Chapter 2 - Environmental Context of International Business

International Business Environment | Chapter 2
MBAH 503: INTERNATIONAL BUSINESS ENVIRONMENT

Chapter 2
Environmental Context of International Business
Syllabus: Framework for analysing international business environment – Domestic, foreign
and global environments and their impact on international business decisions.
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Introduction
In the present times, characterized with economic slowdown and intense competition, the
necessary conditions for success of business are much more complex and uncertain than they
were before. With globalization of business the business firms have to imbibe the capacity to
face global competition for survival and growth. Any strategy formulation exercise entails
establishing a proper firm environment that highlights the critical importance of analysing the
international business environment. The essence of any successful business strategy is its
environmental orientation. Since, there are some fundamental differences between the business
operations in the domestic and the international markets, for a successful strategy, there is a
need to understand the complexities of the international markets. It is more than unlikely that
a firm can extend its domestic strategies into the foreign markets. Mere understanding of the
customer requirements is not enough. A company has to go beyond its internal strategies,
understanding customer requirements. What makes a business strategy successful in one
market and a failure in another is because of the difference in the firms’ capabilities to
understand and respond to the international business environment.
International Business Environment: The Conceptual Framework

The simplest way to explain the environment of business is to conceptualize it as comprising
of the ‘surroundings’ which have direct and indirect influence on the business. The traditional
view of business is to look upon the same as a closed system, which is not influenced by the
external and internal factors. However, after Hawthorne experiments, it was realised that
business cannot be run by mere economic rationality and there are internal and external factors
which can influence the functioning and performance of the business. Business is no longer
seen as a closed system, but is looked upon as an open system, which is influenced by the
factors within and outside the organization. Business Environment as described by Richman
and Copen “Environment consists of factors that are largely if not totally, external and beyond
the control of individual industrial enterprise and their managements. These are essentially the
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‘givers’ within which firms and their management must operate in a specific country and they
vary, often greatly, from country to country”.
Business environment is becoming very complex day by day as there is intense competition
between the firms. Moreover, many issues related to business, such as environmental issues
such as deforestation, global warming, depletion of the ozone layer, pollution of land, air and
water, inclusiveness of growth, etc. are no longer strictly the issues related to books and
conferences. They are the things of discussion in the public domain. The bu sinesses are
challenged today to develop creative ways to make profits without unduly harming the existing
environment. Considering the variety of these sources of change in the environment, global
managers are challenged to keep themselves abreast and adjust as needed.
Gone are the days when business was heavily protected and subsidized, licenses, quotas and
restrictions were the order of the day. Now competition is the name of modern business.
Businessmen always stand on the brink of a fear to eliminate f rom the market. They stand on
their feet to cut down costs, to eliminate deficiencies and incessant improvement in the quality
is order of the day. But by the competition, consumer is obviously benefited by the diverse
openings of different competitors. According to Micheal Porter “aggressive home-based
suppliers and demanding local suppliers competing domestic rivals will keep each other honest
in obtaining government support”. Nowadays competition is not only from rival firms but also
from the ever-improving technology. For example, with the emergence of smart phones, many
products such as – cameras, walkman, cassettes, video recorders, personal diaries, telegrams,
watches, alarm clocks, calculators, etc. are out of business. So, today’s business is witnes sing
the manifolds competition which was not prevalent in the past and this competition is created
out of the changes that have taken place in various components of the business environment.
In order to survive and grow in this complex situation, the firms have to understand and even
forecast these changes and their possible influence on the business and devise strategies for
survival and growth.
Components of international business environment

Environment is a complex mix of components, which interact with each other and produce
situations which can be favourable or unfavourable for business. Wiiliam F. Gluck has defined
business environment set of factors, described as, “Business environment is the process by
which strategists monitor the economic, governmental, market, supplier, technological,
geographic, and social settings to determine opportunities and threats to their firms”.
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Depending upon their proximity to a firm, various components of business environment can be
divided into two categories:
a) Internal environment
b) External environment
Both these factors have varying degree of influence on the business firm. There is va rying
degree of control of a firm on these environmental components. The internal environment
comprises of the components which are related to direct achievement of the objectives and
have a direct bearing on a firm’s performance. Since they relate to the achievement of tasks
and activities within the organization, they are also called task environment. A firm’s
management can assert control on these factors. Hence, the internal environment is also
connoted as controllable environment.
The external environment comprises of the components which lie outside a firm. These
components have a remote or indirect influence on a firm’s activities. These components do
not intervene with the day to day activities, but assert an influence. Hence, the other name given
to external environmental components is the remote environment. Since these components lie
outside the firm, the management of the firm cannot exercise a direct control on them. So, the
external environment is also considered to be uncontrollable.
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Internal Environment
An organization's internal environment is composed of the elements within the organization,

including current employees, management, and especially corporate culture, which defines
employee behavior. Although some elements affect the organization as a whole, others affect
only the manager. A manager's philosophical or leadership style directly impacts employees.
Traditional managers give explicit instructions to employees, while progressive managers
empower employees to make many of their own decisions. Changes in philosophy and/or
leadership style are under the control of the manager. In other words, Internal driving forces
are those kinds of things, situations, or events that occur inside the business, and are generally
under the control of the company. Various components of internal environment of a firm are:
 Value Systems
 Vision and Mission
 Objectives & Strategy
 Core Competences
 Resources
 Organizational Structure
Value Systems
According to business dictionary, the value systems are comprehended as a coherent set of
values adopted and/or evolved by a person, organization, or society as a standard to guide its
behavior in preferences in all situations. They represent the individuals’ and consequently the
firm’s commitment to abide by the self -defined set of norms and values. These norms and value
define a firm’s conceptualization of righteousness and wrongfulness of its actions and they set
the standards for the range of deviations that they would allow to themselves while earning the
profits. These value systems tell us purpose of doing the business and the basic values for which
a firm stands for. All the subsequent actions of a firm are translated on the basis of their value
systems.
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For example, purpose and values of Tata group are stated as under:
Purpose and Values of Tata Group Purpose
At the Tata group we are committed to improving the quality of life of the communities we
serve. We do this by striving for leadership and global competitiveness in the business sectors
in which we operate. Our practice of returning to society what we earn evokes trust among
consumers, employees, shareholders and the community. We are committed to protecting this
heritage of leadership with trust through the manner in which we conduct our business
Core values
Tata has always been values-driven. These values continue to direct the growth and business
of Tata companies.
The five core Tata values underpinning the way we do business are:
• Integrity: We must conduct our business fairly, with honesty and transparency. Everything
we do must stand the test of public scrutiny.
• Understanding: We must be caring, show respect, compassion and humanity for our
colleagues and customers around the world, and always work for the benefit of the communities
we serve.
• Excellence: We must constantly strive to achieve the highest possible standards in our day-
today work and in the quality of the goods and services we provide.
• Unity: We must work cohesively with our colleagues across the group and with our
customers and partners around the world, building strong relationships based on tolerance,
understanding and mutual cooperation.
• Responsibility: We must continue to be responsible, sensitive to the countries, communities

