The macro-environment includes societal forces that affect the micro-environment. These forces, such as demographic, economic, natural, technological, political/legal, and social-cultural factors, make up the company’s macro-environment. It is important for companies to continually monitor and adapt to the marketing environment in order to take advantage of opportunities and manage risks. Armstrong and Kotler (2003) define the marketing environment as encompassing all individuals and forces that impact a company’s ability to effectively engage with its target market.
The purpose of this report is to analyze the impact of macro-environmental forces on PepsiCo in China using the PEST analysis. PepsiCo was the first U.S. company to introduce its products in China after the country implemented the reform and opening up policy in 1979. Over time, PepsiCo has gained a deep understanding of the need to adapt to China’s varied macro-environmental forces and has adopted a localization strategy known as “Think local, Act local”. This report incorporates extensive research and literature review from relevant books, journals, and internet sources.
The article provides information about the company’s history, how the macro-environment affects PepsiCo’s marketing efforts in China, as well as the impact of macro-environmental forces on their marketing activities. It concludes that despite having exceptional products and technology, global acceptance can be hindered by a lack of awareness regarding the local macro-environment.
Introduction
Companies in economic globalization must recognize, evaluate, and monitor external environmental forces. They should also assess the current and future impacts of these forces on their business activities. Jobber (2001) suggests that the macro-environment includes broader forces that influence both the company and other actors in the microenvironment. These forces can be classified as demographic, economic, social-cultural, political-legal, natural, and technological.
According to Kotler and Keller (2005), marketers must be knowledgeable about various aspects of the demographic environment. Specifically, they need to consider worldwide population growth, the evolving makeup of age groups and ethnicities, fluctuations in educational levels, and the shift from mass marketing to micromarketing. Additionally, in the economic sphere, marketers should prioritize understanding income distribution, levels of savings, debt, and access to credit. Finally, in the social-cultural arena, marketers must comprehend individuals’ perspectives on themselves, organizations, society, nature, and the universe.
In order to cater to different subcultures, marketers must advertise products that match primary and secondary values. They should also take into account different factors in various settings. For example, in the natural environment, marketers need to be aware of limited raw materials availability, increasing energy costs, and pollution levels. Moreover, they have to adapt to changing government responsibilities for protecting the environment. In the technological sphere, marketers must recognize the fast pace of technological progress for innovation purposes. Additionally, they should accommodate diverse research and development budgets and expect heightened government regulations due to technological advancements.
Finally, in the political-legal environment, marketers must comply with numerous business regulations and work with special-interest groups. This report will use PEST to analyze the macro-environmental forces that impact PepsiCo in China. After years of operating in China, the company recognizes the importance of adapting to the various macro-environmental forces and implementing their localization strategy, “Think local, Act local.”
Company Profile
PepsiCo, created in 1965 through the merger of Pepsi-Cola and Frito-Lay, has continuously grown its portfolio. In 1998, it acquired Tropicana and later merged with The Quaker Oats Company in 2001, which also included Gatorade. At present, PepsiCo is a significant global player in the food and beverage sector, earning more than $35 billion in revenue in 2006 and employing about 168,000 people.
PepsiCo has been operating in China since the beginning of the country’s reforms. In 1981, Pepsi-Cola became one of the initial American investors in China by signing an agreement with the Chinese government to build a bottling facility in Shenzhen. Currently, PepsiCo has established more than 40 joint or fully-owned businesses in China, investing over US$1 billion and creating employment for approximately 10,000 individuals” (Official website of PepsiCo).
How the Macro-environment Affects PepsiCo’s Marketing Activities
When examining the macro-environment, it is essential to acknowledge the factors that may affect important variables concerning an organization’s supply and demand levels as well as its costs. The PEST analysis framework offers a means to categorize these environmental influences, encompassing political/legal, economic, social/cultural, and technological forces. These external factors are typically uncontrollable by the firm and can present risks. Consequently, employing the PEST tool is vital in evaluating how China’s macro-environment impacts PepsiCo.
