In recent years, an increasingly competition rate in domestic market has forced many company’s to expand the business. This trend is also due to several other reasons such as future growth, searching for new market and diversifying and expanding a business (Acevedo, 2010). In order to expand businesses successfully it is vitally important to understand environmental factors affecting the international business. This is because of environmental forces may have the most significant impact on the business. There are several environmental forces identified such as economic, culture, natural environment, technology, politics and legal environment (Ball & McCulloch, 1996). These forces are uncontrollable as they are externally driven factors. Multinational Corporation is those enterprises that operate in several countries but managed from home country. Moreover all the firms or group that derives revenue from operation outside of the home country is considered a MNC (Business dictionary, 2010). Company faces some issues, the issue of natural environment related to water in India and the issue of fraudulent business practice that has been identified by some of its shareholders. Moreover company also faces the tainting crises of their global marketing strategy that was later addressed by the company’s new CEO.
Therefore, it is necessary to investigate how the issues relating to international environment influence on the company’s operation. Further the report will discuss a model of the international environment which consists of environmental forces mentioned above, and it will also analyse the model of Market Screening.
The report has three main aims firstly to identify the importance of analyzing international environmental forces, secondly to identify the current situations and issues related to the environmental factors affecting Coca-Cola Company and at last providing some solutions to the company to overcome these issues.
2. A brief introduction of the Coca-Cola Company
It was the time of 1886 in Atlanta where John Pemberton a pharmacist came out with a caramel colored liquid at Jacobs’ pharmacy and mixed it with carbonated water. Later on the sample was provided to the customers, this soon became very popular and something special. It was time were the drink was sold to the customers for five cents per glass and that drink was named as Coca-Cola. In those days the Pemberton sold around 9 glasses of Coca-Cola a day. Unfortunately Pemberton died in 1888 and hence the businessman Asa Griggs Candler secured rights to the business for a total of about $2,300 and became the first president of the company (Coca-Cola, 2008a). During the period of 1893-1904 the company built the syrup plants in Chicago, Dallas and Los Angeles, the company hires Hilda Clark the first spokesperson for the drink. Later on the two lawyers Benjamin Thomas and Joseph Whitehead secured exclusive rights from Candler to bottle and sell the beverage for $1(Coca-Cola, 2008a). During 1919-1940 Robert Woodruff became the president of the company, when his father purchased the business from Candler, as being the marketing genius Woodruff expands the company overseas in 1928 to the Olympic Games in Amsterdam (Coca-Cola, 2008a). Further the company expands its brand with new flavors such as Fanta, Sprite and Diet Coke. Later on in 1990-1999 the company segmented the new market with its brand related with sports activity, such as FIFA world cup, Olympic Games and Rugby World Cup, it was the time where the Soft Drink Coca-Cola became an official drink of NASCAR racing (Coca-Cola, 2008a).Now the company is operating in more than 200 countries with more than 400 brands of drinks. From serving just 9 glasses per day now the company Coca-Cola became world’s ubiquitous brand serving more than 1.4 billions beverages each day (Coca-Cola, 2008a).
3. Importance of Analyzing Environmental forces
Environmental forces are those forces that influence the management function of the business. It consists of many elements that are uncontrollable such as politics, economy, culture, technology, finance, and legal environment. Due to an increase in global warming nowadays, sustainability of natural environment is an important issue in development and industrial policies in many countries for the past several years (Khambata & Ajami, 1992). Concern for the environment has grown because of several reasons. Firstly, the damage to environment is becoming increasingly visible. Secondly the society is becoming more concerned with the environment as it recovers support from political and financial section. Thirdly, the international bodies such as World Bank and United Nation have become more responsive towards the environment, by establishing clear guidelines and laws to protect the environment (Khambata & Ajami, 1992). In addition the analysis of environmental factors is vitally important for the MNC, because it provides an overall outlook of the economy and its impact on the business during the change in the economy (Ball & McCulloch, 1996). For instance, analyzing the economy provides the information regarding the financial and political situation of the market, identifying the economy will help the business to run safe and successful business career.
