INTRODUCTION OF
INTERNATIONAL BUSINESS
One of the most dramatic and
significant world trends in the past two decades has been the rapid, sustained
growth of international business. Markets have become truly global for most
goods, many services, and especially for financial instruments of all types.
World product trade has expanded by more than 6 percent a year since 1950,
which is more than 50 percent faster than growth of output the most dramatic
increase in globalization, has occurred in financial markets. In the global
foreign exchange markets, billions of dollars are transacted each day, of which
more than 90 percent represent financial transactions unrelated to trade or
investment. Much of this activity takes place in the so-called Euromarkets, markets
outside the country whose currency is used.
This pervasive growth in market
interpenetration makes it increasingly difficult for any country to avoid
substantial external impacts on its economy. In particular massive capital
flows can push exchange rates away from levels that accurately reflect
competitive relationships among nations if national economic policies or
performances diverse in short run. The rapid dissemination rate of new
technologies speeds the pace at which countries must adjust to external
events. Smaller, more open
countries, long ago gave up illusion of domestic policy autonomy. But even the
largest and most apparently self-contained economies, including the US, are now
significantly affected by the global economy. Global integration in trade,
investment, and factor flows, technology, and communication has been tying
economies together.
Why then are these changes coming
about, and what exactly are they? It is in practice, easier to identify the
former than interpret the latter. The reason is that during the past few
decades, the emergence of corporate empires in the world economy, based on the
contemporary scientific and technological developments, has led to
globalization of production. As a result of international production,
co-operation among global productive units, the large-scale capital exports,
“the
export of production” or
“production abroad” has come into prominence as against commodity export in
world economy in recent years. Global corporations consider the whole of the
world their production place, as well as their market and move factors of
production to wherever they can optimally be combined. They avail fully of the
revolution that has brought about instant
worldwide communication, and near
instant-transformation. Their ownership is transnational; their management is
transnational. Their freely mobile management, technology and capital, the
modern agent for stepped-up economic growth, transcend individual national
boundaries. They are domestic in every place, foreign in none-a true corporate
citizen of the world. The greater
Interdependence among nations has
already reduced economic insularity of the peoples of the world, as well as
their social and political insularity.
DEFINITION OF
INTERNATIONAL BUSINESS:
International business includes
any type of business activity that crosses national borders. Though a number of
definitions in the business literature can be found but no simple or
universally accepted definition exists for the term international business. At
one end of the definitional spectrum, international business is defined as
organization that buys and/or sells goods and services across two or more
national boundaries, even if management is located in a single country. At the
other end of the spectrum, international business is equated only with those
big enterprises, which have operating units outside their own country. In the
middle are institutional arrangements that provide for some managerial
direction of economic activity taking place abroad but stop short of
controlling ownership of the business carrying on the activity, for example
joint ventures with locally owned business or with foreign governments.
In its traditional form of
international trade and finance as well as its newest form of multinational
business operations, international business has become massive in scale and has
come to exercise a major influence over political, economic and social from
many types of comparative business studies and from knowledge of many aspects
of foreign business operations. In fact, sometimes the foreign operations and
the comparative business are used as synonymous for international business.
Foreign business refers to domestic operations within a
foreign country. Comparative
business focuses on similarities and differences among countries and business
systems for focuses on similarities and differences among countries and
business operations and comparative business as fields of enquiry do not have
as their major point of interest the special problems that arise when business
activities cross national boundaries. For example, the vital question of
potential conflicts between the nation-state and the multinational
firm, which receives major
attention is international business, is not like to be centered or even
peripheral in foreign operations and comparative business.
SCOPE OF
INTERNATIONAL BUSINESS ACTIVITIES
The study of international
business focus on the particular problems and opportunities that emerge because
a firm is operating in more than one country. In a very real sense,
international business involves the broadest and most generalized study of the
field of business, adapted to a fairly unique across the border environment.
Many of the parameters and environmental variables that are very important in
international business (such as foreign legal systems, foreign exchange
markets, cultural differences, and different rates of inflation) are either
largely irrelevant to domestic business or are so reduced in range and
complexity as to be of greatly diminished significance. Thus, it might be said
that domestic business is a special limited case of international business.
The distinguishing feature of
international business is that international firms operate in environments that
are highly uncertain and where the rules of the game are often ambiguous,
contradictory, and subject to rapid change, as compared to the domestic
environment. In fact, conducting international business is really not like playing
a whole new ball game, however, it is like playing in a different ballpark,
where international managers have to learn the factors unique to the playing
field. Managers who are astute in identifying new ways of doing business that
satisfy the changing priorities of foreign governments have an obvious and
major competitive advantage over their competitors who cannot or will not adapt
to these changing priorities.
