Chapter 2

INTERNATIONAL BUSINESS
ENVIRONMENT
INTERNATIONAL BUSINESS ENVIRONMENT

• Environment literally means the surrounding,

external objects, influences, or circumstances
under which someone or something exists.
Davis Keith defines the environment of
business as “the aggregate of all conditions,
events and influences that surround and affect
it.
INTERNATIONAL BUSINESS ENVIRONMENT

• There are two sets of factors- internal and

external – which influence the business policy
of an organization. The internal factors are
known as controllable factors because the
organization has control over these factors. The
business can modify or alter such factor to suit
the environment. The external factors are
known as uncontrollable factors and legally
beyond the control of the individual enterprise.
INTERNATIONAL BUSINESS ENVIRONMENT

• The internal environment consists of a large number of factors

which contribute to the success or failure of an organization. It
refers to all the factors within an organisation, which impart
strength or create weaknesses of a strategic nature. Strength
is an inherent capacity of an organization which can be used
to gain strategic advantage over its competitors.
• On the other hand, the weakness of an organisation refers to
its inherent limitation or constraint which creates a strategic
disadvantage. Some of the important internal factors include
organizational resources, research and development and
technology capabilities, financial capabilities, marketing
capabilities, operations capabilities etc.
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• The term “business environment” generally refers
to the external forces, factors and institutions that
are beyond the control of the business and they
affect the functioning of a business enterprise and
include factors outside the firm which can lead to
opportunities for or threats to the firm.
• Although there are many external factors, the
most important factors include customers,
competitors, suppliers, government, and the
social, political, legal and technological factors etc.
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• As firms expand to international markets, structural
and environmental complexity and uncertainty
increases, requiring managers to focus on the impact
of the international business environment on their
firms’ operations. International business environment
is different from domestic business environment
because the environment changes when a firm crosses
international borders.
• Typically, a firm understands its domestic environment
quite well, but is less familiar with the environment in
other countries and must invest more time and
resources into understanding the new environment
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• Therefore, IBE is multidimensional
encompassing political risks, cultural
differences, exchange risks, legal and taxation
issues and technological environments
 Political Environment
• The political environment refers to the type of government, the
government relationship with business,
• Doing business internationally means dealing with different types
of governments, relationships, and levels of risk. The political
environment in a country influences the legislations and
government rules and regulations under which a foreign firm
operates.
• Every country in the world follows its own system of law. A foreign
company operating in that particular country has to abide with its
system of law as long as it is operating in that country. Countries
can be classified as free-market, centrally planned, or mixed.
• Free-market economies are those where government intervenes
minimally in business activities, and market forces of supply and
demand are allowed to determine production and prices.
 Economic Environment
• The economic environment relates to all the factors that
contribute to a country’s attractiveness for foreign
businesses. 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, and
the newly industrializing or emerging economies. Within
each category there are major variations, but overall the
more developed countries are the rich countries, the less
developed the poor ones, and the newly industrializing
(those moving from poorer to richer). These distinctions
are usually made on the basis of gross domestic product
per capita (GDP/capita).
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• While analyzing the economic environment, the organization
intending to enter a particular business sector may consider
the following aspects:
 Economic system to enter the business sector.
 Stage of economic growth and the pace of growth.
 Level of national and per capita income.
 Incidents of taxes, both direct and indirect.
 Infrastructure facilities available and the difficulties thereof.
 Availability of raw materials and components and the cost
thereof.
 Sources of financial resources and their costs.
 Availability of manpower-managerial, technical and workers
available and their salary and wage structures
 Technological Environment
• The technological environment comprises
factors related to the materials and machines
used in manufacturing goods and services.
Receptivity of organizations to new technology
and adoption of new technology by consumers
influence decisions made in an organization. As
firms have no control over the external
environment, their success depends upon how
well they adapt to the external environment.
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• Technology often is seen as giving firms a
competitive advantage; hence, firms compete
for access to the newest in technology, and
international firms transfer technology to
be globally competitive.
 Cultural Environment
• The cultural environment is one of the critical components of
the international business environment and one of the most
difficult to understand. This is because the cultural
environment is essentially unseen;
• it has been described as a shared, commonly held body of
general beliefs and values that determine what is right for one
group, according to Kluckhohn and Strodtbeck. National
culture is described as the body of general beliefs and values
that are shared by a nation.
• Beliefs and values are generally seen as formed by factors such
as history, language, religion, geographic location,
government, and education; thus firms begin a cultural
analysis by seeking to understand these factors.
 Competitive Environment
• the competitive environment also changes from
country to country. This is partly because of the
economic, political, and cultural environments;
these environmental factors help determine the
type and degree of competition that exists in a
given country. Competition can come from a variety
of sources. It can be public or private sector, come
from large or small organizations, be domestic or
global, and stem from traditional or new
competitors. For the domestic firm the most likely
sources of competition may be well understood.
 Cont…
• For example, in the 1990s in the United States
most business was privately owned and
competition was among private sector
companies, while in the People’s Republic of
China (PRC) businesses were owned by the
state. Thus, a U.S. company in the PRC could
find itself competing with organizations
owned by state entities such as the PRC army.
This could change the nature of competition
dramatically.
 TOOLS FOR INTERNATIONAL BUSINESS
ENVIRONMENT ANALYSIS
• 1. PEST ANALYSIS PEST analysis is an analysis of
the political, economic, social and technological factors
in the external environment of an organisation, which
can affect its activities and performance.
• It is a part of the external environmental analysis, and
gives an overview of the different macro environmental
factors that the company has to take into consideration.
It is a useful strategic tool for understanding market
growth or decline, business position, potential and
direction for operations
 1. PEST ANALYSIS

