PESTEL analysis on the external business environment of Malaysia based whisky industry.
Ong Kok Siong 20050208
PART A: PESTEL analysis on the external business environment of Malaysia based whisky industry.
PART B: Analysis of the external business environment of whisky industry in Malaysia based on the three most important issues.
The external business environment is always changing and not in constant. It is therefore extremely important for an industry to act and react accordingly to the current external business environment so that profit maximization can be achieved. There are three most important issues that are currently affecting the whisky industry in Malaysia that include political, economic and social factors.
From the view of political issues, there are three main factors that affect the whisky industry. One of factors is that there will ...
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PART B: Analysis of the external business environment of whisky industry in Malaysia based on the three most important issues.
The external business environment is always changing and not in constant. It is therefore extremely important for an industry to act and react accordingly to the current external business environment so that profit maximization can be achieved. There are three most important issues that are currently affecting the whisky industry in Malaysia that include political, economic and social factors.
From the view of political issues, there are three main factors that affect the whisky industry. One of factors is that there will be no tariff reduction on the export of alcohol from Malaysia according to International Trade and Industry Minister Datuk Mustapa Mohamed (2010). It is one of the policy under the implementation of Asean Free Trade Area(AFTA)starting on Jan 1,2010.Tariffs are normally imposed on imported and exported goods in the aim to control the trade between nations to support and protect the welfare of own citizens.
When there is no tariff reduction on export of alcohol, it will become a threat to the whisky industry in Malaysia as higher cost of sales needs to be incurred. This cost of sales will then pass to the consumers by setting a higher selling price on the exported whisky. As a result, the price of the whisky exported from Malaysia will remain high in global market and thus local whisky industry will lose the competitive advantage compared to other industry in international market. The consumers will switch to other brands of whisky that is lower in price and with a same quality and this will result in a loss of demand for the local whisky. The whisky industry will have to bear the loss in profit once the demand drops.
Besides that, based on the Budget 2011, Prime Minister Datuk Seri Najib Tun Razak (2010) said that the government will not further increase the excise duty on the alcoholic beverages for the coming year. Excise duty is a form of tax that on goods produced for sale within the country and it is a kind of indirect tax. This policy will benefit the whisky industry as no further pressure will be exerted to both the whisky industry and also consumers especially in this economic downturn.
For this time being, the economy in Malaysia not yet recovers from the recession experienced in 2008 and consumers will still be careful with their spending especially on luxury goods like whisky. The policy of not increasing the excise duty will have a significant positive impact on boosting the whisky industry and also the market in Malaysia. In other words, the price of the whisky will not be further raised when the excise duty is not increased. With more availability of income on luxury goods, the consumers will increase their spending on whisky and therefore the demand for whisky will go up in the market of Malaysia. The whisky industry will increase the production to meet the extra demand and thus the industry is expected then to have growth in sales as well as profits.
The third policy that will influence the whisky industry in Malaysia is the increment of service tax from 5% to 6% starting on 1 of January 2011 as stated in Budget 2011. Service tax is applied to certain prescribed goods and services including the food, drinks, tobacco, health services, advertising services and so on. This service tax will be collected by the government as the revenue for the government that will further be used for the welfare and benefits of citizens.
The increase of service tax will be a threat to the whisky industry. The advertising expenditure of the whisky in Malaysia is expected to be dropped as government proposed to impose service tax on paid television broadcast services in future. This will definitely cause the fall in the will of whisky manufacturers and sellers to advertise through the powerful media, television. As a result, the demand of consumers on whisky will decrease as they will not be aware of the latest news and promotions on whisky. The drop in demand will then lead to contraction in the whisky industry.
From the view of economic issues, one of the major factors that will affect the whisky industry is the increase of CPI for alcoholic beverages in Malaysia. The table 1 as shown as below is the official statistics of CPI for various main groups form Department of Statistics Malaysia. It is only the extract of the full table.
Table 1: CONSUMER PRICE INDEX FOR MAIN GROUPS, MALAYSIA (2005=100)
Sources: Department of Statistics Malaysia
From the table 1, it is clearly shown that the Consumer price index (CPI) for alcoholic beverages has increased 4% in September of 2010(134.3) compared to the same month in 2009(130.3) in which the base year is in 2005(100). CPI is a measure of changes through time in the price level of consumer goods and services purchased by households and it is used as an indication of the inflation for the price of a particular product. The increase of 4% in CPI for alcoholic beverages will also represent that the price for whisky has increased by 4% in a year and this will further decrease the purchasing power of consumers for whisky. In other words, Malaysians need to pay more money for the same amount of whisky they consume. This is a threat to whisky industry as the consumers will switch their taste to other beverages instead of whisky. They will change to other beverages that will give the same satisfaction as whisky but lower in price. The demand for whisky will then go down and therefore the industry is expected to have a loss in profit.
Diagram 1: THE MALAYSIA UNEMPLOYMENT RATE (YEAR 2009 TO 2010)
The diagram 1 as shown above is the Malaysia unemployment rate for the year 2009 to 2010 by Trading Economics. According to Trading Economics, the unemployment rate in Malaysia was reported as 3.20% in the third quarter of 2010 and this has decreased by 0.4% as compared to same quarter in the last year. This brings a good sign and opportunity to the whisky industry as the workers in Malaysia are increasing. More people are getting their job and they are contributing their skills and knowledge to the economy of Malaysia. With the workers available in Malaysia, whisky industry can expand its market by developing new products through continuous research and development to attract more consumers. The whisky industry can also increase their supply to meet the extra demand for whisky by employing more workers available in market. Besides that, the geographical area of whisky industry can be improved and widened by opening more shops for sales so that the consumers can buy the whisky anytime and anywhere when they want it. In fact, workers are the basic element and component in the work of expanding the whisky industry.
