international business enviroment ppt

7/30/2019 International Business Enviroment Ppt

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Session

INTRODUCTION TOINTERNATIONAL BUSINESSENVIRONMENT

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International Business

When business activities are performed on aninternational level, these can be termed asinternational business.

Basic functions, processes and techniques of

international business are essentially the same asthose involved in domestic business.

What is different is the environment within whichthese functions are performed and processes arecarried out.

International Business environments are unfamiliarand different from the domestic environment

These variations may need adaptation for businesssuccess.


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International Business Environment

In the context of a business firm, environmentcan be defined as various external factors andforces that surround the firm and influence itsdecisions and operations.

The two major characteristics of theenvironment as pointed out by this definitionare:

1. these factors and forces are external to the

firm2. these are essentially uncontrollable. The

firm can do little to change them


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Micro and Macro Environments

Micro environment can be defined as thefactors inthe firm's immediate environment which directlyinfluence the firm's decisions and operations. Theseinclude: suppliers; various market intermediaries and

service organizations such as middlemen, transporters,warehouses, advertising and marketing researchagencies, business consulting firms and financialinstitutions; competitors, customers and generalpublic.

While the customers constitute firm's market, suppliers

and market intermediaries help providing the firm withinputs and assist in production and marketingprocesses.

Competitors and general public also influence the waya firm conducts its business.


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Micro and Macro Environments

Macro environment consists of broaderforces which affect the firm as well as otherfactors in the firm's micro environment.

These include factors such as geographic,economic, financial, socio-cultural, political,legal, technological and ecological forces.

Firms need to continuously monitor changesin these environmental forces and devisestrategies to cope with them.


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Domestic, Foreign and GlobalEnvironment


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Relevance of InternationalBusiness Environment

When a firm decides to enter into international business, itfaces two major decision problems:

1. Which markets to select, and2. How to enter into those markets.

Both these decisions are strategic in nature and are greatly

influenced by the environmental forces. Firms select those countries as their target markets which

have sufficient market potential. Market potential in turn depends upon geographic,

economic and cultural environments prevailing in theforeign countries.

Demand for fans, for instance, will be more in countrieswhich are geographically located in hot zones and whereper capita income is high enough for the people to affordpurchase of fans.

Besides climate and sufficient income, electricity should beavailable to make the fans workable.


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Once the firm identifies countries with market potentials, it needsto decide as to what mode it should use for entering into thosemarkets.

A wide range of options such as exporting, licensing/franchising,joint venture or setting up wholly owned subsidiaries abroad areavailable to firms.

Firm's actual choice of market entry mode is influenced by avariety of environmental factors.

Exporting is desirable when it is economical to produce in thehome country and there are no legal restrictions on import ofgiven product in the foreign markets.

In the case of import bans or excessive costs of transportation, afirm may choose to set up its manufacturing and marketing

subsidiaries abroad. But this is feasible only when foreigngovernments are not averse to foreign direct investment, andnecessary raw materials and labor are available locally atcompetitive prices in the foreign countries.

In countries where first condition is not fulfilled, the firm can go infor either licensing or joint venture as these entry modes arepolitically less objectionable.


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Environmental forces play an equally important role in shapinga firm's functional and tactical decisions. What should be the scale of production? Should the firm employ labor or capital intensive techniques? How to finance firm's foreign operations? How much to repatriate? What marketing mix should the firm use? Should it hire local persons or employ foreign nationals? What should be their compensation package?

Answers to these and other questions require in-depth analysisof the prevailing environments in foreign countries.

Since the environments differ, firm cannot be much successful

by falling back upon its domestic decisions and practices. Firm needs to screen the foreign country environments and

accordingly decide about the best course of action in eachcountry.


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FOREIGN ENVIRONMENT

Foreign environment consists of geographical, economic,financial, socio-cultural, political, legal and ecologicalforces.

A firm needs to examine these components of theenvironment for each one of the foreign countries in which

it operates. All the components-and elements of the foreign

environment might not be relevant to a decision maker.Much depends on the nature of the firm and its decisions.

For a small firm interested in exporting, analysis of thecommercial policy and the economic environment would be

sufficient. But for a multinational corporation interested in setting up

a manufacturing plant in a foreign country, geographic aswell as socio-cultural, legal and political environmentswould be as important as the economic environment.


