Nature and Complexity of IB Environment

5. INTERNATIONAL BUSINESS
ENVIRONMENT AND
STRATEGIC MANAGEMENT

BY Gupta Bdr. Chhetri 2

Environmental Forces Environmental Forces

A. Internal Environmental Forces B. External Environmental Forces:
 Internal environmental forces are controlled by the management. Such forces remain under the control,  They are uncontrollable environmental forces where management has no direct control although it can exert some
command and supervision of management. They are: influences. These forces are in three areas, they are:
 Resources: Land, raw materials, labor, capital, technology, knowledge etc. 1. Domestic or national environmental forces

 Management: Production, marketing, finance, HRM etc.  They are all uncontrollable forces originating within the home country that surround and influence the operation and
development of a business firm or company.
 In practical life a firm has to take into account various factor to determine its internal organizational
 Management must be very much familiar with these forces such as regulatory provisions like firm or company registration,
capabilities. Some of these factors are: income tax, export and import, customs, and VAT; political stability and security; investment regulations, foreign exchange
 Production facilities to meet the foreign market orders. control, labor union and organization; business diplomacy of the government etc.
 Timely supply of required inputs and energies. 2. Foreign environmental forces

 Credit facilities to finance purchases.
 Product adaptation capability in terms of skill and technology.
 Efficient human resources development management and marketing ability.
 Strong management, organization and office facilities.
 Clear understanding of the management goal and priorities.
BY Gupta Bdr. Chhetri
 Adequate physical facilities for marketing such as warehousing, transportation, communication, etc.
 They are all uncontrollable forces originating outside the home country that surround and influence the operations and
development of a firm or company.
 All the forces are the same but they operate differently in foreign countries. For example political system, regulations,
societal norms, culture, business practices, etc. are quite different in different countries.
3. International environmental forces:
 A firm or company is exposed to international environment
3 BY Gupta Bdr. Chhetri 4
(a) When there are connections between the domestic environmental forces and foreign environmental forces, and
(b) When there are interactions between the environmental forces of two or more than two foreign countries.

Environmental Forces Environmental Forces

B. External Environmental Forces : B. External Environmental Forces :
International business managers are exposed to various forms of areas from which information can be derived 3. Consumption patterns:
from the analysis of international environment forces like:
(a) who are the consumers?
1. Factors that affect demand:
(b) where they consume and where they buy?
(a) political stability, security and attitude towards national development;
(c) how much and how they consume?
(b) legal or regulatory factors that limit the business,
(d) what are the latest trends in their behavior? etc.
(c) level of economic development; 4. Competitors and their strategies:
(d) basic needs and climatic and geographical factors;
(a) who are the competitors?
(e) societal and cultural forces like attitudes and beliefs, traditions, lifestyle and habits, religion and
(b) what are their import volumes?
languages; etc.
(c) what are their strategies?
2. Market-size and trends:
(d) what are their strengths and weaknesses?
(a) import volume, value, prices and sources;
(e) what are the reasons for their successes?
(b) import growth rates;
(f) is there chance to entering the market? Or are there any niche market where competitors have not
(c) major market players or leading buyers and their roles, etc.
BY Gupta Bdr. Chhetri 5 reached?
BY Gupta Bdr. Chhetri 6

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Environmental Forces Environmental Forces
5. Factors to which market respond directly: Uncontrollable Environmental Forces (Domestic, Foreign or International)
- Which might be the important factors among price, product, distribution channel, Some of the important external or uncontrollable environmental forces are
promotional means, terms of sales, etc. that responds quickly and directly. 1. Geographical or Physical Environment:
6. Market access and preferential trading arrangements: - Elements of nature, physical location, topography, climatic conditions, availability of natural resources
(renewable and non-renewable), etc.
- Trade regulations of the host countries might be favorable or unfavorable.
2. Political Environment:
- Some of the developing countries are given preferential treatments and often importers are
- Political climate: stability and security, types of government and philosophies, nationalism, political risks,
not familiar about such facilities. international and diplomatic relations, etc.
- Such preferential arrangement might have resulted out of the bilateral treaties like Nepal- 3. Legal and Regulatory Environment:
India trade treaty, regional trade and investment agreements like SAFTA, and multilateral - The legal system, international laws and institutions, all legal provisions on trade and investment that affect
negotiations like WTO. the operation and development of foreign business firms and companies, and enforcement mechanism.
4. Economic and Socio-Economic Environment:
- Income and distribution of income, production costs, consumption expenditures, demographic features and
distribution, etc.
BY Gupta Bdr. Chhetri 7 BY Gupta Bdr. Chhetri 8

Environmental Forces Environmental Forces

5. Financial and Foreign Exchange Environment: C. Task Environment: Operational Forces:
- Inflation; monetary situation; foreign exchange market, policies and reserves; etc. It consists of the factors in the immediate competitive situation of a particular
6. Socio-Cultural Environment: organization. These factors affect the managerial ability to obtain the resources,
manage operation and generate output.
- Attitudes, beliefs, customs, religions, etc. of the people.
 Customer
7. Labor Environment:
 Suppliers
- Composition, skills, attributes union, strikes, etc.  Distributors
8. Technological Environment:  Government
- The research and development works, innovation, protection of IPRs, etc. that affect the  Financial Institutions
conversion of resources to product or service.
 Media
9. Commercial Environment Competitive and Distribution Environments:
 Social organization
- Types and number of competitors; competitor's location, strategies, strengths and  International governing Bodies
weaknesses; matching agencies available for distribution of goods, etc.
BY Gupta Bdr. Chhetri 9  International agencies
BY Gupta Bdr. Chhetri 10

Analysis of Environmental forces

 It is a strategic tools and process to assess external and internal forces that affect
the operation of a business organization.
 Environmental analysis involves identifying the present and future opportunities
and threats to and from a firm’s principal constituents along the dimensions of a
firm’s economic, political, legal, technological and social environment.
1. Purpose of analysis of environmental forces:

BY Gupta Bdr. Chhetri 11 BY Gupta Bdr. Chhetri 12

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Analysis of Environmental forces Analysis of Environmental forces
1.Purpose of analysis of environmental forces: 2. Tools of Analysis:

i. It helps in: - A manager has a high probability to achieve a success in business operation if he/she can vigilantly understand
and analyze the environmental forces.
a. Selection of the most appropriate country or market for trade or investment,
- Various tools of environmental analysis have been given different abbreviated names.
b. Selection of market segments, and - A manager uses one of such tools depending on the nature of a business. These tools are:
c. Forecasting market demand. (1) PEST analysis, (Political, Economical, Socio-cultural, Technological)
ii. It provides information required to conduct marketing research. (2) PESTLE Analysis, (Political, Economical, Socio-cultural, Technological, Legal, Environmental)
iii. It helps in formulating international business strategies and making strategic decisions (3) STEEPLE analysis, (Socio-cultural, Technological, Economical, Environmental, Political, Legal, Ethical)
that relate to: (4) SLEPT Analysis, (Socio-cultural, Legal, Economical, Political, Technological)
a. What entry strategy to follow? Such as whether to produce at home and market (5) STEPE Analysis and (Socio-cultural, Technological, Economical, Political, Environmental)
abroad or produce as well as market abroad. (6) ETPS analysis, (Economical, Technological, Political, Socio-cultural)
b. What production and management strategy to follow? For example should the firm
standardize or adapt the production and management systems? and where P=Political, E=Economic, 5= Sociocultural, T=Technological, L=Legal, and
c. What marketing strategies to follow in respects of product, packaging, presentation,
BY Gupta Bdr. Chhetri 13 E=Ecological or Environmental.
BY Gupta Bdr. Chhetri 14

pricing, physical distribution, channel of distribution, and promotion?

