Environmental factors affecting Nespresso in China

8 August 2016

The micro environment on the other hand comprises the industry and market.  Religion, education, ethnicity, education and language, age group, family, cross cultural differences. In 1978, the Chinese government introduced a birth control policy of one child per family. (Newsweek 2014) This in the long run will reduce both sales and labor availability for Companies especially foreign brands like nespresso. The business culture in china is based on strong family ties and cultural network.

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Guanxi is a Chinese business practice of favoring a family and close friends prior to doing business. This could be unfavorable to foreign businesses like nespresso and other western companies. LEGAL FACTORS. Foreign trade laws, land ownership laws, patent and trademark laws, piracy laws, lobbying laws. According to reports, foreign firms cannot and do not acquire land as all land remains the property of the Chinese government. However the lease system provides foreign firms and corporation access to land for about a period of 50years after which the lease can be renewed.

There was a case of McDonalds in Beijing who were forced out of their property by the government during the contract period (China unique, 2013). This spells an unstable working environment for nespresso. ECONOMIC FACTORS Economic factors include, Unemployment rate, exchange rate, inflation, interest rate, consumer discretionary income, labor cost. Unemployment: According to the ministry of human resources and social security of the PRC, there has been a significant decrease in unemployment rate in China from 4. 10 in the last quarter of 2013 to 4 percent in the second quarter of 2013 (Trading economics, 2014).

This will increase salaries and wages due to scarcity of labor as only few of the population are unemployed. Similarly, Chinas inflation rate as reported by National Bureau of Statistics of China was at 2. 50 percent in January 2014 (Bloomberg business week Jan. 2014). This has caused a reduction in unemployment and an increase in wages. This might mean an increase in sales for western brands like nespresso and luxurious brands. According to ban and company luxury goods purchases has slowed down by 7percent as Chinese shoppers now do their luxury shopping abroad (Ban and company 2013).

This might not be too good for foreign companies in china but it shows how passionate Chinese are for luxury brands. Chinas GDP were recorded at 7. 7 percent (9. 4 trillion USD) in the fourth quarter of 2013. (Bloomberg business week Jan. 2014) The above information shows that China’s economic environment would promote and facilitate business activities. (Trading economies, 2014). Lower unemployment rate implies high purchasing power of customers. Inflation will affect nespresso because suppliers will demand more. High interest rate means high return on investment.

The higher consumer’s discretionary income, the higher their purchasing power especially for premium products like the nespresso brand. POLITICAL FACTORS. Factors present in the political environment include Political Stability, government involvement, trade barriers (tariff and non-tariff) Political stability: The three decades of reform in china has led to both a political and social landscape. (China daily Feb 2014). China has a unique form of political risk which is a constant battle between the central government and local government over applicable laws.

For Nespesso, this stability and a clear understanding of local law would guarantee a stable business environment in the long run. Government involvement: The purpose of this is to protect domestic firms. (Protectionism). Government may impose barriers (tariff and non-tariff) on imports or foreign investment in order to protect domestic industries and to reduce competition. Although china has continuously opened its market for foreign investors, it has also place restriction on some foreign businesses in certain industries.

For instance the restriction on American producers of autos, beef and steel into its market. (Bloomberg news April 2013) TECHNOLOGY. Technology when applied to work makes it easier, quicker and sometimes more efficient. The level of technology. Technology is inputs that improves an organization’s output. Technological factors includes machinery, communication, internet penetration, transport and logistics, social infrastructure. Internet penetration and logistics. See question 2 THE MICRO ENVIRONMENT INDUSTRY ANALYSIS PORTER’S FIVE FORCES.

Local suppliers include; Yunnan Zheng coffee co ltd, Baoshan Yatong coffee commercial co. ltd, Dehong Hogu coffee co ltd, Yunnan Changshengda investment co. ltd, Kunming Qianxi industry and trade co ltd, Acme Fate international ltd (Alibaba, 2014). This shows that the supplier power is low because there are so many suppliers in the industry. Power of buyers (customers): With over 14million people in shanghai and other major cities of china and the tea drinking tradition of the Chinese people, there tend to be a high buyer power amongst customers.

Also, the quest for luxurious band amongst Chinese consumers tend to influence buying power Competitors: The level of competition in china is high not just for coffee consumption but also for other hot drinks. In terms of luxurious coffee key players include Starbucks, costa, McDonalds, 85 degrees, pacific coffee etc. research from Mintel has shown that there has been an increase in the number of cafes from 15,898 to 31,283 between 2007 and 2012. (China briefing, 2013).

