International Business Environment

Kshitij Awasthi
 Environmental Analysis
• The prospects of a business depend not only on its resources
but also on the environment
• Internal factors controllable
• Environment necessitates adaptability for survival and
success
• Environmental analysis is an essential prerequisite for strategic
management decision-making
• Definition “The process by which strategists monitor the
economic, governmental/legal, market/competitive, supplier/
technological, geographic, and social settings to determine
opportunities and threats to their firms”
• Gaining prominence due to complexity of environment
• More crucial for international business strategy
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 Analyzing International Business environment

Environmental Assessment

Micro Environment Macro Environment

Economic
Political-Legal
Supplies Socio-Cultural
Customers Demographic
Marketing intermediaries Natural
Public Physical and technological
International

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 Environmental Analysis: Micro vs. Macro
• “The micro environment consists of the actors in the
company’s immediate environment”
• Effect the performance of the company
• Include the suppliers, marketing intermediaries,
competitors, customers, and publics
• “The macro environment consists of the larger societal forces
that affect all the actors in the company’s micro environment
namely, the demographic, economic, natural, technological,
political and cultural forces”.

• Usually micro factors are more crucial to businesses due to their

close and direct linkages with firm; however in an international
setting macro environment is equally important.
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 Micro Environment: Suppliers & Customers
• Suppliers In an international business environment become
important
• Availability of suppliers
• Supply terms and inventory conventions
• Payment and delivery rules

• Customers may also have different

• Categories of customers and the number
• Customer preferences

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 Micro Environment: Competitors & Marketing
Intermediaries
• Competitors
• Competitive dynamics; number of players and rivalry
• Competition with substitutes
• Price sensitivity

• Marketing Intermediaries might differ in

• Channels of distribution
• Availability or lack of availability of preferred intermediaries

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 Micro Environment: Public
• “Public is any group that has an actual or potential interest in or impact
on an organization’s ability to achieve its interests”
• Media
• citizens forum
• Local community

• Becomes more important in new country as their attitude towards

businesses may be different
• They may be more aware about rights and details

• Public as environmental factor is growing in its importance steeply

specially after the coming of social media

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Macro Environment
 Assessing Environment: Economic Conditions
• “Economic conditions, economic policies and the economic system
are major constituents of the economic environment

• Economic conditions which need attention of firms for IB

• The nature of the economy
• The stage of development of the economy
• Economic resources
• The level of income
• A good economic environment assessment leads to solutions for
specific conditions like offering products for low income countries

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 Contd..
• The economic environment can be very different from one nation
to another.
• Countries are often divided into three main categories:
• The more developed or industrialized,
• The less developed or third world,
• The newly industrializing or emerging economies
• This distinction is largely based on level of economic development
like GDP, education, infrastructure, technology, health care
• Level of economic activity combined with these factors as well as
the degree of government control of the economy, affect virtually
all facets of doing business
• A firm needs to understand this environment if it is to operate
successfully internationally
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 Elements of the Economic
Environment
• Gross domestic product (GDP): the total value of all
final goods and services produced in a country in a
given year equal to total consumer, investment, and
government spending, plus the value of exports,
minus the value of imports.
 Other Features of an Economy
• Inflation
• Unemployment
• Debt
• Income distribution
• Poverty
• Labor costs
• Balance of payments
 Definition of Economic System

• A mechanism that deals with the production, distribution, and

consumption of goods and services
• Types:
• Market economy
• Command economy
• Mixed economy
Dimensions of The Economic Freedom Index
 Means of Economic Transition
• Liberalizing economic activity
• Reforming business activity
• Establishing legal and institutional frameworks
• Success is linked to how well the government deals with:
• Privatization
• Regulation
• Property right protection
• Fiscal and monetary reform
• Antitrust legislation
 Assessing Environment: Economic Policy
Government policy have huge impact of businesses; particularly for
international business

• Import policy- quota and tariff

• Protection to domestic companies in priority sector

• Monetary and fiscal policies

• Openness to private businesses

• FDI related rules and variations therein

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 Political and Legal Environment

• Political and government environment has close relationship with

the economic system and economic policy

• Political systems decide on the control on economy

• Government makes laws that regulate the conduct of business

• E.g., Food standards; environment, investment

• The rules of the game in such environment also relate to extent of

legal protection available

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 Definition of a Political System

• The complete set of institutions, political

organizations, and interest groups,
• The relationships among institutions, and the
political norms and rules that govern their functions
 Individualism vs. Collectivism

