PESTLE Analysis Country\'s Profile Political Perspective Environmental

PESTLE Analysis

Country's Profile

Political Perspective

Environmental Perspective

Legal Perspective

Economic Perspective

Cultural and Ethnic Issues

Technological Perspective

Billabong is a leading name in the apparel industry of Australia. The company specializes in casual wear, wet suits and accessories. This report is intended to analyze the feasibility of setting up a manufacturing facility in Karachi, Pakistan. It is also intended that this manufacturing plant will be used as a regional office and will be used to introduce the products of Billabong in the Asian market.

During this feasibility study, the methodology used was PESTLE analysis. This method enabled the management to analyze this business proposal from political, economic, social, technological, legal and environmental point-of-view. While analyzing Pakistani market as a future prospective, it was established that this business venture can be subjected to higher risks by political, social, and environmental forces. On the other hand, the legal structure of Pakistan offers medium risk to the business operations of Billabong. Whereas, technological and economic factors can cause no or less harm to this business venture. As a matter of fact, they both actually support the establishment a manufacturing facility in Karachi, Pakistan.

After thorough analysis, it is concluded that instead of setting up a manufacturing facility, it is better to outsource Billabong's manufacturing to a local firm and sales operations should be conducted from the Head Office, Australia.

Introduction

Billabong is a leading brand in Australia and specializes in surfware and sports apparel. Another major product line is accessories for the surf, skate and snowboard markets. It has extended its presence in more than sixty countries. BBG's strategy is to differentiate its products through quality, novel designs and branding. Management aims to initially build up a core niche brand then slowly differentiate products to appeal to a broader market without diluting this core.

Billabong International Limited (BBG) produces surfwear and sports apparel and accessories for the surf, skate and snowboard markets. BBG now has a presence in more than 60 countries. The Billabong brand is targeted to both active participants in surf and extreme sports and people who desire to be identified with its image. BBG supports the promotion of the Billabong brand through the sponsorship of athletes and events. Where Billabong serves the clients in all around the world, it is planning to penetrate in to Asian market by opening a production facility in Pakistan and establishing a corporate office which can explore Asian market by staying in the region.

The report is intended to provide an outlook to the management of Billabong regarding extending their operations in Pakistan. The report is an effort to assess the risks and other feasibilities related to this venture from PESTLE point-of-view. This approach will be helpful in evaluating viability of investment in Pakistan from political, economic, social, technological, legal and environmental aspects.

Country's Profile

Pakistan is a major part of South Asia and has an undeniable importance in world's politics and trade. It has been one of the key players in a global textile industry. However, because of high degree of volatility in Pakistan's economic, social and political scenario, this industry has now shifted to other Asian countries. The reason for selecting Pakistan for opening new manufacturing facility is its low production costs. Secondly, other overheads in terms of taxes and duties also reduce other manufacturing overheads greatly.

However, in order to consider this country for this investment, we need to understand the profile of it in the initial phase. This profile is based on the description provided by the Central Intelligence Agency which is updated till June, 2012. During last sixty five years of its separation from India, it has seen a great deal of variation in its political, social and cultural landscape. Its location gives it an extraordinary importance in World trade and politics as it is centrally situated between huge economic powers like China and also closely located to countries like Afghanistan, Iran etc. which have a substantial status in War against terrorism and other global political turmoil.

Furthermore, its ideal location as a major port near the coastline of Arabian Sea, further establishes its importance in world trade. The region has a rather dry deserted weather which does not hamper overall production and other marketing activities. Pakistan is rather self-sufficient in terms of natural resources however poor attention has been on their extraction paid so far. The country although, has a profile of agricultural land but most of its perishable goods are still imported because of lack of attention from public and private investors in this sector.

Considering natural calamities and hazards, earthquakes and heavy floods have been reported in past few years. However, our intention is to build a production facility in Karachi which is a main metropolitan city of Pakistan, carrying out seventy percent of its trade activities. And, research shows that this city has shown signs of minor earthquakes which have proved to possess no major threat.

