The purpose of this report is to provide a comprehensive research and analysis of the political, economic, social and technology environment can affect the international operation and decision-making of a business. This study will evaluate Herton expansion into its potential market in Taiwan as part of its strategy to become a regional player through PEST analysis, which should help to determine the best strategic direction for Herton to take in the coming years. PEST analysis is a strategic planning approach to reduce business threats and a tool to evaluate the business environment (Frue, 2016). It can provide a deeper understanding of international business, involving potential benefits, cost-effectiveness, and risks. In addition, determine which market entry strategy is most appropriate for Herton and allowing the product to successfully enter the target market. And the last part, these are several recommendations to help Herton successfully expand their business in the future.
Currently, Taiwan has a high level of openness, cultural diversity and is a relatively stable potential market. As the global economy recovers steadily, Taiwan’s economic growth has started to pick up and is considered a high-income economy. According to the 2017 World Bank Report, Taiwan’s ease of doing business has been ranked 15th in the world (Bank, 2017). A high ease of doing business rankings means that the regulatory environment is more conducive to the business operation and investment. These conditions will help Herton expand its business to the Taiwanese market.
Brief introduction of current business in Malaysia
Herton is a local biscuit brand from Malaysia with its corporate headquarters in Muar, Johor. Besides that, Herton is continuing looking forward to new products and innovations in order to maintain its position as a successful and innovative biscuit brand. They have set up a R&D department that specialises in this area so that they can always be stay at the forefront of innovation. Herton sells a wide range of biscuits to meet different needs of customers, such as seasonal biscuits and health low sugar cookies. The mission of Herton has long been to produce all kinds of high-quality, affordable, and fun-eating snacks for every home all over the world. However, Herton’s products have their own international characteristics, the products they developed should be more in line with the global market.
2.0 PEST factors of country chosen
Globalization is widening the gap in competitiveness among nations and entrepreneurs need to comprehend the more substantial forces forming their choices. To determine whether a country is a good investment opportunity, use a diagnostic tool such as PEST analysis to analyse the business environment of Taiwan and look at the possibility of investment opportunities. However, PEST analysis is the key element in any industry to understand how survive and operates effectively. PEST analysis is an acronym for political, economic, social, and technological environment, an analysis of the external macro-environment that affect all firms (Jennifer, 2017).
2.1 Political Factors
The political environment refers to the political modifications that influence the government which often have an impact on the organisation and how they do business. Businesses must consider and respond to the current and anticipated future legislation before expanding into new regions and adapt their marketing strategies accordingly (How IKEA adapted its strategies to expand in China, 2013 ). Herton’s business will be affected by regulatory changes in Taiwan, which may include a change in taxation, labour law, food administration or health-related laws.
Taiwan’s political status has become complicated because of the controversy over the country in the Republic of China. The different organisation has different concepts of what the current formal political situation in Taiwan is. In addition, the situation may be confused because parties are different, and the parties are handling the controversy through deliberately vague policies. The current situation is accepted because it does not define Taiwan’s legal status or future status. Rather, it allows the parties to interpret Taiwan’s situation in a politically acceptable manner. Hence, Taiwan has a volatile political situation but is stable currently.
In 2016, the overall average nominal tariff rate on imported goods was 6.35% (Export, 2017). In addition, the establishment of enterprises in Taiwan must also pay corporate income tax (CIT) that is 17% on the total annual taxable income. According to the Asian Intelligence Report released by the Political and Economic Risk Consultancy (PERC), Taiwan’s Corruption Perceptions Index ranked the sixth among Asian countries. Taiwan’s score was 6.08, with zero stands as the best score and 10 as the worst score (CPIB, 2017). The report also suggests that the success of Taiwan’s political and commercial relations and the restriction on illicit activities, have contributed to achieve better results this year (Lee, 2017).
2.2 Economic Factors
Economic factors have a significant impact on how an organisation conducts its business and thus directly affecting the organisation’s profitability. It is an indicator of the state of health in any economy and under favourable conditions firms can be encouraged to expand and take risen (BUSINESS, 2016).
Taiwan’s economy faces fluctuations in global demand due to its over-dependence on exports. Besides that, Taiwan’s economy ranked Asia’s highest in the 2015 Global Entrepreneurship Index with certain advantage. Electronic components and personal computer are the main two areas of international power in Taiwan’s information technology industry (Ibp, 2016). Taiwan’s economic performance depends to a large extent on its ability to export goods and services, which in recent years has reached more than 70% of GDP.