The guiding principles of firm
engaged in (or commencing) international business activities should incorporate
a global perspective. A firm’s guiding principles can be defined in terms of
three board categories products offered/market served, capabilities, and
results. However, their perspective of the international business is critical
to understand the full meaning of international business. That is, the firm’s
senior management should explicitly define the firm’s guiding principles in
terms of an international mandate rather than allow the firm’s guiding
principles in terms as an incidental adjunct to its domestic activities.
Incorporating an international outlook into the firm’s basic statement of
purpose will help focus the attention of managers (at all levels of the
organization) on the opportunities (and hazards) outside the domestic economy.
It must be stressed that the
impacts of the dynamic factors unique to the playing field for international
business are felt in all relevant stages of evolving and implementing business
plans. The first broad stage of the process is to formulate corporate guiding
principles. As outlined below the first step in formulating and implementing a
set of business plans is to define the firm’s guiding principles in the market
place. The guiding principles should, among other things, provide a long-term
view of what the firm is striving to become and provide direction to divisional
and subsidiary manager’s vehicle, some firms use “the decision circle” which is
simply an interrelated set of strategic choices forced upon any firm faced with
the internationalization of its markets. These choices have to do with
marketing, sourcing, labor, management, ownership, finance, law, control, and
public affairs. Here the first two marketing and sourcing-constitute the basic
strategies that encompass a firm’s initial considerations. Essentially,
management is answering two questions: to whom are we going to sell what, and
from where and how will we supply that market? We then have a series of input
strategies-labor, management, ownership, and financial. They are in their
efforts to develop their own business plans. As an obligation addressed
essentially to the query, with what resources are we going to implement the
basic strategies? That is, where will we find the right people, willingness to
carry the risk, and the necessary funds? A third set of strategies legal and
control-respond to the problem of how the firm is to structure itself of
implement the basic strategies, given the resources it can muster. A final
strategic area, public affairs, is shown as a basic strategy simply because it
places a restraint on all other strategy choices. Each strategy area contains a
number of subsidiary strategy options. The decision process that normally
starts in the marketing strategy area is an iterative one. As the decision
maker proceeds around the decision circle, previous
selected strategies must be
readjusted. Only a portion of the possible feedback adjustment loops is shown
here.
Although these strategy areas are
shown separately but they obviously do not stand-alone. There must be constant
reiteration as one moves around the decision circle. The sourcing obviously
influences marketing strategy, as well as the reverse. The target market may
enjoy certain preferential relationships with other markets. That is,
everything influences everything else. In as much as the number of options a
firm faces is multiplied as it moves into international market, decision-making
becomes increasingly complex the deeper the firm becomes involved
internationally. One is dealing with multiple currency, legal, marketing,
economic, political, and cultural systems. Geographic and demographic factors
differ widely. In fact, as one moves geographically, virtually everything
becomes a variable: there are few fixed factors.
For our purposes here, a strategy
is defined as an element in a consciously devised overall plan of corporate
development that, once made and implemented, is difficult (i.e. costly) to
change in the short run. By way of contrast, an operational or tactical
decision is one that sets up little or no
Institutionalized resistance to
making a different decision in the near future. Some theorists have
differentiated among strategic, tactical, and operational, with the first being
defined as those decisions, that imply multi-year commitments; a tactical
decision, one that can be shifted in roughly a year’s time; an operational
decision, one subject to change in less than a year. In the
international context, we suggest
that the tactical decision, as the phrase is used here, is elevated to the
strategic level because of the rigidities in the international environment not
present in the purely domestic-for example, work force planning and overall
distribution decisions. Changes may be implemented domestically in a few
months, but if one is operating internationally, law,
contract, and custom may
intervene to render change difficult unless implemented over several years.
SPECIAL
DIFFICULTIES IN INTERNATIONAL BUSINESS
What make international business
strategy different from the domestic are the differences in the marketing
environment. The important special problems in international marketing are
given below:
1. POLITICAL AND
LEGAL DIFFERENCES
The political and legal
environment of foreign markets is different from that of the domestic. The
complexity generally increases as the number of countries in which a company
does business increases. It should also be noted that the political and legal
environment is not the same in all provinces of many home markets. For example,
the political and legal environment is not exactly the same in all the states
of India.