Threat of new entrants: With the existence of so many players in the coffee industry it can be concluded that there is high threat of new entrants because it may seem that coffee business in China is attractive. Analysts say there will be a continuous increase in the consumption of instant coffee. (Euro monitor international). Industry rivalry: Competition is intense in the coffee industry in china as key player continue to compete in different ways. According to reports, there is a continuous fight for market share, who has more coffee shops etc.

As Starbucks plans to have 1500 stores in china, costa coffee has stated their intention to increase its number to 2500 by 2018. Nestle and Starbucks has been competing for dominance of china’s coffee market for the last decade. While nestle has focused on being a ubiquitous brand, Starbucks has targeted the upper middle class. (Context china) QUESTION TWO According to reports, China has 618million internet users. 80percent of this number are mobile internet users. (ZDnet, 2014). The outbreak of mobile internet users drove the number from 500million as at December 2013.

With this number of internet users, a firm would have no problem carrying out online sales, advertising, or communicating with its customers. A report by adage confirms that Taoboa and Tmall, two of china’s largest e-commerce company broke their last year’s sales record via the internet. Therefore many firms are capitalizing on the power of the internet by doing series of online promotion. (Adage, 2013) Online retail sale according to Bloomberg, went up by 2percent last year (adage, 2013). The surging internet purchase indicates that Chinese consumers are moving away from bricks and mortar outlets for their shopping.

Opportunities of online CRM and sales include; Wider reach. Using the internet, nespresso can keep up with a large number of its customers on a daily or weekly bases. Advertising. Nespresso can also use the internet to advertise its product to millions of customers at the same time. This could be cheaper to operate too. Segmenting purposes. The record of customers and their previous purchase can help nespresso in automatically segmenting it customers based on purchase history Feedback and adjustment. Customer feedbacks is very important as these information can be used in making services or products better.

Despite the attractive and promising nature of using the internet, investors and firms should also consider the drawbacks of using the internet for sales and communication. The Chinese government recently just imposed a new law regarding e-Commerce in China. The law stipulates that real names registration of sellers on third party platforms, strict seven days return policy, and also online payment market place must safeguard user’s privacy. (Pac net services, 2014) Another report says the government is imposing a law where all consumer to consumer online trading would have to register for a business license and also pay taxes (China daily, 2014) Legal system.

There are different legal restriction and regulation from government and regulatory bodies. Payment environment: the cash payment culture of the Chinese creates difficulties for online shopping. International credit cards are not accepted in most online shops. There is unavailability of credit card payment in most transactional websites. The online payment system in china is still at an infant stage. Logistics network environment: there is a restriction on foreign investment of logistics companies.

Limited choices of delivery therefore, much more time is spent on delivery (jitm, 2007). QUESTION THREE Despite the large number of internet users I personally would recommend that nespresso adopt another marketing strategy as it will be very harmful to assume that the nespresso club would work in the Chinese market. From careful observation of the forces at work in the Chinese market environment, I can say that there is high level of government protectionism and regulation on internet businesses (Ecommerce) that tends to favor Chinese owned firms and businesses.

Report has it that not only were a lot of websites blocked in china, there were also a Chinese replacement. Sites blocked include Facebook, yahoo, google, twitter, YouTube etc. according to report, the British newspaper The Guardian along with The New York times and Bloomberg news has been blocked in china for over a year. Motives for this act remains unknown (Taipei Times, 2014). Nespresso’s use of the internet is limited as not so much can be achieved due to interference by the government therefore using the internet could hinder performance as there is too much interference from the government.

Nespresso should adapt its marketing mix to overcome the current situation of internet insecurity so as to reduce reliance on the internet. Though the internet can be used to position the nespresso brand image in the minds of the consumers for sales, or advertising or customer relationship but it won’t be wise business decision to apply the nespresso club concept in China because the government can decide blacklist them just like the case of Facebook.

Nespresso should create more awareness about its brand to the Chinese public especially the less educated ones explaining the difference between house coffee and the nespresso brand Lastly, since there is already a tea drinking tradition amongst the Chinese population, nespresso should consider a local adaptation which involves offering other kinds of hot drinks so as to have a variety of products for it ever growing tea drinking customers.

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