Analysis of Environmental forces Analysis of Environmental forces

3. Methods or Techniques of Environmental Analysis
- Methods or Techniques of environmental analysis basically involve the
techniques of collecting information required for such analysis.
BY Gupta Bdr. Chhetri
4. Methods or Techniques of Environmental Analysis
A. Environmental Scanning (ES):
- It is a system designed for a continual monitoring of changes in the environmental forces that have direct
effects on the business operation of a firm.
- It is also used for the strategic management process.
- A management can formulate its corporate plan and strategies only after the surrounding situations and
environmental forces are scanned articulately.
B. SWOT Analysis:
- It gives a summarized mind-map of the analyzed information that instantly helps management in decision
making process and in identifying areas of where actions are required or in formulation of plan and strategies.
- This process identifies Strengths (S) and Weaknesses (W) that arise from internal or organizational
environmental forces of a company or firm and also classifies Opportunities (O) and Threats (T) created by the
external environmental or market forces.
- The SWOT Analysis is helpful in matching the firm's resources and capabilities to the competitive environment
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in BYwhich it operates.
Gupta Bdr. Chhetri 16

Analysis of Environmental forces Analysis of Environmental forces

C. Business Forecasting: E. Market Screening (MS):
- It is used to estimate or to target future production, input procurement, staff requirements, import, export, sales, - It is a version of environmental scanning (ES) in which a company or firm identifies priority markets by using
etc. with estimation of time series, cross-sectional or longitudinal data. the environmental forces to eliminate the less desirable markets.
- Forecasting is used in marketing planning and in everyday business forecasting for manufacturing companies. - MS is helpful in developing strategies to
- It helps to determine the goals in quantitative terms and reduce uncertainty to some extent. - Expand market to overseas and
D. Benchmarking: - Receive regular feedbacks on the world market situations and prospects.
- It is defined as "measurement of the quality of a firm's policies, products, programs, strategies, etc., and their - There are two types of MS:
comparison with standard measurements, or similar measurements of the best-in-class firms".
1. Country Screening (CS)
- The objectives of this exercise are - In country screening (CS) a group of potential countries are used in market
(1) To determine what and where improvements are required, selection process.
(2) To find how other firms achieve their high performance levels, and 2. Segment Screening (SS)
(3) To improve the firm's performance. - In segment screening (SS) market segments. groups of consumers, are used as the
basis for the selection of market.
- The parameters of comparison are production, technology and processes; product, design and packaging;
personnel strategies; marketing strategies; sales; export, etc.
BY Gupta Bdr. Chhetri 17
- Both screenings are used in selection of a prospective market.
BY Gupta Bdr. Chhetri 18

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Socio-cultural Forces Socio-cultural Forces contd…
A. Aesthetic:
 It is expressed in terms or art including colour, symbols and numbers; music, folklore, dramas and dances; and
foods.
1. Art, colour, symbols and numbers
 Business managers are required to understand meaning and uses of arts, signs, symbols, colours and numbers.
 It is necessary to know the Dos and Don'ts in these respects.
 These elements might also have different meanings in different cultures.
 Wrong use of these elements might ruin the business for ever.
For examples
 Islamic society prefers green and white colours as auspicious.
 But green and yellow are associated with diseases or sickness in some Asian countries.
 The colour of death and mourning is black for Christian and Islamic religion followers and white for Hindu and others. Purple is
associated with death in Latin America.
 Green is associated with cosmetics in French, Dutch and Swedes societies and with environment in the world.
 Yellow and orange express joy in many countries and to Americans it is feminine. Blue is masculine and red is considered as
BY Gupta Bdr. Chhetri 19 feminine in many countries including UK, France and Nepal.
BY Gupta Bdr. Chhetri 20

 Many peoples in African countries don't prefer red colour mainly for the religious reason, while red is a popular and auspicious
colour of Hindu religion.

Socio-cultural Forces contd… Socio-cultural Forces contd…

 Aesthetic value is also attached differently to numbers. 2. Language - communication
 In Nepal number 8 and 12 are considered unlucky numbers like 4 in Japan and 13 in USA.  Language is one of the most important components of culture.
 Similarly number 7 is considered good luck in the USA and number 1 is in Nepal.  There are hundreds of languages and thousands of local dialects in the world.
 Possible sensitivity must be carefully studied and analyzed while using symbols like Swastika, the Sun, the Moon, images of the Gods  There are differences between spoken and unspoken languages.
and Goddesses and any other religious symbols on products, packaging or advertisement.
 Understanding language helps to communicate and inter-relate the culture.
 In Hindu and Buddhist cultures an astrologer determines the most auspicious time to start any special or gigantic activity or project and
the Priests are supposed to perform rituals to bring good luck and blessings of the Gods and the Goddesses for business ventures or a  Each language has slang, double meanings of words, sense and nuances, which cannot be understood without guidance of a mentor or
project. professional teacher.

Music and Folklore:  The same language is spoken in different regions having different slang and meanings. For example French language is spoken and
written differently in France, Belgium, Canada and West African countries. Likewise, English is spoken differently in USA, Britain,
 Different countries have different tastes in music like Ballad in the USA, Bolero in Mexico, Samba in Brazil, bailey dance in Middle East Australia and South Africa.
and North Africa, etc.
 Incorrect translation may ruin the whole purpose of the activity. Professional translator should cross check the words when it is an
 Many young generations have developed tastes for foreign music. advertisement or official document.
 Recently Salsa dance that originated in Caribbean countries is getting popularity all over the world.  In many advertisements of Indian companies in Nepal certain English words are translated into Hindi and then in Nepali giving complete
 In Japan Koraoke is getting popularity to learn Western music. different and funny tastes to hear and watch.

 Youths in Nepal have also started learning various types of dances and music including Salsa and Koraoke from other continents.
 Although globalization has resulted in people favoring various forms of music they still are attached by the strong feeling of nationalism
and have remain stuck with their indigenous art, music, slogans, proverbs, tales in media and product packaging.
BY Gupta Bdr. Chhetri 21
 Unspoken languages such as gestures and body languages also give different meanings than the spoken languages. Like the "thumbs-up"
mean "all-right" in many countries. Making circle with the thumb and forefinger is friendly in USA and Japan but it signifies "worth
zero" in France and Belgium, and is a sexual invitation in Greece and Turkey.
 In some countries bribes are highly welcome than gifts. Managers must make considerations like whom to give? How much to give?
BY Gupta Bdr. Chhetri 22
Where to give? When to give? Etc.