• Individualism: primacy of the rights and role of the

individual
• Collectivism: primacy of the rights and role of the
community
 Political Ideology

• The system of ideas that expresses the goals,

theories, and aims of a sociopolitical program
• Most modern societies are pluralistic—different
groups champion competing political ideologies
 Definition of a Legal System

• The mechanism for creating, interpreting, and

enforcing the laws in a specified jurisdiction
• Types:
• Common law
• Civil law
• Theocratic law
• Customary law
• Mixed systems
 Trends in Legal Systems

• The preference for stability

• The influence of national legacies
 Operational Concerns that Face
Managers Worldwide
• Starting a business
• Entering and enforcing contracts
• Hiring and firing local workers
• Closing down the business
 Strategic Concerns that Face
Managers Worldwide
• Product safety and liability
• Marketplace behavior
• Product origin and local content
• Legal jurisdiction
• Arbitration
 Intellectual Property

• Intangible property rights that are a result of

intellectual effort
• Intellectual property rights refer to the right to
control and derive the benefits from writing,
inventions, processes, and identifiers
• Local attitudes play a large role in piracy
 Analyzing International Business environment

Environmental Assessment

Micro Environment Macro Environment

Economic
Political-Legal
Supplies Socio-Cultural
Customers Demographic
Marketing intermediaries Natural
Public Physical and technological
International

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 Government Business Relation
• Government-business relationships also differ from country to
country.
• Business may be viewed positively as the engine of growth
• it may be viewed negatively as the exploiter of the workers, or
• Somewhere in between as providing both benefits and
drawbacks.
• Specific government-business relationships can also vary from
positive to negative depending on the type of business operations
involved and
• The relationship between the people of the host country and the
people of the home country

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 Some types of Government control

• Licensing

• Statutory compliance

• Disclosure requirements

• Advertising

• Anti- Competitive behavior

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 Government as resource provider
Governments not just controls but can also facilities the business

• Small scale industries

• Specific industries (Solar panels/ alternate fuel)

• Special Economic Zones (IT parks)

• Research and Development Centers

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 Changes in Political and Legal environment
• Also, governments change in different ways--
• Regular Elections
• Occasional Elections
• Death
• Coups
• War
• New legislation may come due to political factors
• One of major concern of international firms is the degree of
political risk in a foreign location
• Political risk refers to the likelihood of government activity that has
unwanted consequences for the firm.
• can be dramatic as in forced divestment, more moderate, as in
unwelcome regulations or interference in operations
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 Political and Legal Environment in India
• India is a mixed economy with elements of both capitalist and
socialist economies

• Indian government controls

• Industries Directly (Schedule A)
• Land allotment to industries
• Trade Practices (MRTP Act)
• Export and Import license
• Product standardization
• Labor laws

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 Socio-Cultural Environment
• Important yet sometimes overlooked aspect
• Many socio-cultural factors that affect business
• Buying and consumption habits of the people,
• Language,
• Beliefs and values,
• Customs and traditions,
• Tastes and preferences,
• Education
• Cost of ignoring could be very high
• To avoid that International Business strategy of the firm
should be the one that is appropriate in the socio-cultural
environment
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 Hofstede (1980) Model of Cultural values
• This model proposes four dimensions of cultural values
1. Individualism: Degree to which a nation values and encourages
individual action and decision making
• For example, in a nation that is high on individualism one
expects individual goals, individual tasks, and individual reward
systems to be effective, whereas the reverse would be the case in
a nation that is low on individualism.
2. Uncertainty Avoidance : degree to which a nation is willing to
accept and deal with uncertainty
3. Power distance : degree to which a national accepts and sanctions
differences in power
4. Masculinity : degree to which a nation accepts traditional male
values or traditional female values
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 Attention to Socio-Cultural Environment
• Same basic product, the mode of consumption, conditions of use,
purpose of use or the perceptions of the product attributes may
vary very much from one market to other
• Need to adapt the strategy to suit the environment
• Change in Marketing mix
• Promotion- advertising medium; message
• Price- preference in prices
• Product attributes- color, design,
• Place- preferred channels of distribution
• Social environment of the business ; the alertness or vigilance of
the consumers and of society at large

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 Culture

Learned norms based on values, attitudes, and beliefs

of a group of people
 Cultural Diversity

A means of gaining global competitive

advantage by bringing together people of
diverse backgrounds and experience
 Cultural Awareness

• Problem areas that can hinder managers’

cultural awareness…
• Subconscious reactions to circumstances
• The assumption that all societal subgroups are similar
 The Idea of a “Nation” – Delineating
Cultures

