The International Business Environment

Overview of the International Business Environment

International business offers substantial potential risks and returns from an organizational
perspective.

LEARNING OBJECTIVES

Recognize the complex factors that may impact an organization’s strategic decision to expand
internationally

KEY TAKEAWAYS

Key Points

• The modern economy is globally connected, and growing more so every day. Weighing
the pros and cons of international expansion is a key strategic consideration.
• The multinational enterprise ( MNE ) is the primary player in international business.
MNEs are present in virtually every industry nowadays.
• Entry modes for international businesses include global concentration, global synergies,
and other strategic global motivations.
• With the complexity of international operating environments, organizations should
consider economic, technological, legal, socio-cultural and environmental factors.
• Weighing the risks and potential returns and determining a required rate of return for an
international expansion is a key aspect of global financial management.

Key Terms

• MNE: Or a multinational enterprise, MNEs are defined as organizations which operate

across multiple political borders.

International business is an enormously relevant facet of the modern economy, and will only
become more integrated into core business strategy as technology continues to progress.
International business is simply the summation of all commercial transactions that take place
between various countries (crossing political boundaries). This is not exclusively limited to the
domain of business, as NGOs, governments, and coops also operate across country borders with
a variety of objectives (aside from simple profitability).

From a business perspective, the primary incumbent in an international business environment is

the multinational enterprise (MNE), which is a company that pursues strategic success in global
production and sales (i.e. operating within a number of country borders). The number of
examples of this type of firm is constantly growing. From fast food chains like McDonald’s to
auto manufacturers like Honda to smartphone designers like Samsung, the number of
international players in most markets is constantly on the rise.

Why Expand Globally?

Global expansion is costly and complex. To offset these costs and risks, organizations must have
strong reasons for developing a global strategy. These reasons generally fit one (or more) of the
following three strategic areas:

• Global Concentration – Depending upon the competitive concentration of a given industry

in a given region, it may make sense to enter a market where competition is relatively
scarce (and demand is high).
• Global Synergies – Some organizations have highly developed competencies that are
easily scaled. In these situations, global expansion means natural synergy.
• Global Strategic Motivations – Other reasons for expansion to a given country may exist
strategically, such as developing new sourcing sites for production or acquiring strategic
assets in a given region.

External Factors Impacting Expansion

International expansion can be a costly and complex procedure. Before considering such a
significant strategic move, management must weigh the external factors that will impact success
during a global transition. These include:

• Socio-cultural: The social environment of a given region can have a significant impact on
success. Food companies are highly impacted by this – certain cultures prefer certain types
of foods.
• Geographic/Environmental – For example, skiing equipment may not do so well in regions
without snow or mountains. Oil companies can only source oil from resource-rich regions.
• Legal/Political – Some countries have high barriers to entry, complex tax rates, and/or
unclear legislative practices. Ease of doing business is critical here.
• Economic – The standard of living is different from region to region, and recognizing the
value of a given market in terms of spending power, currency, and market size is critical to
deciding upon expansion.
• Technology – Access to internet, electricity, clean water and a variety of other
technological dependencies must be considered prior to entry if the organizational
operations rely on easy access.

Weighing the pros and cons of entering a given reason, and calculating projected cash flows,
costs, and required returns on investment are central financial considerations to entering a new
international market.
Volume of Merchandise Exports: Despite a dip in 2008 as a result of the banking crisis and
subsequent recession, the volume of global exports continues to rise even over this short time
period. Globalization is an enormous source of growth.
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environment/

Major factors affecting International Business

International business:

International business refers to all commercial activities such as trade of goods, services,
technology, knowledge and capital across national borders. The cross border transactions take
place between individuals, business firms and government agencies (International Business,
2019). Thus, international business refers to cross border transactions of goods and services
taking place between two or more countries. Also, International business occurs in different
forms:

• Cross border transactions of goods and services from one country to another
• Contractual agreements to use products, services and processes of other nations
• Operating sales, manufacturing, research and development activities in foreign markets.
Multinational corporation (MNC):

MNC is a corporate organization that has its operations and facilities in more than one country.
MNC is a large corporation which produces and sells its goods and services in number of
countries. Generally, MNC firm has a centralized head office and number of offices in other
countries. Thus, MNC’s are large size firms that have their operations in number of countries and
all the operations are centrally controlled by parent company ("Multinational Corporations
(MNCs)", 2019). For instance, Woolworths is a large MNC that has its operations in New Zealand,
Africa, Asia, Europe and Australia with its headquarter in Australia (Woolworths International,
2019). Further, Woolworths has 59 stores in 11 countries (Khumalo, 2016).