Socio-cultural Forces contd… Socio-cultural Forces contd…

 Different code languages are used for bribes in different parts of the world. Like "Morbida" in Latin America, "Dash" or "Brown
Envelope" in West Africa, "Pot de Vin" in France, "Grease" in USA, "Ghoose" in Nepal, "Malpani" in India and "La Bustaralla" in Italy.
 A manager can judge the level of corruption in various countries by going through the report of Transparency International that gives the
Corruption Perception Index (CPI). It gives highest score and ranking to those countries having no or less corruption.
3. Material culture - Economics and technology
 Material culture is associated with human-made objects what and why it is made is concerned with the uses and economic forces and how
it is made is concerned with technological forces.
 Material culture includes the techniques and know-how used in the creation of goods and services, the manner in which the people of the
society use their capabilities, and the resulting benefits.
 Superior technologies are being accepted by the society in order to improve the standard of living and to make life style comfortable.
 In the meantime, technology has become a competitive strategy to the transnational corporations or MNCs as it help and enable to:
a. Gain competitiveness and leadership in the market,
b. Use in a company product or service,
c. Set up subsidiary- in foreign markets.
d. Bargain while setting up foreign joint venture with minority equity or to set up subsidiary.
e. Change the international division of labour. Low cost labour can be used in developing countries.
f. Establish strategic alliance with company having high cost research and development facilities.
BY Gupta Bdr. Chhetri 23
Cultural Aspects of Technology
 Many self-employed small plant operators might find difficulty to adjust in a large factory
which require to perform the same job 100s of times a day. (Monotonous).
 Many people in developing countries have not been able to develop a culture of "throw
away instead of repair" because of habit and the time they are having for repair works.
 Many countries have technological dualism. Most modern as well as primitive technologies
are prevailing side by side.
 Appropriate technologies: labour intensive, intermediate and capital-intensive, depending
on the availability of capital, labour, market demand, levels of income etc.
 Many advanced countries face boomerang effects as the technology sold to other nations
was used to produce goods to compete with those of the seller of technology.
 Advancement in ICT enabled the growth of global market in different forms and has
transformed the marketing system in many areas including finance.
BY Gupta Bdr. Chhetri 24

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Socio-cultural Forces contd…
B. Deep Culture Components :
1. Attitudes and Beliefs:
 Attitudes and beliefs are the most important components that affect the people's behaviours in a society.
 Overall economic and business development of a country is highly dependent on attitudes of the citizens.
 Attitude helps to bring and follow law and order in a society.
 Normally individual attitudes are interrelated by family background, education and society's perception to development and life.
 Attitudes towards time: "Time and Tide wait for no man" is a proverb from Western parts of the world. Time is considered precious in the
USA, European countries and Japan. However, in developing countries particularly in Asia, Latin America and Middle East it is normal
for ministers, executives and senior officials to arrive late at meetings or ceremonies.
 In a country like Nepal traditionally guest or representatives or members are invited one hour earlier than the time given to a chief guest.
 The government officials have tendencies to call the visitors - "Bholi", that means "Tomorrow" and when the visitor goes next day again
he might be called "Bholi". Recently visitors themselves have realized the value of time and are prepared to bribe the poorly paid officials
to get thing done "now" or "today" instead of "Tomorrow".
 The Japanese have culture to think a little longer that the people in other parts of the world before they make any decision on the
establishment of new project or new business relationship. If a manager has offered for exports of a product it is necessary to give
adequate time for decision to a Japanese prospective customer. Once they react to your offer than only you should give your decision or
counter offer.
BY Gupta Bdr. Chhetri 25
Socio-cultural Forces contd…
2. Religions:
 Religion is one of the most powerful forces that determines human attitudes and beliefs and directly affect their behaviours.
 A good knowledge of religions enhances the understanding of a business manager on why behaviours vary from people to people and
from region to region.
 A manager is supposed to respect the religions and their beliefs and should know the religious holidays and practices that might affect on
production and productivity in a country.
 Hinduism is the most ancient (traditional) human religion practiced in the world. Judaism, Jainism, Buddhism, Taoism and Confucianism
developed in the world before the Christianity. Other religions including Islamic were promulgated one after another after the Birth of
Jesus Christ.
 According to a calculation based on the average figures the adherents of major religions are: 28% Christianity, 25% Islamic, 19% Hindu,
6% each of Buddhist, Chinese and Indigenous and 10 percent are the followers of the rest of the religions.
BY Gupta Bdr. Chhetri 27
Complexity of Doing Business Across Culture
1. Production Complexity
 It is necessary that production schedule should be prepared considering religious holidays and other social considerations.
 For example, in all Islamic countries production and productivity are affected when all people go a complete fasting during day
light time in Ramadan month. A special clean and quite place has to be arranged to the workers at factory for praying because
people are supposed to pray at least five times a day.
 Similarly in Hindu followers virtually don't work during a long festival seasons that normally falls in the month of October.
2. Financing
 In developing countries additional financial provisions are required for donations to political and social organizations.
3. Personnel Management
 In high-context culture many staff are recruited and promoted based on the recommendations of high or influential authorities
or personalities.
 Traditionally from 17th century British and Latin American appointed officials of corporation to people who have attended
good schools and who have good family background. Hangover of such a mind-set prevails as yet in many countries and many
organization.
BY Gupta Bdr. Chhetri 29
Socio-cultural Forces contd…
Attitudes towards changes:
 The Americans are famous for the most positive attitudes towards change or new and innovative ideas. For example
whenever time-saving kitchen gadget is introduced in the market an American lady will immediately buy and use it.
Americans would also like to travel new cities and taste new foods as soon as opportunities arise and accept any changes
without hesitation and analyze the consequences only after having experience.
 However, Japanese, Saudi Arabian, German and British would like to think twice before they accept any change over what
they normally practice.
Attitudes towards work and achievement:
 A drastic change in attitudes towards work of people in developing countries due to the demonstration effects.
 The fact that many foreign consumer and electronic goods are available in the market at affordable prices and there are
being used by many people in the all over the world for greater prestige and pleasure.
 Even in one of the poorest countries in the world like Nepal the lowest paid workers have subscribed mobile phone sets
and seen talking.
 A good impression of quality education has been created by the private schools charging higher fee than public schools,
giving nice school outfits. Middle class and lower middle class also would like to send their children to such private
schools as a matter of prestige. Increase in living costs and costs of education have also forced to change the attitudes
towards work.
BY Gupta Bdr. Chhetri 26
 As such many housewives have also started working to meet the increasing household expenditures.
Socio-cultural Forces contd…
3. Social Organizations:
Associations:
 Another type of social organization like associations or clubs are formed by age, gender, function, or subject of
common interest by any society.
 Anyone who fits to the group and have common interest can be the member of such association or club.
 In Nepal most of youth or women groups have formed clubs for sports, education, and health services.
 Such organizations may be political, social, art & cultural, professional, recreational, religious and
occupational.
 These associations are very much powerful groups among them the political and labour forces are highly
strong and influential to the business activities.
 The other associations involved in friendly environment, health, religious and morality may also affect the
production and marketing activities of a company.
 These organizations sometime prove more helpful for the promotion of business.
BY Gupta Bdr. Chhetri 28
Complexity of Doing Business Across Culture
4. International Marketing
 The ways of life and culture of a society can never be neglected while designing product, distribution, packaging, advertisements and personal
selling process and strategies.
 Sensitivity of using any of the religious symbols, colour, feelings, in mass media in a country having different cultures should be well
conceived by the management.
 A business manager's idea or concept is not adequate.
 It is necessary to use opinions of local professionals, advertisers, legal experts and sociologists before launching any strategies related to the
marketing mix like product, promotion, and price and distribution channel.
5. Communication
 In a high-context culture like Japan and Nepal language is more complex as three different levels of languages are used depending on the
status of relative to the persons who is speaking: senior, junior or colleague (having almost the same status).
 For instant there are three different words for "you": like 'Timi', 'Tapai and 'Hajur' that have to be used depending on the status and rank.
 But in low context culture it is simpler as a single language carrying a meaning is used.
 Second aspect of communication is explicit and implicit.
 In explicit language culture, the managements are taught in communication. It is necessary that one should say what he means what he says.
Vagueness in direction or instruction is considered poor in communication ability. The burden of effective communication is on speaker.
BY Gupta Bdr. Chhetri
 While in implicit language culture burden of communication is shared by both speaker as well as listener. 30There is a possibility to avoid
misunderstandings through cross questions and discussion.
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Complexity of Doing Business Across Culture
6. Negotiation and Bargaining:
 The process of negotiations among executives in cross culture countries has similarity as well as dissimilarity.
 Management experts have identified five standard stages of negotiation that are almost similar in many countries. These stages
are:
(1) Planning: Gathering information through research, planning strategy, making initiation internal decisions on
expectation or outcome and course of action or bargaining position;
(2) Non-task time: Introduction and getting acquainted each other;
(3) Exchange of information: Establish common facts and context of the negotiation;
(4) Influencing other party: To express and convince your desired result; and
(5) Reach to a mutually acceptable point of negotiation.
Complexity of Doing Business Across Culture
7. Timing and content:
 Americans are very much time conscious and would not like to waste much time and in a few moment after
introduction and routine exchange of greetings would like to say "let us get into the business", .
 Similarly American normally prepares a very much detailed and explicitly spelt out document including the
penalties for non-compliance.
 The cases are different with the French, Japanese, African and some other Asians. These people would like to
spend some time to discuss on non-business issues and serve tea or snacks to establish a kind of humanly
relationship and thereby create an atmosphere for business discussion.
 Many business executives in other parts of the world give emphasis on the establishment of relationship based on
trust and performance.