• P- Political factors are basically to what degree

the government intervenes in the economy.
Specifically, political factors include areas
such as tax policy, labour law, environmental
law, trade restrictions, tariffs, and political
stability. Political factors may also include
goods and services which the government
wants to provide or be provided (merit goods)
and those that the government does not want
to be provide
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2. E- Economic factors include economic growth, interest rates,
exchange rates and the inflation rate. These factors have major
impacts on how businesses operate and make decisions. For
example, interest rates affect a firm’s cost of capital and
therefore to what extent a business grows and expands.
Exchange rates affect the costs of exporting goods and the
supply and price of imported goods in an economy.
3. S- Social factors include the cultural aspects and include
health consciousness, population growth rate, age distribution,
career attitudes and emphasis on safety.
For example, an aging population may imply a smaller and less-
willing workforce (thus increasing the cost of labor).
Furthermore, companies may change various management
strategies to adapt to these social trends (such as recruiting older
workers.
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• T- Technological factors include technological
aspects such as R&D activity, automation,
technology incentives and the rate of
technological change.
• They can determine barriers to entry,
minimum efficient production level and
influence outsourcing decisions. Furthermore,
technological shifts can affect costs, quality,
and lead to innovation.
 Benefits of PEST Analysis
• is useful for four main reasons:
• – It helps to spot business or personal opportunities,
and it gives advanced warning of significant threats.
• – It reveals the direction of change within the business
environment. This helps to shape the business
accordingly.
• – It helps avoid starting the projects that are likely to
fail, for reasons beyond the control of firms.
• – It helps to develop an objective view of new
environment while entering a new country, region, or
market.
 SWOT ANALYSIS
• It is an analysis of an organization's strengths and
weaknesses alongside the opportunities and threats
present in the external environment.
• It involves the collection and portrayal of
information about internal and external factors
which have, or may have, an impact on business. It
is a framework that allows managers to synthesize
insights obtained from an internal analysis of the
company’s strengths and weaknesses with those
from an analysis of external opportunities and
threats. SWOT is an acronym which stands for
 SWOT ANALYSIS
1. Strengths: factors that give an edge for the company
over its competitors.
2. Weaknesses: factors that can be harmful if used
against the firm by its competitors.
3. Opportunities: favorable situations which can bring
a competitive advantage.
4. Threats: unfavorable situations which can negatively
affect the business. Strengths and weaknesses are
internal to the company and can be directly managed
by it, while the opportunities and threats are external
and the company can only anticipate and react to them
 Benefits of SWOT
SWOT tool has 5 key benefits:
– Simple to do and practical to use;
– Clear to understand;
– Focuses on the key internal and external
factors affecting the company;
– Helps to identify future goals;
– Initiates further analysis.
 Cont,…

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Externa
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• End of chapter 2