Various companies are involved in transacting their goods, services and capital across the
national borders and are affected by number of factors. various restrictions are also imposed on
companies that are transacting their business at international level. various internal and
external factors directly impact the working of these business firms. Various external
environment factors directly affecting the working of large MNCs include social conditions of
economy, political and legal factors, etc. However, internal factors can be controlled by the
management team of companies by taking various strategic initiatives.

Following is the detail discussion on various external factors that are affecting the working of
international corporations:

• Political factors:

Various political factors affect the international factors. Political factors such as changes
in tax rates, policies and actions of government, political stability of country, foreign
trade regulations etc. affects the working of an international business firm. Lack of
political stability in the country directly impacts the operations of business firm. Also,
various tax policies and government initiatives sometimes hinders the expansion of
business in other countries. Thus, effective political environment of business influences
the growth of business firm (Shaw, 2018).

• Economic factors:

Economic factors relates to the economic system of the country where the firm has its
operations. Various econocmi factors such as inflation rate, interest rate, income
distribution, employment level, allocation of government budget, etc., directly impacts
the operations of business firm (NDUNGU, 2012). Various economic factors such as
purchasing power of customers also determines the demand of various products and
services.

• Legal factors:

Legal factors relate to the legal environment of the country in which firm operates.
Different laws prevail in different countries and international business firms have to abide
by the laws of each country. Laws relating to age and disability discrimination, wage
 rates, employment and environment laws affects the working of business firms. Along
with this, various international lending agencies affects the legal culture and working
policies of business firm

• Social factors:

Social factors such as education, awareness and trends and status of people in the society
affects the consumer behavior to purchase various goods and services. Also, Social
environment and culture such as customs, lifestyles and values differs from country to
country which further directly impacts the international business.

• Environmental factors:

Environment factors such as weather, climate change, temperature etc. affects the
business firm and the demand pattern of various goods and services. increasing
environment awareness has made this external environment factor a significant issue to
be considered by business firms. Move towards environment friendly products and
services also has affected the demand pattern of various goods and services.

• Technical factors:

Technological changes in the industry has both positive and negative impacts on the
working of business firms. Technological changes and development of automated work
processes helps in increasing the efficiency of business processes. However,
technological changes also threaten the demand of various products and services in the
industry

Taking an example of Woolworths:

PESTEL ANALYSIS DETAIL

POLITICAL FACTORS The head office of Woolworths is located in Australia
and there are close economic relations exist between
Australia and New Zealand which provides various
profitable work opportunities to
Woolworths. Political stability exists in the countries
where Woolworths has its operations. Also, lowering
rate of corruption in Australia will further increase
 the profitability of Woolworths. following figure
shows the corruption index in Australia:
ECONOMIC FACTORS Woolworths operates in economically sound and
stable work environment which helps in stabilizing
the sales and profit of the business firm. Also, there is
rising disposable income of consumers in Australia
which further will be a positive growth indicator for
Woolworths. However, various economic factors
such as recession has impacted the financial position
of Woolworths by causing the factors that led to the
closure of retail stores in UK. This further affected
the overall sales growth of Woolworths.
SOCIAL FACTORS Rising trend of healthy and sustainable options has
influence the working of Woolworths. Woolworths
has successfully met the needs of large customer
base by providing and delivering fresh fruits and
vegetables to its customers. Woolworths also had
developed its online portal to provide for online and
convenient shopping experience to customers. Along
with this, Woolworths has started its sustainable
strategies to meet the needs of green customers.
TECHNICAL FACTORS Woolworths also had adopted number of
technological innovations as a result of various
technological trends in retail sector to improve the
quality of its products and services. woolworths in
current times has introduced Visa Paywave to
improve the convenience of customers in shopping
and to reduce the waiting time of customers in long
queue. Along with this, Woolworths has installed
self-check out machines to reduce the chance of
thefts being taking place (Ahillon, 2019).
ENVIRONMENT FACTORS Rising awareness among customers about
environment sustainability has influenced various
operations of retail firms. Various environmental
laws have also been established to reduce negative
impacts on environment. Woolworths has
adopted number of environment friendly business
practices with the aim to reduce negative impacts on
environment. Various recycling and ethical sourcing
practices have also been adopted by Woolworths to
comply with various environmental regulations.
LEGAL FACTORS Various taxation policies and food licensing
requirements also affects the working of food and
grocery stores. Also, Woolworths has to comply with
various employee related regulations and fair work
act policies to keep its employee satisfied with
various work policies ("Employment & labour law in
Australia | Lexology", 2019). Woolworths also has
developed number of policies to comply with changes
in various laws relating to employment, competition,
 product safety, environment protection etc.

