Turkish, Kurdish, Arabic, Armenian and Greek and has a work force of 24.4 million and 70% of the population live in urban areas of the country. Turkish law prohibits the labour of child under 15 years of age, however if they are 13 & 14 and are enrolled in school can do light and part time work.

Technological: Turkey has various research institutions and organisation which are focused on R&D along with many ancient Technical universities which is benefiting the country in advancement of technology such as telephone lines, mobile phones, radio stations, television stations and Internet. Turkey is famous for its telecommunication development.

Possible Impact of the environmental factors

PEST analysis reveals that there lie some similarities and some differences in each of the environmental factors of both the countries. We may examine that politically at the moment both Cambodia and Turkey have stable governments even if they had violence and disturbances in the political situation of the country in the past. Both the countries have maintained good relationship with the United States and have also invested a lot in both countries. Both have open economy allowing other nations to come and do business in their country using their available resources such as land labour etc. Having a stable and sound political environment is always a boon for both the host and the home nation for starting any business.

Economic analysis reveals that Turkey is way ahead than Cambodia. GDP of Turkey is 60 times bigger than Cambodia, which means there is a sound economic environment for doing business. If we have a look on the exports and imports sector, Turkey is doing pretty good. From the apparel industry’s point of view, in both the countries, Garment and Textile industries are flourishing since long time and have aided the economy of both the countries with positive effect. As we can see that the number of FDIs in Cambodia have increased very dramatically (12 fold since 2004) in very short time, it may be due to the reason Cambodia due has a very low cost labour. Also, Turkey has been able to attract a lot of FDIs in their country. Turkey has signed customs union with EU and also has bilateral treaties with US, it may help Apparel industry to have much competitive advantage. Having sound and stable economy is very much helpful for any business who wants to expand and in these criteria both countries have 50-50 chances of selection.

Socially and culturally, both the countries are very different. Cambodia is considered as a Buddhist country and Turkey has 99% population of Muslim religion. People in Turkey are much educated or have higher literacy rate than Cambodia.

Technological environment has also got much difference in both the countries. Turkey in comparison to Cambodia is much advanced. In Cambodia, the FDIs which have started their operation are transferring their technological knowledge to the country, whereas Turkey has developed much in telecommunication and textile industry. Turkey used to import the textile machinery from Germany, but recently they have begun manufacturing on its own from small to medium sized companies involved in manufacturing. According to German Engineering Federation Textiles Machinery Association, German textile machinery exports had gone down by 62% in 2008 as compared with 2007. So, we can see the development in technology in Turkey is much more than Cambodia.

Porter’s Diamond Theory:

We can use the Diamond model of Michael Porter to assess the viability of both the countries. Classical theories of international trade and business propose that comparative advantage lie in the factor endowments that any country has got. Those factor endowments include, Land, Natural resources, labour and the size of local population. Porter argued that a nation creates new advanced factor endowments such as skilled labour, a strong technology and knowledge base, government support and the culture. Porter’s diamond model consists of four major aspects 1) Factor Conditions 2) Demand Conditions 3) Related and supporting Industries and 4) firms strategy, structure and rivalry which creates competitive advantage amongst the nations and now there are two additional variables 1) Government and 2) chance also influence the system.

Factor of condition: It represents the position of factor of production, input which is necessary to compete in any industries, which are Land, Labour, Capital, Infrastructure, Natural resources etc. Appleyard and Field (2001) argue that all the classical theories in trade rest on the factors of production for example Adam Smith’s absolute advantage, David Recardo’s Comparative advantage and Hechesher-Ohlin theorem etc. If we compare Cambodia and Turkey, Turkey has the competitive advantage over Cambodia due to these factors of productions discussed above. Turkey is a large country, have huge population, huge work force (unskilled and semiskilled), good infrastructure and more capital than Cambodia, so Turkey gains the high priority for any business willing to go global.

Demand Condition: It represents the demand condition for the industry’s products or services in the local and global market. As it is revealed through PEST analysis, that both the countries are doing pretty good in textile and garment industry, attracting and encouraging the investors to come and invest because there is a huge demand of this industry worldwide, because of the cheap labour in Cambodia and Location factor of Turkey. Both countries are different in creating demand conditions. Turkey has got huge potential than Cambodia.