The Gross domestic product (GDP) measures the national income and output of a country’s economy. GDP equals the total expenditure on all final products and services produced by the country within the stipulated period of time. According to the above part, after Taiwan’s GDP fell 1.57% in 2009, its GDP value slowly rose back. Besides that, according to the following economic data, several indicators of exchange rate, growth rate, and inflation rate has shown that Taiwan is a stable economy and suitable for investment opportunities.
When an economy flourishes, it means that people’s income level is growing rapidly and purchasing power is strong. On the contrary, when an economy experiences a slump and its income level is low, which limits its desire to purchases goods or services. However, the continuous rise of Taiwan’s GDP in recent years has stimulated people’s purchasing and further increased the performance of Herton.
2.3 Social Factors
The social factor takes into consideration all events that affect social markets and identify emerging trends. These factors help organisation to further understand the mentality and needs of local consumers and react to certain changes to drive customers. It includes population growth, age distribution, cultural expectations, healthy consciousness, professionalism and so on.
With the continuous improvement of medical science and public health awareness, the average life expectancy of Taiwanese people has generally increases (Liu Li-jung ; Christie Chen, 2016). As a result, the demographic structure is gradually aging while the era of advanced age is approaching. Business must create a relative strategy to consider the convenience and needs of elder customers. Due to the prosperous business and employment in the northern part of the country, it has attracted the southern people to move northward for employment. Meanwhile, these southern talents accelerated the urbanisation and economic prosperity in Taipei City as well as contributed to the income level “South High North Low”.
About 95% of Taiwan’s population is Han Chinese, with Taiwanese and Mandarin as its official language. English language is rarely used outside of large multinational organisations, so a translation may be necessary. Confucian values have infiltrated Taiwan’s business environment, guiding etiquette, and conventions. As a foreigner should be familiar with this system of behaviour in order to better succeed in their business. This is a peaceful society and no different from other Southeast Asian countries as well as the urban development and working condition conducive to business. Therefore, the investment with respect to the social structure will be a safe bet.
2.4 Technology Factors
The role of technology in business is increasing every year, and advances in technology can optimize internal efficiency while also help to avoid product or service technology becoming obsolete within a few months after it is launched. Businesses adapt the latest applicable technologies to respond to rapid environmental changes, which can improve service levels and significantly reduce costs.
Taiwan’s IT industry has played an important role in the global information technology market over the past two decades. As the government attaches great importance to the development of high-tech expertise, coupled with marketing and management knowledge to build their own industries. The industry leverages its industrial resources and product management expertise to work closely with key international suppliers to become a R&D development hub of the Asia-Pacific region. Besides that, Taiwan has long been recognised by the international community as a technology island. It is a leading supplier of integrated circuit design, computers and mobile devices, the innovation of Taiwan companies is internationally renowned (Monthly, 2017). Taiwan is also a place where new technologies are nurtured with its open attitude.
Taiwan enjoys a reputation for public transport and expatriates agree on safe, clean, reliable, and competitive prices. The major cities in Taiwan are train, buses, and taxis, while Taipei and Kaohsiung there are underground train services. The other is a powerful real-time information system that can inform passenger traffic information anytime, anywhere. With these two aspects, using public transport will be more convenient and comfortable. The quality of public transport will also be enhanced.
3.0 Benefits, costs and risks in the business endeavour
Any organisation that wants to expand its business must prepare a business case that is a reasonable tool to ensure that the investment is in the strategic direction of the organisation and the benefit it will delivers. It typically provides key decision-makers with relevant information such as the cost of doing business, the potential for benefits as well as the risks. The following will discuss the costs, benefits, and risks that Herton may face if operating in Taiwan.
Herton may assume the risk of lower brand awareness in the international market. The company has not yet reached into the worlds best-selling biscuit brand list so fewer people know the product information. However, Taiwan also produces a considerable number of biscuit brands such as Chia Te and Li Yi, the most famous brands in the industry (Chris-Budgetpantry, 2014) . Local people are more loyal to local products and brands so that Herton must be more ground-breaking strategy to attract customers and increases its market share in Taiwan. Besides that, Herton entered the market in Taiwan will be financial losses due to the risk of exchange rate fluctuations and inaccurate market assessments.