As per the statistics provided by CIA, the country has a gross population of over 190 million with an annual growth rate of 1.551%, which makes it 6th most populated country worldwide. There are six major ethnic groups in Pakistan which have many extensions themselves. Its state religion is Islam and other non-Muslim minorities form around 5% of the total population. Major metropolitan cities where main trade activities and practically the whole business of a country (be it economic or political) is being run are Karachi, Lahore, Islamabad (Capital), Rawalpindi and Faisalabad (which is a major city related to the textile industry).

The country has a turbulent political history. It has a democratic government right now; however it has been under martial law four times since its independence. Even the democratic governments have been operating under substantial pressure of military, clergy, landlords, bureaucrats and industrialists.

Political Perspective

Pakistan has a turbulent political history. After four martial laws and several failed democratic governments, the country has been a Warfield among many political parties. Law and order situation of Pakistan becomes a headline in international politics every now and then. Clergy and religious fundamentalists have been a major force in the political landscape. This intensity has arisen greatly after Pakistan's partnership with U.S. In war against terrorism. During this period, Pakistan did play a major role in this war however; its internal stability has been placed at stake. As per the statistics of South Asia Terrorism Portal, minimum 6142 individuals have been killed in multiple riots and attacks. This number includes militants, security forces personnel as well as innocent civilians (2012).

On top of that, the law and order state of the metropolitan cities is also highly volatile. Around 70 factories including few major garment factories were burnt when the former Prime Minister, Benazir Bhutto was assassinated in 2007. Property worth billions was demolished. Judiciary, democracy, military and clergy are few major forces in Pakistan. As of recently, Pakistan is going through a tough period as their prime minister, Syed Yousuf Raza Gillani has been removed by the Supreme Court on June 19, 2012. Such major events have been taking place in the political history of Pakistan quite frequently and they have instigated the general public as well which usually results in hampering overall economic activities.

Riots in the metropolitan cities are rather seen as part of everyday life which is a major risk for the on-going business of the manufacturing plant if set there. Therefore, even after getting our assets insured, the safety of our staff there will be at jeopardy at all times. A country which such frequent and turbulent political fluctuations not only affects the overall situation for the going concern of the business but also has a potential of adversely affecting the business by poor policy management. Highly volatile political system is a major risk which has a potential of affecting the business management in Pakistan.

Environmental Perspective

From environmental perspective, Pakistan has been a member of various international agreements. These agreements include treaties related to Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, and Law of the Sea, Marine Dumping, Ozone Layer Protection, Ship Pollution, Wetlands, and Marine Life Conservation (CIA, 2012).

As of now, Pakistan and especially its metropolitan cities where main manufacturing plants are situated, have a highly insufficient infrastructure. Industrial wastes have been dumped into Arabian Sea in the name of disposal. Similarly, water pollution and poor sewerage system are few examples of its incapable infrastructure. Water and fuel supply have been a major hurdle for industries in Pakistan as it has been facing a catastrophic shortage of electricity as well as natural gas. Therefore, industrial sustainability is incomplete danger.

In order use the fertile lands, deforestation is being used as a tool for using these lands for other purposes and in turn, they are causing an undeniable damage to the eco-life. On the other hand, due to floods in the northern areas, soil erosion and desertification are also major environmental hazards that Pakistan is facing.

Furthermore, Pakistan is facing a fatal shortage of fresh water reservoirs. Poor water management and inadequate storage are the main causative agents for this situation. There have been various plans been rolled out in Pakistani parliament, however most of them failed to secure the support of majority so there has been no substantial growth in this regard. The country has been working in a close liaison with United Nations Development Pogramme and has been taking measures for saving wildlife, and maintaining adequacy of natural resources (See Figure A in Appendix A).

Out of all these factors, poor infrastructure and shortage of energy and fresh water resources are main factors which can act as a major hurdle in carrying out manufacturing in Karachi, Pakistan. According to Pakistan Textile Journal, more than three hundred factories have shutdown only in Sindh, Pakistan during 2011. Major textile factories are located in Punjab, Pakistan. And the number of factories shutting down in these two provinces is increasing everyday (PTJ, 2011). This particular risk is of high potential as it has already affected many national enterprises greatly.