 Though these are similar in many countries it has been frequently noticed that there are differences in terms of timing, 8. Location
contents, location, participants, influencing tactics and techniques of negotiations.  Negotiations are normally done in a formal environment within the premises of company office in a board room or
meeting room in the United States, South Korea and United Kingdom.
 But such negotiation processes in Japan, China, India or Nepal are more information and are even concluded in a
restaurant or hotel lobby.
BY Gupta Bdr. Chhetri 31 BY Gupta Bdr. Chhetri 32

Complexity of Doing Business Across Culture Political Forces:

9. Participants  Political Decisions or change in the policy decisions and public action might affect business organization.
 Size of the negotiating team depends on the cultural aspect of a country.  National security, political sovereignty, ideology, national pride etc. are the fundamentals that form a basis for host government
actions that may lead to possible political risks to business organization.
 Japanese, Chinese, Mexican and Indian who believe in team work normally would like to associate all
departmental head or technical executives in negotiation process. Therefore, they expect the participants of similar  Lower level of perceived political risks higher will be the chances for attracting domestic or foreign investment and business.
rank officials from the other party also.
 However, American would like to work with a small team of one or two important executive carrying authority to
make decisions on behalf of the company.
10. Decision making
 Three basic aspects of decision making vary significantly by culture to culture.
 These are who makes the decision, how decisions are made and what context lead to make decision.
 Normally decisions in America are based on rational and quantitative research and in many other countries
decisions are based on the past experience and qualitative analysis of possible future impacts.
11. International Laws and regulations
12. International economic scenarios
BY Gupta Bdr. Chhetri 33 BY Gupta Bdr. Chhetri 34

13. International political instability

Political Forces: Political Forces:

The following are the political Forces that affect the international business:
1. National Security:
 An international business person or marketer should give top most priority to national and political security
conditions in assessing the risk of losing properties or investment before any business and investment.
 When a country is already at the verge of war, revolution and frequent government changes there is no chance to
entering international business or marketing into such a country.
 Another possibility is nationalization of private or foreign private property where the ownership and management are
transferred to government. Like in India during the regime of Indira Gandhi in 1969,14 commercial banks with deposit over
Rs. 500 million", and other basic services and industries such as coal, iron, non-cooking mines, textiles, airlines, etc., were
nationalized.
The possible reasons for state ownership are:
a. Desire of a government to increase state revenues;
b. Basic services and commodity organization can be run more efficiently for the public benefits;

2. Expropriation -clwu|x0f_, state Ownership or Nationalization: c. Political ideology can be served better;
d. Interest to increase vote bank serving certain community discriminately;
 It involves seizure of a company's property without compensation.
e. Funds and management of companies having many networks and high financial stake can be controlled.
 They affect the competitiveness in the market Privatization comes under pressure and market failure is possible.
The disadvantages of state ownership are:
 However, in modern age many governments are going to favourable direction by providing legal guarantee on not
implementing the policy of expropriation of property and thereby attracting foreign direct investment. a. It is a basis of unfair competition as it does not need to make profit.
b. It can cut the price as it gets financial support at no cost or less cost.
 In case of expropriation for some reason normally the government makes provision to compensate or reimburse
the value of assets that have been seized. However, such compensations are not prompt, adequate and effective. c. It receives government supports to strengthen competitiveness.

BY Gupta Bdr. Chhetri 35

d. BY
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is difficult
Bdr. Chhetri
to collaborate with state enterprises as its scope, working modalities are different.
36

e. It can be inefficiently managed by bureaucrats having no business experiences.

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Political Forces: Political Forces:
3. Investment Guarantee and Dispute settlement: 4. Privatization:

 Many International regulatory provisions, legal bindings, institutional mechanisms have been  The Transfer of ownership and management of public assets to private citizens and foreign nationals or
multinationals.
created to protect the properties of foreign investors in developed countries but it may not be
the case in developing and underdeveloped nations.  In late 1980s, many government-owned companies and businesses were privatized during the movements towards
liberalization after well-known Structural Adjustment Programmes (SAPs) of the Washington based institutions -
 Some of such institutional provision include Multilateral Investment guarantee Agency the World Bank (WB) and the International Monetary Fund (IMF) - were implementing in more than 100
(MIGA) of the World Bank guarantees the private sector's investment by giving political risks countries around the world.
insurance, technical assistance and dispute mediation.  Move to privatization drive was for the reasons like:
 Moreover, the International Centre for the Settlement of Investment Disputes (ICSID) of the (i) Effective use of the available resources,
World Bank also helps to resolve the disputes between the host government and foreign (ii) Efficiency in production of goods and services,
investors. (iii) Prudential management decisions and dynamic leadership,
(iv) Risk taking capabilities and result oriented research and development works, etc.