When it comes to the cultural influences, it is vitally important for the business to understand the culture of the society, as it provides challenges to MNC in marketing products, managing workforce and dealing with the host country government (Mahoney, et al., 2001). Like all other human activity, the business also operates in the context of society. Therefore, it is vital for the business to understand and adopt the culture of people in the market it operates (Mahoney, et al., 2001). In addition, the legal environment of the country is also main contributor. MNC are influenced by many laws and regulation formed by states, nation and international bodies like World Trade Organization and United Nation. The purpose of these bodies is to prevent the unethical practice such as counterfeiting, briberies, corruptions and stealing of intellectual property right (Ball & McCulloch, 1996). As, MNC are influenced by many environmental forces mentioned above, it becomes vital for the business to analyze the target market using a market screening model prior to conducting the business.
Every MNC needs to analyses the economy of the host country prior to conducting the business. The purpose of analyzing the economy is to identify the overall outlook of the economy and its impact on the business during the change in the economy (Ball & McCulloch, 1996). For example, the forecast for an increase of employment will have an impact on marketing managers as they have to revise upward their sales forecast, on the other side the production manager have to be ready to increase their production process. An increase in production process will require a new plant if the old plant is working on full capacity. This in turn influences on the production department as it requires additional workers and raw material for production. Further the financial department has to make sure that enough cash flow is ready to meet these requirements (Ball & McCulloch, 1996). Hence the change in one factor can have a significant influence on the management function. However, there are many other environmental factors that can impact on the management function, hence it is vital for the business to consider these factors while operating in multi-nation.
In case of the Coca-Cola Company, it has always been analyzing the market before conducting the business in that area, it has the strategy of analyzing the market and then grows along with market to provide jobs, investments and economic opportunities (Coca-Cola, 2008b). The company has used this strategy in many markets such as Africa, Latin America, Eurasia and Pacific and got success. However, the company is always engaged in the economic impact in the different areas such as goods purchased, global salaries and benefits, shareholders dividends, local capital expenditure and income taxes (Coca-Cola, 2008b). Further, as explained in appendix 1, the company is managing its areas of impact on economy by providing values to its shareholders, increasing global salaries and benefits to the employee and paying more taxes to the government from year 2006 to 2008 (See Appendix 1). Company also believes that as it is dependent on the consumer’s purchasing power, the sustainability of the company depends on sustainable economy. Along with that, the company also believes in calculated investments in areas where the company observe market potential to drive business growth (Coca-Cola, 2008b).
However, the company is engaged in job creation through their value cycle, with their Manual distribution center (MDC) model the company has created many jobs in Africa, till now the company has formed around 1800 small distribution business creating employment more than 7,500 people(Coca-Cola, 2008c). Along with this MDC model the company sets a goal of creating more 1,300 to 2000 independent distribution businesses in Africa. Further, creating more 5,300 to 8,400 jobs by 2010 (Coca-Cola, 2008c). However, the company has created economic opportunity in Africa with the help of its MDC program, it is participating in economic development process by running such programs which is very beneficial for Africa, to strengthen the economy.
3.2 Natural Environment
Environmental concerns has been raised increasingly both in national and international markets, because damage to the natural environment has been an issue in development and industrial policies in many countries over the past several years (Khambata & Ajami, 1992). However, the concern for the environment has influenced the MNC by providing both the challenges and new opportunities. Challenges are that in the form of new consideration for the environment, every decision made by the management must be environmental friendly and should regulate with the environmental guidelines and law of the local government of the country (Khambata & Ajami, 1992). The opportunities arise with the preservation of the environment, with new consumer products, technologies and new energy sources. However, the MNC have an opportunity to develop the new products and technology which is environmental friendly. This also enables the company to use new source of energy, substituting the old products with its new environment safe product. It means the opportunities arise in the form of new market for the products, as this also concern the environment (Khambata & Ajami, 1992). Hence, the environmental issues clearly moved to the center stage. That is the reason, no MNC can avoid these responsibilities during making the decision at a management level.
