INTRODUCTION
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 forex
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, and “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 is 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 a 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.
BENEFITS OF
INTERNATIONAL BUSINESS SURVIVAL
Because most of the countries are
not as fortunate as the United States in terms of market size, resources, and
opportunities, they must trade with others to survive; Hong Kong, has
historically underscored this point well, for without food and water from china
proper, the British colony would not have survived along. The countries of
Europe have had similar experience, since most
European nations are relatively
small in size. Without foreign markets, European firms would not have
sufficient economies of scale to allow them to be competitive with US firms.
Nestle mentions in one of its advertisements that its own country, Switzerland,
lacks natural resources, forcing it to depend on trade and adopt the geocentric
perspective. International competition may not be matter of choice when
survival is at stake. However, only firms with previously substantial market
share and international experience could expand successfully.
GROWTH OF
OVERSEAS MARKETS
Developing countries, in spite of
economic and marketing problems, are excellent markets. According to a report
prepared for the U.S. CONGRESS by the U.S. trade representative, Latin America
and Asia/Pacific are experiencing the strongest economic growth. American
markets cannot ignore the vast potential of international markets. The world is
more than four times larger than the U.S. market. In the case of Amway corps. A
privately held U.S.
Manufacturer of cosmetics, soaps
and vitamins, Japan represents a larger market
Than the United States.
SALES AND PROFIT
Foreign markets constitute a
larger share of the total business of many firms that have wisely cultivated
markets aboard. Many large U.S. companies have done well because of their
overseas customers. IBM and Compaq, foe ex, sell more computers aboard than at
home. According to the US dept of commerce, foreign profits of American firms
rose at a compound annual rate of 10%
Between 1982 and 1991, almost
twice as fast as domestic profits of the same companies.
DIVERSIFICATION
Demand for mast products is
affected by such cyclical factors as recession and such seasonal factors as
climate. The unfortunate consequence of these variables is sales fluctuation,
which can frequently be substantial enough to cause layoffs of personnel. One
way to diversify a companies’ risk is to consider foreign markets as a solution
for variable demand. Such markets,
Even out fluctuations by
providing outlets for excess production capacity. Cold weather, for instance
may depress soft drink consumption. Yet not all countries enter the winter season
at the same time, and some countries are relatively warm year round. Bird, USA,
inc., a Nebraska manufacturer of go carts, and mini cars, for promotional
purposes has found that global selling has enabled the company to have year
round production. It may be winter in Nebraska but its summer in the southern
hemisphere-somewhere there is a demand and that stabilizes the business.
INFLATION AND
PRICE MODERATION
The benefits of export are
readily self-evident. Imports can also be highly beneficial to a country
because they constitute reserve capacity for the local economy. Without
imports, there is no incentive for domestic firms to moderate their prices. The
lack of imported product alternatives forces consumers to pay more, resulting
in inflation and excessive profits for local firms. This
Development usually acts a s
prelude to workers demand for higher wages, further exacerbating the problem of
inflation. Import quotas imposed on Japanese automobiles in the 1980’s saved
46200 US production jobs but at a cost of $160,000 per job per year. This cost
was a result
of the addition of $400 to the prices of US
cars, and $1000 to the prices of Japanese imports. This windfall for Detroit
resulted in record high profits for US automakers. Not only do trade restrictions
depress price competition in the short run, but they also can adversely affect
demand for year to come.
EMPLOYMENT
Trade restrictions, such as high
tariffs caused by the 1930’s smoot-hawley bill, which forced the average tariff
rates across the board to climb above 60%, contributed significantly to the
great depression and have the potential to cause wide spread unemployment
again. Unrestricted trade on the other hand improves the world’s GNP and
enhances employment generally for all nations. Importing products and foreign
ownership can provide benefits to a nation. According to the institute for
international Economics-a private, non- profit research institute – the growth
of foreign ownership has not resulted in a loss of jobs for Americans; and
foreign firms have paid their American workers the same, as have domestic
firms.