and environments in which we work, always ensuring that what comes from the people goes
back to the people many times over.
We see a strong sense of purpose, which shows the group’s commitment to improving the
quality of life of all the stakeholders. All the businesses of the group have been built on these
core values and we see that even the present times of low ethical behaviour even highly reputed
firms, Tata group has never come in any kind of controversy.
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Vision and Mission
The vision of an organization outlines what the organization wants to be, or how it wants the
world in which it operates to be (an "idealised" view of the world). It is a long-term view and
concentrates on the future. It can be emotive and is a source of inspiration. It is a long-term
view of the self and tells what the stakeholders of a firm see for themselves after doing the
business. It sets a framework for the business to develop a roadmap of activities to translate
into the vision.
The firm’s mission decides the course of action that a firm will follow in order to survive and
grow. In the present times, the firms develop a few core competences and develop their entire
global business plan on its basis. They do not dissipate their resources by venturing into too
many businesses, but concentrate on their core strengths and do not mind outsourcing the rest.
The mission is the roadmap to achieve the framework defined by the vision.
Let us understand the concept from an example of global company “Coca-Cola’. The mission
and vision of Coca Cola group are as under:
Mission and Vision of Coca Cola Group
The world is changing all around us. To continue to thrive as a business over the next ten years
and beyond, we must look ahead, understand the trends and forces that will shape our business
in the future and move swiftly to prepare for what's to come. We must get ready for tomorrow
today. That's what our 2020 Vision is all about. It creates a long-term destination for our
business and provides us with a "Roadmap" for winning together with our bottling partners.
Our Mission
Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company
and serves as the standard against which we weigh our actions and decisions.
• To refresh the world...
• To inspire moments of optimism and happiness...
• To create value and make a difference.
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Our Vision
Our vision serves as the framework for our Roadmap and guides every aspect of our business
by describing what we need to accomplish in order to continue achieving sustainable, quality
growth.
• People: Be a great place to work where people are inspired to be the best they can be.
• Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy
people's desires and needs.
• Partners: Nurture a winning network of customers and suppliers, together we create mutual,
enduring value.
• Planet: Be a responsible citizen that makes a difference by helping build and support
sustainable communities.
• Profit: Maximize long-term return to shareowners while being mindful of our overall
responsibilities.
• Productivity: Be a highly effective, lean and fast-moving organization.
Objectives and Strategy
Business Dictionary defines the objective of a firm as a specific result that a person or system
aims to achieve within a time frame and with available resources. In general, objectives are
more specific and easier to measure than goals. Objectives are basic tools that underlie all
planning and strategic activities. They serve as the basis for creating policy and evaluating
performance. Some examples of business objectives include minimizing expenses, expanding
internationally, or making a profit. In other words, objectives are the quantified and measurable
steps to achieving the mission of a firm.
The mission translates into more operational paradigm in the form of strategy, which operates
at various levels. A strategy is a long-term plan, formulated by the top management to achieve
the goals within the framework of environmental uncertainty. Strategy is the direction and
scope of an organisation over the long-term: which achieves advantage for the organisation
through its configuration of resources within a challenging environment, to meet the needs of
markets and to fulfil stakeholder expectations. Strategies exist at several levels in any
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organisation - ranging from the overall business (or group of businesses) through to individuals
working in it.
Corporate Strategy - is concerned with the overall purpose and scope of the business to meet
stakeholder expectations. This is a crucial level since it is heavily influenced by investors in
the business and acts to guide strategic decision-making throughout the business. Corporate
strategy is often stated explicitly in a "mission statement".
Business Unit Strategy - is concerned more with how a business competes successfully in a
particular market. It concerns strategic decisions about choice of products, meeting needs of
customers, gaining advantage over competitors, exploiting or creating new opportunities etc.
Operational Strategy - is concerned with how each part of the business is organised to deliver
the corporate and business-unit level strategic direction. Operational strategy therefore focuses
on issues of resources, processes, people etc.
While understanding the tools for strategic analysis are beyond the scope of this lesson, it is
pertinent to mention some of the tools:
a) PEST analysis
b) Scenario planning
c) Five force analysis
d) Market segmentation
e) Directional policy matrix
f) Competitor analysis
g) Critical success factor analysis
h) SWOT analysis
Core Competences
The core competences are the main strengths or strategic advantages of a business. Core
competencies are the combination of pooled knowledge and technical capacities that allow a
business to be competitive in the marketplace. Theoretically, a core competency should allow
a company to expand into new end markets as well as provide a significant benefit to customers.
It should also be hard for competitors to replicate. The term "core competency" is relatively
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new. It originated in a 1990 Harvard Business Review article. In it, the authors suggest that
business functions not enhanced by core competencies should be outsourced if economically
feasible. The term was coined by CK Prahlad as an alternative tool to competitiveness, in
addition to Porter’s model of generic strategy.
Since core competences are difficult to imitate, they are also called as distinctive competences.
Firms often develop core competences, but only a few are able to convert it into successful
business. The classical case of Cannon vs Xerox is an example. Both the companies started by
developing core competence in optical scanning, but over a period of time, Xerox outsmarted
the former by its superior strategy. Cannon, at one time, had practically driven Xerox even out
of its home country i.e. USA. But, Xerox developed a very comprehensive marketing and
customer service strategy and regained its leadership in the photocopier industry. Similarly,
Honda developed the core competence in the field of petrol engine and this led it to become a
market leader in the products based on the same. Honda is the leader in cars, generator sets,
and now two wheelers also. The formidable competitive advantage dwells upon the core
competence.
Resources
Firm’s access to exclusive resources is a big source of competitive advantage. The resources
can be in the form of raw material, cheap labour, technology, networks, cheap power,
infrastructure, etc. These resources enable a firm to achieve effective strategy implementation
resulting into a characteristic distinctiveness. For example, Chinese manufacturers have access
to good infrastructure, cheap power and other inputs. Further, they have exclusive knowledge
of materials science and are able to reengineer the products to reduce the costs, without
significant reduction into the operational performance of the products. This makes them the
low-cost producers of the world, unmatched by any country in the world, eroding the
competitive advantage of several developed nations. In the present times, the intangible
resources, such as knowledge, technology, etc. are also playing an important role in imparting
competitiveness to the firms.
Organizational Structure
Certain firms have organizational characteristics, including the structure and systems, which
can be a good source of competitive advantage. Japanese firms have very strong systems of
planning and collective decision making, organizational commitment and h igh degree of
operational competence to produce zero defect products. Such an output is the result of the
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organization-wide efforts. In the present times, several firms have developed lean and efficient
organizational structures, which help them to produce unmatched quality. Properly designed
organizational structures facilitate hassle free communication between individuals, reduces
conflict and helps in achieving better coordination between various departments. Similarly,
organizational culture helps in motivating employees and achieving better productivity. The
systems of multinational companies have helped them to survive for centuries, in diverse
business environments. The recent example of strike and violent protests in Maruti were the
results of the organizational problems. The top management failed to anticipate the brewing
problem within the organization and the firm had to face labour protests, shut down of
production and loss of market position. Maruti will have to work very hard to come out of this
regain its leadership position in the automobile industry.
Business environment is a complex combination of various surrounding components, both

