NMIMS

INTERNATIONAL BUSINESS
APPLICABLE FOR JUNE 2022 EXAMINATIONS

1. “War between Russia and Ukraine is not only affecting trade of these two countries but
entire Global Business.” – In the light of above statement analyze International Business
Environment.

Answer:

International business environment:

The growth in the market and penetration between the markets makes it difficult for any
country to avoid the external impacts on its own economy. Capital flows from one economy
to another can lead to fluctuations in exchange rates. Global integration of trade,
investment and increased mobility of human resources has been making the economies
more sensitive to change within each other. The economic environment of the market,
apart from other factors like political stability etc., affects the businesses in many ways. This
is because the economy of a country affects the businesses directly. When a company
decides to enter a particular country, it has to assess the following major issues:

 What is the demand of the company's product?

 What is the cost of production?

When resolving the abovementioned issues, the country should be evaluated by looking at
its macroeconomic conditions, such as its level of investment, consumption, income level,
employment level, balance of payment condition, inflation and infrastructure development.
International economic environment is more complex than its domestic counterpart. In
international economics, apart from the home country a host country is involved. The
conditions in the host country can affect the profits of the company either adversely or
favourably. International economic environment is subject to various kinds of regulatory
environment.

Impact of wars on global business with reference to Russia-Ukraine war:

In terms of trade and export-import, whole world is joined together so even if there is war
going on between two countries, it has big impact on rest of the countries as well and
reasons could be different. Russia and Ukraine’s war is going on since 23 rd February and
even now, there are no concrete results for the same. Meanwhile, this war has affected
world trade and if we assess the impact even on India itself, oil prices are going up, gold
prices are going up, no peace among world nations and most of them are asking Mr.
Narendra Modi to intervene and stop the war but till now, nothing positive has emerged
and situation is getting worse day by day. Putting aside the very real human cost, war has
also serious economic costs – damage to infrastructure, a decline in the working population,
inflation, shortages, uncertainty, a rise in debt and disruption to normal economic activity.
In many circumstances, war can lead to inflation – which leads to loss of people’s savings,
rise in uncertainty and loss of confidence in the financial system. If a country is devastated
by war and the capacity to produce goods is sharply reduced, it can create the
circumstances of hyperinflation as governments desperately print money to try and deal
with the lack of goods.

War can often lead to higher prices of oil because major conflict can threaten supplies. The
2022 Russian invasion of Ukraine led to a rise in the price of oil and gas, and this will lead to
higher global prices for fuel. As Russia is a major supplier of oil and gas, economic sanctions
on Russia in response to the invasion will reduce supply and put upward pressure on gas
prices. During war we often see a rapid rise in public sector debt. The government is willing
to borrow a lot more than usual because – there is patriotic support for the war effort.

Both the First and Second World Wars were very costly for the UK. In both cases, the
national debt rose very sharply. In the post-war period, debt continued to rise due to
reconstruction and the creation of the welfare state.
Although war can provide a temporary boost to domestic demand, it is important to bear in
mind the cost of war. In particular the opportunity cost of military spending, the human cost
of lost lives, the cost of rebuilding after the devastation of war. Also, it depends on the kind
of war, how prolonged it was, where and how it is fought. For example, the US fought wars
– WWII, Korean War, Vietnam War and it appeared that these wars led to a boost in
domestic demand and some manufacturing companies did very well. However, we shouldn’t
forget that these wars occurred on territories outside the US. The real devastation took
place in Asia and Europe. It is possible to estimate economic costs of war – cost of military,
etc. However, it is harder to estimate the psychological costs of war – the pain of death,
suffering, fear and disability. A conflict can leave soldiers and civilians traumatised for the
rest of their lives.

Impact of Russia-Ukraine war on Global business (Main points)

 Within a month of war, oil prices have really gone up in most of the countries. Oil
and gas prices have surged over supply fears as Russia is one of the world's biggest
producers and exporters of the fossil fuels.
 Many European countries get the gas from Russia so as the war is going on, this is
very hard for these countries to import the gas and even the war concludes, there is
a possibility that economic sanctions on Russia would make it difficult for these
countries to get the gas.
 Russia-Ukraine war has big impact on the transport as well, during the pandemic,
transport system was affected globally and this war is creating further problems.
Various transport modes such as ocean shipping and rail fright are affected.
 Russia-Ukraine war has great impact on global supply chain as well and it could
continue for some more time.
 Russia and Ukraine account for 30% of world’s export of wheat and 80% of sunflower
oil etc. With this war, food supplies also affected.
2. “Documentary Letter of Credit collection method is the most popular mode of collecting
payment by the exporters” – Analyse the statement. How is an irrevocable L/C different
from back to back L/C?

