Module III - Environment Analysis in

International Business

Dr. Arpita Shrivastava

 Global Business Trends - 2021
● McKinsey’s most recent consumer survey, published
in late October, found that countries with older
demographics, such as France, Italy, and Japan, are
less optimistic than are those with younger
populations, such as India and Indonesia. China was
an exception—it has an older population but is
conspicuously optimistic.
 Definition
Environmental analysis is defined as ―

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.

According to Coulson -Thomas (1991), “Organizations face an unprecedented range of

challenges and opportunities in the social, economic, political and business environment.
This external environment is characterized by uncertainty, surprise, turbulence and
discontinuity”.
 What and why?
Environmental diagnosis consists of managerial decisions made
by analyzing the significance of the data (opportunities and
threats) of the environmental analysis

Environmental analysis is the cornerstone of new business

opportunity analysis too.
 Tools for International Business Environment Analysis

PEST SWOT
ANALYSIS ANALYSIS

ETOP
PESTEL MODEL

PORTER’S FIVE
FORCES
MODEL
PEST Analysis
 PESTEL Model

● PESTEL model is PEST

including legal,
environmental, ethical &
demographic forces.
 Political and Legal Environment

Despite the globalization of business, firms must abide by the local rules
and regulations of the countries in which they operate.
We already discovered how US-based Google had to deal with the Chinese government’s
restrictions on the freedom of speech in order to do business in China. China’s different set of
political and legal guidelines made Google choose to discontinue its mainland Chinese version of
its site and direct mainland Chinese users to a Hong Kong version.
 Case lets - political

To protest Iraq's invasion of Kuwait in 1990, many world governments levied

economic sanctions against the import of Iraqi oil. Political considerations affect
international business daily as governments enact tariffs (taxes), quotas (annual
limits), embargoes (blockages), and other types of restriction in response to
political events.
 Impact of political instability
Businesses engaged in international trade must consider the relative instability of
countries such as Iraq, South Africa, and Honduras. Political unrest in countries
such as Peru, Haiti, Somalia, and the countries of the former Soviet Union may
create hostile or even dangerous environments for foreign businesses. In Russia,
for example, foreign managers often need to hire bodyguards; sixteen foreign
businesspeople were murdered there in 1993. Civil wars, may disrupt business
activities and place lives in danger. And a sudden change in power can result in a
regime that is hostile to foreign investment; some businesses may be forced out
of a country altogether. Whether they like it or not, companies are often involved
directly or indirectly in international politics.
A company may ask several questions regarding a prospective
country’s government to assess possible risks:

1. How stable is the government?

2. Is it a democracy or a dictatorship?
3. If a new party comes into power, will the rules of business change dramatically?
4. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national
legal document?
5. How involved is the government in the private sector?
6. Is there a well-established legal environment both to enforce policies and rules as well as to challenge
them?
7. How transparent is the government’s political, legal, and economic decision-making process?
 Example
China, has recently been threatened with severe trade sanctions because of a
history of allowing American goods to be copied or counterfeited there. As a
result, businesses engaging in international trade may need to take extra steps to
protect their products because local laws may be insufficient to protect them.
 The economic environment
Managers must monitor currency, infrastructure, inflation, interest rates, wages, and taxation. In assessing
the economic environment in foreign countries, a business must pay particular attention to the following
four area

1. Average income levels of the population. If the average income for the population is very low, no
matter how desperately this population needs a product or service, there simply is not a market for it.
2. Tax structures. In some countries, foreign firms pay much higher tax rates than domestic competitors.
These tax differences may be very obvious or subtle, as in hidden registration fees.

3. Inflation rates: Business profits fell as consumers' purchasing power was eroded by inflation. High
interest rates and unemployment reached alarmingly high levels.

