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SNHU - MBA-515 - Business Environment, Innovations and Entrepreneurship
Written by: Chris Bell - December, 2016

Contract Manufacturing PEST Analysis External Factors



PEST Analysis


WesBell Electronics will complete a PEST analysis of external factors that may affect their business in the area of politics, economics, social awareness and technological competition. Political concerns that relate to WesBell include government tax policies, labor rates and new regulations and standards. As the government improves it forces companies to change and improve as well, so there are political issues that could change the way WesBell conducts business. Economic concerns related to WesBell include interest rates, copper as a commodity and fluctuations in currency values. As the economy changes WesBell needs to adapt to higher interest rates and fluctuations in currency values because their competition will. Social factors that relate to WesBell include population growth, the desire for a wireless society and environmental resource concerns. The added population increases housing demands and simultaneously increases the demand for copper wiring. Technological factors in 2016 are all around us, sometimes when we don't even notice them, and include innovation and automation, research and development and mass amounts of data. Technology turns people into machines and 8 hour days into 24 hour days. Technology lowers costs and creates high-volume low-margin competition. So it's a serious threat and opportunity for WesBell in contract manufacturing.

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Even though they reinvest their profits, as a small company, they have trouble competing with their biggest competitors on a national level. Their biggest strength in contract manufacturing has been to turn their small customers' manual processes into machine driven technology so that it saves them money. However, bidding on competitive annual contracts with General Electric can be much more difficult for WesBell due to their current size and capacity level. "First variant: for the strengths and opportunities of the project the level of estimates is right relative to the average. And in their relationship decision makers adheres to the generally optimistic position. At the same time, weaknesses and threats assessment are located to the left relative to the average level. At that the decision maker tuned pessimistically regarding the possibility of their implementation. This is the most favorable case for the subsequent analysis. (Chernov, 2016)"

Contract Manufacturing PEST Analysis

Political


A major political concern for WesBell in contract manufacturing is government tax policies because the world is getting smaller with global competition in mind. For instance, President Elect Trump has said that he wants to implement a new 35% tax when US companies bring goods back into the USA after having them manufactured at low labor rates in foreign countries. The validity of his comments aren't as important as the fact that something so drastic could happen, and that companies need plans in place to adapt to the changes. WesBell could see an increase in business, and needs to be prepared for OEMs to start including a 35% tax while comparing pricing amongst contract manufacturers.

The labor rate is a factor that will affect WesBell because it will create a larger expense for the same amount of labor. In order to make the same profit margin they will have to increase their prices similarly. "Employer costs for health benefits increased 2.7 percent for the 12-month period ending in September 2016. Among occupational groups, compensation cost increases for private industry workers for the 12-month period ending in September 2016 ranged from 1.8 percent for management, professional, and related occupations to 3.2 percent for service occupations. (BLS.gov, 2016)" Even though all companies are affected by the same increase, there is still a big disruption in the industry. Possible solutions would be to train better employees and create more efficient processes that create a lower cost-per-unit than the competition. All contractors have the cost of gas, and the increased cost of gas, so getting to the destinations more efficiently would be something more imperative to improve. It's still a factor that affects WesBell in contract manufacturing because they need to use the labor rate in a formula that wins contracts whether the labor rate is low or high.

New government regulations and standards trickle throughout contract manufacturing from big to small in a tree-like format. First we see General Electric, Ford and Intel comply with a new standard and begin to request new information about products, then we see smaller OEMs request the same data. Similarly, most industries respond to new ideas, concepts and products over a long period of time. Adapting quicker can give WesBell an edge in negotiations by offering new data before being asked to supply it. Once WesBell is told by GE to comply with a new standard they offer the same service to the small customers that don't necessarily require it, such as ISO 9001, which is an International Standard of Organization. Many more standards trickle through the industry such as RoHS, REACH, UL, CSA, MSHA and OSHA. They each require some added testing or template-style-organization in order for products to comply.

WesBell states that their products are all UL (Underwriter's Laboratories) approved which means it was manufactured to meet 600 volts and UL tested it as a third party, and stamped it as approved. "RoHS, also known as Lead-Free, stands for Restriction of Hazardous Substances. RoHS, also known as Directive 2002/95/EC, originated in the European Union and restricts the use of six hazardous materials found in electrical and electronic products. (RoHS Guide, 2016)" RoHS means the product is lead free, REACH includes more hazardous metals, UL is USA test approval, CSA is Canadian test approval, MSHA is a safety standard for the mining industry which supply large copper cables and OSHA is another safety standard that affects most warehouse and equipment operations. Being approved before being asked could give WesBell a competitive advantage which makes it a factor in the analysis.