STANDARDS OF
LIVING
Trade affords countries and their
citizen’s higher standards of living than other wise possible. Without trade,
product shortages force people to pay more for less, products taken for
granted, such as coffee and bananas may become unavailable overnight. Life in
most countries would be much more difficult were it not for the many strategic
metals that must be imported. Trade also
Makes it easier for industries to
specialize and gain access to raw materials, while at the sometime fostering
competition and efficiency. A diffusion of innovations across national
boundaries is useful by-products of international trade. A lack of such trade
would inhibit the flow innovative ideas.
FRAMEWORK FOR
ANALYSING INTERNATIONAL BUSINESS ENVIRONMENT
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”.
STANDARDS OF LIVING
Trade affords countries and their
citizen’s higher standards of living than otherwise possible. Without trade,
product shortages force people to pay more for less, products taken for
granted, such as coffee and bananas may become unavailable overnight. Life in
most countries would be much more difficult were it not for the many strategic
metals that must be imported. Trade also
makes it easier for industries to
specialize and gain access to raw materials, while at the same time fostering
competition and efficiency. A diffusion of innovations across national
boundaries is useful by-products of international trade. A lack of such trade
would inhibit the flow innovative ideas.
FRAMEWORK FOR
ANALYSING INTERNATIONAL BUSINESS ENVIRONMENT
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”. “Environmental diagnosis
consists of managerial decisions made by analyzing the significance of the data
(opportunities and threats) of the environmental analysis”. The definition of
environmental analysis given above has been made in the context of the
strategic management process for an existing firm. It is, however,
Quite obvious that environmental
analysis is the cornerstone of new business opportunity analysis too. Indeed,
today a much greater emphasis is given than in the past to the fact that
environmental analysis is an essential prerequisite for strategic management decision-making.
For instance, in his recent editions of Marketing Management, Philip Kotler,
the world-renowned professor and author, describes Marketing Environment Audit
as the first component of a Marketing Audit, whereas in the earlier editions of
this book, the definition of Marketing Audit does not have any reference to the
environment. It is now unquestionably accepted that the prospects of a business
depend not only on its resources but also on the environment. An analysis of
the strengths, weaknesses, opportunities and threats (SWOT) is very much
essential for the
business policy formulation. Just
as the life and success of an individual depend on his innate capability, including
physiological factors, traits and skills, to cope with the environment,
the survival and success of a
business firm depend on its innate strength – the resources as its command,
including physical resources, financial resources, skill and organization – and
its adaptability to the environment. Every business enterprise, thus, consists
of a set of internal factors and is confronted with a set of external factors.
The internal factors are generally regarded as controllable factors because the
company has control over these factors; it can alter or modify such factors as
its personnel, physical facilities, organization and functional means, such as
the marketing mix, to suit the environment. The external factors, on the other
hand, are by and large, beyond the control of a company. The external or
environmental factors such as the economic factors, socio-cultural factors,
government and legal factors, demographic factors, geophysical
factors etc. are, therefore,
generally regarded as uncontrollable factors. As the environmental factors are
beyond the control of a firm, its success will depend to a very large extent on
its adaptability to the environment, i.e. its ability to properly design and
adjust the internal (the controllable) variables to take advantage of the
opportunities and to combat the threats in the
environment.
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 effect 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 is
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 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 IMPORTANTDEVELOPMENT 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 were 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 1991has wide opened
many of the industries for the private sector.The scope of international
business depends, to a large extent, on the economicsystem. 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. Withinthe 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 ofcertain 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 analyzed 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 productattributes
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
apposed 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.
The occupational and spatial
mobilities of population have implications for business. If labour is easily
mobile between different occupations and regions,its supply will be relatively
smooth, and this will affect the wage rate.If labour is highly heterogeneous in
respect of language, caste and religion,ethnicity, etc., personnel management
is likely to become a more complex task.
The heterogeneous population with
its varied tastes, preferences, beliefs,temperaments, etc. gives rise to
differing demand patterns and calls for different marketing strategies. References
to a number of demographic factors that have business implications have already
been made under “socio-cultural environment”.
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 thepreservation 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 tocope with the technological changes, may not survive. Further, the
differing technological environment of different markets or countires 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 stabilisers help increase the sale of electrical
appliances in markets characterised 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.