4. Fluctuating exchange rates: A foreign investor may sustain large losses if the value of the currency
drops substantially.
Macro factors include:
• Employment/unemployment
• Income
• Inflation
• Interest rates
• Tax rates
• Currency exchange rate
• Saving rates
• Consumer confidence levels
• Recessions

Micro factors include:

• The size of the available market
• Demand for the company’s products or services
• Competition
• Availability and quality of suppliers
• The reliability of the company’s distribution chain (i.e., how it gets products to customers)
 Case of Zimbabwe Economic Crises 2008

https://www.youtube.com/watch?v=5Wq0yv73NpY
 Socio Culture Environment
Socio-cultural perspective is one of the most important factor influencing
decision of marketing managers and strategic goals of companies entering new
foreign markets

As populations age, for example, markets for popular music

and fashions may shrink while markets for luxury goods and
health products may increase. Additionally, changes in the
proportion of genders and different racial, religious and ethnic
groups within a society may also have a significant impact on
the way a company does business.
 Few Examples
In China, a harmonious environment is more important than day ‐to ‐day productivity. In Morocco, women can assume
leadership roles, but they are usually more self ‐conscious than American women. In Pakistan, women are not often found in
management positions, if they're in the workplace at all.

For example, the Japanese feel that work is an important part of their lives. This belief in work, coupled with a strong group
orientation, may explain the Japanese willingness to put up with things that workers in other countries would find
intolerable

Americans tend to emphasize personal growth, accomplishment, and “getting what you deserve” for performance as the
most important motivators. However, in Asian cultures, maintaining group solidarity and promoting group needs may be
more important than rewarding individual achievement

Few examples (language)

1. Coca‐Cola's English “Coke adds life” theme translated into “Coke brings your ancestors back from the dead” in
Japanese
2. In Chinese, the English Kentucky Fried Chicken slogan “finger ‐lickin' good” came out as “eat your fingers off.”
 The technological environment

The technological environment contains the innovations, from robotics to

cellular phones, that are rapidly occurring in all types of technology. Before a
company can expect to sell its product in another country, the technology of
the two countries must be compatible.
 Social / technological Environment

● With change in the consumption habits of people, Neelesh,

who was running a sweets shop shifted to chocolate
business. On the eve of Diwali he offered chacolates in
attractive packages at reasonable prices. He anticipated
huge demand and created a website chocolove.com for
taking orders online. He got lot of orders online and earned
huge profit by selling chocolates.
Identify and explain the dimensions of business
environment discussed in the above case
 Economical Environment

● A recent rate cut in the interest on loans announced by the

Banks encouraged Amit, a science student of Progressive
School to take a loan from State Bank of India to
experiment and develop cars to be powered by fuel
produced from garbage. He developed such a car and
exhibited it in the Science Fair organized by Directorate of
Education. He was awarded first prize for his invention.
Identify and explain the dimensions of business
environment discussed in the above case?
 Technological environment

 Ten years ago, consumers wanted businesses to market

their products and services on TV, radio and in
newspapers. But after the introduction of the iPhone
and the emergence of social media, consumer
preferences changed. Audiences have now become
more mobile, which means that to reach them,
companies have had to develop mobile marketing
strategies.
1. With the election of a new government the sensex drops by
748 points.
2.A particular channel refrains from showing the advertisement
of a particular product as it is banned by the government.
3. A software is in high demand among the industrial buyers as
it can connect all the branches of a company as a single
integrated unit.
4. At the time of holi a large number of manufacturing firms get
involved in making colours which are used in the celebration
of this colourful festival.
5. It is not advisable to open a luxury car showroom in the
middle of an economy where per capita income is very low
 SWOT Analysis Strategies
In the process of adaptability analysis, enterprise top management should be based on the determination of internal and external variables, using
leverage, inhibitory, vulnerability, and problematic four basic concepts to analyze this model.

1. Leverage (S + O). Leverage effects arise when internal and external opportunities are consistent and adaptive to one
another. In this situation, companies can use their internal advantages to pick up external opportunities and fully
integrate opportunities and advantages. However, opportunities are often fleeting, so companies must sharply capture
opportunities and seize the opportunity to seek greater development.

2. Inhibitory (W + O). Inhibiting means impeding, preventing, influencing and controlling. When the opportunities provided
by the environment are not suited to the internal resource advantages of the company, or cannot be overlapped with
each other, the advantages of the enterprise will no longer be realized. In this situation, companies need to provide and
add certain resources to promote the transformation of internal resources and disadvantages into advantages to cater to
or adapt to external opportunities.

3. Vulnerability (S + T). Vulnerability means the decrease or decrease in the degree or intensity of advantages. When
environmental conditions pose a threat to the company’s strengths, the advantages cannot be fully exerted and ending
up with a fragile situation. In this situation, companies must overcome the threats to take advantage of them.