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Geographic Environment

Geography is animportant component of the foreignenvironment and refers to a country's climate,topography, natural resources and people.

Every organization engaged in international business

must have some knowledge of geographic features ofthe Foreign country as these influence the nature andcharacteristics of a society.

It also affects demand pattern of the people living inthe country. Geography is a major contributory factorto the development of business systems, tradecenters and routes.


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Different climatic conditions (viz., rain, snowfall, wind,temperature, humidity, etc.) give rise to demand fordifferent types of products.

It is largely due to climatic differences that people differin their housing, clothing, food, medical and recreational

needs. Many a time needs are same, and the same products are

demanded. But because of the climatic and/ortopographic differences, products need adaptation ormodifications to suit local conditions.

Rolls Royce cars from Britain, for instance, required

extensive body work and renovations in Canada becausethe salted sand, spread over streets to keep thempassable throughout four or five months of virtuallycontinuous snow in Canada, caused rusting andcorrosion in the fenders and door panels; and the oilsystem also developed leaks.


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Geographic conditions also affect a firm'splant location decision.

A firm prefers to set up its manufacturingplant in a country which has favorable

climatic conditions, possesses suitabletopography (i.e., surface features such ashills, plains, river and sea) and where rawmaterials, energy and labor are cheaplyand abundantly available.

Foreign country's nearness to othermarkets and its strategic location on majortrade routes are other equally importantconsiderations.


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Firms' distribution and logisticstrategies are directly influenced bygeographic conditions in the foreignmarkets.

Re-order points and safety levelstocks are kept generally higher for

those countries or places which arenot easily accessible and can be cutoff suddenly due to bad weather.


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Economic & FinancialEnvironment

Various dimensions one needs to considerwhile attempting an economic and financialanalysis include: foreign country's level ofeconomic development, income,

expenditure pattern, infrastructureincluding financial institutions and system,inflation, foreign investment in the country,commercial policy, balance of paymentsaccount, accounting systems and practices,

and integration of the foreign country'sforeign exchange, money and capitalmarkets with the rest of the world.


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Economic Environment

Among all the uncontrollables, economicenvironment is perhaps the most importantfactor.

An analysis of economic environmentenables a firm to know how big is themarket and what its nature is.

Answers to these questions in turndetermine whether a firm should enter agiven foreign market, and if yes, whatstrategies it should use to successfully runits business operations.


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Economic Development: Economic development isdirectly related to the development of marketing ina country.

Countries characterized by high levels of economic

development not only have high demand for avariety of products, but also have betterinfrastructure and more developed marketingsystems.

Competition is also high in these countries.

In the less developed countries, on the other hand,not only demand is low, but infrastructure is alsopoor. It, therefore, becomes quite difficult andmore expensive to do business in such nations.


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Income: Income is an important indicator of the country'slevel of development and also its market size.

Gross national product (GNP) and per capita income areamong the major measures of income.

While sales of most of the industrial goods and capital

equipment generally co-relate with GNP, demand forconsumer products depends on per capita income. Though per capita income is a useful measure, it is not a

full-proof measure of the country's development andprosperity. What is more relevant is the distribution ofincome. While in the developed countries incomedistribution is relatively more even, it is highly skewed in

the developing countries. Since only a small portion of thepopulation accounts for 60 to 70 percent of the country'sGNP and the rest are poor in the developing countries,market for high priced product and non-essential productsis limited only to select rich people.


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Besides income, one should acquire information aboutthe sectoral distribution of the GNPas it is animportant determinant of kinds of goods in demand ina foreign country.

If the majority of a country's GNP comes fromagriculture, it implies that the country is agriculturebased and it shall have a good demand foragricultural inputs such as seeds, fertilizers, pesticidesand agricultural machinery and tools.

An industrial nation with relatively higher dependenceon manufacturing, on the other hand, shall have agood market for raw materials, plant and machinery,and also for a variety of consumer durables and non-durables.


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Financial Environment

Monetary and Fiscal Policies: Inflation,interest rate, various kinds of duties andexchange rates are the variables related to

the country's monetary and fiscal policiesand have a substantial impact on the costsand profitability of business operations.