For part of operating costs, Herton need to spend more on employee wages because of Taiwan’s minimum salary is NT $22,000 converted to RM3,000 while Malaysia’ minimum wage is RM1,000 (Everington, 2017). As a result, Herton’s payroll expenses will be higher than in Malaysia and may have to adjust their pricing strategy to avoid losing profits below cost. On the other hand, when each foreign company enters the Taiwan market, it must pay the import fee (6.35%) and be subject to customs inspection before entering the country.
As for the benefits, Taiwanese have a 46.43% purchasing power advantage over Malaysia, which means Herton can make more profit in a buying-power-rich country (Numbeo, 2017). Increasing wealth leads to increased consumption, including demand for imports. Commercial documents in Taiwan are written in Chinese, which means that foreign investors from non-Chinese-speaking countries face translation cost when registering for business in Taiwan (Zamora, 2017). Hence, Herton is a Chinese-founded biscuit company in Malaysia that is less susceptible to language barriers and easier to engage with customers. Owing to Taiwan’s high-tech environment, Herton can take this opportunity to produce quality products with better equipment and talent.
4.0 Proposed Mode of Entry
These are two entry modes which are suitable for Herton to enter into Taiwan market, which is Exporting and Joint Venture. Exporting is the goods and services that are produced in one country and purchased by the citizens of another country (Amadeo, 2017) while joint venture is a cooperative enterprise of two or more business entities entered into the market for specific business activities (Murray, 2017).Joint venture and exporting are chosen as most Taiwanese are addicted to snacks and biscuits and Herton is famous as a biscuit brand in Malaysia. Also, exporting and joint venture can spread the “new” and unique style of Herton around Taiwan which indirectly promotes Malaysian food as the product awareness will increase by reaching out to the Taiwanese widely.
Within 5 years short-term period, exporting will be the entry mode used to promote Herton into Taiwan as test marketing for new product development before stabilizing the business in the future through business expansion. Through exporting, Herton selling in Taiwan will be able to keep its original unique taste that Taiwanese are willing to try and the cost of Herton as an overall will be lower through exporting as everything will be purchased using Malaysian Ringgit(MYR). The equipment used for making biscuits, which is an asset can be exported as it is a long-term asset that will last for a longer period through efficient production and requires an amount of maintenance only. By exporting as well, the business will be able to gain knowledge and experiences of conducting it in Taiwan before considering a further expansion when the business is moving steadily. However, the business will need to understand that Taiwanese need time to accept Herton due to different food culture as well as aware to the taxation rate required for importing to Taiwan.
When the business is relatively stable and further expand its business with Taiwan companies can be a joint venture as long-term entry to the model. Because of the right time and opportunities for loyal consumers after setting up joint ventures with local businesses and adapting well into the Taiwanese food culture. The joint venture made it easier for Herton businesses to find and access resources because locals knew the cheaper suppliers. Besides that, Herton can share their costs and expenses with the local firms through a joint venture that reduces the financial burden (BusinessTown, 2017). Although joint ventures have advantages over Malaysian companies, they still need to be cautious about choosing a robust, lucrative potential business and considering prices and locations to get good quality ingredients with cheaper prices for own knowledge. Also, choosing someone that the Malaysia firms are familiar with to avoid management conflicts due to cultural differences.
The development direction of biscuit industry is more convenient that is easy to carry, resistant to storage, long shelf life and other characteristics, is a typical convenience food. In a variety of climate and environmental conditions will not affect its pine, fragrant and crisp features. Herton can be based on different consumer habits, occupational characteristics, lifestyle, market segmentation, develop personalised products to truly provide consumers with convenience. For example, soda and chocolate biscuits are popular among middle-aged and elderly customers because of its crisp, ease of digestion and absorption. Taiwan’s aging population is large, and it is very important to develop biscuits suitable for the elderly.
In conclusion, every business should try to capitalise on existing opportunities and face threats from the business environment. Since companies are unable to change the external environment they can only respond. However, they can change their internal environment to grasp the opportunities and face threats. Analysing the business environment of the enterprises can be very important for the success and survive in its industry. In addition, each business’s decision requires a cost-benefit analysis. It can help organisation determine which approach is most appropriate and rewarded by analysing each option and avoiding the risk of failure.
Lastly, choosing a market entry mode has a great impact on international business and can be regarded as the leading edge of international marketing (Wind & Perlmutter, 1977). Herton’s business may be challenged by local businesses, but it is a suitable choice to bring into Taiwan. A joint venture is considered a long-term mode of entry because of the lesser risk and brings more benefits for the enterprise than the initial short-term entry model, exporting used for test marketing new product development.