Economical


Interest rates affect many industries so it's a good example of an external factor that can disrupt the contract manufacturing industry. Perhaps interest rates will go down rapidly and allow cheap debt to catapult companies into the next level, only to increase interest rates and crush them. "Cheaper borrowing costs: Lower interest rates make the cost of borrowing cheaper. It will encourage consumers and firms to take out loans to finance greater spending and investment. (Pettinger, 2016)" WesBell has a good ratio of Assets to Liabilities and strong enough earnings to pay off their debt in about 4 years. Increased interest rates could turn into a competitive advantage for WesBell while competition with high debt will have new expenses. "Increases the cost of borrowing: Interest payments on credit cards and loans are more expensive. Therefore this discourages people from borrowing and saving. People who already have loans will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall. (Pettinger, 2016)" Interest rates also change how the rest of the world operates which leads to more risks and various unknown factors. Controlling debt is more important than trying to create a way to beat the cost and volatility of interest rates.

Copper is a commodity just like Gold and Silver which means it's traded daily and fluctuates by the minute. It's completely unpredictable and changes the way copper wire is purchased, used, manufactured and distributed. While copper increases companies end up holding inventory at low cost levels and make bigger margins. It can't be predicted like interest rates or labor rates, but strategic planning is necessary around the subject. For instance, inventory control, waste control, shipping costs and quantity discounts don't change with the fluctuation of copper pricing as a metal. WesBell will see changes throughout the industry when prices rise, and especially when they fall. Falling copper prices will cause companies to hold high-cost inventory for too long and fall into the pit of losing money to get rid of it or wait until prices come back up.

Social


The housing market will grow along with the growth of the population, which means the demand for copper wiring will grow as well. About 15% of WesBell's products are sold to contractors, electricians and installers that work on homes and buildings. The added population will also use more electronics, appliances and other technology that OEMs manufacture, therefore increasing the demand for contract assembly. "Asian countries have shown particularly impressive growth over the last few decades (fig. 3). The increase in per capita copper consumption in Asia ranged from a low of about 40 percent in India to a high of about 82 percent in Taiwan between 1985 and 1998. Changes in per capita copper consumption in developing countries in other parts of the world have been smaller, but still positive. (Kesler, n.d.)"

The thought of a wireless society doesn't seem to far down the road, but it's a scary thought for WesBell. More often than not, the term "wireless" is more about hiding wires than creating battery operated electronics. So the hidden wire harnesses inside electronics shouldn't disappear any time soon, but it's something for WesBell to keep an eye on. When wire harnesses are replaced WesBell may need to think about assembling the new technology that replaced wiring connectivity. However, it's a big factor to consider because the sociocultural mindset is geared towards "wireless".

Environmental resource concerns are a factor for WesBell to consider because it's popular for companies to consider the environment as they manufacturer and dispose of items that may cause harm to all of us. For instance, Alpha Wire has a great brand of wire products in the industry, and created a new brand of EcoWire®. Not only is it made in a natural environment without harmful materials, the insulation is biodegradable. "EcoWire derives its advantage from its unique insulation, a modified polyphenylene ether (mPPE) thermoplastic. Mppe-based insulation is non-halogenated and contains no heavy metal pigments, allowing it to help manufacturers meet Waste Electrical and Electronic Equipment (WEEE) requirements. (Alpha Wire, n.d.)" WesBell doesn't manufacture this product but can promote it in their literature as a company that believes in the environment.

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Technological


Innovation and automation are factors for WesBell to consider because companies cannot simply stand still in the world of technology or else they will fall behind. "In areas such as mobile telephony and consumer electronics markets, a steady rise in demand for process repeatability has fueled a trend towards increasingly more complex and miniaturized products, to the point that industrial automation offers the only viable production strategy for many products. This trend also has the potential to eliminate the competitive advantages associated with a low-cost manual workforce because manual assembly techniques will be incapable of producing future generations of miniaturized items. Manufacturers are now being forced to make high stakes investments in automation technology or to forfeit the ability to produce and market the next generation of products. (Dashchenko, 2007)" Other companies are innovating and automating equipment and processes which could severely hurt WesBell from a competitive standpoint. WesBell will need to reinvest their profits into new equipment to stay competitive, even if the equipment can't quite prove a return on investment in 5 years. They also need to invest profits into smart people that can improve processes and procedures that will lower their overall labor rate and maximize the total potential of the new equipment.

Instead of researching new ways of completing the same jobs and developing new products and processes, WesBell could wait for their competitors to complete that work and copy it. However, WesBell didn't start as a "me too" operation and should not start operating that way. They have always tried to offer something that their competition could not or would not offer. Their website was one of the first in the industry to show up in the search engines and they have always offered additional services and payment structures that weren't common with competition. Recently, WesBell researched and developed a new website that would allow customers to buy services online, whereby adding 100' of wire to their cart, entering a cut-length, and clicking few more buttons to buy a finished product.