2. CULTURAL
DIFFERENCES
The cultural differences, is one
of the most difficult problems in international marketing. Many domestic
markets, however, are also not free from cultural diversity.
3. ECONOMIC
DIFFERENCES
The economic environment may vary
from country to country.
4. DIFFERENCES
IN THE CURRENCY UNIT
The currency unit varies from
nation to nation. This may sometimes cause problems of currency convertibility,
besides the problems of exchange rate fluctuations. The monetary system and
regulations may also vary.
5. DIFFERENCES
IN THE LANGUAGE
An international marketer often
encounters problems arising out of the differences in the language. Even when
the same language is used in different countries, the same words of terms may
have different meanings. The language problem, however, is not something
peculiar to the international marketing. For example: the multiplicity of
languages in India.
6. DIFFERENCES
IN THE MARKETING INFRASTRUCTURE
The availability and nature of
the marketing facilities available in different countries may vary widely. For
example, an advertising medium very effective in one market may not be
available or may be underdeveloped in another market.
7. TRADE
RESTRICTIONS
A trade restriction, particularly
import controls, is a very important problem, which an international marketer
faces.
8. HIGH COSTS OF
DISTANCE
When the markets are far removed
by distance, the transport cost becomes high and the time required for affecting
the delivery tends to become longer. Distance tends to increase certain other
costs also.
9. DIFFERENCES
IN TRADE PRACTICES
Trade practices and customs may
differ between two countries.
The business environment
comprises a microenvironment and a macro environment.
MICRO
ENVIRONMENT
“The micro environment consists
of the actors in the company’s immediate environment” that affect the
performance of the company. These 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”.
It is quite obvious that the micro
environmental factors are more intimately linked with the company than the
macro factors. The micro forces need not necessarily affect all the firms in a
particular industry in the same way. Some of the micro factors may be
particular to a firm. For example, a firm, which depends on a supplier, may
have a supplier environment, which is entirely different from that of a firm
whose supply source is different. When competing firms in an industry have the
same microelements, the relative success of the firms depends on their relative
effectiveness in dealing with these elements.
Suppliers
An important force in the
microenvironment of a company is the supplier, i.e., those who supply the
inputs like raw materials and components to the company .The importance of
reliable source/sources of supply to the smooth functioning of the business are
obvious. Uncertainty regarding the supply or other supply constraints often
compels companies to maintain high inventories causing cost increases. It has
been pointed out that factories in India maintain indigenous stocks of 3-4
months and imported stocks of 9 months as against an average of a
few hours to two weeks in Japan.
Because of the sensitivity of the
supply, many companies give high importance to vendor development. Vertical
integration, where feasible, helps solve the supply problem .It is very risky
to depend on a single because a strike, lock out or any other production
problem with that supplier may seriously affect the company. Similarly, a
change in the attitude or behavior of the supplier may also affect the company.
Hence, multiple sources of supply often help reduce such risks. The supply
management assumes more importance in a scarcity environment. “Company
purchasing agents are learning how to “wine and dine” suppliers to obtain
favorable treatment during periods of shortages. In other words, the purchasing
department might have to “market” itself to suppliers”.
CUSTOMERS
As it is often, exhorted, the
major task of a business is to create and sustain customers. A business exists
only because of its customers. Monitoring the customer sensitivity is,
therefore, a prerequisite for the business success. A company may have
different categories of consumers like individuals, households, industries and
other commercial establishments, and government
and other institutions. For
example, the customers of a tyre company may include individual automobile
owners, automobile manufacturers, public sector transport undertakings and
other transport operators. Depending on a single customer is often too risky
because it may place the
company in a poor bargaining
position, apart from the risks of losing business consequent to the winding up
of business by the customer or due to the customer’s switching over the
competitors of the company. The choice of the customer segments should be made
by considering a number of factors including the relative profitability,
dependability, stability of demand, growth prospects and the extent of
competition.
COMPETITORS
A firm’s competitors include not
only the other firms, which market the same or similar products, but also all
those who compete for the discretionary income of the consumers. For example,
the competition for a company’s televisions may come not only from other T.V.
manufacturers but also from two-wheelers, refrigerators, cooking ranges, stereo
sets and so on and from firms offering savings and investment schemes like
banks, Unit Trust of India, companies accepting public deposits or issuing
shares or debentures etc. This competition among these products may be
described as desire competition as the primary task here is to influence the
basic desire of the consumer. Such desire competition is generally very high in
countries characterized by limited disposable incomes and many unsatisfied
desires (and, of course, with many alternatives for spending/investing the
disposable income).