Answer:

A letter of credit (L/C) is an instrument signed by the importer’s banker that promises to
make payment to the exporter if he follows the conditions mentioned in the L/C and if the
specification about the quantity and quality of exports matches with those mentioned in the
L/C. It is a letter of promise and not a letter of guarantee of the underlying commercial
transaction. The issuing bank gets a fee for making the L/C. An L/C serves the interest of
both the parties. Exporter is assured that he will get the payment and he will try to hedge
against foreign exchange risk, credit risk, political risk, country risk etc. by trading in the
derivative market. Also, the importer will make the payment when he is in receipt of the
goods.

For example, assume that the buyer of certain merchandise is in Mumbai, India, and the
seller of the said merchandise is in the USA. The buyer and the seller do not know each
other and, therefore, the seller will ask for the payment in advance for shipping the
merchandise to the buyer. On the other hand, the buyer feels that it may not be prudent for
him to make advance payment to the overseas seller whom he does not know. Under this
circumstance, no trade can take place unless there is an intermediary who can bridge the
lack of trust between the buyer and the seller. The commercial bank can play the role of this
intermediary and inspire confidence among the two parties. This can be done by issuing an
LC at the instance of the buyer in favour of the seller.

Documentary letter of credit:

A documentary letter of credit is bank’s promise to pay a seller on behalf of the buyer as
long as the seller complies with precisely defined terms and conditions specified in the
credit. Parties of the transaction are applicant, beneficiary and assurance of payment.
Applicant is the buyer of goods, beneficiary is the seller of goods and assurance of payment
is the bank that substitutes its credit for that of the buyer, Minimum terms, conditions and
information that is needed to be agreed upon between the Applicant and Beneficiary for the
Applicants bank to issue the Credit to the Beneficiary.

A documentary letter of credit provides almost equal security to both the buyer and the
seller. The bank assumes the payment responsibility for the buyer, thereby placing the
credit standing of the bank between the seller and the buyer. With use of a letter of credit,
buyer and seller do not communicate directly. The bank(s) act as intermediary (ies) between
the two.

Letters of credit are the most common form of international payment because they provide
a high degree of protection for both the buyer and the seller. The buyer specifies certain
documents (including a title document) from the seller before the bank is to make payment,
and the seller is assured that payment will be received after the goods are shipped so long
as the specified documents are provided.

Advantages

For the seller:

 elimination of the credit risk, the receipt of an undertaking from a bank (banks) to
pay for commodities supplied or services provided, if the seller lacks adequate
information about the financial standing of the buyer or the credit relationship;
 elimination of the risk of receipt of a counterfeit undertaking or an undertaking
issued by a non-existing bank;
 elimination of the risk of non-payment / late payment / partial payment for goods
supplied / services provided;
 maximum reduction in the time interval between the shipment of the commodity
(the provision of services) and the receipt of proceeds;
 elimination of the risk of order abandonment (change in conditions) by the buyer
without the consent (permission) of the seller;
 possibility to get short-term funding;
  Possibility to increase supply volumes, to promote commodities (services) in new
markets, to gain competitive advantages.

For the buyer:

 a letter of credit can be opened at the buyer’s own expense or using a bank loan by
pledging other collateral to secure performance of its obligations (a lien on assets or
a deposit, etc.);
 the buyer may withhold payment pending documentary confirmation that the goods
meet the quality requirements and have been delivered in full to their specified
destination (the payment is made after the goods are have been delivered and
documents provided);
 the buyer specifies a list of documents against which payment will be made;
 the buyer limits the time frames for the provision of documents and goods delivery.

Irrevocable L/C and back to back L/C

An irrevocable letter of credit (ILOC) is an official correspondence from a bank that
guarantees payment for goods or services being purchased by the individual or entity,
referred to as the applicant, that requests the letter of credit from an issuing bank. An
irrevocable L/C once issued, cannot be changed or modified by importer without the
agreement of issuing bank, advising bank and exporter. If amendments have to be made,
same can be incorporated only after consultation cum mutual agreement between these
parties.