SWOT ANALYSIS:

SWOT analysis is one of the most important business analysis tool that helps in understanding
the internal and external business environment of a firm. SWOT analysis refers to the framework
that involves analysis of the competitive position of the business firm which further is useful in
conducting strategic planning for business firm. Thus, SWOT analysis is a strategic planning tool
that helps in identifying the internal and external environment factors of business firm. Internal
environment analysis of business firm involves analysis of the strengths and weaknesses of a
business organization that are also within the control of business firm. External analysis includes
analysis of opportunities and threats of business organization which are external to business firm.
Thus, it has been identified that business firms by applying SWOT analysis can identify various
competencies and characteristics of business organization. Following is the detailed analysis of
various elements of SWOT analysis:

• Strengths:

Strengths are internal attributes of the company that helps in achieving strategic business
position through distinct competencies. Various strengths of business firm include strong
employee attitude, excellent customer service, established brand image etc.

• Weaknesses:

Weaknesses are the internal constraints of business firm that stops an organization to
achieve the competitive position in industry. Thus, weaknesses are the areas which needs
improvement by the business firm. For instance, weak brand image and lack of capital of
business firm restricts the business to achieve competitive advantage (Parsons, 2019).

• Opportunities:

Opportunities are the favorable external factors that can help business firm to achieve
competitive advantage. For instance, expanding business in untapped markets and
gaining large number of customers is a good opportunity for business firm.

• Threats:

Threats refers to negative external environment forces that can harm a business
organization. Business firms lack control over external environment threats which may
 cause number of problems and difficulties for business firm. For instance, change in
behavior of consumers or entry of new firms in industry (SWOT, 2019).
Taking example of Woolworths:
STRENGTHS
Well known retail brand with
larger market share in industry.
Offers Diverse range of products
and services under one roof
Strong brand image and
reputation
Strong brand image and
reputation
Leading position in retail market
Economics of scale due to
operations at large scale
Lower bargaining power of
suppliers
Convenient shopping experience
to consumers
WEAKNESSES OPPORTUNITIES
Lack of presence in Expanding business in
other economies developing economies
Lack of brand Decreasing cost of
awareness among local distribution and increasing
people profit margins
Low pricing of products Expanding product base by
offering gluten free and
organic products
Expanding customer base
Promoting goods over
social media and other
online channels
THREATS
Reduction in
purchasing power of
customers through
global recession
Increase in cost of
various raw materials
Huge competition
from other dominating
retail firms
Increase in prices of
organic produce
New regulations by
government
authorities
Micro factors affecting business- Internal influences on a business

Micro environment of business includes various internal environment factors of business firm
that affects the performance and decision making of an organization. various micro environment
factors of international business include customers, competitors, distribution channels, suppliers,
public, etc. Thus, micro environment factors are factors that exist in the immediate operation
environment of business and directly impacts the operations of business organization. Micro
factors of business also involve various factors relating to resource availability and usage of
resources (Pratap, 2019). Following is the detail discussion of various micro environment factors
of business:

• Impact of customers on business:

Customers are important micro environment factor of business that impacts the
operations of business organization. Customers have gained lot of importance in 21st
century. Business firms in current times cannot successfully run a business without
fulfillment of needs and wants of customers. Also, customer preferences changes at
regular pace which influences the working of business firms (Seidel, 2019). Thus,
customer focus and engagement have become key factor for business firm to be
considered while determining the type of products and services to be offered to
customers. Customer engagement also influences the competitive position of business firm .
For instance, Woolworths has taken various initiatives to provide convenient services to
customer. Woolworths also has developed online portal to provide convenient shopping
facility to customers. Various store innovation has also been done by Woolworths to
ensure that customer do not face any difficulty in shopping. Woolworths also ensures that
customers get fresh fruits and vegetables. Along with this, Woolworths is known for
providing superior services to customers at reasonable prices. All these initiatives have
helped Woolworths to achieve competitive position in industry. In addition to this,
Woolworths also has adopted number of rapid prototyping techniques to try new ideas
with customers and to gain their feedback from customers regarding various products and
services (Woolworths Innovation Lab, 2019).

• Suppliers factors affecting business:

Suppliers provides various raw materials, technology, human resources and other
components to the company. international business firms operate on large scale and
procure resources and other supplies from number of suppliers. It is must for international
business firm to have well managed supply chain. Business firms should remain in touch
with various suppliers to reduce their operational cost and to ensure that various raw
materials required in business are readily available (HQ, 2015). However, growing
concern for quality products and need for sustainable and ethical products has increased the
bargaining power of number of suppliers. Location, price charged by suppliers, quality of
products provided by suppliers etc. affects the selection of suppliers by the business firm.
Also, price charged by various suppliers directly impacts the cost structure of various
goods produced by the business organization. For instance, Woolworths has developed
effective supply chain management system by developing effective relations with number
of suppliers and procuring timely supplies from suppliers. Various products of suppliers
 such as fresh fruits and vegetables are directly stored in the retail stores of the company.
Thus, Woolworths ensures that fresh and quality produce is procured from suppliers.