If the consumer decides to spend
his discretionary income on recreation (or recreation cum education) he will
still confronted with a number of alternativeschoose from like T.V., stereo,
two-in-one, three –in-one etc. The competition among such alternatives, which
satisfy a particular category of desire, is called generic competition. If the
consumer decides to go in for a T.V. the next question is which form of the
T.V. – black and white or colour, with remote-control or without it etc.
In other words, there is a product form
competition. Finally the consumer encounters the brand competition i.e., the
competition between the different brands of the same product form.
An implication of these different
demands is that a marketer should strive to create primary and selective demand
for his products.
MARKETING
INTERMEDIARIES
The immediate environment of a
company may consist of a number of marketing intermediaries which are “firms
that aid the company in promoting, selling and distributing its goods to final
buyers”.
The marketing intermediaries
include middlemen such as agents and merchants who “help the company find
customers or close sales with them”, physical distribution firms which “assist
the company in stocking and moving goods form their origin to their
destination” such as warehouses and transportation firms; marketing service
agencies which “assist the company in targeting and promoting its products to
the right markets” such as advertising agencies, marketing research firms,
media firms and consulting firms; and financial intermediaries which finance
marketing activities and insure business risks.
Marketing intermediaries are
vital links between the company and the final consumers. A dislocation or
disturbance of this link, or a wrong choice of the link, may cost the company
very heavily. Retail chemists and druggists in India once decided to boycott
the products of a leading company on some issue such as poor retail margin.
This move for collective boycott was, however, objected to by the MRTP
commission; but for this company would, perhaps, have been in trouble.
DEMOCRATIC
A company may encounter certain
publics in its environment. “A public is any group that has an actual or
potential interest in or impact on an organization’s ability to achieve its
interests. Media publics, citizen’s action publics and local publics are some
examples.
For example, one of the leading
companies in India was frequently under attack by the media public,
particularly by a leading daily, which was allegedly bent on bringing down the
share prices of the company by tarnishing its image. Such exposures or
campaigns by the media might even influence the government decisions affecting
the company. The local public also affects many companies. Environmental
pollution is an issue often taken up by a number of local publics. Actions by
local publics on the issue have caused some companies to suspend operations
and/or take pollution abatement measures.
GROWTH OF
CONSUMER PUBLIC IS AN IMPORTANT DEVELOPMENT AFFECTING BUSINESS.
It is wrong to think that all
publics are threats to business. Some of the actions of the publics may cause
problems for companies. However, some publics are an opportunity for the
business. Some businessmen, for example, regard consumerism as an opportunity
for the business. The media public may be used to disseminate useful
information. Similarly, fruitful cooperation between a
company and the local publics may
be established for the mutual benefit of the company and the local community.
MACRO
ENVIRONMENT
As stated earlier, a company and
the forces in its microenvironment operate in a larger macro environment of
forces that shape opportunities and pose threats to the company. The macro
forces are, generally, more uncontrollable than the micro forces. A sketch
picture of the important macro-environmental forces is given below.
ECONOMIC
ENVIRONMENT
Economic conditions, economic
policies and the economic system are the important external factors that
constitute the economic environment of a business.
The economic conditions of a
country-for example, the nature of the economy, the stage of development of the
economy, economic resources, the level of income, the distribution of income
and assets, etc- are among the very important determinants of business
strategies.
In a developing country, the low
income may be the reason for the very low demand for a product. The sale of a
product for which the demand is income elastic naturally increases with an
increase in income. But a firm is unable to increase the purchasing power of
the people to generate a higher demand for its product. Hence, it may have to
reduce the price of the product to increase the sales. The reduction in the
cost of production may have to be effected to facilitate price reduction. It
may even be necessary to invent or develop a new low-cost product to suit the
low-income market. Thus Colgate designed a simple, hand-driven, inexpensive
($10) washing machine for low-income buyers in less developed countries.
Similarly, the National Cash Register Company took an innovative step backward
by developing a crank-operated cash register that would sell at half the cost
of a modern cash register and this was well
received in a number of
developing countries.
In countries where investment and
income are steadily and rapidly rising, business prospects are generally
bright, and further investments are encouraged. There are a number of economists
and businessmen who feel that the developed countries are no longer worthwhile
propositions for investment because these economies have reached more or less
saturation levels in certain respects. In developed economies, replacement
demand accounts for a considerable part of the total demand for many consumer
durables whereas the replacement demand is negligible in the developing
economies.