The political-legal environment encompasses the laws and regulations that govern politics and government, shaping political systems. This includes constitutional law, electoral laws, human rights legislation, and administrative procedures.
Before playing the game, make sure you understand the rules. It is impressive to see how some people in the business world do not grasp the political-legal aspect of marketing. Ignoring laws, regulations, and guidelines can lead to fines, negative publicity, and expensive lawsuits.
PepsiCo, a foreign company, plans to invest in China’s regulated beverage industry. The government’s regulations state that obtaining approval for a new bottling plant takes approximately three years, and the production volume of concentrates must be re-approved each year. Furthermore, PepsiCo incorporates elements from Chinese culture, such as zodiac animals and Spring Festival couplets, into its TV advertisements as part of its global advertising strategy.
Pepsi Cola has established itself as the leading soft-drink brand in China by employing a successful approach and leveraging its extensive advertising experience in the country. However, the company’s market strategy may be impacted by government policies and regulations. In China, where media freedom is restricted due to communist rule, individuals still retain some level of personal expression in their everyday lives. Nevertheless, foreign companies like Pepsi Cola face tight control from the government over media outlets and may encounter additional regulations.
The importance of the economic environment cannot be overstated.
The economy significantly impacts consumer spending and purchasing behavior, constituting approximately two-thirds of total economic activity. As Boone and Kurtz (n. d.) illustrate, the economic environment includes various factors that influence consumer purchasing power and marketing strategies. These factors encompass the business cycle stage, inflation rate, unemployment level, resource availability, and income levels.
China experienced the highest economic growth rate globally from 1990 to 2006, averaging at 10%. Nevertheless, official records revealed a consistent rise in Chinese inflation, reaching 5% for two consecutive months in August 2006. This situation presents a considerable obstacle for PepsiCo as it leads to a general price increase and diminished buying power.
Inflation will drive up costs for companies, including expenses for purchasing production materials, which may result in a reduction in sales. The marketers at PepsiCo have a clear understanding that inflation will cause consumers to react in two ways:
- Decrease their brand loyalty. In a recent research, most Chinese consumers are willing to use cheaper brand, and honesty, because it works just as well.
- Stockup. “Many consumers take advantage of coupons and sales to stock up” (Hair et al. 1992, p. 52).
Income is a vital factor in the economic environment of marketing as it significantly impacts consumers’ purchasing power. For a product to succeed, it must be priced reasonably and also offer enough appeal for consumers to be willing to pay more due to its health benefits and association with a modern and prestigious image. Nevertheless, there is a danger of setting the price too high without effectively communicating its value.
The social-cultural environment
Understanding the relationship between marketers, society, and culture in the marketing environment is vital. A crucial aspect of succeeding in China’s business landscape is comprehending the nation’s culture and its people. Griffin & Pustay (2003) emphasize that a society’s culture plays a role in shaping communication and interaction among its members. Moreover, foreign products and services can be influenced by a country’s culture. An example of this is the high demand for soft drinks in China.
Obesity is on the rise among Chinese adults and children due to multiple factors. In Chinese culture, it is crucial for the beverages they consume to offer health benefits. Presently, there is an increasing worry regarding “obesity” within the Chinese population. Despite PepsiCo holding a larger market share, there exists a potential danger of not being able to fulfill the demand for nutritious soft drinks. To effectively conduct business with Chinese companies, comprehending their cultural practices in both business and social settings is indispensable (Patworks LLC. 003).
Initially when Pepsi
Co entered the Chinese market and has already missed out on some business opportunities in China because they assumed that the Chinese people would do things their way. The Chinese culture has a long-established history and does not easily adapt. For instance, conducting business in China entails negotiating contracts, prices, and terms, among other things. Compared to Western standards, the negotiation process in China is slow and deliberate. One challenge when negotiating with Chinese companies is understanding what “no” means. Saying “no” directly is culturally perceived as impolite and unacceptable. Often, when the company hears “we will consider it,” it actually means “no”.