within and outside an organization. The internal components of business environment are the
factors within in an organization and can be within the control of the management of the firm.
These internal components include organizational values, vision and mission, objectives,
strategies, core competence, resources and organizational characteristics of the firms. By
carefully crafting each of these factors, the firms can build the systems, which can help them
to remain competitive. The firms must have effective systems for assessing the internal
conditions of the firms to avoid sudden uncertainties.
External Environment
In addition to the internal environment, which influences a firm’s operations and performance,
there are external factors as well, which influence the firms. The external environmental
components have a remote, but strong influence upon a firm. Being external, these factors are
not within the direct control of a firm and are also called as ‘uncontrollable’ factors.
Some of the components of the external environment are:
a) Geographic environment
b) Demographic environment
c) Economic environment
d) Cultural environment
e) Political environment
f) Legal and regulatory environment
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A. Geographic Environment
The geographical environment comprises of various geographical factors that surrounds a firm.
The business firms operate in one or more geographical areas and the geographical
characteristics of that place assert a direct influence on the firm. The geographical factors
comprise of the physical features of the terrain and the climate, which have a lot of influence
upon other environmental aspects. The geographical areas vary in terms of the physical
features. Some areas are plains, while others are hilly, or deserts. Some areas might be located
on river banks, lakes, seas, etc. The soil of some areas might be fertile, while other areas might
by rocky and sandy. Some areas might face lot of climatic hazards, for example the hurricanes,
earthquakes, extreme weather conditions, heavy rainfall, floods, snowfall, or intense heat.
Some areas might have many seasons, while the climate in some areas might be moderate and
pleasant. Some of the resulting impacts of these geographic features are:
a) Population density
b) Accessibility
c) Consumption habits
d) Economic development
a) Population density
The population density depends upon the geographic conditions of a place. People like to live
in the areas where the geographic and climatic conditions are favourable. The human
population has grown around river beds, coastal areas, fertile plains and valleys. The density
of population is very low in the rough terrains, deserts, snow bound areas, areas with dense
forests, etc. The business needs people for consumption. Hence, the firms prefer to be located
where there is more population as the business operations are far easier in those areas. We see
most of the investment coming in big cities, which are getting bigger because of population
migration. Industrial clusters and investments come around the areas with sizable population.
The population will determine the size of the market and hence its potential and the firms must
choose the countries and the geographical areas, accordingly.
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b) Accessibility
The geographic characteristics of an area influence the accessibility and the development of
means of transport. In the ancient times, the population grew around the rivers and seas because
of the easy transportation. The areas located in rugged terrains would have limited accessibility
and the cost of transportation in these areas would be very high. For example, in hilly areas,
the cost of transportation of building material is so high that it almost doubles the cost of
construction. Similarly, areas with favourable physical features would be easily accessible,
often located on well-developed roads, rail or waterway transportation facilities. The
accessibility also influences the population density and the firms need to take them into
consideration as well.
b) Consumption
The consumption patterns of the population are highly influenced by the areas in which they
live. The prevailing climatic conditions will decide the type of houses in which they will live
in. The building material, the design and the type of houses will vary. Most plains would have
flat roofed houses, multiple or group houses and very dense population would be living in small
areas. In the hilly areas, the houses would be made of wood and they would be located in far
off areas. Similarly, the requirements of energy for heating, or air conditioning of the houses
would influence the cost of living.
The people’s clothes would depend upon the area in which they are living. The people living
in hot areas would prefer light clothing, while those living in the cold areas would prefer the
woollen clothing, which could be costlier. The firms will have to design their garments
depending upon the markets in which they are selling the products. The areas with more seasons
would create more demand for a wide range of products, while the areas with more or less
similar climatic conditions would create lesser needs as the clothes and other requirements
would not need much replacement.
Peoples’ food is highly dependent upon the geographical area in which they live. The people
living in the areas with fertile soil would prefer grains, vegetables, dairy products, etc. The
people living in cold countries would be non-vegetarian and those living in hot and humid areas
would prefer lighter food. Geographical areas have another so ciological aspect, where the
people of similar beliefs, language and culture would live together, and the consumption would
also be influenced accordingly.
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c) Economic development
There is an indirect association between the geographical area and its economic development.
But the population leads to business, more investment, more employment, and hence more
economic development. World-over, the economic development has happened in clusters,
often in favourable physical conditions as well. The fertile plains o f Ganga, the coasts, the
plains of Deccan have attracted investment and have much better infrastructure as compared
on far flung areas. Peoples’ consumption changes significantly with the area’s economic
development. The requirements of cars, houses, material pleasures, etc. is highly influenced by
the economic development of that area. The above discussion shows that the geographic
features of an area have a lot of influence on a firm and they must consider these aspects while
deciding upon the location of a firm, and then the strategies and plans to run the business
operations.
B. Demographic environment
Demographic environment of a country refers to the pattern of population and the changes in
the societies, cities, regions and nations. It analyses the population characteristics on the basis
of age, gender, education, marital status, household patterns, religion, nationality, ethnicity,
etc. Demography provided an analysis of qualitative as well as quantitative aspects of the
population. Some of the issues covered under demographic environment are:
a) Population size:
The very size of a population determines the size of the possible business. It represents the
potential to which the market can expand. By virtue of their population, China and In dia are
considered to be very powerful emerging economies, overtaking even the developed nations.
All the multinational companies are making their way into these markets have tremendous
potential for consumption.
b) Age distribution
In India, we are witnessing an increase in the population in the age group of 15-40 years, i.e.,
the productive people. This means that the economic prosperity of people is likely to increase
in the times to come. India is called Youngistan because the young population represents hopes
and aspirations and also the capacity and energy to realize those dreams, and hence offers
opportunities to the business firms. On the other hand, we find an increasing population of old
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people in countries like Japan. This is because of very low birth rates and high life expectancy.
This can influence the spending habits and business potential significantly.
c) Migration
The migration of people from villages to cities, and from the country to other countries in
search of job has a high influence on the business potential. People increase their economic
prosperity by movement and thus the business potential grows. There is an increasing trend
amongst the people to move towards metropolitan cities, where there are more jobs, better
living standards and a different lifestyle.
d) Education and occupation
There is a trend towards higher education and preference for white collar jobs over the blue -
collar jobs. This also has a tremendous impact on the spending habits of the business.
e) Family size and structure
The size of family and its structure has a significant impact on the consumption patterns. In the
rural and semi-urban areas, still joint families exist. The members of the family have an
important say in the matters concerning other members. In the cities, there is increasing trend
towards nuclear families and their lifestyle and consumption is undergoing a major change.
Demographic characteristics of population must be studied by the firms before they decide to
venture into any overseas market. In a fast-changing society, the nature of demographic
indicators of the population is undergoing a change and each change represents an opportunity
to the business firms. The growth of several emerging economies like China, India, Brazil,
South Africa, etc. is largely due to the robust demographic profile of these societies.
C. Economic environment
The economic environment is a major determinant of market potential and opportunity. Since
the single most important indicator of market potential is income, the first step in determining
the potential of a country or a region is to identify the total, and even more significantly, the
per capita income. In general, as peoples’ income rises, they spend less on the necessities and
more on the discretionary purchases. One of the ways of determining market potential for a
product is to evaluate product saturation levels. In general, it is appropriate to compare the
saturation levels of countries or of consumer segments with similar income levels. Coun tries
and markets go through typical stages of market development. Although, development is on a
continuum, it is possible to identify distinct stages and formulate general estimates about the
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type of the market that will be found in a country or a market at a particular stage of
development. In advanced countries, for example, more than half the GNP is accounted for by
the services as opposed to goods. In under-developed countries, the proportion of services is
very low.
Changes in world economy
Over the years, several changes have taken place in the world economy, which have changed
the very manner of doing business. Keegan has identified the five most significant changes in
the world economy, which have occurred in the past decades, and will influence th e conduct
of business. These changes are:
a) Increasing capital movement
In the present time, capital movement rather than trade have become the driving forces of world
economy. The capital movement represents the attractiveness of a country for investment. For
example, by its favourable pro-business policies, China has attracted the maximum investment.
In no time, China is likely to emerge as the manufacturing base for the whole world. Many
countries were ahead of China in terms of trade, but they feel the threat to their economy
because of a sudden increase in the economic potential of China, arising because of huge
foreign investment.
b) Jobless growth
Despite economic development, the production has become uncoupled from employment and
the Government of India claimed to have touched 8% growth in the GDP, the growth is a
jobless growth. The increase in productivity does not translate into more jobs for the people.
Such a situation is not good for the economies in the long run because a large section of the
society will be siphoned out of the economic activities.
c) Value driven competition
The primary products have become uncoupled from the industrial economy and in the industrial
economy, focus is more on innovation and value addition and not mere value addition. Michael
Porter has stated in his book, “The Competitive Advantage o f Nations,” that as an economy
progresses, it is driven by the factors of production, namely land, labour, capital and
management. However, after one stage, it stops getting leverage out of mere factors of
production. It becomes a wealth driven economy. Here, wealth begets more wealth. However,
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in long run, such a strategy is not going to deliver results. If an economy aspires to grow further,
it has to become an innovation driven economy. Thus, primary products cease to the driving
forces of the industry. Industry is going in for rapid innovation and thus is aiming at delivering
higher value to its customers.
d) Globalization
The global forces of the world economy are in control and the macro economics of nation-
states no longer control economic outcomes. Keegan observes a gradual separation between
economics and politics, although the shift is very subtle. The economy is in the control of the
market forces because more and more governments are opening up and allowing business to
work freely.
e) Free market economy
The free market economy, where market forces control the economy, the state intervention has
been reduced. The 75-year contest between capitalism and socialism is over. The clear success
of the capitalist system over the communist centrally controlled model has led to the collapse
of communism as a model of organization of economic activity and as an ideology by the above
remarks, it is clear that the world economy is heading for a new world economic order. The
leftist forces are not as strong as they were on the yesteryears. The world is no longer a bi-polar
world, but is now a multi-polar world with many regional economic groupings and powers.
The democracy has shown a definite edge over other systems and is likely to persuade more
and more countries to allow free play of the market forces.
Elements of Economic Environment
Economic environment is a multidimensional entity and it has dynamic interaction with other
environmental components as well. While there are many elements of the economic
environment, it comprises of five main components, as mentioned below:
a) Economic Conditions
b) Economic System
c) Economic Policies
d) International Economic Environment
e) Economic Legislations
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a) Economic Conditions
In order to understand the economic condition, it is pertinent to have a look at the state of
economy of India since last decade. From the stage of ‘India Shining’ in 2004, when all the
economic indicators showed a robust economic health of the nation, today we are facing tough
times. The inflation and interest rates are very high, whereas the economic growth, budgetary
deficit, value of rupee is touching the lowest benchmarks. Deteriorating economic conditions
have eroded the investment, leading higher unemployment and the country is passing through
a tough time. Economic Policies of a business unit are largely affected by the economic
conditions of an economy. Any improvement in the economic conditions such as standard of
living, purchasing power of public, demand and supply, distribution of income etc. largely
affects the size of the market.
The economic condition passes through the business cycles, which has five stages - Prosperity,
Boom, Decline, Depression, and Recovery. The prudence of the economists lies in how they
are able to prolong the prosperity and boom, and reduce the impact and duration of decline and
depression. As explained earlier, Indian economic is definitely passing through a phase of
slowdown and the skill of the economists managing the affairs lies in how they are able to get
to the recovery stage.
In order to assess the economic condition of a country, it is important to study the following
economic conditions:
(i) Stages of Business Cycle
(ii) National Income, Per Capita Income and Distribution of Income
(iii) Rate of Capital Formation
(iv) Demand and Supply Trends
(v) Inflation Rate in the Economy
(vi) Industrial Growth Rate, Exports Growth Rate
(vii) Interest Rate prevailing in the Economy
(viii) Trends in Industrial Sickness
(ix) Efficiency of Public and Private Sectors
(x) Growth of Primary and Secondary Capital Markets