The economic policy of the
government, needless to say, has a very great impact on business. Some types or
categories of business are favorably affected by government policy, some
adversely affected, while it is neutral in respect of others. For example, a
restrictive import policy, or a policy of protecting the home industries, may
greatly help the import-competing industries.
Similarly, an industry that falls
within the priority sector in terms of the government policy may get a number
of incentives and other positive support from the government, whereas those
industries which are regarded as inessential may have the odds against them.
In India, the government’s
concern about the concentration of economic power restricted the role of the
large industrial houses and foreign concerns to the core sector, the heavy
investment sector, the export sector and backward regions. The monetary and
fiscal policies, by the incentives and disincentives they offer and by their
neutrality, also affect the business in different ways.
An industrial undertaking may be
able to take advantage of external economies by locating itself in a large
city; but the Government of India’s policy was to discourage industrial
location in such places and constrain or persuade industries undertaking, a
backward area location may have many disadvantages. However, the incentives
available for units located in these backward areas many compensate them for
these disadvantages, at least to some extent.
According to the industrial
policy of the Government of India until July 1991, the development of 17 of the
most important industries was reserved for the state. In the development of
another 12 major industries, the state was to play a dominant role. In the
remaining industries, co-operative enterprises, joint sector enterprises and
small scale units were to get preferential treatment over large entrepreneurs
in the private sector. The government policy, thus limited the scope of private
business. However, the new policy ushered in since July 1991 has wide opened
many of the industries for the private sector.
The scope of international
business depends, to a large extent, on the economic system. At one end, there
are the free market economies or capitalist economies, and at the other end are
the centrally planned economies or communist countries. In between these two
are the mixed economies. Within the mixed economic system itself, there are
wide variations.
The freedom of private enterprise
is the greatest in the free market economy, which is characterized by the
following assumptions:
(i) The factors of production
(labor, land, capital) are privately owned, and production occurs at the
initiative of the private enterprise.
(ii) Income is received in
monetary form by the sale of services of the factors of production and from the
profits of the private enterprise.
(iii) Members of the free market
economy have freedom of choice in so far as consumption, occupation, savings
and investment are concerned.
(iv) The free market economy is
not planned controlled or regulated by the government. The government satisfies
community or collective wants, but does not compete with private firms, nor
does it tell the people where to work or what to produce.
The completely free market
economy, however, is an abstract system rather than a real one. Today, even the
so-called market economies are subject to a number of government regulations.
Countries like the United States, Japan, Australia, Canada and member countries
of the EEC are regarded as market economies. The communist countries have, by
and large, a centrally planned economic system. Under the rule of a communist
or authoritarian socialist government, the state owns all the means of
production, determines the goals of production. and controls the economy
according to a central master plan. There is hardly any consumer sovereignty in
a centrally planned economy, unlike in the free market economy. The consumption
pattern in a centrally planned economy is dictated by the state.
China, East Germany Soviet Union,
Czechoslovakia, Hungary, Poland etc., had centrally planned economies. However,
recently several of these countries have discarded communist system and have
moved towards the market economy. In between the capitalist system and the
centrally planned system falls the system of the mixed economy, under which
both the public and private sectors co-exist, as in India. The extent of state
participation varies widely between the mixed economies. However, in many mixed
economies, the strategic and other nationally very important industries are
fully owned or dominated by the state. The economic system, thus, is a very important
determinant of the scope of private business. The economic system and policy
are, therefore, very important external constraints on business.
POLITICAL AND
LEGAL ENVIRONMENT
Political and government
environment has close relationship with the economic system and economic
policy. For example, the communist countries had a centrally planned economic
system. In most countries, apart from those laws that control investment and
related matters, there are a number of laws that regulate the conduct of the
business. These laws cover such matters as standards of products, packaging,
promotion etc.
In many countries, with a view to
protecting consumer interests, regulations have become stronger. Regulations to
protect the purity of the environment and preserve the ecological balance have
assumed great importance in many countries. Some governments specify certain
standards for the products (including packaging) to be marketed in the country;
some even prohibit the marketing of certain products. In most nations,
promotional activities are subject to various types of controls. Media
advertising is not permitted in Libya. Several European countries restrain the
use of children in commercial advertisements. In a number of countries,
including India, the advertisement of alcoholic liquor is prohibited.