For example the company Coca-Cola, has a goal to grow the business not the carbon in the manufacturing operations. Therefore, they are always engaged in the activity of energy efficiency by reducing the emission of greenhouse gas from the cold drinks equipments (Coca-Cola, 2008d). There goal was to reduce 5% emission of carbon by 2015. However, the company is also engaged in refuel process by developing its supply vehicles that cause less emission as possible then before (Coca-Cola, 2008d). Further, appendix 2 describes the energy efficiency of the company from year 2004 to 2008 (See Appendix 2). Along with this the company is also engaged in the activity of reduce, recycling and replenish system for saving water. As the company has a goal of improving the water efficiency of 20% by 2012 as compared to 2004 (Coca-Cola, 2008e), it uses the system of recycling and replenishes system. With the recycling process the company reuses the waste water after processing it through wastewater treatment within their plant (Coca-Cola, 2008e).
However, with regard to the issue of water used by Coca-Cola in some part of India, it explains why the company faces such problems even if the company is always engaged in sustainability development activity. It identifies in Science and Environment centre by experts working in Delhi the capital of India, that the company is creating a shortage of fresh water in some drought prone areas leaving the poor local villagers with too little water (The Economist, 2005). The company argues that it has already started measuring and improving their use of water before it troubles India. It has already improved 6% of water efficiency around 2003 and 2004 (The Economist, 2005). Company says it has already increased the efficiency from 3.12 liters to 2.72 liters of water usage for producing the final product. However, to improve this situation, the company has completed assessment by going plant by plant to calculate the local water scarcity ratio for improving the water efficiency (The Economist, 2005). Is it essential for the company to identify the issue of water, as water is the only raw material for the company’s product. According to the theory of Market Screening, it is clearly evident that the company should screen the basic requirements such as climate, topography and availability of natural resources (Ball & McCulloch, 1996). Moreover, water is the only vital recourses of the company the company must deal this issue vitally for its long-term survival. Hence it is necessary for the company to analysis the availability of resources for setting the business in that particular market, if not analyzed properly it can hamper the business of company.
Culture is the set of values, attitudes, beliefs, behavior and customs that differentiate the society (Mahoney, et al., 2001). Culture consists of different elements such as language, communication, religion, values and attitude and social structure. As mentioned above cultural differences pose challenges to MNC in marketing products, managing workforce and dealing with the host country government (Mahoney, et al., 2001). Therefore, the MNC must remember that they must behave in accordance with the rules of local culture in order to conduct the business successfully (Mahoney, et al., 2001). Cross cultural literacy is an understanding of another culture; hence the business people must not only understand the foreign culture but also modify and adopt his own behavior in accordance with the local culture (Mahoney, et al., 2001). Many countries have more than one culture. For example, Japan has homogeneous culture while the country like Australia has heterogeneous culture. Therefore, the MNC must understand the primary national culture as well as the subculture in order to run the business successfully (Mahoney, et al., 2001). Cultural difference often creates the ethical problems. For example, the accepted behavior in one culture may be viewed as immoral in some other culture. In some poor countries workers are often expected to pay small payments for stamping a passport or finding a lost hotel reservation while this may be considered as bribery in richer countries such as Australia and Germany (Mahoney, et al., 2001).
For example, during 1999 Coco-Cola tainting crisis affected Coca-Cola global marketing strategy (Taylor, 2000). Later on in 2000, Douglas Daft became Coca-Cola new chairman of the Board and CEO. He introduced new marketing strategy which is “think local and act local”, this means the company should identify the needs of the customers in local market, as Coca-Cola is a global brand and people do not drink Coca-Cola globally (Tian, 2006). Hence, Coca-Cola understood and respected Chinese culture in variety of ways. On its website, company posted the images and showed its appreciation of traditional local culture on its Chinese website (Tian, 2006). On January 18, 2004 when the Chinese people were celebrating their new year, the company posted the image of Dui Lan on its website where the people write good wishes to celebrate their new year (Tian, 2006). Following the Chinese culture the company posted a couplet on its website such as “happy monkey year”. Another image was a Fu which was posted on Chinese website, as people post this on their doors and windows to bring themselves a good luck on Chinese new year (Tian, 2006). However these pictures were posted by company on the Chinese website, this signifies that company understands and adopts the Chinese traditional culture. The above examples describe how the company understands Chinese culture by adopting the local beliefs and respecting the local culture.