Although Asian Development Bank has been working in a close liaison with Pakistan Supreme Court as the judiciary has made some substantial advancement in environmental law cases. There have been various cases which have resulted in an inclusion of right to live in a clean and healthy environment as a fundamental one. Moreover, first instance environmental tribunals have been established in four provinces along with an environmental magistrate who has jurisdiction to hear criminal and other offenses at the district court level. Now the environmental management will be taken care of at provincial level rather than federal level. Following the recent constitutional amendment in Pakistan, however, ADB is also assisting in enhancing judicial capacity to adjudicate on environmental issues by developing an environmental law curriculum that will be taught in judicial academies and possibly law schools, and seeking to provide some environmental training of judges (ADB, 2012).

Legal Perspective

The legal system of Pakistan is also rather unstable quite similar to its political structure. The ruling office in the Judiciary is the Supreme Court and Islamic Sharia Court which operates under the supervision of the Supreme Court. There are hundreds of cases filed against corrupt politicians and other office holders in government system but nothing much has been done so far. Back in 2007, the then President Pervez Musharraf suspended the Chief Justice of Pakistan's judiciary in response to ruling given against his second re-election. For months, the whole legal systems of Pakistan remain stagnant resulting into several riots between lawyers, politicians and State Police. However, after months of struggle, the Chief Justice Chowdary Muhammad Iftikhar was resumed at his former position.

For several years, the judiciary played its role well till June 2012. In June 2012, the son of the same Chief Justice has been accused of taking heavy amount in the form of bribery. This is just one of many examples which can be given as a proof of legal instability in Pakistan (The Economist, 2012). Other than main judiciary, the State Police has been considered as one of the most corrupt departments in Pakistan. As per Transparency International Survey, Pakistan has scored 3.5 out of 10, on Corruption Perception Index and government bodies are the most corrupt of all the departments in Pakistan (January, 2012).

However, despite these instabilities in legal system of the country, this risk has a medium potential of directly affecting the business of Billabong if a manufacturing facility is established here and the selling process is carried out from Pakistan.

Economic Perspective

As per the economic overview of Pakistan shared by Central Investigation Agency, Pakistan has been subjected to political instability since decades. Due to which the rate of foreign investments has been decreasing greatly in a past decade. The GDP of Pakistan in the year 2011 was USD 488 billion as compared to USD 476 billion in 2010 Agriculture is the main industry which has been supporting the 1/5th of total GDP and provides employment to 2/5th of the employed population. Textile was considered as the main industry till 2008 and was the major source of export earnings for Pakistan. However, due to political, legal and economic disturbance, the industry failed to expand and the most of the manufacturing units had to shut down (CIA, 2012).

As per official statistics, the unemployment rate is 5.6% which is certainly not a reliable figure.

Due to increasing prices and low rate of growth (which was 3.04% as of now as per figure D), most of the population has been pushed below the poverty line. As per the statistics given by United Nations Development, half of the population is below the poverty line. Furthermore, rate of inflation has increased drastically from 7.7% to 11% from 2007 till 2011. The inflation rate of Pakistan was last recorded at 12.3% in May 2012. The inflation in Pakistan is the key economic factor governing the purchasing power and overall process in the economy. Pakistan faced highest inflation in the year 2008 when it was at 25% (Figure B).

Secondly, Pakistan rupee has been facing a constant devaluation in international market. Since 2007, this devaluation has reached 40%. Even an agreement between International Monetary Fund and Pakistani government has failed to provide sustainability to Pakistani currency. Currently, Pakistani rupee has been at its recorded declined value of 94.45 / USD (Figure C).

The foreign trade of Pakistan has been in a deficit during past five years. The statistics for the year 2010-2011 shows exports and imports of USD 24,810 million and USD 40,414 respectively, leaving a deficit of USD 15604 million. This continuing deficit was reduced in the year 2011 due to better economic activity as compared to prior years where imports were nearly twice as exports (PBS, 2011). Due to recent wave of terrorism and political instability, foreign investment has decreased greatly. The only ray of hope for Pakistan is the remittance worth USD 1 billion which is sent by overseas Pakistanis. From 2008-2011, Pakistan has been facing a budget deficit due to increasing prices of fuel.