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(xi) Size of Market
b) Economic Systems
An Economic System of a nation or a country may be defined as a framework of rules, goals

and incentives that controls economic relations among people in a society. It also helps in
providing framework for answering the basic economic questions. Different countries of a
world have different economic systems and the prevailing economic system in a country affect
the business units to a large extent. Economic conditions of a nation can be of any one of the
following types: -
(i) Capitalism
The economic system in which business units or factors of production are privately owned and
governed is called Capitalism. The profit earning is the sole aim of the bu siness units.
Government of that country does not interfere in the economic activities of the country. It is
also known as free market economy. All the decisions relating to the economic activities are
privately taken. Examples of Capitalistic Economy: - England, Japan, America etc.
(ii) Socialism
Under socialism economic system, all the economic activities of the country are controlled and
regulated by the Government in the interest of the public. The first country to adopt this concept
was Soviet Russia. The two main forms of Socialism are: -
i. Democratic Socialism: -
All the economic activities are controlled and regulated by the government but the people
have the freedom of choice of occupation and consumption.
ii. Totalitarian Socialism: -
This form is also known as Communism. Under this, people are obliged to work under the
directions of Government.
(iii) Mixed Economy: -
The economic system in which both public and private sectors co -exist is known as Mixed
Economy. Some factors of production are privately owned and some are owned by
Government. There exists freedom of choice of occupation and consumption. Both private and
public sectors play key roles in the development of the country. At the time of independence,
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India had opted for a socialist economy, which has transformed into the market led economy.
Although we have a free market economy, the government and the government owned
institutions play an important role in the economy. Hence, we are a mixed economy even in
the present times.
c) Economic Policies
Government frames economic policies. Economic Policies affects the different business units
in different ways. It may or may not have favorable effect on a business unit. The Government
may grant subsidies to one business or decrease the rates of excise or custom duty or the
government may increase the rates of custom duty and excise duty, tax rates for another
business. All the business enterprises frame their policies keeping in view the prevailing
economic policies. Important economic policies of a country are as follows: -
(i) Monetary Policy
The policy formulated by the central bank of a country to control the supply and the cost of
money (rate of interest), in order to attain some specified objectives is known as Monetary
Policy.
(ii) Fiscal Policy
It may be termed as budgetary policy. It is related with the income and expenditure of a country.
Fiscal Policy works as an instrument in economic and social growth of a country. It is framed
by the government of a country and it deals with taxation, government expenditure,
borrowings, deficit financing and management of public debts in an economy.
(iii) Foreign Trade
Policy It also affects the different business units differently. E.g. if restrictive import policy has
been adopted by the government then it will prevent the domestic business units from foreign
competition and if the liberal import policy has been adopted by the government then it will
affect the domestic products in other way.
(iv) Foreign Investment Policy
The policy related to the investment by the foreigners in a country is known as Foreign
Investment Policy. If the government has adopted liberal investment policy then it will lead to
more inflow of foreign capital in the country which ultimately results in more industrialization
and growth in the country.
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(v) Industrial Policy
Industrial policy of a country promotes and regulates the industrialization in the country. It is
framed by government. The government from time to time issues principals and guidelines
under the industrial policy of the country.
d) Global/International Economic Environment
The role of international economic environment is increasing day by day. If any business
enterprise is involved in foreign trade, then it is influenced by not only its own country
economic environment but also the economic environment of the country from/to which it is
importing or exporting goods. There are various rules and guidelines for these trades which are
issued by many organizations like World Bank, WTO, United Nations etc. Besides the above
policies, Governments of different countries frame various legislations which regulates and
control the business.
D. Cultural environment
The term culture originated in 18th and 19th centuries in Europe and has been acquiring
different connotations, each representing a different perspective, viz. agriculture, anthropology,
sociology, philosophy, psychology, etc. Etymologically, it refers to the cultivation of the soul.
As the philosophers accommodated a wider and practical perspective to life, accommodating
other existential aspects, culture acquired a different meaning and is used to refer to all the
ways in which the humans overcome their original barbarism through artifice and become fully
human. Thus, it is the set of shared values of a society. It encompasses religion, language,
customs, traditions and beliefs, tastes and preferences, social stratification, social institutions,
buying and consumption habits etc.
The study of culture is the study of all aspects of a society. It is the language, knowledge, laws,
and customs that give society its distinctive character and personality. In the context of
consumer behaviour, culture is defined as the sum total of learned beliefs, values, and customs
that serve to regulate the consumer behaviour of members of a particular society. Beliefs and
values are guides for consumer behaviour; customs are unusual and accepted ways of behaving.
The impact of culture is so natural and ingrained that its influence on behaviour is rarely noted.
Yet, culture offers order, direction, and guidance to members of society in all phases of human
problem solving. Culture is dynamic, and gradually and continually evolves to meet the needs
of society.
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Culture is learned as part of social experience. Children acquire from their environment a set
of beliefs, values, and customs that constitute culture (i.e., they are cultured). These are
acquired through formal learning, informal learning, and technical learning. Advertising
enhances formal learning by reinforcing desired modes of behaviour and expectations; it
enhances informal learning by providing models for behaviour.
Culture is communicated to members of the society through a common language and through
commonly shared symbols. Because the human mind has the ability to absorb and process
symbolic communication, marketers can successfully promote both tangible and intangible
products and product concepts to consumers through mass media.
Impact of Culture on business and individual decision making
Culture has several interfaces where it influences the business and has an impact at the macro
level as at the individual level. Some of the macro level impacts of culture are:
(i) Decision-making: In some societies, all-important organizational decisions are