3.4 Political and Financial risks
It is vitally important for a company to identify the financial and political risks of the host country prior conducting the business, as this can provide the guidelines to the company regarding the situation in the host country. However these factors are difficult to forecast, even if the MNC conduct risk assessment task to identify these factors. This is because of poor decision taken with the improper forecast of the financial and political factors. Further the financial conditions are often caused by the political factors. Therefore, it is crucially essential to identify the political risk prior to conducting the business in the host country (Madura, 2009).
For example, “the September 11, 2001, terrorist attack on the United States affected U.S. based MNC because of political risks and financial risk. Political uncertainty caused uncertainty about economic conditions, which results in a reduction in spending by consumers and, therefore, a reduction in cash flows of MNC” (Madura, 2009).
Further, the Coca-Cola Company and its two largest bottling partners, Coca-Cola Enterprises and Coca-Cola bottling company are expelled from the list of social responsible company prepared by one of the leader in defining the corporate social responsibility standards KLD research and Analytics Inc (Politicalaffairs, 2007). Hence the world largest socially screened fund for individual investor TIAA-CREFF,s will not allow any investment in the Coca-Cola company and its two associate companies (Politicalaffairs, 2007). In addition some of the shareholders are also suing on the company for its fraudulent business practices for its improperly inflating revenues to boost stock price, because of company’s misstatements and omissions, investor has to suffer losses of up to $11.79 per share (Politicalaffairs, 2007). The above two example shows the current political and financial affairs of the company.
3.5 Legal Environment
According to World Customs Organization in 2005 around â‚¤270 billions was attributed to counterfeiting goods, while it is much more in 2007 (Hurn, 2008). According to Hurn 2008 around 50% of fake goods entering US comes from China that worth $25 billions.
For example “In 2007 Zheng Xiaoyu, the former head of Chinas state Food and Drug Administration, was sentenced to death for corruption for making bribes to approve unsafe medicines that caused the death of dozens of patients” (Hurn, 2008).
Nevertheless, looking towards the legal environment of Coca-Cola, it can be said that company is bind by many codes of business, and believes in acting with integrity around the globe (Coca-Cola, 2008f). Company has the codes of its business which describes, what is expected to everyone, what is expected of managers and dealing with customers, suppliers and consumers (Coca-Cola, 2008f). Further, the company also believes in raising concern, if anyone observes behavior that concerns or that may represents the violation of the codes than people have a right to raise the issue promptly, because the company believes that this will help the company to deals with the issue to correct it. Hence this shows that company is concern with its codes of business, and it believes in legal and ethical business practice (Coca-Cola, 2008f).
In addition, the company also makes sure that their business partners such as suppliers are abide by the codes of business of Coca-Cola, and if any of its suppliers is practicing the unethical practice of making payment to third part then the company will be liable for this unethical practice (Coca-Cola, 2008f). Hence the company not only run its business ethically but also makes sure that their suppliers are bound by the company’s codes of business, in order to run the whole business ethically. Along with this the company also competes fairly, and complies with all applicable competition laws around the world, however the company has adopted Competition Law Guidelines that is applicable in various part of the world (Coca-Cola, 2008f). The guidelines describes that the employees of the company must gathered information of its competitor legally without practicing unethical behavior. This shows how the company is concerned about the legal environment by following the laws and binding their suppliers to conduct the business legally and ethically.
This report aims to identify the importance of analyzing the environmental forces affecting the MNC for conducting the business in host country. There are many difficulties faced by Coca-Cola in natural, political, cultural and financial issues that are mentioned above. The company must take an advantage of opportunities available in the market and understands its threats for its future growth. Market screening model will help the company to scan the target market. Further understanding the importance of environmental forces and using the market screening model will help the company to achieve the goals.
In recommendation, the company should concentrate on the issue related with water in India, by continue improving the use of water efficiency and conducting a survey of water ratio on all of its plants. In addition, the company must make sure that it conducts the survey for availability of its recourses (Water) prior to setting up the plant in particular area. Moreover, the company must also deal with issue of fraudulent business practices that has been concern by the shareholders, by conducting ethical business practice. There are some limitations of this report as the information is mainly based on secondary sources. It would be desirable to conduct the further research by using primary sources.