Related and Supporting industries: Third determinant of national advantage in an industry is to have suppliers and related industries which can give the industry a competitive advantage. If local supporting industries are competitive, any business can enjoy the cost effectiveness. Scanning both the countries, we can find out that, Cambodia has least supporting industries than of Turkey. Turkey is developing and has many textile machinery manufacturers currently, if business needs, they don’t have to look outside the country and also they can save much cost over it which gives some competitive advantage of low cost leadership in comparison to the countries where businesses have to import the machinery at higher cost and taxes.

Firm’s Strategy, Structure and Rivalry: As this factor clearly says that, strategy of businesses operating in the country, its structure and the rivalry or competition amongst them creates competitive advantage of the nation. While doing PEST, we saw the trend of FDIs going to both the country is very much increasing, hence, this factor is growing. Various international firms operating there are teaching the countries how they do business back home, which is adding something to the country. Both the countries are learning from the investors. The huge attraction in the garment, textile and apparel industry has also increased rivalry among the businesses, which is considered good because it increases pressure to improve and innovate on what they are doing, which helps nation to get advantage. We can find out that Turkey is dominant in this factor than Cambodia.

Government and Chance: Chance events are developed in the period of time by new innovations, new technologies, positive political developments and shifts in foreign demand, where any nation can capitalise using this chance to get the competitive advantage amongst the nation. Government on the other hand is also equally important to be considered because it can improve or detract from the national advantage due to the policies which may influence (negative and positive) on each of the determinants of diamond model discussed above. In the case of Cambodia and Turkey, both the country’s government are interested in attracting more FDIs in their country and have opened their economy which we can see in the GDP growth rate of both countries reflect it and can compare the two nations which one is more attractive.

Market entry mode for foreign business:

Making decision of how to enter the market or the country for business is so crucial and can have significant impact on the business. There are various modes of entry into international marketing such as the Internet (use of internet or e-commerce), Exporting (direct sale of domestically produced goods), Contracting, Licensing, International Agents and Distributors (use of distributors for selling goods), Strategic Alliances (joining hand with the competitor), Joint Ventures, Mergers and Acquisitions, FDIs etc. Some of them are discussed below and we will examine which mode will be much suitable for our apparel industry to enter both Cambodia and Turkey.

Licensing: This entry mode permits a company in the target company for using its technology, brand, expertise, where the organisation charges a fee or royalty for that use. Licensor has to invest very little, but it has got a huge potential of providing very large return on investment. Licensing includes franchising, turnkey contracts and contract manufacturing . We can have examples of franchising strategy applied McDonald’s restaurant, Coffee Republic and Dominos Pizza entering into the target country.

Joint Ventures: In this entry mode foreign business selects a local business and invests some shares in it. Doing so, both the firms share the risk and the rewards while doing business, their technology and the government regulations and other legal obligations imposed in the country. In some countries there is a legal requirement to have local partner to do business by any foreign company with limited number of shares.

Foreign Direct Investment: In FDI, business has the direct ownership of facilities in the target country. They open wholly new subsidiary (Greenfield investment) or they can use Merger and Acquisition strategy. In this they have to transfer their resources such as capital, technology and the skilled personnel. In this kind of entry mode, business has a high degree of control in the operations.

Best entry mode:

Cambodia:

As we did the PEST and Diamond analysis of the country, we can see various factors that may affect the operation of the business. Cambodian government are flexible enough to get the foreign business to come and start up a business and the foreign and local apparel and textile industry are also flourishing in the country due to the low cost labour available in the country. For Cambodia, we can have a licensing mode of entry; because there are still many things need to be improved in the country such as labour skills, government fiscal and monetary policy, infrastructure and technology. If the business adopts the licensing entry strategy, business will have less risk due to various factors like, language problem, exchange rate risk, labour obligations, and government regulations.

Turkey:

For Turkey, we can propose the FDI form of entry in the market. Instead of opening a wholly new subsidiary, company can think of acquiring or merging with the local firm already established and doing considerable business, which will help the company to gain the existing customers, market, talent of the company. As we have seen the trend of FDI going to Turkey, which has increased tremendously in the recent years, because of the less risk and the market is growing enormously in comparison to the neighbouring countries and the demand for apparels and textiles produced in Turkey is also quite high so the company will not have to invest much of their time to create the environment as it is already created. Government is also flexible enough for the FDIs and the political stability will help, pool of skilled labour availability will also help reducing cost of transferring the knowledge from US to Turkey where as it is quite high in case of Cambodia.