BY Gupta Bdr. Chhetri 37 BY Gupta Bdr. Chhetri 38

Political Forces: Political Forces:

5. Political Embargos and Sanctions: d. Restriction or ban is imposed on uses of imported items. The objective is to create market to local products. The problem
arises in case the local products or inputs are of low quality or high cost or unreliable in delivery time.
 An embargo involves a complete ban on all commercial activities between two countries, while sanctions are more limited in
scope. e. Price control system - government often tended to introduce price control system to support public welfare and reduce
inflationary pressure. But it negatively affects the growth in investment and capital.
 In Sanction, a country prohibits trade in certain types of goods or transactions.
f. Labour Unions - Some governments support to labour unions, most of whom are ideological oriented, but it may reduce the
 A country prohibits individuals and companies under its jurisdiction from engaging in trade or transacting with those of
export competitiveness of a factory and of a country.
another country.
7. Political Activism and movements
 A sanction is like a partial embargo.
 There are many political, economic, social and environmental activists (PESEAs) at national, regional and international levels.
6. Economic Risk and Labor Conditions:
 Their acts can be termed as "activisms" or movements that are generally intentional actions to introduce political changes,
 A government may take measures to increase revenue, to protect domestic industries, to reduce unfair trading practices, to
economic justice, social changes and environmental healthiness.
increase or conserve foreign exchange reserves, etc.
 Activisms can be through two systems
 Some of such economic risks that may crop up out of the political decisions and directly affect business transactions are briefly
presented below: (a) protests like boycotts, rallies, street marches, strikes, BANDH (closing down or halting activities), statement to or in
the public media, petition drive, pamphleteering, solemn processing, and
a. Increase in income tax on profit from business and in import tariffs on inputs that have to be imported.
(b) persuasion like convincing people or government about the culture, religion, feminists (Women empowerment),
b. Control in allocation of foreign exchange required to import machinery, plants, or raw materials might hamper the
campaigning, cooperation movements, political lobbying, etc.
establishment and operation of a factory.
 Persuasion
BY Gupta Bdr.is activism to change people's behaviour, manner, understanding etc. or to develop40the government's understanding
c. BYImposition of a law requiring to use certain percentage of input produced domestically (local
Gupta Bdr. Chhetri 39
content requirement). At one Chhetri

on a particular issue before it imposes any radical regulatory changes.

point garment factories in Nepal were required to use Nepali fabrics at least 10 percent of total fabric requirements.

Political Forces: Political Forces:

8. Lobbying is Also a Kind of Persuasion Activism
 Lobbying is also a kind of persuasion activism or movement to influence the government authority or legislators or Parliament
members.
 The objective of the "lobbyist" is to get regulatory provisions or government decisions made in their favour.
 A lobbyist can be consultant, layer, trade association, corporation executive, Chamber of commerce, any non-governmental
organization, international non-governmental organization, think-tank, etc.
 Different countries have different cultural practices and systems of lobbying the bureaucrats or politicians.
 In some of the countries like Georgia, Lithuania, Poland, and Hungary professional lobbyists have to be registered under the
regulations passed by the respective parliaments.
 The environmentalists are in favour of the conservation and green movements. They have created various organizations all
over the world for the sustainable management of bio-diversity and ecology for the human well-being. These organizations are
against any element or activity that pollute, degrade and destruct air, water, forest, wild creatures and other natural resources.
 By organizing various movements or activism they create public awareness of nature's rights, environmental sciences, ecology,
ozone depletion, global warming, climate change, acid rain, harmful genetically modified organisms (GM0s), emissions of
carbon dioxide, sulphur dioxide, use of harmful pesticides, water additives like fluoride, ethanol processing plants, etc.
 Recently "transformational activisms" are being frequently discussed in the society. It is defined as opening of minds to
BY Gupta Bdr. Chhetri
creativity, 41
new ideas, new cultures, broader view of life, new historical perspective etc. that will bring a meaningful changes in
9. Violence and Terrorism
 Terrorisms include killings and kidnapping of people, destructions of property, and violence and other illegal activities.
 The most possible types and reasons for terrorism are:
a. Political: To overthrow a government or to get release of their imprisoned members;
b. Economic: To demand ransom to run or operate a terrorist group;
c. Religious: To punish non-believers of terrorist's religion;
d. Ethnic: Traditional fight between the parties like in Ireland, Muslims and Serbs in Former Yugoslavia, Muslims in Northern
Nigeria, Tamil and Singhalese in Sri Lanka, etc.;
e. Nuclear, Chemical and Biological Terrorisms: For political reason
f. Cyber Terrorism: It is an attack to damage the computer service system by creating virus. In the past MNCs lost billions of
dollar and tracing the terrorists was the most difficult task.
 The whole world was shocked when on 11 September 2001 the world's most powerful nation, the USA, was victimized by a
historical terrorist's attack by hijacking four civilian airliners within a couple of hours and crashed two into the Twin-Tower -
The World Trade Centre, one into the Pentagon, Washington DC, and fourth one in Pennsylvania.
 Apart from Al Queda the other well-known terrorist organizations are Irish Republican Army (IRA), Hamas (Palestinian
Sunni-Islamic fundamentalist militant) and other fundamentalist groups, the Basque separatist42Movement (ETA), the Japanese
BY Gupta Bdr. Chhetri

the society and the world as a whole. Red Army (JRA), the Germany Red Army Faction, etc.

7
Political Forces: Planning Political Risks – Assessment and Measures
10. Hostility:
 Enmities between the people, group or country Many countries in the Western and Eastern parts of the world have many kinds
of ethnical groups, tribes, races, religions, ideologies, etc.
 The people belonging to such groups might have historical or traditional animosity or enmities between the groups.
 A business leader of MNE is also supposed to understand and consider such situations before he or she attempts to enter any
foreign country for business operation.
 Some of the examples of hostilities are between:
i. Arab VS Israel
ii. Indian VS Pakistani over disputed territory of Kashmir
iii. Hutus VS Tutsis in Burundi and Rwanda
iv. Tamils VS Sinhalese in Sri Lanka
v. The US VS Al Qaeda and Iraq
vi. Fundamental Islamic group VS Non-Islamic groups in Northern Nigeria
vii. Blacks VS Whites in South Africa
viii. Vietnam VS Cambodia
BY Gupta Bdr. Chhetri 43 BY Gupta Bdr. Chhetri 44

ix. Chinese VS Japanese

Planning Political Risks – Assessment and Measures Planning Political Risks – Assessment and Measures
2. Careful Selection of Entry Strategy:
A. Macro or long-term measures:
- The multinational or transnational corporations can reduce the political risks by careful selection of entry strategy.
1. Creating Positive Attitude about Foreign Investment: - In case where it is necessary to transfer the capital in cash and in machinery the joint venture entry strategy can be
- It is utmost necessary that positive attitudes toward the FDI is created among the political considered safer than full ownership.

leaders and government bureaucrats and public awareness is build on the contributions of - Local partner can handle the risks more amicably and carefully with the politicians than a foreigner.
foreign investors to the socio-economic development of a country. - The other suitable strategy will be to come with non-equity based investment such as providing license only to produce
and market or give order to produce and export on a contract manufacturing basis or give franchising only where the
- They must understand that foreign investments local will use the popular brand names or other advantages of your company.