Advertisements, including packaging, of cigarettes must carry the statutory
warning that “cigarette smoking is injurious to health”. Similarly,
advertisements of baby food must necessarily inform the potential buyer that
breast-feeding in the best. In countries like Germany, product comparison
advertisements and the use of superlatives like ‘best’ or ‘excellent’ in
advertisements is not allowed In the United States, the Federal Trade
Commission is empowered to require a company to provide the quality,
performance or comparative prices of its products.
“What is being asked of the drug
industry and of American business in general is a fuller disclosure of the
relevant facts about products. For drugs, food additives, some cosmetic
preparations, and so forth, a full disclosure requires more knowledge of the
long-range side effects of materials ingested into the complex human body. For
American industry as a whole, greater candour has been called for under such
legislation as Truth in Lending and Fair Packaging Act, under administrative
decrees such as the warning requirement on cigarette packages and advertising,
under the threats of private damage suits using the common-law concepts of
warranty, and under voluntary programmes such as unit pricing and listing
nutritional content of foods. The increasing complexity of products and the
variety of product choices suggest further moves away from ‘caveat emptor’ or
‘let the buyer beware’ doctrines, moves which on the whole should prove a
welcome although sometimes inconvenient challenge for business”.
There are a host of statutory
controls on business in India. If the MRTP companies wanted to expand their
business substantially, they had to convince the government that such expansion
was in the public interest. Indeed, the “Government in India has an
all-pervasive and predominantly restrictive influence over various aspects of
business, e.g. industrial licensing which decides location, capacity and
process; import licensing for machinery and materials; size and price of
capital issue; loan finance; pricing; managerial remuneration; expansion plans;
distribution restrictions and a host of other enactments. Therefore, a
considerable part of attention of a Chief Executive and his senior colleagues
has to be devoted to a continuous dialogue with various government agencies to
ensure growth and profitability within the framework of controls and
restraints”.
Many countries today have laws to
regulate competition in the public interest. Elimination of unfair competition
and dilution of monopoly power are the important objectives of these
regulations. In India, the monopolistic undertakings, dominants undertakings
and large industrial houses are subject to a number of regulations which
prevent the concentration of economic power to the common detriment. The MRTP
Act also controls monopolistic, restrictive and unfair trade practices which
are prejudicial to public interest. Such regulations brighten the prospects of
small and new firms. They also increase the scope of some of the existing firms
to venture into new areas of business. The special privileges available to the
small scale sector have also contributed to the phenomenal success of the
Nirma.
Certain changes in government
policies such as the industrial policy, fiscal policy, tariff policy etc. may
have profound impact on business. Some policy developments create opportunities
as well as threats. In other words, a development which brightens the prospects
of some enterprises may pose a threat to some others. For example, the
industrial policy liberalizations in India,
particularly around the
mid-eighties have opened up new opportunities and threats. They have provided a
lot of opportunities to a large number of enterprises to diversify and to make
their product mix better. But they have also given rise to serious threat to
many existing products by way of increased competitions; many seller’s markets
have given way to buyer’s markets. Even products which were seldom advertised
have come to be promoted very heavily. This battle for the market has provided
a splendid opportunity for the advertising industry. Advertising billing has
been increasing substantially.
That an estimated cost savings of
about Rs. 200 crores per year have accrued to the Reliance Industries as a
result of the changes in duties on some of the material inputs used by them is
just an indication of the tremendous impact the fiscal and tariff policies can
have on the business.
SOCIO-CULTURAL
ENVIRONMENT
The socio-cultural fabric is an
important environmental factor that should be analysed while formulating
business strategies. The cost of ignoring the customs, traditions, taboos,
tastes and preferences, etc., of people could be very high. The buying and
consumption habits of the people, their language, beliefs and values, customs
and traditions, tastes and preferences, education are all factors that affect
business.
For a business to be successful,
its strategy should be the one that is appropriate in the socio-cultural
environment. The marketing mix will have to be so designed as best to suit the
environmental characteristics of the market. In Thailand, Helene Curtis
switched to black shampoo because Thai women felt that it made their hair look
glossier. Nestle, a Swiss multinational company, today brews more than forty
varieties of instant coffee to satisfy different national tastes.
Even when people of different
cultures use the same basic product, the mode of consumption, conditions of
use, purpose of use or the perceptions of the product attributes may vary so
much so that the product attributes method of presentation, positioning, or
method of promoting the product may have to be varied to suit the
characteristics of different markets. For example, the two most important
foreign markets for Indian shrimp are the U.S and Japan. The product attributes
for the success of the product in these two markets differ. 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. Similarly, the mode of consumption of tuna, another seafood
export from India, differs between the U.S. and European countries. Tuna fish
sandwiches, an American favourite which accounts for about 80 percent 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.