At the same time, from the point of view of demand, the decrease in unemployment rate will also lead to an increase of demand for whisky. When the people are working, they will have own income and salary for the consumption of daily products. When they are able to achieve the basic living cost and requirement, they tend to go for luxury goods for better enjoyment of life. In this case, when more people are working, the consumption of whisky will also increase as demand of high income people for whisky rises.
2011 per capita income is expected to go up by 6.1% to RM28, 000, while income in terms of purchasing power parity will hit US$16,000 (Malaysia Budget 2011). This will offer an opportunity to the whisky industry as when the income of Malaysians increases, the consumers will be more able and willing to purchase whisky, the luxury good to increase their quality of social life. This will then result in an increase of demand for whisky and boost up the sales of whisky. Whisky industry is expected to expand and earn more profit in the year 2011.
Graph 1: THE GDP GROWTH RATE FOR 3 YEARS (2008-2010)
Sources: Department of Statistics Malaysia
The graph as shown in the above is the illustration of Gross Domestic Product (GDP) for 3 consecutive years (2008 to 2010) from Department of Statistics Malaysia. According to Department of Statistics Malaysia, the Gross Domestic Product(GDP) growth rate for the second quarter of year 2010 has increased drastically to 8.9% as compared to the same period of time for last year(-3.9%). GDP is the amount of goods and services produced in a year. The increase of GDP indicates the economic growth in Malaysia. In other words, when the production of a country increases, the resources of the country are being utilized at a higher employment level. More workers are employed to turn the resources of the country into finished goods and this increases the export level of the national products which will in return bring the economic growth to the country.
In this case, when the economy is in a good condition, the standard of living of Malaysians will also increase and they tend to spend and consume more on luxury goods. The consumption of whisky will become more as the spending of Malaysians on luxury goods is getting higher as the indication of the growth in the value of GDP. The whisky industry will gain a profit once the consumption among citizens is higher.
Table 2: THE POPULATION SIZE AND PATTERN IN MALAYSIA (EXTRACT)
Source: Department of statistic and economic planning unit.
As from the view of social issues, the population of Malaysia is the main concern that will influence on whisky industry. The Table 2 as shown in the above is the population size and pattern in Malaysia as the source from Department of Statistics and Economic Planning Unit. Based on the Table 2, the population of Malaysia has increased from 26.75miliions in 2005 to 28.96 millions in 2010 and 63.6% of the total population falls in the age between 15 and 64. The increase in population size in Malaysia will bring a better opportunity to whisky industry as the demand of the industry towards labour force can be fulfilled that will cause a higher development and expansion of the industry. More labour can be employed to work in whisky industry and contribute their skills and knowledge in improving the current industry condition and also the supply of the industry. This will create an opportunity to the whisky industry in long term.
While more than half of population of Malaysia achieves the drinking age limit (above 18) and this will increase the potential consumers and demand for whisky in future. More citizens will be exposed to whisky through the advertising at the internet and television. In addition, they will be more sensitive and conscious about the benefits of drinking whisky due to the research and reports being done by scientists. From the combination of both, the demand will become higher and the extra demand will be fulfilled when more production of whisky is achieved. This is significant to whisky industry as they will gain much more profit from it.
Dr. Jim Swan, an independent consultant to the worldwide drinks industry (2005) said that drinking whisky can help protect human against cancer. This thesis is originated from a research that showed the people who drink single malt whiskies have greater health benefits rather than drinking red wines. Dr. Jim Swan(2005) further explained that single malt whiskies have more ellagic acid than red wine and this ellagic acid is a highly effective ‘free radical scavenger’ that ‘absorbs’ rogue cells that occur in the body during eating. The free radicals will break down the DNA structure of human cells which will lead to the producing of replacement rogue cancer cells in the body. Drinking whisky can reduce the risk for the citizens from developing cancer cells in the body.
When the citizens of Malaysia aware of the health benefit from drinking whisky, more people will probably start to consume whisky and the existing consumers will also increase their consumption on whisky. This will create better opportunity to whisky industry from the side of demand for whisky and profitable of the industry.
According to a new study by researchers (2010) at the National Institute on Alcohol Abuse and Alcoholism (NIAAA), National Cancer Institute (NCI), and the U.S. Department of Agriculture (USDA), alcohol reduces the quality of diet. It is stated in the study that people who drink more are also likely to eat less fruit and consume more calories from a combination of alcoholic beverages and foods high in unhealthy fats and added sugars. The increased alcohol intake and heavy calories food consumption will therefore cause a harmful effect to human health such as the formation of cardiovascular disease, certain cancers, and other chronic health problems.
When more Malaysians are concerned about the finding of this new study, the demand of whisky will drop as they will be more health conscious and thus reduce the consumption of whisky. Instead of drinking whisky, they will change their taste to healthier beverages such as milk, juices, green tea and so on that provide higher nutritional value to the body. This brings a negative effect to the whisky industry in Malaysia that will cause a lower profitability.
In conclusion, the three main issues that are currently facing the whisky industry bring and create more opportunities than the threats to the industry in Malaysia. The current external business environment in Malaysia will benefit the industry to have a better growth rate and achieve the expansion in size. In future, it is recommended that the whisky industry focus and emphasize on the continuous research and development so that the industry will keep on growing and become a highly competitive industry.
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