(i) Give additional employment, 3. Technology transfer and management only:

- A foreign investor can also reduce the political risks by organizing transfer of technology and management of business
(ii) Bring capital and transfer new technologies, only.
(iii) Utilize domestic resources, - In this case he or she has to mobilize the major capital investment requirements through local or international
banks.
(iv) Upgrade skills of locals,
- International Finance Corporation (IFC) of WB also provides financial facilities to the transnational corporation to
(v) Substitute imports and promote export resulting favorable balance of payments invest in developing countries in the selected sectors.
(BOPS) position,
BY Gupta Bdr. Chhetri 45 - When the local or international banks have invested in a foreign venture the risk of confiscation
BY Gupta Bdr. Chhetri 46 and expropriation is
minimal.
(vi) Pay taxes to government, etc.

Planning Political Risks – Assessment and Measures Planning Political Risks – Assessment and Measures
4. Insurance of Investment: B. Micro or short-term measures:
- The business investment can be insured with any insurance company or international 1. Negotiation to phase-out:
financial institutions.
- Negotiate with the government for planned phasing out and compensation.
- The World Bank has set up an institution called MIGA: Multilateral Investment - In this case the foreign investor will transfer the ownership and management of a firm gradually or step by
Guarantee Agency. It disseminates information on investment opportunities and provides step in a number of years.
guarantee to foreign investors against losses caused by non-commercial risks. - For example 30 per cent of the ownership will be transferred by the end of first year, another 30 per cent by
- Moreover it has also an institution called ICSID: International Centre for Settlement of the end of second year and rest at the end of fourth year.
Investment Disputes that facilitates settlement by conciliation or arbitration of foreign - In practical life it may not be as easy as it looks particularly in case where revolutionary political party
direct investment disputes. having anti FDI policy, has taken over the government.

5. Strong Bilateral Agreement: 2. Political Lobbying and Bribery:

- Even before the investment is made in the host country, a foreign investor can pursue the - In many developing countries government changes quite frequently and the leaders of the strong or
powerful political party threatens the TNC or MNC to confiscate the property.
host government to enter into a bilateral investment agreement with home government,
whereby strong clauses could be included to compensate fully in case of expropriation of - When the situation gets as worst as this the foreign investors is left with no option but to bribe them to
BY Gupta Bdr. Chhetri 47 BY Gupta Bdr. Chhetri 48
escape from confiscation or expropriation.
the assets of the foreigners by who so ever might be the ruler of host country.

8
Role of strategy in IB Role of strategy in IB contd…
(b) Value addition
A. Strategy and opportunity:
- It is possible by upgrading product quality, introducing premium to ultra premium quality products, improving
 Strategy in the context of IB can be defined as several activities that the managers carry out abroad to meet the compliance to international standards and norms, and introducing or redefining the branding strategies.
objective of an MNE by reducing global risks and staying competitive.
(c) Value creation
 Increase in profitability can be measured by comparing profit with investment or in terms of rate of return on
investment made by an MNE in a particular business. - It is possible by product differentiating through introduction of innovative products, deciding on strategic
alliance with other partners, developing new varieties and engaging on corporate social responsibilities.
 MNEs can increase profitability and profit growth rate adopting one of more of three options
(a) Value retention
- It is possible mainly by reducing production cost and improving operational and resources utilization efficiency,
improvement in quality and productivity by research and development activities, develop standard or best
practices and resource efficient processes, improvement of production technology, upgrading machineries,
creating better storage and logistics, introducing effective communication and promotion activities, launching
quality inspection and certification programs.

BY Gupta Bdr. Chhetri 49 BY Gupta Bdr. Chhetri 50

Role of strategy in IB contd… Role of strategy in IB contd…

B. Strategic opportunities and subjects :

BY Gupta Bdr. Chhetri 51 BY Gupta Bdr. Chhetri 52

B. Strategic opportunities and subjects contd… B. Strategic opportunities and subjects contd…
1. Globalization, investment, production and trade 5. Efficiency and Cost Reduction:
- Globalization increases the possibilities of global investment, production and trades in merchandise, services, - Opportunities also exist in the modern world to increase effectiveness and efficiency in operation and thereby
foreign currencies and intellectual properties. reducing cost of overall business with the development of IT, infrastructure, logistics and trade facilitation
moves.
2. Mode of entry options:
6. International Finance:
- With the increase in market access conditions and liberalization in trade and investment many optional
opportunities to enter into global business are evolved like exporting & importing, licensing, franchising, - Opportunities have also been created by offering fund for international business (trade or foreign investment) at
strategic alliance, joint venture, contract manufacturing, merger & acquisition, turnkey project, management easy terms and conditions by the international, regional and national financial institutions and commercial banks.
contract, Greenfield investment, wholly owned subsidiaries, and outsourcing.
7. Operational Management:
3. Global marketing opportunities:
- Once the MNEs has set up its subsidiaries many operational aspects required formulation of strong strategies
- There are dynamic effects of the globalization with the liberalization and deregulations as almost all countries like product or production, pricing, distribution, marketing, financial, HRM, IT, etc.
particularly the members of the WTO have open up their markets for any foreign goods. 8. Institutional Developments:
4. Organizational Approach Options: - In the past three decades many multinational institutions are established to support the global economic
- There are three strategic organizational options to enter into IB: integration drive like the World Trade Organization (WTO), regional economic institutions (SAFTA, NAFTA,
ASEAN etc.
(a) Cost reduction and standardization with home country oriented or centralized ethnocentric approach;
BY Gupta Bdr. Chhetri 53 BY Gupta Bdr. Chhetri 54
(b) Customization with local responsiveness host country oriented poly-centric approach; and
(c) Combination of both standardized as well as customized geo-centric approach.

9
C. Strategic Opportunity Assessment Technique Strategic Opportunity Assessment Techniques contd…
1. Environmental Scanning:
- Collection of information of environmental forces and continual monitoring of changes in the environment.

2. SWOT analysis:
- Analysis of Strength, Weakness, Opportunities and Threats

3. Business Forecasting:
- Estimation of future business requirement.

4. Benchmarking:
- Determining the standard to meet for the quality.

5. Market Screening:
- Identifying Priority market
BY Gupta Bdr. Chhetri 55 BY Gupta Bdr. Chhetri 56

Choosing International Business Strategy Choosing International Business Strategy contd…

 Choosing a strategy is highly creative, complex and challenging task of the management of MNE
1. Authenticity:
 Choice must be based on the benefits it provides to achieve the objective of competitive advantage and profit.
 The decision on the final choice should be taken with due diligence considering the following parameters:
 It should be prudent and if possible obviously stating what an organization will do and what it will not do legally.

2. Believability:
 Based of reality and relevancy
 There should be some real basis in terms of the relevant and trustworthy evidences and commitments by the management team so that
it becomes acceptable to the higher decision making authority.
 Logical or convincing reasons should be backed by data, personal beliefs, confident and values of the management team.

3. Communicability:
 It is equally necessary to be convincing and understandable so that all participants or staff and other stakeholders become conscious.
 If it is not understood by them it will be a waste of time and a constraint in getting thing done.
 Making all understand to the strategies is a kind of test of the management team's commitment and accountability.
 It is also necessary to communicate to present seriousness, determination and willingness to work based on the chosen strategies.