The differences in languages
sometimes pose a serious problem, even necessitating a change in the brand
name. Preett was, perhaps, a good brand name in India, but it did not suit in
the overseas market; and hence it was appropriate to adopt ‘Prestige’ for the
overseas markets. Chevrolet’s brand name ‘Nova’ in Spanish means “it doesn’t
go”. In Japanese, General Motors’ “Body by Fisher” translates as corpse by
Fisher”. In Japanese, again, 3M’s slogan “sticks like crazy “translates as
“sticks foolishly”. In some languages, Pepsi-Cola’s slogan “come alive”
translates as “come out of the grave”.
The values and beliefs associated
with colour vary significantly between different cultures. Blue, considered
feminine and warm in Holland, is regarded as masculine and cold in Sweden.
Green is a favourite colour in the Muslim world; but in Malaysia, it is
associated with illness. White indicates death and mourning in China and Korea;
but in some countries, it expresses happiness and is the colour of the wedding
dress of the bride. Red is a popular colour in the communist countries; but
many African countries have a national distaste for red colour.
Social inertia and associated
factors come in the way of the promotion of certain products, services or
ideas. We come across such social stigmas in the marketing of family planning
ideas, use of bio-gas for cooking, etc. In such circumstances, the success of
marketing depends, to a very large extent, on the success in changing social
attitudes or value systems.
There are also a number of
demographic factors, such as the age, and sex composition of population, family
size, habitat, religion, etc., which influence the business. While dealing with
the social environment, we must also consider the social environment of the business
which encompasses its social responsibility and the alertness or vigilance of
the consumers and of society at large. The societal environment has assumed
great importance in recent years. As
Barker observes, business
“traditionally has been held responsible for quantities for the supply of goods
and jobs, for costs, prices, wages, hours of works, and for standards of
living. Today, however, business is being asked to take a responsibility for
the quality of life in our society. The expectation is that business- in
addition to its traditional accountability for economic performance and results
– will concern itself with the health of the society, that it will come
up with the cures for the ills
that currently beset us and, indeed, will find ways of anticipating and
preventing future problems in these areas”.
As Stern succinctly points out,
the “more educated the society becomes, the more interdependent it becomes, and
the more discretionary the use of its resources, the more marketing will become
enmeshed in social issues. Marketing personnel are at interface between company
and society. In this position, they have the responsibility not merely for
designing a competitive marketing strategy, but for sensitizing business to the
social, as well as the product demand of society”.
DEMOGRAPHIC
ENVIRONMENT
Demographic factors like the
size, growth rate, age composition, sex composition, etc. of the population,
family size, economic stratification of the population, educational levels,
languages, caste, religion etc. Are all factors that are relevant to business?
Demographic factors such as size
of the population, population growth rate, age composition, life expectancy,
family size, spatial dispersal, occupational status, employment pattern etc,
affect the demand for goods and services. Markets with growing population and
income are growth markets. But the decline in the birth rates in countries like
the United States have affected the demand for baby products. Johnson and
Johnson have overcome this problem by repositioning their products like baby
shampoo and baby soap, promoting them also to the adult segment, particularly
to the females.
A rapidly increasing population
indicates a growing demand for many products. High population growth rate also
indicates an enormous increase in labour supply. When the Western countries
experienced the industrial revolution, they had the problem of labour supply,
for the population growth rate was comparatively low. Labour shortage and
rising wages encouraged the growth of labour-saving technologies and
automation. But most developing countries of today are experiencing a
population explosion and a situation of labour surplus. The governments of
developing countries, therefore, encourage labour intensive methods of production.
Capital intensive methods, automation and even rationalization are opposed by
labour and many sociologists, politicians and economists in these countries.
The population growth rate, thus, is an important environmental factor which
affects business. Cheap labour and a growing market have encouraged many
multinational corporations to invest in developing countries.
NATURAL
ENVIRONMENT
Geographical and ecological
factors, such as natural resource endowments, weather and climatic conditions,
topographical factors, locational aspects in the global context, port
facilities, etc., are all relevant to business.
Differences in geographical
conditions between markets may sometimes call for changes in the marketing mix.
Geographical and ecological factors also influence the location of certain
industries. For example, industries with high material index tend to be located
near the raw material sources. Climatic and weather conditions affect the
location of certain industries like the cotton textile industry. Topographical
factors may, affect the demand pattern. For example, in hilly areas with a
difficult terrain, jeeps may be in greater demand than cars.