• Competitors factors affecting business:

Various competitive factors also affect the working of company. Large number of
competitors exist in the industry and initiatives undertaken by competitors directly
influences the working of company. Market share of the competitors also affects the
profitability of business firm. However, larger competition in the market signified huge
demand for the product in the market. Products and services provided by competitors also
creates new demand trends in the industry by creating demand for new products and
services which further reduces the demand of firm products and services in the industry.
Rapid change in the needs of customers is also the result of actions taken by competitors.
This further influences the business organization to bring some innovation and develop
products according to the needs of customers ("Competitive Forces Affecting Business
Environment", 2019). Thus, it is must for business firms to provide differentiated
products to customers to gain larger market share. For instance, Woolworths has reduced
its prices as a result of reduced prices of ALDI and coles stores. Also, Woolworths also
has taken number of initiatives to move toward more uniform pricing policies
("Australia's food & nutrition", 2012).

• Industry rivalry affecting business:

Rivalry among the existing competitors also affects the operations of business firms.
Behavior of competitors affects the operations of business organization. Competitive
rivalry also pressurizes business firms to offer quality produce to customers at reasonable
prices. Also, competitive rivalry influences business firms to increase their spending on
product and service innovation. For instance, huge competition exists in the retail
industry and various dominating firms such as Coles supermarkets, Wes farmers, ALDI,
etc. are competing against one another to achieve higher market share in the retail
industry ("Woolworths's Competitors, Revenue, Number of Employees, Funding and
Acquisitions", 2019).

• Porter 5 forces analysis

porter 5 force analysis is one of the important framework that helps in evaluating the
competitive position of business firm. Various factors influence the profitability of
business firm. Rivalry among existing competitors, chance of entry of new firms,
availability of substitute products, availability of customers and suppliers etc. directly
affects the profitability of business organization (CHAPPELOW, 2019). Porter 5 forces
are the competitive forces that helps in determining the strengths and weaknesses of
business firm. Also, these five forces helps in developing corporate strategies for business
organization. following is the detail description of porter five forces:
• Competition in industry:

Competition in the industry refers to the number and ability of competitors existing in the
industry. Huge competition in the industry and number of equivalent products and
services lowers the power of business firm. However, lower rivalry among existing firms
helps business firm to charge higher price for various products and services from
customers.

• Threat of new entrant:

This relates to the potential of other firms to enter the industry. lower time and money
required in setting up the business increases the threat of new entrants being faced by the
company. Lower potential of other firms to enter the industry increases the power of
existing firms to charge competitive price from customers.

• Bargaining power of suppliers:

It refers to the ability of company suppliers to charge higher price for inputs served to the
business organization. Number of suppliers, quality and uniqueness of supplier products
and switching cost of company to other suppliers impacts the bargaining power of
suppliers in industry. Fewer suppliers in industry increases the bargaining power of
existing suppliers.

• Bargaining power of customers:

Bargaining power of buyers refers to the ability of buyers to lower the price of products
and services being offered to them. Number of business firms, number of buyers, amount
of purchase, switching cost to other organizations etc. determines the bargaining power
enjoyed by the buyers.
 • Threat of substitute products:

Substitute products refers to goods that can be substituted in place of other products and
services. Availability of substitute produces increase threat of substitute being faced by
business firm. Availability of substitute goods also determine the price of goods charged
by the company.

Following table shows the porter five force analysis model for Woolworths:

PORTER FIVE FORCES DETAIL

Competition in the industry
Huge competition exists among dominating
firms in retail sector in New Zealand and
Australia. Coles, ALDI, Wes farmer and
Woolworths are some of the dominating firms in
retail industry. These firms compete against each
other to capture larger share in market and to
increases their profitability.

Threat of new entrants
Threat of new entrants is relatively low for the
Woolworths due to development of leading
positon in the industry. Also, huge investment is
required in setting up chain of grocery stores
which further lowers down the threat of new
entry being faced by Woolworths.