The nation is a useful definition of society

because:

• Similarity among people is a cause and an effect

of national boundaries

• Laws apply primarily along national lines

 The Nation as a Cultural Mediator

• A national culture must be flexible enough to

accommodate the diversity of various
subcultures, ethnic groups, races, and classes

• Yet every nation boasts certain human,

demographic, and behavioral characteristics
that constitute its national identity
 Country-By-Country Analysis

• Managers find this difficult to implement

because:
• Subcultures exist within nations
• Similarities link groups from different countries
 How Cultures Form and Change

• Change by Choice
• Reaction to social and economic situations
• Change by Imposition
• Imposed introduction into a culture of certain elements
from an alien culture
Language as Both a Diffuser and
Stabilizer of Culture

A common language within a

country is a unifying force
Major Language Groups: Population and Output
 Religion As A Cultural Stabilizer

Centuries of profound religious

influence continue to play a major
role in shaping cultural values
and behavior
 Behavioral Practices Affecting Business

• Issues in Social Stratification

• Social ranking is determined by:
• Factors pertaining to you as an
individual
• Factors pertaining to your affiliation
with certain groups
 Group Affiliations Can Be:

• Ascribed or Acquired
• Include those based on gender, family, age, caste, ethnic,
racial, or national origin

• A reflection of class and status

• Include those based on religion, political affiliation, and
professional and other associations
 Social Stratification and Employment
Practices

• Performance Orientation
• Open and Closed Societies
• Gender-Based Groups
• Age-Based Groups
• Family-Based Groups
 Work Motivation

• Materialism and Motivation

• Expectation of Success and Reward
• Performance and Achievement: The
Masculinity-Femininity Index
• Hierarchies of Needs
Hierarchy of Needs
 Relationship Preferences

• Power Distance
• Individualism Versus Collectivism
 Risk-Taking Behavior

• Uncertainty Avoidance
• Trust
• Future Orientation
• Fatalism
 Information and Task Processing

• Perception of Cues
• Obtaining Information: Low Context versus
High Context Cultures
• Information Processing
• Monochronic Versus Polychronic Cultures
• Idealism Versus Pragmatism
 Communication

• Spoken and Written Language

• Silent Language
• Distance
• Time and Punctuality
• Body Language
• Prestige
 Degree of Cultural Differences

Cultural Distance
When a company moves within a cluster of culturally
similar countries, it should expect to encounter fewer
cultural differences and to face fewer cultural
adjustments.
Cultural Friction
A business interaction may be viewed negatively
because of possible changes in power relationships and
the sovereignty that sets countries apart.
 Company and Management Orientations

• Polycentrism
• belief that business units in different countries should act like local
companies
• Ethnocentrism
• conviction that one’s own culture is superior to that of other countries
• Geo-centrism
• requires companies to balance knowledge of their own organizational
cultures with both home and host country needs, capabilities, and
constraints
 Example of Socio-Cultural variation 1

• In the U.S. market, correct weight and bacteriological factors

are more important rather than eye appeal, colour, uniformity
of size and arrangement of the shrimp which are very
important in Japan.
• Tuna fish sandwiches, an American favorite which accounts for
about 80 per cent of American tuna consumption, have little
appeal in high tuna consumption European countries where
people eat it right from the can.
• A very interesting example is that of the Vicks Vaporub, the
popular pain balm, which is used as a mosquito repellant in
some of the tropical areas.

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 Assessing Environment: Demographic Environment
• Demographic factors are important consideration as they affect the
demand pattern for goods or services
• Size of the population (India, China Vs Singapore)
• Population growth rate (negative in Japan and many European
countries like Hungary, Portugal)
• Age composition (Japan vs India)
• Life expectancy (African Countries)
• Gender ratio
• Family size
• Employment pattern
• An international business strategy necessitates to understand these
factors and respond accordingly

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Effect of Demographic Environment : Some scenarios
• A rapidly increasing population indicates a growing demand for
many products
• Consumer products; food products
• The governments of developing countries encourage labour
intensive methods of production due to labor surplus
• The decline in the birth rates, on the other hand, in countries like
the United States have affected the demand for baby products
• Johnson and Johnson repositioned their products like baby
shampoo and baby soap, promoting them also to the adult
segment, particularly to the females
• Highly heterogeneous labor in respect of language, caste
• and religion, ethnicity, etc., can make personnel management a more
complex task
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 Assessing Natural Environment