These variables also Influence afirm's

decision to move funds from one nation toanother.


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Financial Environment

Commercial and Foreign Investment Policies:Each country has its own commercial and foreigninvestment policies which must be studied in detail toascertain country's openness for trade and investmentwith other countries.

A proper understanding of these policies can be quitehelpful in ascertaining what tariff and non-tariffbarriers the particular country uses to protect itsdomestic industry from foreign competition.

The country may plan to minimize the incidence ofthese trade measures.


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Culture

Culture can be defined as a "sum total of man'sknowledge, beliefs, art, morals, laws, customs and anyother capabilities and habits acquired by man as amember of society.

It is a distinctive way of life of a group of people, theircomplete design of living.

Culture thus refers to a man's entire social heritage - adistinctive life style of a society and its total valuesystem which is intricately related to the consumption

pattern of the people and management philosophiesand practices.


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Culture

Within each culture there are many subculturesthat can have businesssignificance.

Subcultures are found in all national cultures and failure to recognizethem may create impressions of sameness which in reality may not exist.

A single national and political boundary does not necessarily mean asingle cultural entity.

Canada, for instance, is divided between its French and English heritages,although politically the country is one.

Because of such distinctive cultural division, a successful marketingstrategy among the French Canadians might not effectively work among

the English Canadians or vice-versa.

Similarly a single personnel policy may not work with workers employedin two different plants if they belong to different sub cultural groups anddiffer in their work habits and underlying motivations.


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Culture-Language Language is an important element of culture and it is through language

that most of the communications take place. An international marketer should have a thorough understanding of the

language of the market - particularly the semantic differentials andidiomatic nuances which are essential characteristics of all languagesof the world.

Dictionary translation could be quite different from the idiomaticinterpretation of a language. When literal translations are made ofbrand names or advertising messages from one language to anotherby people who know the language but not the culture, serious mistakesmay occur.

When General Motors of the United States literally translated itsmarketing phrase 'Body by Fisher' into Flemish language, it meant'Corpse by Fisher'. Similarly, the phrase "Come alive with Pepsi" faced

problems when it was translated into German advertisements as"Come out of grave" or in Chinese as "Pepsi brings your ancestors backfrom the grave".

When the American car called 'Nova' was introduced in Puerto Rico,sales were poor until the company realized that the word Nova waspronounced as 'No va' - which literally meant in Spanish "does not go".Sales were better when the name was changed to 'Carbie'.


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Culture-Aesthetics

Aesthetics pertain to a culture's sense of beauty and good taste,and is expressed in arts, drama, music, folklore, dance and thelike.

Aesthetics are of special interest to the international businessexecutives for these govern the norms of beauty in a society andare helpful in correctly interpreting meanings of various methods

of artistic expressions, colors, shapes, forms and symbols in aparticular culture. Colors, for instance, mean different things to different people. The

color of mourning is black in the United States, but it is white inthe Far East. Green is restful color to Americans, but it is dislikedby people in Malaysia where it connotes illness and death.

Symbols also need to be interpreted correctly. Seven, for instance,signifies good luck in the United States but just opposite inSingapore, Ghana and Kenya. Use of number four should beavoided in Japan because it is pronounced as 'shi' which inJapanese means death.

Sensitivity to the aesthetics of a society and their symbolicexpressions can greatly help in avoiding socially embarrassingsituations and correctly designing the products and messages.


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Culture-Material Culture

According to Ball and McCulloch, material culture refers toall manmade objects and its study is concerned with howman makes things and who makes what and why.

While the question 'how? relates to technology, otherquestions 'who', 'what' and 'why' are part of economics.

These elements influence the level of demand as well astypes and quality of goods in demand, and consumptionpattern in a society.

Business implications of material culture of a society areobviously many.

The goods and services that are acceptable in one marketmay not be acceptable in another market because of

differences in material cultures of two societies. For example, sophisticated electronic appliances widely in

demand in the technologically and economically advancedWestern countries may not find a market in the lessdeveloped countries of Asia, Africa or Latin America.


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Culture- Business Customs andPractices

A familiarity with business customs and practices prevalent in differentcountries is a must to avoid business blunders.