The technological environment
The technological environment encompasses the application of scientific breakthroughs, creations, and advancements in the field of marketing. Remarkable progress in technology can greatly impact various industries. Nevertheless, despite the potential offered by novel products, their creation involves a lengthy and intricate process.
Despite the fact that not all companies have succeeded, many have taken risks with technology in order to achieve success. One company that exemplifies this is PepsiCo, which made a substantial investment in attempting to introduce salad vegetables to the fast food chain market in China. While the project appeared promising from a technical standpoint, thanks to an established infrastructure and high-quality products, PepsiCo’s marketing strategy did not align with its technological planning. Consequently, the selected fast food chain declined to purchase the vegetable stock, leaving PepsiCo with excess produce and no other markets to sell it. In the end, this gamble did not yield favorable results for the company.
Impact of Macro-environmental Forces on PepsiCo’s Marketing Activities
Marketing managers in the business arena face the challenge of dealing with environmental forces that are often beyond their control. They must strive to adapt to changing environmental conditions, as both environmental opportunities can turn into threats and environmental threats can become opportunities (1989, p. 55). Overcoming macroenvironmental clashes and barriers between the Chinese macro-environment and international business is crucial for marketers.
The political-legal environment
Laws and regulations have an impact on all aspects of marketing operations and decision-making. This includes designing, labeling, distributing, advertising, and promoting goods and services. The management of PepsiCo acknowledges that these regulations have already affected their marketing activities. To effectively navigate the extensive, intricate, and dynamic political-legal environment, larger companies like PepsiCo maintain an in-house legal department.
Ensuring compliance with China’s laws and regulations is essential for foreign companies’ marketers to avoid damaging their reputation and impacting profits. It is crucial to take measures to control the political-legal environment. PepsiCo has made significant investments in adjusting its operations and business strategies to align with the local culture and practices. At present, PepsiCo indirectly manages 24 bottling joint-ventures through two Hong Kong-based companies, of which it holds partial ownership. Moreover, the company maintains a strong market presence by partnering with domestic companies and the Chinese government. To oversee its operations across various countries, PepsiCo has established its Asia-Pacific headquarters in Shanghai.
The economic environment
Due to the interconnectedness resulting from the global economy, companies must scan, monitor, forecast, and assess the economic health of foreign nations. Currently, in China, the inflation rate stands at 5%, which adds pressure on consumers to make more economical purchases. PepsiCo needs to comprehend that buyers will not pay more for a product than they perceive its value to be, regardless of the selling price.
During periods of high inflation, marketing managers must implement special pricing tactics. They should establish a reliable cost-forecasting system and utilize anticipatory pricing. Hair et al. (1992) categorize these tactics into two types: cost-oriented and demand-oriented. Cost-oriented tactics include delayed-quotation pricing and escalator pricing. Delayed-quotation pricing is a commonly used tactic where the price of a product is not determined until the item is complete or delivered.
Demand-orientated pricing methods such as price shading and increasing demand through increasing selected demand, unique offering, and system selling are crucial for companies like PepsiCo. It is important to consider the economic environment when determining the pricing strategy, especially in China where people have relatively low incomes. Customer affordability is a key factor in PepsiCo’s pricing decisions, as consumers will choose alternative products if the price is too high.
As a multinational company in the era of globalization, it is crucial for us to always appeal to Chinese consumers. In order to succeed, we have had to adapt to the local economic environment. Luckily, most Chinese can afford an occasional soft drink as a can of Coke only costs RMB1.90 ($0.24) in Shanghai today. Because of the reasonable price of Coke, our products currently reach approximately 60% of China’s population.
The social-cultural environment.
The social-cultural environment comprises institutions and other factors that impact a society’s fundamental values, perspectives, preferences, and behaviors. Cultural variables also influence product decisions. It has been noted that in China, there is a growing concern about the problem of “obesity”. If soft drinks are not seen as healthy, PepsiCo faces a potential risk. Therefore, PepsiCo has decided to implement a viable solution to reduce calorie intake from soft drinks.