4. Deliverability:
 It should be feasible and implementable or doable or executable.
 It can be further broken down to identify short-term, medium-term and long-term actions, which should be clearly deliverables in the
BY Gupta Bdr. Chhetri 57 real BYworld (time)
Gupta Bdr. Chhetri with budget and clarity of accountabilities. 58

 There should be risk management mechanism also.

Choosing International Business Strategy Estimating Market Potential

 Various information and data are necessary for several sources to determine market potentials
that includes :
i. Total market volume and value, market growth rates, and unit prices of the product or services;
ii. Buyer's profiles, preferences, tastes and requirements;
iii. Competitor's profiles, their production and marketing strategies and strengths and weaknesses;
iv. Distributor's profiles, nature, strategies and other systems;
v. Prevailing price structures and normal margin of channels of distribution;
vi. Effective strategies for market penetration;
vii. Product characteristics, consumer's reactions and attitudes to existing products; and
viii. Logistics and infrastructures.
 Marketers use various market potential estimation techniques in international markets. These
include proxy indicators(A variable used to stand in for one that is difficult to measure
directly), chain ratio method, time series analysis, and multiple regression modeling.
BY Gupta Bdr. Chhetri 59 BY Gupta Bdr. Chhetri 60

10
Estimating Market Potential Estimating Market Potential
Elements of Determining Market Potentials: 3. Competition:
1. Market Size:  If the industry has high competition in the selected market the entry barriers are high from competition point of
 Market size is the total market sales potential of all companies put together. view.
 For consumer goods the data related to population size, age, income level, etc. can help in determining the market size while  In this situation a company needs to sell at a lower price even if the quality of the product is better than those of
for industrial products it is necessary to get the data on industries and their sizes in a particular market. the competitors to follow market penetration strategy at the initial stage.
 Market size can be estimated through top-down research as well as bottom up research.  This strategy is followed by the MNEs with most popular brands in the new markets with a view to hold and lead
 The best way to get the data on market size is to outsource information from marketing consultant in a particular market. the market in a long run.
2. Market Growth: 4. Profitability:
 Market growth rate can be determined by checking records of the facts and figures for the past five years for a particular  As the objective of all business organization is profit making, it is necessary to determine and forecast the
product or service. profitability in the particular market for company's product or services.
 Many marketing related web-sites or market and product specific magazines or bulletins occasionally present such data.  If a business is going to give low profitability then the volume of turnover should be high to earn targeted profit.
 Market Analysis Tools of International Trade Centre (ITC)- is also one of most reliable sources to determine the market size, But if the volume of business is low the profitability should be higher to sustain the business.
market growth rates, major import markets and their trends, and market access conditions.
 Profitability is simply determined by calculating the following ratios:
 Market volume, growth rate and per unit price paid for import can also be determined through this tools to form a basis for
selection of the most prospective market. ROl - Return on investment ROS - Return on sales
BY Gupta Bdr. Chhetri 61 BY Gupta Bdr. Chhetri 62
RONA - Return on net assets ROCE - Return on capital employed.

Estimating Market Potential

5. Consumer and Product Type:
 Change in the volume of market and potential also depend on the type of product and type of consumer or
consumer segments.
 In case of product requiring daily use the promotional strategy could be to encourage use of products more than
necessary for the benefit of company also.
 Like TV ad toothpaste companies normally shows tooth brush fully covered by paste and encourage brushing at
least twice a day and immediately after meal. All health conscious consumers tend to follow the TV ad of the
companies.

BY Gupta Bdr. Chhetri 63 BY Gupta Bdr. Chhetri 64

Entering and operating International Market A. Types of Organization

A. Types of Organization
Features Global and International
Companies
General Feature • Views world as a single
market with
standardized product or
service (Same product
all over the world)
Management Style • Home Country Oriented
Organizational Structure • Centralized
Examples • Pfizer
BY Gupta Bdr. Chhetri
Multi Domestic Companies Transnational or Multi-
Type 1: Global and International Company
national Company  The global company views the world as a single market and tries to create standardized goods
and services and integrate operations worldwide.
• Operates more • A world wide company  Such company is characterized by:
independently and with combination of
formulate business benefits of global scale • ethnocentric or home country oriented in management style and type of products and
strategies based on the efficiency and local services it provides,
perceived market responsiveness.
feature, focused on local • centralized organizational structure with a common set of working manual and
market management strategies world-wide, and
• Host Country Oriented • Customized and
standardized • Requiring high coordination among foreign operations and concentrated configuration
• Decentralized • Both of the different parts of value chain.
 For example, pharmaceutical company; Pfizer can be considered as a global company.
• Nestle • Unilever
65 BY Gupta Bdr. Chhetri 66

11
A. Types of Organization A. Types of Organization
Type 2: Multi-domestic Company Type 3: Transnational or Multinational Company
 The multi-domestic company affiliates or subsidiaries in many countries, each of them operates more  The transnational company is a worldwide company.
independently and formulate business strategies based on the perceived market features and requirements.  It has combination of benefits of global scale efficiency with local responsiveness.
 Such company is characterized by:
 It helps to achieve global integration while permitting to retain local flexibility.
• Poly-centric or host country oriented or local responsive in management style and type of products and
 Such company is characterized by:
services it provides,
• Geo-centric or home and host country oriented or local responsive in management style and type of
• Focuses on specific domestic market and is free to customize or adapt its product, marketing strategies, and products and services it provides,
production techniques,
• Focuses on standardization and free to customize or adapt its product, marketing and production
• Decentralized organizational structure and has flexible sets of operation manual and uncoordinated techniques,
management strategies world-wide, and
• Combines centralized and decentralized organizational structure and has flexible sets of operation manual
• Requiring low coordination among foreign operations and dispersed configuration of the different parts of and uncoordinated management strategies world-wide, and
value chain. • Some of such companies are losing their national identity and are increasingly involved in global social
 For Example, Nestle is a multi-domestic company. It uses a unique marketing and sales approach for each of the and charitable activities also.
markets in which it operates and it adapts its products to local tastes by offering different products in different  It is characterized by an integrated and interdependent network of subsidiaries all over the world.
markets.
BY Gupta Bdr. Chhetri 67
 A great example of a transnational company is Unilever.
BY Gupta Bdr. Chhetri 68

B. Decision on organization structure Modes of entry in international business

Market entry decisions
 Choice of an entry mode depends on many factors such as:
a. Types of product or service of a company.
b. Extent of location advantages - availability of market, low cost labor and raw materials.
c. Level of technology to be used or company's market expansion strategies.
d. Competitive advantage or competency of a foreign firm or company
e. Investment environment in a host country.
f. Analysis of advantages and disadvantages of entry modes.
 When a business person analyzes the advantages and disadvantages of several entry modes he/she can consider
the following the steps:
1. Export Directly:
 At first export directly to the market and acquire experience through foreign importing agents or
distributors.
2. Joint Venture:
 If a company is unfamiliar with a country's environmental forces and political, legal and economic risks are
higher, it may wish to opt joint venture strategy where such risks are shared with local partners and financial
institutions.
 But joint venture also becomes unattractive if a company's operation is based on highly sophisticated technology
or patent or certain business secret based technology.
 Joint venture is highly useful to utilize the local resources and location advantages.