An international business manager must have necessary knowledge abouthow business is conducted and what importance business people in a foreigncountry attach to work, time, formality, change and achievement.

American managers, for instance, are by nature highly work oriented andattach utmost importance to speed and punctuality in business dealings.

They are, moreover, highly achievement oriented and fond of new things. But people in other parts of the world do not share these values and beliefs. Japanese, for instance, are also workaholics but they are very slow in

decision making Latin Americans too do not believe in haste and spend considerable time in

socializing and developing friendships before coming to businesstransactions.

A person dealing with people from different cultures should be well aware ofdifferences in the number and nature of stages involved in businessnegotiations and formalities to be observed in concluding business contracts.

While in countries like the United States it is necessary to have finalagreement in writing, this practice is not much appreciated in many WestAsian countries where oral agreement alone is considered more thansufficient.


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POLITICAL ENVIRONMENT

Political Stability:

Stability of the government and governmentpolicies are a major concern for the internationalfirm.

Since business decisions, these days involve hugeinvestments and are irreversible, what the foreignfirms look in for is politically stable countries.

Political instability can result from either change in

the type of government, a shift in political partiesthat form the government or change in thegovernment policies without change in thegovernment or shifts in political parties.


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Political Risk:

Political risk which is defined as the vulnerability of a project to thepolitical acts of a sovereign government is a big threat to foreignbusiness.

The political acts leading to political risks can range from

confiscation, expropriation, nationalization, domestication torestrictions on transfer of finds.

Confiscation occurs when a foreign investment is taken over by agovernment without any compensation.

Expropriation takes place when the government takes over foreigninvestment but some compensation is paid. The compensation may

or may not equate with the market value of a firm. Nationalization affects the entire industry rather than a single

company, and involves transferring ownership of the confiscated orexpropriated business to a national firm or government entity.


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Political Risk:

International firms need a proactiveapproach to deal with political risks.

An effective management of risks callsfor recognizing the existence of variouskinds of political risks and theirconsequences, and developing

appropriate plans and policies to dealwith such risks.


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LEGAL ENVIRONMENT

Every business firm operates within the jurisdiction oflegal system.

This is true of domestic as well as international firms. But the problem for the international firms is that the

laws that they face in their home countries might bedifferent from those encountered in the hostcountries.

Advertising laws in Germany, for instance, are sostrict that is it best advised for the internationalmarketer to get himself good legal counsel beforeframing his advertising strategy.

Similarly there exist laws in European countriespreventing promotion of products through pricediscounting. These laws are based on the premisethat such practices differentiate buyers.


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LEGAL ENVIRONMENT

In the last few decades, efforts have beenmade to evolve international laws

International laws deal with upholding orders. Originally these laws recognized only nations

as entities, but today these laws alsoincorporate role played by individuals.


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LEGAL ENVIRONMENT International laws may be defined as a set of rules and

regulations which the nations consider binding uponthemselves.

This definition brings out two important characteristics ofinternational law.1. One there is absence of the existence of a comprehensive legal

system. There is truly no comprehensive body of law becauseas stated earlier international commercial law is of recentbirth. This has had a direct bearing upon the existingadministering authorities. As of today, there are only a fewinternational bodies for administering justice. These includeInternational Court of Justice founded in 1946 and the WorldCourt at Hague.

2. Second characteristic of the international law relates to thefact that no nation can be forced into these rules as stated inthe phrase 'consider binding upon them'. Since all nationsrecognize the sovereignty of the legal systems, international

judgements are, therefore, based on the premise of goodhumanity and not on the basis of any particular country's legalsystem.


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ECOLOGICAL ENVIRONMENT

Ecology refers to the pattern and balance ofrelationships between plants, animals, people andtheir environment.

Earlier there was hardly any concern for thedepletion of resources and pollution of the

environment. Smoke stemming from the chimneys and the dust

and grime associated with factories were acceptedas a necessary price to be paid for thedevelopment.

But in recent years, the magnitude and nature ofthe 'pollution overload' have assumed suchalarming proportions that pressures have built upall over the world to do something urgently lest thesituation gets out of control.


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international business enviroment ppt

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