Ecological factors have recently
assumed great importance. The depletion of natural resources, environmental
pollution and the disturbance of the ecological balance has caused great
concern. Government policies aimed at the preservation of environmental purity
and ecological balance, conservation of non-replenishale resources, etc., have
resulted in additional responsibilities and problems for business, and some of
these have the effect of increasing the cost of production and marketing.
Externalities have become an important problem the business has to confront
with.
PHYSICAL AND
TECHNOLOGICAL ENVIRONMENT
Physical Factors, such as
geographical factors, weather and climatic conditions may call for
modifications in the product, etc., to suit the environment because these
environmental factors are uncontrollable. 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. Some products, like many
consumer durables, have certain use facility characteristics. The sale of
television sets, for example, is limited by the extent of the coverage of the
telecasting. Similarly, the 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.
Technological factors sometimes
pose problems. A firm, which is unable to cope with the technological changes,
may not survive. Further, the differing technological environment of different
markets or countries may call for product modifications. For example, 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 increase the demand for some existing products.
For example, voltage stabilizers help increase the sale of electrical
appliances in markets characterized by frequent voltage fluctuations I power
supply. However, the introduction of TV’s, Fridges etc, with in built voltage
stabilizer adversely affects the demand for voltage stabilizers. Advances in
the technologies of food processing and preservation, packaging etc., have
facilitated product improvements and introduction of new products and have
considerably improved the marketability of products.
The television has added a new
dimension to product promotion. The advent of TV and VCP/VCR has, however,
adversely affected the cinema theatres. The fast changes in technologies also
create problems for enterprises as they render plants and products obsolete quickly.
Product-market-technology matrix generally has a much shorter life today than
in the past. It is particularly so in the international marketing context. It
may be interesting to note that almost half of Hindustan Lever’s 1980 export
business did not exist in 1987. In fact, as much as a third of the company’s
1987 turnover was from products and markets, which were under three years of
age.
INTERNATIONAL
ENVIRONMENT
The international environment is
very important from the point of view of certain categories of business. It is
particularly important for industries directly depending on imports or exports
and import-competing industries. For example, a recession in foreign markets,
or the adoption of protectionist policies by foreign nations, may create
difficulties for industries depending on exports. On the other hand, a boom in
the export market or a relaxation of the protectionist policies may help the
export-oriented industries. A liberalization of imports may help some
industries which use imported items, but may adversely affect import-competing
industries.
It has been observed that major
international developments have their spread effects on domestic business. The
Great Depression in the United States sent its shock waves to a number of other
countries. Oil price hikes have seriously affected a number of economies. These
hikes have increased the cost of production and the prices of certain products,
such as fertilizers, synthetic fibres, etc. The high oil price has led to an
increase in the demand for automobile models that economise energy consumption.
The demand for natural fibres increased because of the oil crisis.
The oil crisis also prompted some
companies to resort to demarketing. “Demarketing refers to the process of
cutting consumer demand for a product back to level that can be supplied by the
firm”. Some oil companies-the Indian Oil Corporation, for example-have
publicized tips o how to cut oil consumption. When the fertilizer price shot up
following the oil crisis, some fertilizer
companies appealed to the farmers
to use fertilizers only for important and remunerative crops. The importance of
natural manure like compost as a substitute for chemical fertilizers was also
emphasized.
The oil crisis led to a
reorientation of the Government of India’s energy policy. Such developments
affect the demand, consumption and investment pattern. A good export market enables
a firm to develop a more profitable product mix and to consolidate its position
in the domestic market. Many companies now plan production capacities and
investment taking into account also the foreign markets. Export marketing
facilitates the attainment of optimum capacity utilization; a company may be
able to mitigate the effects of domestic recession
by exporting. However, a company
which depends on the export market to a considerable extent has also to face
the impact of adverse developments in foreign markets.
SUMMARY
International business is a
necessity in today’s world. The gains for greater awareness and knowledge of
international business fare immense for nations, multi-national enterprises,
trading companies, exporters and even individuals. To go global, the first step
would be to understand the international business environment. International
business in nothing but extending the areas of activities of business across
the boundaries. We have discussed about the importance of understanding
international business environment in detail. The concepts of microenvironment and
macro environment with reference to the political, legal, economical and
cultural background are also discussed. Understanding international business
environment requires greater research and information. The fulfillment of this
research could happen with greater understanding of the framework for analyzing
the international business environment.
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