• Geographical and ecological factors are relevant to business

• Natural resource endowments,
• Weather and climatic conditions,
• Topographical factors,
• Port facilities,
• Differences in geographical conditions between markets may call for
changes in the marketing mix.
• Geographical and ecological factors also influence the location of
certain industries.
• industries with high material index tend to be located near the
raw material sources
• Earth quake prone zones need to make investment in safety

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 Effect of Natural Environment : Some scenarios

• Climatic and weather conditions affect the location of certain

industries
• The cotton textile industry.
• Topographical factors may, affect the demand pattern.
• In hilly areas with a difficult terrain, jeeps may be in greater
demand than cars.
• Ecological factors have recently assumed great importance
• Government policies aimed at the preservation of environment
have resulted in additional responsibilities for business
• Have the effect of increasing the cost of production and
marketing

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 Assessing Environment: Physical Environment
• Physical / natural Factors, may call for modifications in the
product,
• For example, Esso adapted its gasoline formulations to suit the
weather conditions prevailing in different markets.
• Business prospects depend also on the availability of certain
physical facilities. For example
• The sale of television sets, is limited by the extent of the
coverage of the telecasting.
• Demand for refrigerators and other electrical appliances is
affected by the extent of electrification and the reliability of
power supply.
• The demand for LPG gas stoves is affected by the rate of
growth of gas connections.
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 Assessing Environment : Technological Environment
• Variation in technology development levels between two countries
might have huge implications
• Modification in product or services requires to survive/grow
• Many appliances and instruments in the U.S.A. are designed for
110 volts but this needs to be converted into 240 volts in
countries which have that power system.
• Technological developments may change the demand for some
existing products
• Voltage stabilizers help increase the sale of electrical appliances
in markets characterized by frequent voltage fluctuations in
power supply
• However, the introduction of TVs, Fridges etc, with in built
voltage stabilizer adversely affects the demand for voltage
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stabilizers
 Technological Environment: Examples

• Change in acceptance of technology

• For Higher end mobile handset there was minimal demand
initially but now a big proportion of mobile sales is smart
phones in India
• Importance moved from battery life to camera to applications
• Nokia from market leader to a fringe player (specially in
smartphones)

• Internet banking
• E-commerce

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 Assessing Environment : International Environment
• As the economies are integrating; they are affecting each other in
more direct ways
• Geo-political factors; Wars; Treaties
• Recession/ Boom in foreign markets especially in large
economies
• Adoption/relaxation of protectionist policies by foreign
nations
• Particularly important for industries directly depending on imports
or exports and import-competing
• The oil crisis led to a reorientation of the Government of India’s
energy policy.
• Such developments affect the demand, consumption and
investment pattern.
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THE CAGE DISTANCE FRAMEWORK
Cultural distance
Attributes creating distance
Different languages
Different ethnicities; lack
of connective ethnic or
social networks
Different religions
Different social norms
Industries or products affected by distance
Products have high
linguistic content (TV)
Products affect cultural or
national identity of
consumers (foods)
Product features vary in
terms of size (cars),
standards (electrical
appliances), or packaging
Products carry country-
specific quality
associations (wines)
Administrative distance
Absence of colonial ties
Absence of shared monetary
or political association
Political hostility
Government policies
Institutional weakness
Government involvement is high
in industries that are
• Producers of staple goods
(electricity)
• Producers of other
“entitlements” (drugs)
• Large employers (framing)
• Large suppliers to government
(mass transportation)
• National champions (aerospace)
• Vital to national security
(telecom)
• Exploiters of natural resources
(oil, mining)
• Subject to high sunk costs
(infrastructure)
Geography distance
Physical remoteness
Lack of a common border
Lack of sea or river access
Size of country
Weak transportation
or communication links
Differences in climates
Products have a low value-of-
weight or bulk ratio (cement)
Products are fragile or
perishable (glass, fruit)
Communications and
connectivity are important
(financial services)
Local supervision and
operational requirements are
high (many services)
Economic distance
Differences in consumer incomes
Differences in costs and
quality of
• Natural resources
• Financial resources
• Human resources
• Infrastructure
• Intermediate inputs
• Information or knowledge
Nature of demand varies with
income level (cars)
Economies of standardization or
scale are important (mobile
phones)
Labor and other factor cost
differences are salient
(garments)
Distribution or business systems
are different (insurance)
Companies need to be
responsive and agile (home
appliances )
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 Analyzing International Business environment

Environmental Assessment

Micro Environment Macro Environment

Economic
Political-Legal
Supplies Socio-Cultural
Customers Demographic
Marketing intermediaries Natural
Public Physical and technological
International

66