4. Problematic (W + T). When the company’s internal weaknesses and corporate external threats meet, companies face
severe challenges. If they are not properly handled, they may directly threaten the survival of the company.
 Environmental Threat & Opportunities Profile
- ETOP

ETOP analysis is a management tool DEVELOPED BY GLUECK that analyses

environmental information and determines the relative impact of threats and opportunities
for the systematic evaluation of the environment.

ETOP process involves dividing the environment into different environmental sectors and
then analyzing the impact of each sector on the organisation.

ETOP gives a clear picture to the strategies about each aspect of the business
environment, the various individual factors within each sector which affect the business
favourably or otherwise.
Environment Threat and Opportunity Profile
PORTER’S FIVE FORCES MODEL

5 forces model was created by the Michael Porter in 1979 to understand

how 5 key competitive forces are affecting the industry.
 Bargaining power of suppliers

Strong bargaining power permits the suppliers to sell the higher priced or the low-
quality raw materials to their buyers. This directly affects a buying firms’ profits because
it has to pay more for the materials.

The Suppliers have strong bargaining power when:

There are few suppliers but many buyers;

Suppliers are large & threaten to forward integrate;
Few substitute raw materials exist;
Suppliers hold scarce resources;
Cost of switching raw materials is especially high.
 Bargaining power of buyers

the power to demand a lower price or a higher product quality from the industry producers when their
bargaining power is strong. Lower price means the lower revenues for the producer, while the higher
quality products usually raise the production costs. Both scenarios result in lower profits for producers.
Buyers exert strong bargaining power when:

Buying in large quantities or control many access points to the final customer;
Only a few buyers exist;
Switching costs to other supplies are low;
They threaten to backward integrate;
There are many substitutes;
Buyers are price sensitive
 The threat of substitutes

This force is especially threatening when buyers can easily find substitute products with
attractive prices or better quality & when buyers can switch from one product or service to
another with little cost. For example, to switch from a coffee to tea doesn’t cost anything,
nothing like switching from the car to a bicycle.
 Competitive Rivalry

Rivalry among existing competitors: This force is the major determinant of how
competitive & profitable an industry is. In the competitive industry, the firms have to
compete hostilely for a market share, which results in low profits.
Rivalry among the competitors is intense when:

There are many competitors;

Exit barriers are high;
Industry of growth is slow or negative;
Products are not differentiated & can be easily substituted;
Competitors are of equal size;
Low customer loyalty.
 Coca-Cola – Competitive analysis

1. Threat of New Entrants/Potential Competitor:

Medium Pressure
Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant market share
for a long time and loyal customers are not very likely to try a new brand

2. Threat of Substitute Products:

Medium to High pressure
There are many kinds of energy drink s/soda/juice products in the market. Coca-cola doesn’t really have
an entirely unique flavor. In a blind taste test, people can’t tell the difference between Coca-Cola and
Pepsi
 3. The Bargaining Power of Buyers:
Low pressure
● The individual buyer no pressure on Coca-Cola
● Large retailers, like Wal-Mart, have bargaining power because of the large order quantity, but the bargaining
power is lessened because of the end consumer brand loyalty.

4. The Bargaining Power of Suppliers:

Low pressure
● The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, and
caffeine. The suppliers are not concentrated or differentiated.
● Coca-Cola is likely a large, or the largest customer of any of these suppliers.

5. Rivalry Among Existing Firms:  

High Pressure
Currently, the main competitor is Pepsi which also has a wide range of beverage products under
its brand. Both Coca-Cola and Pepsi are the predominant carbonated beverages
and committed heavily to sponsoring outdoor events and activities.
 Conclusion

Every launch or international expansion carries a certain amount of risk that, while it
cannot be completely avoided, it can certainly be mitigated by extensive research,
curiosity for the world we live in and an appreciation for general knowledge that leads us
to read and engage with the rest of the world. While retrieving information is easier than
it has ever been, discerning authoritative material from misleading information can be
tricky, so using and researching multiple sources both online and in paper format is
essential. With regards to information on political issues this is even more important
since political issues can very easily become partisan issues and view the facts though
the powerful lenses of political ideology. Although not an easy task, understanding the
political environment through the PESTEL analysis and building strategic scenarios
based on political realities in the markets a company is targeting, is a fundamental step
in creating a solid international business strategy.