PepsiCo should take into account local customer’s purchase habits and reflect a nation’s culture when making decisions about their products and services. For example, in China, people prefer hot, noncarbonated drinks made with natural ingredients or herbs that they believe have health benefits. Hot teas are especially popular.
Tea is known as “Tea Culture” in China due to its immense popularity. Recognizing the drinking habits of Chinese people, PepsiCo swiftly launched Lipton Tea, a range of noncarbonated beverages, in collaboration with a local partner. By focusing on localized production strategies, PepsiCo successfully increases its market share. In order to prevent missed opportunities and minimize misunderstandings, it is crucial for businesspeople to acknowledge the cultural backgrounds of others. Having a thorough understanding of manners and customs becomes particularly significant during negotiations. If the company expects Chinese individuals to conform to their own ways, they risk losing out on more opportunities.
China, with its rich and ancient culture, along with the influence of over six decades of communist one-party rule, poses a unique challenge for foreign business people and companies. It is imperative to swiftly adjust to these circumstances and embrace the concept of “doing it their way”.
The technological environment
“Technological trends play a crucial role in finding marketing opportunities. These trends encompass advancements in research and development (R&D) that can potentially result in new products or entire industries” (Assael 1990, p. 72). Despite the setback encountered during the development of a new product, the company remains determined to reenter the fast food market by offering salad vegetables. This time, the company assures that it will not overlook the significance of inventory management. PepsiCo comprehends that, in the competitive soft-drink industry with low-profit margins, operational efficiencies in various areas such as procurement, inventory management, production planning, material requirements planning, distribution, and service hold a key advantage.”
PepsiCo, as a leader in the industry, understands the crucial role that information technology plays in its success. It has a strong track record of employing advanced IT to support its direct-store-delivery business model and management. In China, PepsiCo China uses UFIDA’s Enterprise Resource Planning (ERP) system. Additionally, PepsiCo relies on Research and Development as its key strategy to stay ahead in the market. Due to trade secret restrictions on product formulations, the majority of patents focus on technology that supports the beverage industry.
PepsiCo intends to utilize its patents to enhance its presence in all the markets it operates in. Research and development (R&D) plays a crucial role in providing significant benefits to Coca-Cola consumers on a global scale. The main technology fields in which numerous patents have been filed include Packaging, Vending Equipment, Fountain Equipment, Water Treatment, and alternative refrigeration technologies. Specifically in China, water treatment and vending equipment technologies will be advantageous for capturing a larger market share. Additionally, the company will be compelled to create new technologies tailored to the specific needs of China.
Several new technologies will be utilized in the design and packaging of upcoming products. Additionally, Research and Development aims to incorporate local herbal products into the drink to enhance its energy and provide a unique local taste. To ensure efficiency, Research and Development will employ a small-scale bottling system for testing purposes. This system will confirm the feasibility of producing and bottling the new drink on a large scale. Furthermore, PepsiCo plans to conduct field tests in different regions of China to ensure the widespread acceptance of the new product.
Conclusion
According to Ireland and Hitt (1999, p. 43), many films encounter a turbulent, complex, and global external environment that makes their interpretation challenging. In the current rapidly changing and intricate setting, marketing managers must utilize PEST analysis to make well-informed decisions promptly. The crucial factor for achieving success in a particular country is grasping the diverse macro-environment elements that could favorably influence your business relationship. The report includes PepsiCo as a notable example in this regard.
PepsiCo has a deep understanding of China’s different external environments, consumer behaviors, and localization practices, which they consider as their long-term market strategy. As stated by Porter (1985), analyzing the macro-environment is crucial as every industry has a fundamental structure and economic and technical characteristics that need to be understood. It can be concluded that even the best products and technology may not succeed in global markets if there is a lack of awareness about the local macro-environment.