made by the top management, while in others, the decisions are diffused throughout
the organization. For example, the decision making is highly decentralized in
Japanese firms, while it is highly centralized in American firms. There are cultural
reasons behind this.
(ii) Risk evasiveness: The decision-makers in some organizations are averse to risk,
while some take risk and thus make higher gains. The risk bearing behaviour of
groups is also a cultural phenomenon. This influences investment decisions at the
organizational levels and at the micro level of the consumers, it has its impact on
the buying habits. People who take risk buy new and innovative products, while
others prefer to stick to tested products.
(iii) Individual vs group reward: In some societies, such as the Japanese, the group
reward is valued more than the individual reward, which is the order in he American
firms.
(iv) Organizational loyalty: Extrapolating the above point, the societies with strong
inter-personal ties have a high degree of organizational loyalty, while those who
value individual achievements have low organizational loyalty.
(v) Culture and perception: Culture has a great bearing on how people view
themselves and their surroundings, which influences their behaviour. The cultural
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impact of perception influences the sense of self-gratification, empathy and

organizational commitment.
(vi) Individual impacts: Besides the macro level impacts, culture has an impact at the
level of the individuals as well. Culture influences the sense of self and space,
communication and language, dress and appearance, food and feeding habits, time
consciousness, beliefs and norms, customs and rituals, mannerisms and etiquettes,
etc.
Subculture:
Within the broadly defined culture, there are several subcultures, which assert a similar
influence on the business. A subculture is a variant of the culture. While it shares values and
beliefs with the culture, it does modify it according to the specific requirements of the group.
For example, although the people all over India share common values, celebrate common
festivals and profess similar religious beliefs, there are several variations at local levels. Hindus
of northern India would follow different rituals from those in eastern India or southern India.
The marketer must understand the subculture as well while adapting to the local conditions. To
sum up, understanding of culture is very important for success in overseas marketing.
Although, the world is becoming global and there is a high degree of cultural diffusion, still,
there is a need to adapt to the local environment, of which culture is an important constituent.
Culture and International Marketing
Culture has lot of impact on international as the marketing mix has to be designed according
to the cultural characteristics of the population of the host country. For example, when
McDonalds launched their burger into the Indian markets, they introduced the products which
had stronger and pricier tastes to suit the taste buds of the Indian consumers. They did not
introduce any varieties of burger, which used beef as it would have hurt the sentiments of a
majority of the Indian population.
Similarly, culture influences the communication patterns and styles and the marketing
communication campaigns have to be designed accordingly. For example, Pepsi has a very
popular slogan – Come alive with Pepsi generation. When Pepsi used the same slogan in China,
it translated as – Pepsi will bring your ancestors from the dead. This slogan created lot of
negative publicity and it had to be withdrawn. Similarly, a baby food manufacturer had to
change its brand name from ‘Gerber’ because in French it means – to vomit.
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Kellogg could not succeed into the Indian market to the extent to which it had anticipated
because cereals are not the preferred breakfast food. So, they had to target specific consumer
segments such as children, women, etc
The above examples show how firs can make big mistakes when they do not understand the
local culture and introduce their products. So, the new mantra for success into the overseas
markets is – ‘Think Global, Act Local.’ It means that while firms must have a vision to grow
into a global company, they must act according to the culture, tastes and preferences of the
local markets. Such an understanding will help them to be successful into the international
markets.
E. Political environment
As a firm venture abroad, it has to deal with various countries, each having its own political set
up. Some of the components of the political environment are:
(i) Political Systems:
After the disintegration of USSR, the communist or the socialist form of government is not
working in many countries, but the impact of socialism on the thinking of the people and
political class is still discernible. There are countries like Pakistan, which follow dictatorship
style of government, while most countries in Europe and North America follow democracy.
Even the democracy has various forms such as the presidential form, as prevalent in USA, or
the parliamentary form of government, as in UK and India. Some countries in the Middle East
have a typical theist –political set-up, while others are secular countries. There have been lots
of changes in the Arab world, where people have come forward and asserted themselves to
switch over to democracy. The form of government has a direct impact on business because
each form of government has its own typical set of policies, programmes and priorities. These
have an impact on the regulatory mechanist of the countries and the business has to comply
with the laws of the land.
(ii) Political instability
Despite diverse political systems, no system is bad if it works in a stable manner. The biggest
problem arises when there is political instability. Some of the examples of political instability
are:
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• Widespread public protests have changed the dictatorial forms of government in Egypt and
Libya
• There is a bloody battle going on in Syria for the change of government
• Pakistan had a military coup and then a democracy, controlled by the military dictator.
• Afghanistan was under the rule of fundamentalist Taliban and there is elected government
now. Situation will drastically change if US withdraws its army from there.
• Iraq had seen a change in regime, enforced by America
• There were coups and genocides in Sierra Leone, Ethiopia, Eritrea, Congo and many other
African countries.
In each of the examples quoted above, we find an element of uncertainty. The forms of
government change and so do the nature of doing business with that country. For a firm aspiring
to market its products abroad, it has to carefully study the type of the political system and the
stability. In countries, which are politically instable, the business takes extra protective
measures and restricts its operations to exporting or joint ventures. However, in the countries
with high political stability, the business makes direct investments. China has attracted
maximum foreign direct investment because of a stable probusiness attitude of the government.
Despite being a socialist state, China has transformed itself to the needs of time and has opened
up its economy at a fast rate. On the other hand, the ghost of regulatory set-up of the yesteryears
continues to haunt India and we see less investment here. Even within India, we see lesser
investment in the states such as Kerala and West-Bengal because of the leftist parties have been
in power.
(iii) Political risk:
Although, often correlated, political instability and political risk do not go together always. In
the examples of political instability mentioned above, we find that although the governments
have changed in Italy, Japan and India, the basic national character did not undergo any major
change, nor was a change in the policies and business had a sense of continuity and security
while doing business in these countries. However, the war in Afghanistan and Iraq h as had a
tremendous impact on the business. Not many companies are taking the initiative of doing
business in these countries. They would prefer to wait till normalcy returns. Political risk is
more associated with the uncertainty and unpredictability of the political parties in power in a
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country. Basically, political risk depends on two factors - he willingness and the ability of a
government to keep the situation under control. Assessment of political risk:
Marketers need to understand and assess the political risks. While there are several approaches
to do so, Sundaram and Black have summarized the analysis of political risk in the form of the
following points:
Step 1
Determine the critical economic/business issues relevant to the firm.
Assess the relative importance of these issues.
Step 2
Determine the relevant political events. Determine the probability of occurring.
Determine the cause and effect relationship.
Determine the government’s ability and willingness to respond.
Step 3
Determine the initial impact of the probable scenarios.
Determine the possible responses to the initial impacts.
Determine the initial and ultimate political risk.
F. Legal and regulatory environment
The marketers must carefully study the legal and regulatory system prevalent in the countries
to avoid the situations that might result in conflict, misunderstanding or outright violation of
the laws of the foreign country. Some of the important aspects, worth consideration, in the legal
and regulatory environment are:
(i) International Law:
International law has existed since the sixteenth century, although, it has undergone a change
in the form over the years. The international bodies such as UN, WTO and the regional
groupings have been instrumental in developing the international rules and regulations. These
international laws are ratified by the participating countries and are binding in nature. Hence,
the business must understand them correctly to ensure compliance.
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(ii) Conflict of laws:
While doing business across nations, there can arise situations when the laws of two or more
countries can be conflicting. The businessmen must study these laws and take measures to
avoid being caught in such a situation. For example, most of the countries of Middle East want
that the goods should be dispatched to them only in those ships, which do not go to Israeli
ports. They ask for a certificate from the shipping line in this regard. If an exporter ignores this
law, he can be in a very difficult situation and can incur heavy losses.
(iii) Freedom of contracts:
In developed countries and those which have a very sound legal system, the principles of
contract are taken for granted and are strictly enforced by law. However, in some countries,
government interferes with these principles and can cause a loss to the businessman. One
should be vigilant especially while participating in global tenders or the projects of long
gestation periods.
(iv) Patents and Trademarks:
Another important issue for a multinational corporation is the protection of its patents,
trademarks and the intellectual property. Most companies invest heavily in research and
development. However, unscrupulous manufacturers of some developing countries take the
advantage of the difference in the patent laws and manufacture a duplicate of the product,
causing a heavy loss to the original manufacturer. The companies, which has invested heavily
in R&D must analyse these situations and take protective measures. The issue has been
addressed by WTO, which has instituted TRIPS (Trade Related Intellectual Property Rights)
mechanism to avoid loss to the original manufacturers.
(v) Conflict resolution:
It is very difficult to achieve an ideal situation when there is no conflict between the trading
partners. Conflicts do happen, but there has to be a sound system of resolution of the conflicts.
There are sets of principles laid down for international arbitration. The businessmen must be
aware of these and carefully analyse the devotion of the partners towards implementing them.
Besides arbitration, there are alternative mechanisms of dispute resolution developed by
international bodies. Some of the international bodies, which have instituted mechanisms for
international arbitration, are:
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• (ICC) International Chamber of Commerce