Along with these major issues, one cannot ignore the financial management issues that Pakistan has been facing. The amalgamation of the accounts and audit functions of government and poor review of commercial laws has been causing major deficiencies in financial management. Most of the financial reporting in Pakistan is done in accordance with International Accounting Standards which does not comply with the Sharia ordinance. The need for an independent Accounting Standard board having majors in Public accounting and other financial management is the one of the major reasons for this failed financial management system. Also, there are no financial bodies which can govern the operations of unlisted business; therefore most of the income remains untaxed leading to a major GDP deficit (Narayan & Godden, 2000).

Increasing inflation, poor growth rate, low-income rate, high employment and low prices of agricultural products in the international market, are the economic factors that have weakened Pakistan's economy greatly. However, the overall weakness of Pakistan's economy possesses a threat of low degree to the going concern of Billabong directly. As a matter of fact, due to high unemployment, the labor is available at a comparatively lower cost as compared to the other cost of the world. Other overheads are also comparatively low if purchased locally. Therefore, this economic weakness can actually be beneficial for Billabong.

Cultural and Ethnic Issues

Pakistani culture is an example of a typical Asian culture where male dominance and religious extremist groups are the decisive forces in the society. The literacy rate of Pakistan is 50% whereas the population demographics include individuals from aging fifteen years and above. Pakistan is a Muslim country and there are various religious sects such as Sunni, Shia, and Wahabi etc. are present who have different religious beliefs. Although these forces are greatly tolerant towards minorities however within Muslim groups, a great deal of heat is present. Target killings of Shia community are one such examples of violence by extremist groups in the name of religion (BBC, 2011). Furthermore, assassination of Provincial Governor by his Gunman is also such event which shows the violence existing in the religious groups of Pakistan.

Other than religious groups, one cannot ignore the ethnic forces exiting in Pakistan. As per the details provided by CIA, there are six major and various small ethnic groups. Debacles between provincial governments in the name of ethnicity stand as an identity of Pakistan. Riots by the ethnic groups are responsible for heavy losses have caused to private and public property in major metropolitan cities. In addition to that, various political parties are major supporters of these ethnic groups, therefore law and order forces are incapable of taking necessary actions in maintaining peace (BBC, 2011).

Since Billabong is planning to set up a manufacturing facility in Karachi which is major metropolitan city of Pakistan, it is important to evaluate the overall law and order situation in this particular city. It is important to note that Karachi is a city with the maximum target killings and riots rate. Only in 2012, more than 300 people have been assassinated in target killings and the toll remains unidentified for killings during major riots. When Benzair Bhutto, the former Prime Minister of Pakistan, was assassinated, property worth billions was burnt in three days and the death toll was over 800. Secondly, the city is a political hub of two major political parties. In 2011, this toll rose to 1715 due to political clashes between these two political parties (Boone, 2012).

Strength of Ethnic and religious forces in Pakistan especially Karachi, is unquestionable. Despite all the necessary security measures, the probability of disturbance which can be caused to manufacturing activities due to these factors cannot be ignored. It has been evident from international news archrivals that these riots have nearly suspended the wheel of Pakistani economy in the past causing major losses to the businesses. Furthermore, where Billabong is planning to respond to international market and explore Asian market especially from Pakistan, suspension in manufacturing operations can affect the overall operations of Billabong greatly.

Secondly, the labor unions in the textile sector are also subjected to the cultural and ethnic forces. If that be the scenario, the operations of Billabong will affected directly and the losses will have more potential than those caused by the overall disturbance in the city. Thirdly, since Billabong is willing to set up a manufacturing facility which can manufacture casual apparel and wet suits, culturally rigid labor may not find it appropriate and act accordingly. In Pakistan, cultural values vary greatly as compared to Australian culture. Billabong might even need to establish a separate working unit for female and male labor.