Bargaining power of Woolworths and Coles holds around 80 % of

suppliers market share in Australian retail industry. The
larger part of supply produce in Australia is
purchased by these firms which provides that
Woolworths and Coles are major purchaser of
supplier produce in Australia. Also, Woolworths
has maintained effective relation with various
suppliers. This provides that bargaining power of
Woolworths suppliers is moderate.
 Bargaining power of buyers Presence of large number of retail firms
operating in Australia and other countries
increases the bargaining power of customers.
Customers make purchase decision for various
grocery items by comparing the price charged by
various retail organizations. Woolworths has
charged reasonable prices for its quality and
fresh produce which reduces the bargaining
power of buyers. Also, online portal offers fixed
pricing system to customers. Thus, bargaining
power of Woolworths customers is moderately
low.

Threat of substitute products Threat of substitute products is relatively

moderate for Woolworths as retail and dairy
products are available at various retail stores.
However, Woolworths offers fresh produce to
customers which induces customer to purchase
products of Woolworths.

Internal Factors affecting business:

Internal factors are factors within the control of company and are referred to both tangible and
intangible factors of organization which influences the strengths and weaknesses of an
organization. Various internal factors that affects an organization are discussed as follows:

• Human resources:

Human resources are one of the biggest treasure of an organization as whole operations to
the company depends on its human resources. Effective and hardworking staff members
helps in achieving competitive position in the industry whereas lack of skilled staff
members reduces the profitability of business organization and may lead to closure of
business (Internal & External Environmental Factors, 2019). Thus, working of an
organization depends on efficiency, effectiveness, performance and skill base of staff
members. Further, Woolworths has hired more than 11500 employees in its operational
departments to ensure that best quality of services are provided to customers.

• Financial resources:

Financial resources refers to the funds available with the company to carry out various
operations in the organizations. Funds are the base for growth and competitive position in
the industry. Lack of availability of this resource leads to failure and closure of business
organization. Woolworths has gained revenue of $39.568 billion in 2019.
 • Innovation capabilities:

innovation refers to the ability of business organization to introduce new ideas into the
business operations. Innovation capability is also one of the important factor that affects
the operations of business organization. For instance, Woolworths has made use of its
innovation capability in all its operations to increase its reputation in the industry and to
provide convenient services to customers.

• Organizational structure:

Type of organization structure shapes the employee behavior in organization and also
influences the type of communication taking place in organization. Team based structures
helps in free flow of information (Johnson, 2019). Woolworths has adopted hierarchy
based organization structure to maintain control of managers over all the operational
activities and to ensure that all rules and regulations are strictly followed in organization.

• Value proposition:

Value proposition is the belief of customers as to how the products and services of
organization will meet the expectations of customers. Value proposition also influences
customers to purchase goods from the organization. Currently, Woolworths price based
marketing campaign has helped in achieving “cheap cheap” slogan for the new value
proposition.

VRIO ANALYSIS:
VRIO analysis refers to the analytical technique used to evaluate the resources of an organization which
further helps in analyzing the competitive advantage of business in the industry (Frue, 2017). Following
table shows the overview of each term:

RIO ANALYSIS DETAIL

Valuable Valuable resources of an organization helps in exploiting the
opportunity and also helps in mitigating various threats that
can be faced by organization.
Rare Rare resources are strengths to an organization and can lead
to competitive advantage. Thus, these are the resources
which are valuable to organization and are unique among
number of competitors.
Imitable Imitable are resources that are difficult to be acquired by
other firms in industry
Organization Organization that has valuable, rare and imitable resources
must manage and organize its resources to achieve
competitive advantage and to exploit all the available
resources.
VRIO analysis of Woolworths:

Competitive
Resources Valuable Rare Imitable Organized implication
Financial resources Yes Yes Yes Yes Permanent competitive
advantage

Fresh produce and Yes No No No Temporary competitive

Differentiated products advantage

Employees Yes Yes No Yes Temporary competitive

advantage

Distribution network Yes yes Yes Yes Permanent competitive

advantage

Patents Yes Yes Yes No Competitive parity

Brand name Yes Yes No Yes Sustained competitive
advantage
Customer service Yes No No Yes Temporary competitive
advantage

Marketing Yes Yes No Yes Temporary competitive

advantage

Financial services Yes Yes No No Temporary competitive

advantage

The above VRIO analysis of Woolworths provides that financial resources of Woolworths are organized
enough to capture value and huge competitive advantage in the industry. The distribution network of the
company is also effectively organized which helps in procuring sustainable and ethical resources from
number of suppliers. The employees of the organization are rare resource as all the employees are highly
trained. Woolworths provides better compensation packages to its employees to retain the existing staff
members in the organization. However, it has been identified that Woolworths has failed to effectively
organize its number of resources such as patents and financial services which offers only temporary
competitive advantage to the industry.

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