• (AAA) American Arbitration Association
• (IACAC) Inter-American Commercial Arbitration Commission
• (ICSID) International Centre of Settlement of Investment Disputes Swedish Arbitration
Institute
• (UNCITRAL) United Nations Conference on International Trade Law
(vi) Recourse:
In case of a legal action, the operation of law can be very lengthy and costly procedure in many
countries. If a country engages in long legal disputes in a country, it tarnishes its images,
besides incurring losses of time, money and efforts.
(vii) Tariff mechanism:
The tariff and taxation structure of the foreign countries must be clear to the business to avoid
complications at a later stage. Although, the tariff structures are being standardized across
nations, still there exist differences and these must be carefully studied.
(viii) Equity control:
Different countries have different laws regarding equity participation of the foreign partner.
Some might allow 100% FDI in some sectors, while there might be limits on investment. Some
countries make the participation of a domestic partner obligatory. Such different situations
must be carefully studied before taking any investment decision.
(ix) Documentation and formalities:
While most countries are dismantling the tariff barriers, they are yet to make the procedures
easier and user friendly. It is notable that China’s economic success story has a lot to do with
the ease of doing business there. There is little red-tapism and most of the regulatory
requirements are cleared speedily. On the other hand, business has to run from pillar to post to
get approvals and the essential registrations for doing business in India. A thorough knowledge
of the prevailing system is essential for success in a foreign country.
The business is a part and parcel of the social system and is in fluenced by several forces. In
order to be successful, an understanding of the culture is essential, particularly if a marketer
wants to venture out of his national boundaries. There is a sea change in the degree of risk and
uncertainty in international business, which is driven primarily by the environmental forces.
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The business managers must be able to scan the opportunities and identify the threats posed by
the environment and make a way for their success. It is noteworthy that there are several tools
and techniques for analysing the environment and the student is advised to refer to standard
textbooks for the same.
Environmental Analysis
Meaning and Nature of Environment Analysis
Environment analysis is a systematic process by which environmental factors in a business are

identified, their impact is assessed and a strategy is developed to mitigate and/or take advantage
of them.
Environmental analysis is a strategic process that helps to identify all external and internal
elements/factors that may have an effect on an organization’s performance. The purpose of
environmental analysis is to find out existing and prospective strengths and threats, weaknesses
and opportunities of a business. Such a process helps an organization to formulate appropriate
strategies to tackle such issues in the future.
According to Stephen Robbins, “Environment scanning entails scrutinizing the environment to

identify action by competitors, government, union and the like that might impinge on the
organization’s operations.”
Managers usually perform environmental analyses to help them understand the internal and
external environmental factors and the interplay between them. This, in turn increases the
probability of appropriateness of the organizational strategies. In order to perform an
environmental analysis efficiently and effectively, a manager must thoroughly understand the
structuring of the various forces in an organizational environment.
In short, we can explain the environment analysis as an ongoing process which dea ls with the
environmental uncertainties. The main features of environment analysis are as follows:
1. Continuous process: Environment analysis is a continuous process rather than a single shot
activity.
2. Exploratory process: Environment analysis is an exploratory process which involves

identification of opportunities and threats exist in external business environment.
3. Holistic exercise: under environment analysis, we consider all the factors of macro and
micro environment. It comprises the overall view rather than piecemeal view of environment.
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For purposes of environmental analysis, the environment of an organization is generally

divided into 3 distinct levels:
• General Environment
• Operating Environment
• Internal Environment
To improve an organization’s performance, the managers must be well aware of these levels
and the dynamics between them. Further, the policies should be designed and implemented as
a response to them. The components of these environmental have been briefly discussed below.
• General Environment: The general environmental largely consists of the macro (external)
environment of a business. The various sub-environments in these categories include the
following:
o Economic
o Social
o Political
o Legal
o Technological
o Natural
o International
• Operating Environment: The operating Environment includes the task/micro components of

a business. These are:
o Customers
o Creditors
o Suppliers
o Labour
o Publics
o Financers
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o Intermediaries
• Internal Environment: The level of an organization’s environment that has an immediate and
specific implication for it is called the internal environment. It includes the following areas:
o Mission
o Objectives
o Internal power relationships
o Human resource capabilities
o Marketing Capabilities
o Physical assets
o Research and Development
o Brand equity
o Brand image
Objectives of Environment Analysis
The main objectives of doing environment analysis are as follows:
1. To understand current and future changes in environment: The comprehensive study of

business environment helps strategic manager to understand changes in various components of
business environment such as political, economic, technological environment, etc.
2. To provide input for decision making: The decision-making process requires lot of
information to select best available alternatives. Environment analysis provides such
information for decision making process.
3. To formulate appropriate strategy: As we know, environment analysis helps in identifying

threats and opportunities exist in business environment. The managers can frame a competitive
business strategy on the basis such information of threats and opportunities.
4. To ensure optimum utilization of resources: The key of success of business lies in the
optimum utilization of resources. A business can use its resources in most optimum way by
concentrating on its strength and overcome weaknesses. Environment analysis of business
environment highlights such strength and weaknesses of business.
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5. To identify international events and their impact on business: Due to globalization of