In case, the exporter fails to get a transferable L/C, he can open another inland L/C based on
this Foreign L/C. L/C so opened against FLC is known as back-to-back L/C. Under back-to-
back L/C, the exporter requests his bank (advising bank) to open another inland L/C in
favour of the supplier or manufacturer of goods to be supplied to the importer. The
manufacturer become eligible for packing credit with such Back-to-Back L/C and merchant
exporter need not give any advance to the exporter.
3. In early 2000, “United Colors of Benetton”, The Italian Casual Wear Brand decided to
restore it’s lost sales through a shift in strategy. They decided to allow the country
managers to adapt the product offers and rework on the marketing strategies. Products
were redesigned keeping in view the physical differences among various countries
customers. Regional flavours were added in product features and communication
specially when more than 50% business started coming from emerging markets.
a. How does the Brand “United Colors of Benetton” demonstrate the Globalisation of
markets?
b. Do you think that this strategy is appropriate for emerging markets?

Answer:
A) Globalization:

Globalisation is a process where businesses are dealt in markets around the world, apart
from the local and national markets. According to business terminologies, globalisation is
defined as ‘the worldwide trend of businesses expanding beyond their domestic
boundaries’. It is advantageous for the economy of countries because it promotes
prosperity in the countries that embrace globalisation.

The trend of globalization has gained substantial importance in today’s highly integrated
world. Globalization has become a need rather than a choice. Nowadays, organizations face
a highly dynamic market with huge requirements of R&D and innovations in order to stay
ahead of their competitors. The costs involved in such innovation and R&D can only be
borne by multinational organizations. Thus, companies prefer to opt for global operations in
order to take advantage of the economies of scale and avail various benefits. Globalization
can be defined as the process of international integration that arises due to increasing
human connectivity as well as the interchange of products, ideas and other aspects of
culture. It includes the spread and connectedness of communication, technologies and
production across the world and involves the interlacing of cultural and economic activity.

United colours of Benetton and globalization:

UCB has really evolved in last few years since it first started its operations in 1965 in Paris.
Since beginning, UCB believed in aggressive advertising and innovative marketing strategies
which realty helped the company to grow in different markets. One of the provocative
advertising campaigns impacted the business few years back and after that, it made major
changes in its advertising strategy. Along with many countries such as Italy, Germany, UK,
UCB made its mark in India as well. UCB believed in globalization and entered in different
countries in phased manner. Important thing was to take care of the needs of local people
and assessing the market environment before entering in any country. With this way, UCB
attracted lot of people and added large customers in its base. As per the recent survey
based on UCB, it was found that UCB is present in around 40 countries having more than
2000 stores which shows it truly believes in globalization. Benetton group always tried to be
different and operated as per the business environment in which it is operating such as UK,
Germany, Korea and India as well. To manage the business operations well, it uses
technological tools in supply chain and logistics management. Company uses integrated
information systems so it checks daily sales data which is fully integrated. Though clothing is
basic requirement for all of us, style of clothing and needs could be different as per our
culture and this was well understood by UCB in many countries and it can be said that, it has
done good job till now.

B)

In an ever-changing global environment, the complexity of business has multiplied at a fast

pace. In this scenario, it becomes important to devise strategies for the direction taken by
the business so as to enhance the performance of the organization. Every business has to
evolve its strategy on the basis of the needs of the business in relation to its environment.
Strategic planning helps the top management of an organization to assess the impact of
current decisions on the future trends in business. At the time of devising the strategy, the
top management should consider the external interests of the organization, the
expectations of the shareholders, past history and anticipated performance, along with the
mission, objectives and policies of the organization.

An effective strategy has the following constituent elements –

  Helps the organisation to achieve its targets
 Involves both decision-making processes and the execution of such decisions
 Propels the organization to achieve competitive edge over its rivals
 Aids in aligning the organizational strengths and weaknesses to its environment.

Impact of strategy:

As mentioned in the question, UCB decided to allow the country managers to adapt the
product offers and rework on the marketing strategies. Products were redesigned keeping in
view the physical differences among various countries customers. Regional flavours were
added in product features and communication specially when more than 50% business
started coming from emerging markets. I find the marketing strategy of UCB very effective
and planned one.

In this competitive business environment, you need to be cautious and assess the business
environment regularly and whenever required, make necessary changes in your strategies
and then only, you will be successful and hold good market share. In the modern world, we
have plenty of options in everything especially for clothes and outfits so when the
competition is so intense, every company needs to work hard to retain old customers and
acquire new ones. It is given that 50% of the business is from emerging markets for UCB so it
becomes important that company takes care the needs of people belong to these emerging
markets. It is beneficial for UCB to consider the choices and preferences of people and add
regional flavours and customize the products accordingly.

Emerging markets could be quite big in coming future and till that time, if you have good
customer base from those places, you will be in profit. I think United colors of Benetton is
doing correct while changing its strategies as per the requirement and this kind of alertness
is needed when you are in retail industry.