BY Gupta Bdr. Chhetri 69 BY Gupta Bdr. Chhetri 70

Modes of entry in international business Modes of Entry in the International Business

3. Wholly Owned Subsidiary:
 Joint venture and licensing should be avoided in case of highly technological know- how product or services.
 A meticulous analysis and careful prior considerations to all environmental factors are required before a wholly
owned subsidiary company is to be set up in a foreign market.
 There are two strategic options:
(i) To build a subsidiary from the ground up - it is called green-field strategy and
(ii) Second one is to acquire an established enterprise in the target country – it is called acquisition strategy.
4. Non-equity based Operation:
 Entry into a foreign market is not associated with high risk when a company can operate business without capital
investment where there will be no control over foreign assets and no voting right.
 It involves transfer of technology or intellectual property only.
 It always depends on the level of technology used, types of products and services, and a company's market
expansion strategy.
 Such types of operations are based on Licensing, Contract Manufacturing/ Outsourcing, Franchising,
BY Gupta Bdr. Chhetri 71 BY Gupta Bdr. Chhetri 72
Management Contract etc.

12
Collaborative Ventures and Strategic Alliances Licensing
 Strategic Alliance is a business to business collaboration or partnership to pursue a set of  A domestic company (Licensor) enters into a contract with the foreign company (Licensee) to
agreed goals or to meet a critical business need. perform certain specified task.
 It allows each partner to concentrate on activities that best match its capabilities and to learn  Licensing is a form of an arrangement where by a frim grants access, right or permission to
developing competencies. use its processes, copy rights, patents, trademarks, trade secrets, design or technology to
 Strategic alliance is with resources or synergy is formed from joint efforts in production another foreign enterprise for a fee.
capabilities, product, project finance, marketing, sales, distribution, design collaboration,  It is an agreement that contains main provisions for term (time), fee, territory and renewal
equipment, knowledge, expertise, technology, licensing, intellectual property etc. related to the use of the right.
 The objectives of Strategic Alliance are  Advantages are that foreign companies obtain licenses for a small amount of fee instead of
a) To achieve faster market entry, making illegal efforts of counterfeiting or piracy.
b) To gain access to new products, technologies and markets,  However, disadvantage is that foreign licensee may quickly learn the detailed manufacturing
c) To share costs, resources and risks, process or other trade secrets only to turn round and go into competition by setting up another
company.
d) To take advantages of scale, scope and speed
BY Gupta Bdr. Chhetri 73 BY Gupta Bdr. Chhetri 74

Franchising Licensing vs franchising

 Franchising is also a form of Licensing that permits selling of goods or services in foreign
market under a well known Logo, brand name, trademarks or well proven process.
 The Franchisor grants the independent operator the right to distribute its products, techniques
and trademarks for a royalty or fee.
 Various support services like advertisement, training etc. are commonly made available by the
franchisor.
 Agreements typically last from five to thirty years.
 Historical example of franchising was John S. Pemberton's successful franchising of Coca-
Cola. Coca Cola bottling plants in Nepal has received franchising from The Coca Cola
Company, Atlanta, (US) to use its essence for bottling soft-drinks and distribute in Nepal.
 Similarly Holiday Inn is the franchisor of Hotel Soaltee Crownie Plaza in Nepal.
 In regard to contemporary franchise chains, McDonald's is unarguably the most successful
worldwide.
BY Gupta Bdr. Chhetri 75 BY Gupta Bdr. Chhetri 76

 The others are Pizza Hut, KFC (Kentucky Fried Chicken), Bata Shoes, etc.

Global Outsourcing Global Outsourcing contd…

 Outsourcing involves the contracting a part of business operation or process or non-core
function to another company or suppliers.
 Lower international labor rates and professional experienced services at reasonable price can
be the major motivational factor for outsourcing.
 Outsourcing relationship can range from handling over a single task to management of entire
operation.
 An experienced global trade partner specializing in supply of specific product, parts of
products or service can help save money, optimize the supply chain and improve regulatory
compliance - giving companies back their competitive edge.
 If such product, parts of product or services could be outsourced from the supply specialists the
company can focus on their real or true business objective to achieve maximum economic
benefits as well as meeting customers' expectations.
BY Gupta Bdr. Chhetri 77
Benefits of outsourcing are:
1. Cost Reducing and Controlling:
 Outsourcing can substantially reduce the cost and burden of hiring and managing human resources for
example when management of a hotel is entrusted to a professional management team on contract basis
the owners of hotel need not worry about the management of staff and business operation.
 Similarly there are highly specialized functions in international business can be carried out
professionally without hassle and involvement of company staff at the minimum or reasonable service
cost.
2. Improving corporate focus on core competency:
 Normally, outsourcing partners are highly specialized and professional and thereby get rid of the
burdens of management of specialized tasks or supply chain.
 This enables the MNE or company to focus on the core competency and core objective of the business.
 The MNE can increase the turnover as well as improve the customer's satisfaction with quality product
and services.
BY Gupta Bdr. Chhetri 78

13
Global Outsourcing contd…
3. Access to professional services and reduced IT infrastructure overhead
 Many offices normally do not establish IT Department and there is no need to recruit professional technical staff
to maintain the costly IT infrastructure and networking.
 Outsourcing of IT infrastructure has cost saving as well as other benefits including getting rid of complicated
technical understanding of networking with the help of professionals having accumulated experiences.
4. Enhanced supply chain efficiency:
 Supply chain could be managed efficiently if numbers of parts or inputs, or services are outsourced.
 This will permit streamlining or increasing efficiency for time-consuming functions and maximize the use of
external resources.
5. Improved regulatory compliance:
 There are many regulations requiring meeting health related safety and quality requirements and standards. Quite
often such regulations are quite complex to be handled by the professional organizations.
 Governments in home (exporting) and host (importing) countries frequently change the regulations and there are
many regulations requiring certifications.
 Therefore, if the services for regulatory compliance are also outsourcing it will reduce
BY Gupta Bdr. Chhetri 79
the burden of complex BY Gupta Bdr. Chhetri 80

operation and also cost of compliance.

Legal systems: Major areas of manager’s Concern

 The Legal environment of a country is an enforceable body of the rules and laws that regulates or governs the conduct and Strategic Concern Operational Concerns
behavior of individuals or institutions in a society, specifies their rights and obligations and gives the processes by which such
rules are enforced and grievances are addressed.
• Product safety, standards and liability • Business registration and establishment
 General Principles and features of the Legal Environment are as follows: • Rules and regulations • Contract and Enforcement
1. Foundation: Historical Background, culture, tradition, prevailing politics etc. • Local requirement • Pricing and Wages
2. Political Ideologies: • Legal, jurisdiction and arbitration • Hiring
3. Citizen’s Rights • Intellectual Property Right • Financial regulations
• Foreign Exchange
4. Society’s View
• Corporate social Responsibilities
5. Modes and Conducts • Taxation
6. Penalties • International trade and investment
agreements

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