economies, the mutual interdependence of economies has increased. In this situation,
environment analysis helps in identifying and understands international global events and their
impact on business.
6. To know internal environment: The business manager should be familiar with the internal
environment of business. The change in internal environment may affect business in both
negative and positive manner. So, the study of internal environment allows mangers to make
timely adjustments with these changes.
Thus, environment analysis helps the organization to understand the different elements of
environment and anticipate their impact on business. It also helps in develop well thought plan
and policies to deal with these environmental changes.
Factors to be considered for environment analysis
The following external environmental factors must be considered while doing environment
analysis;
1. Events: The important and specific occurrence in external environment is called events.
These events have significant influence on a business organisation. For example, war,
agreements on economic issues, natural calamities directly or indirectly affect the functioning
of business.
2. Trends: Trends can be explained as the tendency of happening of different events in a

particular time interval.
3. Issues: The rising concerns on different matters are called issues. For example, rising issues
on environment, corporate social responsibility are the emerging issues for a business
organisation.
Process of environment analysis
Environment analysis process is a continuous and expensive process which includes following
sequential steps:
• Scanning,
• Monitoring,
• Forecasting, and
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• Assessment
1. Scanning
It is the first step of environment analysis. Under this step the analyst identified all the
environment variables or forces which can influence the profitability and functioning of the
business. We figure out only relevant environment factors so that vague, ambiguous and
irrelevant data can be avoided. Generally, it includes government policies, competitor’s
strategy, market conditions, etc. that can influence the business firm.
Scanning is the process of analysing the factors that may have an implication on the business.
This process involves identification of precursors or indicators of prospective environmental
changes. This stage is therefore aimed at ‘signaling’ the organization to potentially significant
impingement, before it has fully occurred and crystallized. The overall focus here is to detect
the warning signals for a business.
2. Monitoring-
The next step of this process is to analyse effect of all the identified relevant factors on the
different aspects of business.
This step involves in-depth monitoring and analysis of specific environmental trends that have
been identified in the first step. The purpose here is to assemble data to discern trends and
emerging patterns in the environment. The outputs of monitoring include specific description
of environmental factors; identification of specific environmental patterns and trends for
further monitoring and assessment.
After analysing these factors following outcomes are emerged:
• A specific description for all the relevant factors,
• Identification of areas for further and detailed studies, and
• Identification of development and pattern of the industry.
3. Forecasting-
Forecasting is very important for identifying future threats and opportunities and formulate
plan and strategies accordingly. Under this step, environment analyst predicts the future events
and their impact on business on the basis of past and present data. Forecasting covers all the
aspects of business environment i.e. economic, political, and technological, etc.
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“Forecasting is concerned with development of plausible directions, scope, speed, and intensity
of environmental changes, to lay the evolutionary path of anticipatory change”.
4. Assessment-
In the last step, all the factors identified in previous steps are assessed in terms of their impact
on organization performance and profitability. The impact of variables on business depends on
size and nature of the firm.
The focus here is to assess the impact of the identified factors on the business. Herein, “the
frame of reference moves from understanding the environment-focus of scanning, monitoring,
forecasting - to identifying what that understanding of environment means for the organization.
Limitations of environment analysis
Environment analysis process has following limitations:
1. Unexpected and unanticipated events: The future events and factor which may affect an
organization are unpredictable and uncertain. These events and factors cannot be predicted and
quantified accurately.
2. Part of strategy formulation process: The environment analysis is only a part of strategic
formulation process which is based on various inputs. Hence, it does not guarantee the success
of any business plan.
3. Inaccurate data: The process of environment analysis is based on the data which is collected
for the same purpose. But it may be possible that the data used for forecasting or predicting
future event is inaccurate.
4. Involves money and efforts: The process of environment analysis involves time and money.
It is a lengthy process that includes following steps: • Scanning • Monitoring • Forecasting,
and • Assessment
5. Based on Assumptions: The whole process of forecasting is based on certain assumptions

which may or may not be true. There is basic assumption of forecasting that there is a pattern
of happening of an event. This assumption may not be held true in all cases.
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6. Paralysis by Analysis: Analysis paralysis or paralysis by analysis is an anti-pattern,

the state of over-analysing (or over-thinking) a situation so that a decision or action is
never taken, in effect paralyzing the outcome.
Different sources of information for environment scanning
There are various sources of information available for environment scanning. These sources
can be classified as formal or informal, verbal or written and internal or external. Some
important sources are:
1. Verbal information: The verbal information for environment scanning is collected by

analysts through interaction with different groups of people outside the organization. For
example, they attend seminars and workshops on emerging issues; interact with customers,
suppliers, employees, etc.
2. Written or secondary information: This information can be accessed through published

and unpublished sources. For example, information related to government plan and policies
can be collected through government publications such as Economic Surveys, journal,
newspaper etc.
3. Internal sources: When an organisation uses information from their own database then it is
called internal source of information. In the large organisations, a planning department is set
up to collect and retrieves information on various aspects. This information database is used
by the policy and decision makers at appropriate time.
4. Formal studies: Under this source, various studies and surveys are conducted by
organisation or any third parties to collect different information.
5 Formal studies: Sometimes mangers take help of various outside agencies for collecting
relevant information for environment analysis. For example, a organisation can hire a BPO
firm for collecting customer feedbacks.
APPROACHES TO ENVIRNOMENTAL ANALYSIS
Broadly, there are two approaches to environmental analysis:
o Outside-in Approach: Also known as the ‘macro’ approach, this takes into consideration a
long-term perspective of the business. It involves identifying changes in the macro
environment, and making necessary changes in the organization’s internal environment in the
light of these.
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o Inside-out Approach: Also known as the ‘micro’ approach, this involves an analysis of the
changes in the internal environment of the business. Re-building strengths and removal of
weaknesses are the objectives of this approach.
Techniques (Methods) of business environment
1. ETOP
Environmental threats and opportunities profile provide summarized view of environmental

factors and their impact on business organisation. ETOP is prepared generally in following
manner:
• Listing of environmental factors and events: First of all, a list of all general as well as relevant
environment factors is prepared.
• Assess the impact of each factor: In second step, the impact of each critical factor is assessed
and expressed in quantitative or qualitative terms.
• Overall Summary: At the last stage, the impact and importance of each factor is presented in
a summary to provide an overall picture.
2. SWOT Analysis
It is a systematic identification or analysis of Strengths (S) Weaknesses (W) Opportunities (O)

and Threats (T) that exist internal or external to the organisation and the strategy that reflects
the best match between them. It bases on the assumption that an effective strategy maximises
a business’s strengths and opportunities but at the same time, minimises its weaknesses and
threats. SWOT is the cornerstone of business policy formulation; which determines the course
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of action to ensure the survival and growth of the firm. SWOT is an acronym for Strengths,
Weaknesses, Opportunities and Threats. The strengths and weaknesses represent the inte rnal
characterization of the business; whereas the opportunities and threats arise from the external
environments’ interplays. The degree to which the internal environment of the firm matches
with the external environment is termed as strategic fit. SWOT analysis enables organizations
to identify both internal and external influences. SWOT's primary objective is to help
organizations develop a full awareness of all the factors that may affect strategic planning and
decision making. Subsequently, the TOWS matrix framework (presented below) can be applied
to determine various strategic alternatives for an organization.
Components of SWOT Analysis
1. Strength: The strength of a business refers to the capacity by which it gains competitive
advantage over its competitors. For example, superior research facilities are strength for a
business firm. These facilities can be used for developing innovative products at cheaper cost.
2. Weakness: Weakness refers to limitations or weak areas of firm internal environment. For
example, overdependence on a single supplier, limited product line, lack of funds may be
limitations or weaknesses of a business.
3. Opportunity: Opportunities may be explained as favourable conditions in the external

environment of business. A company can earn extra profits by availing the environmental
opportunities. For example, government has made it mandatory to wear helmets for two -
wheeler drivers. This creates an opportunity for helmet producing industries.
4. Threat: The unfavourable conditions in external environment are threats for a business. It
creates risk for an organisation. The growing competition in the industry, change in government
policies and changes in fashion may be threat for business.
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Uses of SWOT Analysis
After identification of external environment threats and opportunities and organisational

strength and weaknesses, the strategic managers consider the various strategic alternatives and
choose the most appropriate business strategy. Thus, environment analy sis/SWOT analysis
plays a very important role in corporate planning and business policy formation. It also plays
significant role in following areas:
• Set objectives–defining what the organisation is intending to do.
• Environmental scanning.
• Internal appraisals of the organisations SWOT, this needs to include an assessment of the
present situation as well as a portfolio of products/services and an analysis of the
product/service life cycle.
• Analysis of existing strategies, this should determine relevance from the results of an
internal/external appraisal.
• Develop new/revised strategies – revised study of strategic concerns may mean the objectives
need to change.
• Preparation of operational, resource, projects plans for strategy implementation.
• Monitoring results – planning against plans, taking remedial action which may mean
amending objectives/strategies.
39
3. PETELS / PESTLE / PEST Analysis

PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal.
Traditionally PESTEL analysis was well-known as the PEST (sometime rearranged as STEP)
analysis. In modern time PESTLE came into existence by splitting the social part of the PEST
into environmental and economic factor into legal factor as these factors have a significant role
in the strategic management these days. It is a strategic arrangement technique that provides a
useful framework for analysing the environmental pressures on an organization. The given
chart exhibits the main factors that might be considered while doing PESTEL analysis:
40
Pros of PESTLE Analysis
o Simple and easy to use framework.
o Involves cross-functional skills and expertise.
o Helps to reduce the impact and effects of potential threats.
o Aids strategic thinking and decision making.
o Helps in identification and exploitation of environmental opportunities.
Cons of PESTLE Analysis
o Oversimplification of information
o Needs to be monitored on timely basis.
o Chances of 'paralysis by analysis'
o Time consuming and costly
o Users' access to quality external information is often restricted because of the cost and time
needed to collate it.
Often, managers choose to learn about political, economic, social and technological factors
only. In that case, they conduct the PEST analysis. PEST is also an environmental analysis. It
is a shorter version of PESTLE analysis. STEP, STEEP, STEEPLE, STEEPLED, STEPJE and
LEPEST: All of these are acronyms for the same set of factors. Some of them gauge additional
factors like ethical and demographical factors.
4. Michael Porter’s Five Force Model:
According to this model, the state of completion in an industry depends on five basic
competitive forces. An assessment of these forces is important for a firm to appropriately
position itself in the market. The below figure presents the five-force model of Michael Porter.
The five basic competitive forces are:
o Rivalry among Existing Firms: Firms in an industry are “mutually dependent”, competitive
moves of one firm have a bearing on the others. The intensity of rivalry may however be subject
to several factors.
41
These include the following:
o Threat of New Entrants:
In a growing industry, the threat of new entrants is high. Potential competition tends to be
higher in such an industry due to its profitability. Barriers to entry in such cases are also low.
Higher are the entry barriers, lesser is the threat of new entrants. These barriers have been
explained below:
42
o Threat of Substitutes:
A substitute is a product that can be used in place of the existing one. While substitutes offer a
definite threat, the extent of it depends on the extent to which the price and performance of the
substitute can match the industry's product, the willingness of customers to switch, their loyalty
and switching costs. Lesser price, better performance, lack of customers’ trust and low
switching costs individually and collectively result in higher threat of substitutes.
o Bargaining Power of Suppliers:
Such power of the suppliers is high in the following cases:
o When there are only a limited number of large suppliers.
o When the resources supplied by them are scarce.
o When the switching costs are high.
o When the customers are loyal.
o When the supplier can integrate vertically.
o When the customer is small and unimportant
o When there are few or no available substitutes.
o Bargaining Power of Buyers:
Powerful customers are able to exert pressure to drive down prices, or increase the required
quality for the same price, and therefore reduce profits in an industry. A great example in the
UK currently is the dominant grocery supermarkets which exert great power over supplier
firms. The bargaining power of the customers is high in the following cases:
o When the customers are small in number
o When the size of the order is very larger
o When several alternative suppliers are available
o When the customers can integrate backwards
o When the customers are well informed
43
o When the switching costs are very low.
ADVANTAGES OF ENVIRONMENTAL ANALYSIS
Advantages
O The very idea of environmental analysis makes one aware of the environment-organization
linkage.
o It helps an organization to identify the present and future threats and opportunities.
o It helps a firm to understand the transformation of the industry environment o It helps in

adequate strategy formulation and implementation.
o It helps in making suitable modifications in the strategies.
o It keeps the managers more informed and alert.
o It provides a necessary and useful factor of the influential factors for a business.
44
Role of Environment Analysis in Strategic management/Decision making process
Strategic management is a process of formulating, implementing, reviewing and controlling

organization plans and policies in order to achieve organizational objectives. Organizational
plans and policies are framed and implemented on the basis of information collected through
the process of environmental analysis. Environment analysis helps in understanding the
relevant environment Forces and their impact on firm so that proper strategies can be adopted.
Environmental analysis is a vital process of strategic management. It allows the identification

and assessment of the internal and external factors for a business that may have an effect on it.
The analysis entails assessing the level of threat or opportunity associated with such factors.
This, in turn helps in the formulation and implementation of appropriate strategic initiatives
and plans. The process of environmental analysis begins from scanning the factors in a firm’s
environment, continues with monitoring and forecasting of the changes, and ends with the
assessment of the impact of them on a firm. Thus, environmental analysis helps a firm in
45
assuming a pro-active stance in understanding and f orecasting the changes in and around its
environment, thereby increasing the probability of success of the organizational strategies.
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International Business Environment | Chapter 2

MBAH 503: INTERNATIONAL BUSINESS ENVIRONMENT

International Business Environment: The Conceptual Framework

Components of international business environment

An organization's internal environment is composed of the elements within the organization,

 Vision and Mission

 Objectives & Strategy

Purpose and Values of Tata Group Purpose

• Responsibility: We must continue to be responsible, sensitive to the countries, communities

Vision and Mission

Mission and Vision of Coca Cola Group

• To refresh the world...

• To inspire moments of optimism and happiness...

• To create value and make a difference.

• Productivity: Be a highly effective, lean and fast-moving organization.

Objectives and Strategy

c) Five force analysis

e) Directional policy matrix

g) Critical success factor analysis

Business environment is a complex combination of various surrounding components, both

Some of the components of the external environment are:

d) Education and occupation

e) Family size and structure

Changes in world economy

a) Increasing capital movement

c) Value driven competition

e) Free market economy

Elements of Economic Environment

d) International Economic Environment

(i) Stages of Business Cycle

(ii) National Income, Per Capita Income and Distribution of Income

(iii) Rate of Capital Formation

(iv) Demand and Supply Trends

(v) Inflation Rate in the Economy

(vi) Industrial Growth Rate, Exports Growth Rate

(vii) Interest Rate prevailing in the Economy

(viii) Trends in Industrial Sickness

(ix) Efficiency of Public and Private Sectors

(x) Growth of Primary and Secondary Capital Markets

(xi) Size of Market

An Economic System of a nation or a country may be defined as a framework of rules, goals

ii. Totalitarian Socialism: -

(iii) Mixed Economy: -

(i) Monetary Policy

(ii) Fiscal Policy

(iii) Foreign Trade

(iv) Foreign Investment Policy

(v) Industrial Policy

d) Global/International Economic Environment

Impact of Culture on business and individual decision making

(i) Decision-making: In some societies, all-important organizational decisions are

impact of perception influences the sense of self-gratification, empathy and

Culture and International Marketing

(i) Political Systems:

(ii) Political instability

• There is a bloody battle going on in Syria for the change of government

• Iraq had seen a change in regime, enforced by America