Storing large amounts of data in a relational database management system allows companies to view their biggest customers, areas of the country with the most sales, best-selling products, variations in profit margins between products and much more. This data is transformed into information that managers can use to make investment decisions about the future of the company. Data can be collected from the website as well. Perhaps there were 1000 views of ProductABC and it was added to cart 990 times, however the Thank You page only got 600 views. That information clearly shows a problem with the check-out page. The data doesn't give answers but it leads to solutions when analyzed accurately. Without collecting data WesBell would be at a severe disadvantage to its competitors.

Prioritized List


Technology is at the top of the priority list for WesBell because they have the most control over the factors that influence it. They can improve their database, they can research and develop, and innovate and automate as long as they have the profits to invest in those areas. Specifically, they could invest in more equipment because they still use some manual labor to complete jobs that could be automated. Sociocultural is next on the list because population growth will strongly affect WesBell, whether it goes up or down. Researching and understanding the level of population and demand for new homes is an important thing to consider. Environmental resources is a bigger concern for manufacturers than distributors, however WesBell will need to understand the concerns and buy from the appropriate manufacturers when they believe social factors change buying habits. Political factors are third on the list because WesBell cannot control new standards and governmental policies that get implemented, but they must follow them once certain customers request it. WesBell can't predict which standards or policies will be more popular or adapted to quicker, so they must stay on top of each in order to be ready for compliance when necessary. Lastly, the economic factors have the least to do with WesBell's growth strategy, which include interest rates and copper fluctuations as a commodity. Both rise and fall on a monthly basis, both are very unpredictable and both tend to affect the entire industry in a similar format. That doesn't mean they should never pay attention to interest rates or the price of copper, but it would be with an internal strategy and business plan.


Readiness to Compete


WesBell is ready to complete in the market they have chosen, which is to better service customers that have less equipment and automation than WesBell, and to distribute copper wire products that their customers cannot buy direct. That's why technology is the biggest PEST factor that will attribute higher levels of competition in their competitive contract manufacturing industry. They aren't trying to compete with the Billion dollar company, Anixter, in fact sometimes they buy from Anixter when time or cost permits. Pricing can be better from big distributers when copper fluctuates up and down, and they have quick shipping processes in place to get WesBell the necessary products on time for their production schedule. As WesBell acquires more equipment, innovates and updates technology they will begin to compete on new levels.

WesBell is ready to compete in the political sector as well because they continue to review new standards and comply with them sooner than their competition. For instance, there is an international standard of organization (ISO 9001) that was updated in 2008 and 2015. Those that were already compliant with ISO 9001:2008 had 3 years to review, update and adhere to the 2015 standard which incorporated more risk management into all areas of business, but WesBell did it in the first year. WesBell has found that the ISO standard isn't just a certificate on the wall, it's a group of processes and procedures that are documented for customers to review. They can review WesBell's quality procedures, equipment calibration process, or how they document errors and put corrective actions in place to prevent the same errors in the future. In other words, they continuously improve the political sector by complying with everything asked of them because they feel it will be seen positively in the eyes of their customers.

WesBell is ready to compete in the social and economic sectors because they understand and agree with the environmental concerns of the world, they are prepared for population growth and increased copper demands, and they keep a close eye on interest rates and debt level. Higher debt with lower interest rates could ruin a company when rates increase again, so WesBell likes to keep their debt (all liabilities) at a ratio of less than 50% of their assets. WesBell is making a point to advertise their RoHS and REACH compliant wire insulation (no hazardous metals), and promoting Alpha Wire's brand of EcoWire as a strong believer in the overall health of the nation and environment.


References:


Alpha Wire. EcoWire® Hookup Wire. Retrieved from:
http://www.alphawire.com/en/Products/Wire/EcoGen/EcoWire

Bureau of Labor Statistics. Employment Cost Index Summary. Retrieved from:
http://www.bls.gov/news.release/eci.nr0.htm

Dashchenko, A. (2007). Reconfigurable Manufacturing Systems and Transformable Factories. Springer Science & Business Media. Pg. 274.

Kesler, S. (n.d.). Mineral Supply and Demand into the 21st Century. Retrieved from:
http://pubs.usgs.gov/circ/2007/1294/reports/paper9.pdf

Pettiner, T. (2016). Effect of Lower Interest Rates. Retrieved from:
http://www.economicshelp.org/blog/3417/interest-rates/effect-of-lower-interest-rates/

Pettiner, T. (2016). Effect of Raising Interest Rates. Retrieved from:
http://www.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates/