Unit 3 International Business Environment
Contents
3.1 Economic and
Political Environments in International Business
3.1.1 Introduction to
Economic Environments
3.1.2 Importance of
Economic Environment
3.1.3 Key Economic
Indicators
3.1.4 Impact of Economic
Policies on business environment
3.1.5 Introduction to
Political environment
3.1.6 Importance of
political environment
3.1.7 Political
Ideologies and systems and its impacts on business
3.2 Cultural and Legal
Environment in International Business
3.2.1 Introduction to
Cultural Environment
3.2.2 Significance of
cultural environment
3.2.3 Elements of
Cultural Environment
3.2.4 Impact of Cultural
Environment On International business
3.2.5 Introduction to
Legal Environment
3.2.6 Importance of Legal
Environment
3.2.7 Different aspects
of Legal Environment
3.3 Technological and
Competitive Environment
3.3.1 Introduction to
Technological environment
3.3.2 Impact of
Technological Environment
3.3.3 Selecting
Appropriate Technology for business
3.3.4 Introduction to
Competitive Environment
3.3.5 Types of
Competitive Environment
3.3.6 Factors affecting
Competitive Environment
3.4 Framework analyzing
International Business Environment
Summary
The international business environment is a complex
interplay of economic, political, cultural, legal, technological, and
competitive factors that significantly impact cross-border trade and investment
decisions. Economic aspects include GDP growth, inflation, and currency
exchange rates, while political factors involve government policies and
stability. Cultural considerations encompass societal norms and communication
styles, crucial for effective cross-cultural management and marketing. The
legal environment consists of international laws and regulations that
businesses must navigate to ensure compliance.
Technological advancements drive innovation and
efficiency in global business, requiring companies to stay updated with
emerging trends. The competitive landscape necessitates analysis of global
market structures and strategies. To comprehend this multifaceted environment,
businesses employ analytical frameworks like PESTLE and SWOT, facilitating
strategic planning and risk assessment for global expansion. Understanding
these diverse elements is essential for companies to make informed decisions
and succeed in the international marketplace.
Introduction
The business environment is shaped by various
dimensions such as economic, social, legal, technological, and political
factors that influence decision-making and success in trading. These aspects,
known as the macro environment, impact multiple companies simultaneously and
should be considered by all businesses for informed decision-making. The legal
environment includes laws, court judgments, and government orders that must be
understood by companies to operate smoothly and avoid legal issues. The political
environment refers to government actions that affect businesses domestically
and globally, with factors like stability and government attitude impacting
success. The economic environment includes economic policies, conditions, and
systems in a country that can influence business operations. For example,
understanding labor laws can help companies avoid penalties, while political
stability and government attitudes can attract investment. In summary,
businesses must be aware of and adapt to the various dimensions of the global
environment to thrive.
Factors such as Interest Rates, Taxes, Inflation, Stock Market Indices, Value
of Rupee, Personal Disposable Income, and Unemployment rate all play a role in
shaping the economic environment. For example, a decrease in tax rates can lead
to a rise in disposable income, resulting in increased demand for products.
The Social Environment includes traditions, values,
social trends, education levels, and the standard of living, all of which
impact businesses. Traditions like festivals create opportunities for
businesses, while upholding values such as social justice can boost a company's
reputation.
Social trends like the focus on health and fitness can
drive demand for certain products. The Technological Environment involves
scientific advancements and innovations that change how goods are produced and
services are rendered. Understanding a country's technological advancements is
crucial for introducing products, with technological compatibility driving
demand. For instance, the rise of e-commerce and initiatives like Digital India
have transformed how businesses operate and interact with consumers.
3.1 Economic and political environments in
International Business
3.1.1 Introduction to Economic
Environments
An economic environment refers to the different
economic aspects that have the potential to impact a company's financial
outcomes and success. These vary based on the type of business being discussed.
An agricultural business could be impacted by factors like weather, which could
influence the growth of crops. Factors like the Internet's growth are more
probable to impact a newspaper industry since online platforms rival newspapers
in advertising revenue. A company's operating environment comprises of macroeconomic
(large-scale) and microeconomic (small-scale) factors.
3.1.2 Definition of economic environment
According to Michael Porter:
"The economic environment consists of factors that affect the general
health and well-being of an economy."
According to David Kotler:
"The economic environment consists of factors that affect the purchasing
power of consumers and the cost of doing business."
3.1.3 Importance
of Economic Environment
1. Consumer
Spending and Demand: The ability of consumers to buy goods and
services is directly influenced by economic conditions. For instance,
substantial inflation can weaken buying power, resulting in lower demand.
Consumer confidence is influenced by economic indicators such as GDP growth and
unemployment rates. When individuals have a sense of stability in their
employment and earnings, they are more inclined to make purchases.
2. Profitability: The
cost of raw materials, labor, energy, and other inputs is affected by the
economic climate. Increasing interest rates, for example, can raise borrowing
expenses for businesses. Government policies, like tax rates and regulations,
can greatly affect a company's profitability.
3. Investment
Decisions: Investors may be discouraged from making new
investments due to economic uncertainty. A steady and consistent economic
atmosphere is better for encouraging investment. Economic conditions affect the
availability of capital, whether it be through loans, equity financing, or
other methods.
4. Competition: During
economic recessions, businesses may face heightened competition as they work to
preserve their place in the market. On the other hand, economic growth can open
doors for newcomers and allow for growth. Pricing decisions are influenced by
the economic conditions. In times of economic decline, businesses might have to
reduce prices to entice customers, whereas in times of economic growth, they
could increase prices.
5. Government
Policies: Government regulations, like trade rules,
environmental guidelines, and labor legislation, can have a significant
influence on the operations and expenses of businesses. Government measures to
boost or hinder economic growth can greatly impact businesses.
6. Globalizations: The
interdependence of world economies causes actions in one area to impact
businesses across the globe. Trade wars, currency fluctuations, and
geopolitical events have the potential to present both obstacles and
advantages.
3.1.4 Types of Economic systems
Economic systems are the structures that societies
utilize to regulate the creation, allocation, and utilization of goods and
services. The following are the three primary types of economic systems:
3.1.5 Key Economic indicators
An economic indicator is a tool utilized to analyze,
gauge, and appraise the general condition of the macroeconomy. A government
agency or private business intelligence organization typically gathers economic
indicators through censuses or surveys, which are later analyzed to produce an
economic indicator. The key tools are as follows:
1. Gross
Domestic Product (GDP):
The total monetary value of all goods and services
produced within a country's borders in a specific period of time is known as
Gross Domestic Product (GDP). As a comprehensive assessment of a country's
economic well-being, it serves as a broad indicator of domestic production.
Even though GDP is usually figured out yearly, it is occasionally calculated
every quarter too. For instance, the U.S. government provides a GDP estimate on
a quarterly and yearly basis. The specific data sets in this report are presented
in actual terms, meaning that the data has been modified to account for
fluctuations in prices and is consequently free from inflation.
GDP is significant as it provides insights into the
economy's scale and performance. The real GDP growth rate is frequently
utilized as a gauge of the overall economic health. In general, a rise in real
GDP is seen as an indication of a healthy economy.
There are two primary methods or formulas by which GDP
can be determined:
1. Expenditure Approach
The expenditure approach is the most commonly used GDP
formula, which is based on the money spent by various groups.
GDP = C + G + I + NX
C = consumption or
all private consumer spending within a country’s economy, including, durable
goods, non-durable goods, and services.
G = total government
expenditures, including salaries of government employees, road
construction/repair, public schools, and military expenditure.
I = sum of a
country’s investments spent on capital equipment, inventories, and housing.
NX = net exports or a
country’s total exports less total imports.
2. Income Approach
This GDP formula takes the total income generated by
the goods and services produced.
GDP = Total National Income + Sales Taxes
+ Depreciation + Net Foreign Factor Income
Total National Income –
the sum of all wages, rent, interest, and profits.
Sales Taxes –
consumer taxes imposed by the government on the sales of goods and services.
Depreciation –
cost allocated to a tangible asset over its useful life.
Net Foreign Factor Income –
the difference between the total income that a country’s citizens and companies
generate in foreign countries, versus the total income foreign citizens and
companies generate in the domestic country.
2. Inflation
rate:
Inflation is defined as a general rise in the Consumer Price Index (CPI), which combines prices for various products with varying weights. The collection of items included in the index is determined by those which are seen as typical of a shared purchasing selection. Hence, the index will consist of varied goods based on the country and the majority's consumption habits. The CPI's total value is determined by the weighting of each item in the basket, as some products could see lower prices while others may go up.
Inflation is influenced by numerous factors.
Initially, a more restricted job market typically results in increased wages
and a rise in inflation. Secondly, increased interest rates typically result in
a deceleration of inflation. Inflation can be changed by government actions
like subsidies, which lower prices for certain goods. On the other hand,
inflation can rise with higher taxes or fiscal stimulus. The inflation rate is
affected by changes in the exchange rate as it impacts how much a country's currency
can buy. Furthermore, domestic inflation is influenced by international
commodity prices, such as oil and gas prices. In the end, limits on capacity,
such as import restrictions, increase the costs of obtaining specific goods and
raise inflation levels.
Inflation Rate Calculation
The formula is used to calculate the inflation rate:
Inflation Rate = (Later CPI − Earlier CPI
/ Earlier CPI) × 100
CPI is an abbreviation of Consumer Price Index. The
price index represents a basket of goods and services whose price development
is observed over time. The inflation rate indicates the percentage change in
this price index between two points in time (base year and end year).
3. Interest
Rate:
The policy interest rate is set by the central bank to
impact key economic variables including consumer prices, exchange rates, and
credit expansion. The policy interest rate sets the rates of other interest
rates in the economy, as it is the cost at which private agents, mainly private
banks, borrow money from the central bank. These banks will provide financial
products to their clients with an interest rate usually determined by the
policy rate.
Policy interest rates also have an impact on the actions of consumers.
Consumers tend to increase their spending on products and assets when interest
rates are low and borrowing costs are lower, and tend to save rather than spend
when rates are high. However, higher policy interest rates also have the effect
of decreasing inflation in the long run, thereby enhancing the purchasing power
of consumers.
Various nations have varying policy interest rates. The overnight lending rate,
discount rate, and repurchase rate (with varying maturities) are the most
frequently used. Typically, central banks utilize the policy interest rate to
implement restrictive or expansionary monetary policy. An increase in interest
rates is often employed to control inflation, devaluation of currency,
excessive expansion of credit, or outflow of capital. Conversely, lowering
interest rates could be a central bank's way of trying to stimulate economic
growth by promoting increased borrowing or devaluing the currency to improve
competitiveness.
In India, It is the RBI's determination of the amount
of money in circulation that impacts interest rates, economic growth, and
inflation control. The RBI uses following tools to influence the interest rate
and keep the prices steady:
·
Repo rate: Repo
rate is the interest rate at which a country's central bank lends money to
commercial banks, typically through short-term loans. RBI uses repo rate to
signal cost of money to banks. Increase in repo rate means money is more
expensive, leading banks to raise interest rates on loans. Lowering repo rate
results in cheaper loans, stimulating borrowing and economic activity.
·
Reverse repo rate: The
reverse repo rate is closely related to the repo rate, but it represents the
opposite transaction. Reverse repo rate is the interest rate at which the
central bank borrows money from commercial banks. Reverse repo rate is when
banks deposit surplus cash with the RBI. Higher rate means less lending
capacity and potentially higher interest rates. Lower rate leads to more
lending, increasing money supply and decreasing interest rates.
·
Cash Reserve Ratio: Cash
Reserve Ratio is the minimum amount of deposits that banks must hold as
reserves. It's like a savings account with the central bank. Increasing CRR
means less money for lending, while decreasing it allows for more lending.
·
Statutory Liquidity Ratio: Statutory
Liquidity Ratio mandates the minimum percentage of deposits that banks must
keep as liquid assets like government securities, cash, or gold. It is a rule
for banks to invest in government securities, affecting their lending capacity.
·
Open Market Operations (OMO): Open
Market Operations involve the central bank buying and selling government
securities to impact money supply and interest rates. When the RBI buys bonds,
money is added to the financial system; when it sells bonds, money is removed.
These tools help manage interest rates, control money supply, and affect loans,
savings returns, and the country's financial health.
Impact of Fixed Deposits and Loan Interest
rates:
The RBI uses these tools and the formula is quite
straight forward, in case of high inflation, RBI increases the repo rate to
decrease the money supply in the economy, resulting in higher borrowing costs. Nowadays, banks must also gather funds in order to lend to borrowers, leading
them to provide attractive loan terms including higher interest rates. Therefore, a high interest rate in periods of inflation may deter individuals
from borrowing and spending, ultimately aiding in the regulation of increasing
prices (inflation) and the stabilization of financial markets. Conversely, if the RBI lowers the repo rate, it indicates that taking out loans
has become cheaper. Commercial banks decrease their loan rates, resulting in
more affordable loans for customers and businesses. This can promote borrowing and spending, leading to increased economic growth
and investor confidence. Decreased bank interest rates may result in greater
investment returns and increased investor participation in the stock market.
Impact on bond yields:
In the earlier example, we observed how the Reserve
Bank of India's decisions have a direct impact on the economy's money
circulation. These alterations in the money supply can have a substantial
effect on the profits of various asset classes for investors. Changes in interest rates can impact the returns on bond investments as bond
yields typically shift inversely to interest rates. Additionally, decreased interest rates have the potential to incentivize
economic growth and increase the possibility of higher returns in the stock
market, highlighting the importance for investors to remain knowledgeable about
these changes.
4. Unemployment
The national unemployment rate refers to the portion
of jobless individuals among the entire labor force. It is commonly
acknowledged as a critical measure of a nation's labor market effectiveness.
During recessions and difficult economic periods, the unemployment rate
receives significant media coverage as a highly monitored economic measure.
This occurs because unemployment affects not only those without jobs, but also
has significant effects on the overall economy due to the severity and duration
of the causes of unemployment.
Unemployment not only affects individuals and
societies but also has a direct impact on the overall economy. When individuals
are not employed, they tend to spend less money, resulting in decreased
economic activity in terms of goods and services bought and made, as stated by
the U.S. Bureau of Labor Statistics.
Unemployed individuals may also have less money to spend, causing a ripple
effect that can result in job loss for those who produced the items they would
have bought.
Moreover, consumers in the United States account for buying over 70% of the
country's economic output. Unemployed people spend less money than employed
people, which can lead to a decrease in product sales when the unemployment
rate is high. This can result in organizations experiencing a reduction in
their revenue.
5. Balance
of Payments:
Structure of the Balance of Payments
- Current Account Balance: This equilibrium holds the highest significance as it is frequently utilized to gauge a country's economic condition. This involves both the inflow and outflow of goods, services, income, and transfers. It is divided into four parts: trade balance, services balance, income balance, and transfer balance.
- Capital Account Balance: This symbolizes the flow of money. For instance, foreign aid or the trading of tangible items other than financial products.
- Financial Account Balance: The financial account balance tracks dealings between parties involving transfer of ownership of a country's assets or liabilities.
Therefore, the formula for the balance of payments
would be the following:
Balance of Payments = Current Account Balance + Financial Account
Balance + Capital Account Balance.
Importance of Balance of Payment
A balance of payment is a crucial financial transaction that provides
information about a country's economic status. The significance of the balance
of payment can be assessed through the following factors:
·
It
analyzes the trade of both exports and imports of products and services over a
specific time frame.
·
Assisting
the government in assessing the export growth potential of a specific industry
allows them to create policies to aid in its development.
·
It
provides the government with a comprehensive view of various import and export
tariffs. The government implements actions to raise or lower taxes in order to
deter imports and promote exports, while also striving for self-sufficiency.
·
If
the economy requires assistance through imports, the government will strategize
based on the BOP, directing funding and technology towards the underperforming
sector to promote future expansion.
·
The
government can use the balance of payments to assess the economy's condition
and strategize for growth. Monetary and fiscal policy decisions are made
depending on the country's balance of payment situation.
6.
Exchange
Rates:
An exchange rate is the fixed rate for exchanging one currency for
another within nations or economic zones. It is utilized for establishing the
worth of different currencies relative to one another and plays a crucial role
in analyzing trade and capital flow dynamics.
Changes in currency values can significantly affect the economy in various
ways. An inevitable result of fluctuating exchange rates, they have the
potential to impact trade, financial growth, investment flows, inflation, and
interest rates, among other things.
Importance of Exchange rates:
1.
Stability
in Balance of Payments (BOP):
A balance of payments records the trade between a country's
entities and those from the rest of the world during a specific period. Any
disparity in that statement inherently alters the exchange rate according to
theory.
If there is a shortage, the currency would lose value as an outcome of the
imbalance. The nation's exports would become more affordable, leading to a rise
in demand and ultimately achieving balance in the BOP.
2.
Foreign
exchange is unrestricted:
Currencies with floating exchange rates can be traded freely, in
contrast to currencies with fixed exchange rates which have restrictions.
Therefore, governments and banks do not have to rely on ongoing management
procedures.
3.
Market
efficiency enhances:
The macroeconomic fundamentals of a nation impact the floating
exchange rate in international markets, which in turn impacts the movement of
portfolios across borders. Therefore, flexible exchange rates improve market
efficiency.
4.
Large
foreign exchange reserves not required:
Central banks do not need to maintain large foreign currency
reserves to protect the exchange rate under a floating exchange rate system.
Therefore, the reserves can be used to stimulate economic development through
the importation of capital goods.
5.
Import
inflation protected:
Nations that have fixed exchange rates must deal with the challenge
of importing inflation via trade surpluses or increased import costs.
Nonetheless, countries utilizing floating exchange rates do not encounter this
issue.
3.1.6 Impact of Economic Policies on Business Environment
The business's economic environment consists of
different economic policies, economic system, economic growth and development
strategies, resource endowment, market size, and infrastructural facilities
status in a country. All of these economic policies impact the business
environment in some manner.
Various economic policies such as fiscal policy, monetary policy, foreign trade
policy, price policy, etc., provide the foundation for how every organization
must operate. In order to comprehend how these policies affect the business
environment, let's delve into each of these components thoroughly.
1. Fiscal
Policy:
Likewise, by adjusting spending on different public projects, the government could impact the current economic situation. Government spending goes towards building infrastructure, providing public services such as hospitals, and establishing large new industrial facilities. For example, if a country experiences inflation. The government planned to lower its spending, resulting in a decrease in people's income. A decrease in income would lead to a decrease in demand, resulting in a decrease in price. During a period of deflation, the government would increase its public spending by funding various public projects, in order to stimulate both income and demand, thus rejuvenating the economy.
Public borrowing is an additional tool available to
the government to impact the economic situation within a nation. This includes
the government selling bonds and persuading the general public and other
organizations to purchase them. By doing this, the government could decrease
the purchasing power in the economy and manage inflation. In times of
deflation, the government could cash in the bonds, resulting in an increase in
purchasing power which could lead to an economic recovery.
2. Monetary
Policy:
Monetary policy is the collection of policies
established and enforced by a nation's central bank to manage the economic
situation. The primary duty of a country's central bank is to uphold the level
of prices and supply of money within the country. This can only happen if the
central bank possesses specific tools. The monetary policy instruments used by
the central bank to regulate the money supply and price level are referred to
as these instruments. They go by the name of Credit control policy. There are
two types of credit controls: Quantitative and Qualitative controls. The first
one focuses on restricting the amount of money in circulation, while the second
is utilized to direct the existing credit within the nation.
The quantitative credit control strategy consists of three instruments: bank rate, open market operations, and variable reserve ratio. The bank rate is the rate at which the central bank discounts eligible bills that have already been discounted by commercial banks. By increasing the bank rate, the central bank can raise the cost of borrowing for businesses when they discount with commercial banks. This would reduce the practice of offering discounts, resulting in a decrease in the money supply in the economy. On the other hand, when the central bank reduces the bank rate, it allows business organizations to access credit at a lower cost, leading them to seek greater discounts on eligible bills from commercial banks. The economy would experience growth due to this lenient credit policy. In the same way, the central bank can adjust the money supply in the economy by buying or selling securities in the open market using open market operations. For instance, let's say there is inflation in a certain economy. Central bank would decrease money supply by selling securities to be purchased by commercial banks and other institutions. During this procedure, the extra funds held by these organizations would be drained, leading to a need for them to limit lending. On the other hand, in cases of deflation, the central bank would purchase securities and transfer the equivalent money to the banking system to encourage the use of more relaxed credit. Variable reserve ratio is the adjustment of the Statutory Liquidity Ratio and Cash Reserve Ratio that commercial banks must hold in relation to their total deposits. Increasing the ratios would result in commercial banks having a smaller amount of funds available for lending, which would lead to a decrease in the amount they can lend. By decreasing the proportion, commercial banks will have a greater amount of funds available to them.
By using qualitative credit controls, the central bank can manage consumer credit, adjust margin requirements, use persuasion, take direct action on non-compliant commercial banks, and more. Through these measures, the central bank can steer available credit towards priority sectors and discourage lending to sectors of lower or no importance. Therefore, companies in the priority sector can grow their business by accessing low-cost funds and support.
3. Foreign
Trade Policy:
The extent of international trade is shaped by the
foreign trade policy. It would impact the business opportunities of the
business entities. A permissive policy would broaden the range for exports and
imports, while a strict policy would limit the range. Likewise, if
protectionism is preferred, business organizations will face fewer market risks
from multinational corporations. If the policy is liberalization, then domestic
businesses must adapt to all challenges from foreign giants. The foreign trade policy
encompasses the exchange rate policy, exchange controls, and customs duties.
All of these are essential for the development of a company. If there is
complete convertibility, businesses would have fewer limitations when
exporting, importing, and making payments. However, with only partial
convertibility, trade opportunities are limited and businesses must endure the
tedious process of obtaining export/import licenses and using authorized
payment methods. Customs duties are also crucial in influencing the amount of
foreign trade. An increase in tariffs would hinder local consumption as the
cost of imported products and services would rise and stay elevated in
comparison to domestically made products and services. A decrease in tariffs
would boost imports and benefit local manufacturers.
The government often updates the foreign trade policy
to meet the needs of the country and its economic situation. In order to
overcome problems with making payments, the government may use different
methods such as devaluing currency, establishing exchange agreements, imposing
tariffs and duties, implementing exchange control regulations, etc. These
strategies will be adjusted as needed to accomplish the intended objectives.
For instance, the government might devalue the currency to boost exports and reduce
imports, making Indian goods cheaper overseas and foreign goods more expensive
in India. Therefore, it is important for businesses to consistently observe any
changes in trade policies in order to adjust their strategies accordingly.
3.1.2
Introduction to Political environment
In the business context, the political environment
includes the legal framework, rules, and governmental decisions that can impact
the functioning and results of businesses. Companies need to monitor the
changing political landscape in order to stay operational. Political changes
have a profound impact on how a company operates, as well as its customers,
suppliers, and distributors. The political landscape, whether local, national,
or international, can greatly influence a company's operations and success. Various
elements impact the political setting of a company, such as trade deals,
policies, and regulations.
The political landscape is always a critical factor in
any business. It is possible for the government to enact laws that could impact
the operations of the company. For instance, mention the ones listed here.
The government has the power to implement environmental laws that require
companies to alter their operations. The company's financing can be impacted by
the political landscape. If the government is not stable, banks and other
lenders may hesitate to offer loans to businesses in that nation. Consumer
behaviour can be affected by the political environment as well. The way the
government operates in a country affects clients from various nations.
Definition of Political Environment
According to Kotler,
“the laws, government agencies, and pressure groups that influence and limit
various organizations and individuals in a given society."
According to David W. Conklin,
“the structure, processes, and activities by which a nation governs itself or
is governed.”
3.1.7 Importance of political environment
in business
1. Regulatory
frameworks:
Businesses are required to follow a complicated
network of rules and regulations at various levels, including local, state,
national, and international. These rules oversee different parts of businesses,
such as labor practices, environmental standards, consumer protection, and
taxation. Failure to comply may lead to significant financial penalties, legal
ramifications, and harm to the organization's image. Comprehending and
adjusting to regulatory changes can lead to potential business openings. New environmental
regulations could encourage the growth of eco-friendly products or services,
leading to the emergence of fresh markets and sources of income.
2. Political
Stability:
A reliable political atmosphere gives businesses
confidence and assurance, enabling them to engage in lasting investments and
strategic choices. Political instability, like constant government turnover,
coups, or civil unrest, may lead to unpredictability and interrupt business
activities. Companies need to evaluate the political risks that come with
operating in various areas. Variables like corruption, safeguarding of property
rights, and adherence to the rule of law can greatly impact a company's decision-making
process.
3. Government
Policies:
Government decisions concerning taxation, monetary
policy, and trade can directly influence a company's profitability. An instance
of this is when lowering corporate taxes can enhance a company's profits,
whereas tariffs or trade obstacles can raise expenses and restrict market
entry. Certain sectors, such as energy, agriculture, and technology, are
influenced by particular government regulations that impact how they function
and compete. Subsidies for renewable energy can promote investment in clean technologies,
whereas limitations on specific industries can constrain growth prospects.
4. Political
Connections:
Political connections are often necessary in certain
countries to secure permits, licenses, and government contracts. Establishing
connections with government officials is essential for businesses to
successfully navigate bureaucratic obstacles and secure a conducive business
environment. Nonetheless, businesses can also be vulnerable to corruption risks
if they overly depend on political connections. Businesses need to be careful
to adhere to ethical standards and steer clear of involvement in bribery or any
other unlawful actions.
5. Public
Opinion:
It is important for businesses to stay informed about
public opinion and social trends, as they have the power to impact government
policies and consumer behavior. Businesses that do not deal with social and
environmental issues could be met with boycotts, demonstrations, and harm to
their image. It is crucial to involve various stakeholders such as employees,
customers, investors, and communities in order to grasp their expectations and
address their issues. Businesses can reduce political risks and establish a
better operating environment by developing trust and goodwill.
3.1.8 Political ideologies and systems and
its impacts on business
Political Ideologies and Systems
are fundamental components of the business environment. They influence how
businesses operate, the regulatory framework they follow, and the economic
conditions in which they thrive or face challenges.
1. Capitalism: Capitalism
supports the idea of individuals owning businesses and having little government
interference in economic matters. It fosters open markets and promotes healthy
competition. A notable illustration of this system is the United States where
companies function within a mostly unregulated free market. Giants such as
Amazon and Google thrive due to their creativity and competitive edge. The
government’s role mainly involves establishing guidelines to uphold fairness in
business conduct.
2. Socialism: Socialism
aims to have the government involved in overseeing aspects of society and
working towards a more equitable distribution of wealth. Its objective is to
bridge the gap between the affluent and the less fortunate by providing
essential services and resources such as education, healthcare and social
security. A notable example of democratic socialism in action is Sweden, where
the government provides welfare programs like healthcare and education at no
cost to citizens. While private businesses are allowed to operate they face
stricter regulations and higher taxes compared to nations. This blend of
ownership ensures that while companies can generate profits people also reap
the benefits of social services.
3. Communism: Communism
advocates a classless society in which all property and means of production are
collectively owned. The government controls the entire economy and businesses
are owned by the government.
Cuba is a communist country whose government controls most trade, industry and
resources. Private ownership is limited and business decisions are centralized.
The government aims to eliminate economic inequality, but this often hinders
innovation and entrepreneurship.
4. Liberalism: Liberalism
emphasizes individual freedom, free markets, and limited government
intervention. He supports the protection of private property and democracy.
The UK is a liberal democracy where businesses operate in a free market with
certain rules to protect the environment, labor rights and competition. The
government provides balanced public services and allows the private sector to
thrive.
1. Democracy: Democracy
is a political system in which citizens have the right to elect representatives
of the government. In a democratic country, the business world benefits from
transparency, the rule of law, and stable governance.
India is the largest democracy in the world. Businesses in India operate within
a legal framework that promotes fair competition, protects property rights, and
provides an independent arbitrator to resolve disputes. Political parties may
change, but the whole system remains the same, providing a favorable
environment for business development.
2. Totalitarianism: Totalitarianism
is a political system in which one party or leader has complete control over
the government and economy. In such a system, businesses often have little
autonomy and economic decisions are heavily influenced by the government.
North Korea is a totalitarian country whose government controls all economic
activities. Business is state property and private enterprise is completely
non-existent. This level of regulation significantly limits business innovation
and competition.
3. Monarchy: A
monarchy is a political system in which a king or queen is the head of state. A
monarchy can be absolute, where the king has all power, or constitutional,
where the king's role is ceremonial and an elected government is responsible
for day-to-day governance.
Saudi Arabia is an absolute kingdom, and the royal family has great influence
on economic policy. The government controls key industries such as oil, and
foreign companies operating in the country must abide by strict rules. The UK,
on the other hand, is a constitutional monarchy in which the royal family
plays a ceremonial role and businesses operate under a democratic,
market-driven system.
4. Oligarchy: An
oligarchy is a political system in which a small group of people, families or
corporations control the government and the economy.
Russia is often referred to as an oligarchy, where a few wealthy businessmen,
known as oligarchs, have significant influence over political and economic
decisions. Businesses in Russia will deal with powerful people in the
government, which can generate income and competition.
Impact of Political environment on
Business
Political ideas and institutions significantly affect
the business environment:
·
Laws and Taxes:
Governments under socialist or communist systems often impose strict
regulations and taxes on businesses, while capitalist systems support less
restrictive competition. powers up.
·
Property Rights:
While property rights are protected in capitalist and liberal systems, property
may be state owned or tightly controlled in communist or totalitarian regimes.
·
Economic freedom:
Under democratic and capitalist systems, businesses enjoy more freedom, while
under authoritarian and communist regimes, the government controls economic
activity.
·
Stability and predictability:
Democratic systems provide greater political stability and predictability,
which is beneficial for long-term business investments.
How economic conditions influence
political decisions.
Economic conditions play an important role in the
formation of political decisions, as they often act as obstacles to the choices
and goals of political leaders. Here are some ways that economics can influence
political decisions:
·
Public Sentiment and Voter Behavior:
Economics has a strong influence on public opinion. When the economy is strong
(eg unemployment is low, GDP is increasing), citizens are generally more
satisfied with their government. On the contrary, in economic downturns (e.g.
recession, inflation), dissatisfaction increases and puts pressure on
politicians to solve these problems. This can affect voting behavior in
elections.
·
Central Policy:
Economic status refers to the policy of the central government. For example,
during a recession, policymakers may focus on stimulus measures such as tax
cuts or increased public spending to stimulate the economy. For example, in
times of economic growth, emphasis may be placed on long-term structural
reforms or solving social problems.
·
Budget Constraints:
Business has an impact on the state budget. Economic growth can increase
income, allowing more money to be spent on social services and infrastructure.
On the other hand, during a recession, low incomes and high health care costs
can strain government budgets and force difficult decisions on how to allocate
resources.
·
International Relations:
Economic activity can affect international relations. Stronger economies
generally have better opportunities to negotiate trade and international trade.
Economic downturns can lead to protectionist policies, such as tariffs or trade
barriers, to protect domestic firms.
·
Community stability:
Economic stress can lead to conflicts and conflicts, which can lead political
leaders to use policies to drive recovery and solve problems on business. On
the other hand, economic success can help improve social cohesion.
·
Politics ideology:
The economic situation can influence the opinion of politicians and leaders.
During times of economic crisis there may be a shift to stricter policies,
while periods of growth may allow for freer trade.
·
Long-term planning:
Business involves long-term planning and rational decision-making. The
government may be interested in investing in education, health and technology
during times of prosperity to support future growth. On the other hand, during
an economic crisis, you can focus on short-term reforms to stabilize the
economy.
3.2 Cultural and Legal Environment in International business
3.2.1 Cultural Environment in
International business
The cultural environment of global business refers to
the system of beliefs, values, norms, customs and practices that shape the
behavior of individuals and groups of society. It includes language, religion,
culture, art and thought processes that influence how people see the world,
interact and do business. Each country or region has its own cultural values
that can affect business, communication and decision-making.
Definition of cultural environment
According to Philip Khotler:
“the set of basic values, perceptions, wants, and behaviors learned by a member
of society from family and other important institutions.”
According to Charles Handy:
“the way we do things around here.”
3.2.2 Significance of culture in
international business
1. Influence
on Consumer Behavior
Culture plays an important role in shaping consumer
preferences, buying behavior and consumption patterns. Understanding local
culture helps companies tailor products, services and marketing strategies to
appeal to their target audience. For example, food habits, religious beliefs
and traditions influence product design, branding and advertising.
2. Effective
Communication
Cultural differences affect the way people communicate
- verbally and non-verbally. Misunderstandings in terms of communication, body
language or the interpretation of contracts can lead to problems and lost
business opportunities. Cultural awareness, including language and linguistics,
is critical to effective negotiation, collaboration and relationship building
in the global marketplace.
3. Management
and Leadership Styles
Culture shapes leadership preferences and management
practices in organizations. In some cultures, hierarchical structures are
extensive and decision-making is centralized, while other cultures value
equality and shared leadership. Multinational companies must adapt their
management style to meet the cultural expectations of their local employees in
order to create a productive work environment.
4. Impact
on Business Negotiations
Negotiation styles vary from culture to culture. For
example, in some cultures relationships and trust take precedence over
contractual agreements, while in other cultures legal agreements are the main
focus. In order to succeed in international markets, businesses must adapt to
different communication methods, such as the pace and flow of conversations,
and the importance of non-verbal communication.
5. Influence
on Organizational Structure and Decision Making
Traditional conflicts affect organizational structure,
power distribution, and decision-making processes. In collectivist cultures,
decisions may involve many stakeholders and require strong consensus, while in
individualistic cultures, leaders may make decisions quickly. Understanding
these cultural patterns can help companies create structures that fit local
practices.
6. Human
Resource Management
Culture impacts employee engagement, motivation, and
retention. Many businesses need to consider their culture when designing
compensation, incentive and career development programs to meet local employee
expectations. Successfully managing a diverse workforce often requires
cross-cultural training.
7. Legal
and Ethical Considerations
Ethical standards and business practices are
influenced by local culture. What is acceptable in one country may be illegal
or illegal in another. Understanding the cultural environment will help your
business comply with local laws, avoid legal disputes and maintain a good
reputation.
3.2.3 Elements of culture in international
business
1. Language
Language is one of the most important aspects of
culture. It is a way for people to exchange ideas, express ideas, and pass on
traditions and knowledge from generations. Language is more than just spoken or
written words; language also includes non-verbal communication such as
gestures, body language, and facial expressions. Each culture has its own set
of symbols and norms regarding speech and behavior, which vary widely between
societies.
2. Religion
Religion is a set of beliefs, values, and practices
associated with cultural practices that are considered sacred or holy. It often
provides moral standards and influences personal behavior and culture. Religion
can bring human values, a sense of right and wrong, and a sense of purpose in
life.
3. Values
Core values are values shared by the entire team.
These are shared ideas that are considered good, important, right, or right in
a culture. Moral values focus on things that people consider important and
strive to achieve, such as equality, freedom, security, family integrity.
4. Norms
Norms are established values and expectations of
people. They define acceptable and unacceptable behavior within the group and
manage day-to-day activities. Traditions are often divided into formal rules
(laws and regulations) and informal practices (social expectations such as
respect and honor).
5. Customs
Culture is the customs and rituals associated with a
particular culture. They are often passed down from generation to generation
and become a means of protecting cultural heritage. Traditions can include
everything from holiday celebrations, religious ceremonies, rites of passage,
to other everyday activities such as meals or thanksgiving.
6. Practices
Practices refer to events or rituals in everyday
cultural life. These behaviors include values, norms, and customs. Behavior
includes how people dress, eat, socialize, and go about their daily business.
3.2.4 Impact of culture on International
Business
Before diving into leadership strategies, it is
important to understand the breadth and depth of different cultures. Culture is
a complex interaction of factors, including:
1. National
Culture: This refers to the beliefs, values and practices
that exist in a country or region. Examples include individualism and groupism
(Hofstede's style), power distance, uncertainty avoidance, masculinity and
femininity, and long-term and short-term.
2. Organizational
Culture: This represents the shared values, standards and
beliefs of a company or organization. It creates communication models,
decision-making processes and the entire workplace. A strong organizational
culture can help bring together diverse employees, while a weak one can create
cultural differences.
3. Generational
Culture: Different generations (eg Baby Boomers, Gen X,
Millennials, Gen Z) have unique values, communication needs and work styles.
These age differences can be linked to national and organizational cultures to
add complexity.
4. Individual
Culture: Everyone has different habits based on their
upbringing, family, education and life experiences. This level of human
humanity must be recognized and respected.
Strategies for Effective Management:
1.
Cultural Intelligence: Developing
cultural awareness means understanding, appreciating, and adapting to different
cultural situations. These include cognitive CQ (awareness of different
cultures), motivational CQ (willingness and confidence to interact with diverse
groups), behavioral CQ (behavior adapted to different cultural contexts), and
CQ metacognitive (awareness and ability to think about interactional
processes).
2.
Effective Communication: It
is important to use clear and concise words, listen carefully, seek clarity and
pay attention to non-verbal cues. Multicultural education can help.
3.
Building trust: Building
trust and mutual understanding among team members requires creating
opportunities for dialogue, encouraging open discussion, and fostering respect
for individual differences. Building a work group that emphasizes unity and
common purpose can be very effective.
4.
Conflict Management: Develop
the ability to mediate cultural conflicts, focusing on understanding the root
cause rather than placing blame. Training on conflict resolution coordination
is highly recommended.
5.
Inclusive Leadership: Leaders
must support diversity and inclusion by fostering a culture of respect and
inclusion. This includes providing equal opportunity, recognizing and rewarding
the contributions of all employees, and preventing harassment.
6.
Flexibility and Adaptability: Organizations
must be flexible and adaptable in their policies and procedures to meet the
needs of a diverse workforce. This may include flexible working arrangements,
cultural policies and HR practices.
3.2.5 Introduction to Legal Environments
The discussion of the legal environment of the
business should establish the importance of law in the development of the
business and in decision making. It is important to emphasize that the legal
system is not only a barrier, but also provides standards in business life,
determines good behavior, protects rights and encourages business. A strong
presentation will introduce the various legal issues related to business, such
as contract law, copyright law, corporate law, labor law and regulatory affairs,
and will show the significant impact of law on all aspects of business.
Definition of Legal Environment
According to Philip Kotler, “the
laws, government agencies, and pressure groups that influence and limit various
organizations and individuals in a given society.”
According to Michael Parkin,
“the body of laws that governs business practices and transactions and which
are designed to maintain competition, protect consumers, and regulate economic
activity.”
3.2.6 Importance of Legal Environment
1. Framework
for business operations: The legal framework provides the
framework within which a business must operate. These include laws and
regulations related to company formation, contracts, intellectual property
rights, employment, taxation and consumer protection. It ensures fair, transparent
and equitable business practices and promotes accountability and compliance.
2. Protection
of business interests:
The legal framework provides the framework within which a business must
operate. These include laws and regulations related to company formation,
contracts, intellectual property rights, employment, taxation and consumer
protection. It ensures fair, transparent and equitable business practices and
promotes accountability and compliance.
3. Ensuring
Fair Competition: The law regulates contracts that protect
commercial interests in business. A good contract can prevent disputes and
ensure that everyone is clear about their obligations. The legal field protects
innovations, trademarks, and patents, allowing companies to maintain their
uniqueness and gain a competitive advantage.
4. Protection
of Stakeholders: These laws ensure job security, quality
products and services. They also protect customers from fraud or inappropriate
behavior. The law protects workers by setting minimum wages, working
conditions, and health and safety standards. They also govern issues such as
discrimination, harassment, and workers' compensation.
5. Corporate
Governance: Legal frameworks play an important role
in ensuring collective governance. Provisions on financial disclosure, auditing
and board accountability help maintain transparency and accountability in
corporate governance. Good corporate governance fosters trust among investors,
shareholders and the public, enhancing a company's reputation and long-term
sustainability.
6. International
business compliance: For businesses involved in international
trade, it’s important to understand the laws of different countries. This
includes trade laws, tariffs, international agreements, and cross-border
regulations. Companies must comply with national and international laws, such
as World Trade Organization (WTO) rules and agreements.
7. Conflict
and Dispute settlement: The legal environment provides
dispute resolution mechanisms through the court system, arbitration and
mediation. This is important for maintaining business relationships and
managing disputes between businesses, customers or suppliers.
3.2.7 Different Aspects of Legal
Environment
The legal environment refers to all
aspects of the laws and regulations governing the business and its operations.
Business must be conducted in accordance with the laws and regulations of
different countries. Generally, India is a developed economy and promotes
direct investment in the country. Therefore, Indian company laws are relatively
simple. The application of the law begins with the decision to set up a company
in India. You need to get the digital identification number online and get the
online signature certificate. It is a legal requirement to register your
company name and status with the Registrar of Companies or ROC. Then you should
get the company documents stamped at the office. Health insurance is also
required in any type of business. There is a pension association for workers
where company registration is done. Business tax registration is a legal
requirement for all businesses. Although India encourages doing business, the
legal environment requires a long process to start or run a business.
·
Sale of Goods Act 1930: Sale
and agreement to sell, implied conditions and warranties, sale by non-owners,
rights of unpaid seller.
·
Negotiable Instruments Act 1881: Meaning
of negotiable instruments, type of negotiable instruments, promissory note,
bill of exchange, cheque.
·
The Companies Act 2013: Meaning
and types, Incorporation, Memorandum and Articles of association, Prospectus,
Issue of shares and bonus shares, rights issue, sweat equity, role of
directors, share qualification, company meetings.
·
The Limited Liability Partnership Act
2008: Meaning and nature of limited partnership,
formation, partners and their relations, extent, and limitation of liability.
·
Consumer Protection Act 1986: Objectives
and machinery for consumer protection, defects and deficiency removal, rights
of consumers.
·
The Right to Information Act 2005: Salient
features and coverage of the act, definition of terms information, right,
record, public authority; obligations of public authorities, requesting
information, and functions of PIO.
Intellectual Property Rights and
Protection
Intellectual property rights are legal rights derived
from intellectual, scientific, literary and artistic rights. This right
protects creators and other producers of intellectual property rights and
services by giving them time to regulate their use. Protected intellectual
property rights, like other property, have commercial interests and can be
owned, sold, or purchased. It is invisible and permanent.
Types/Tools
of IPRs:
- Patents.
- Trademarks.
- Copyrights and related rights.
- Geographical Indications.
- Industrial Designs.
- Layout Design for Integrated Circuits.
1. Patents
A patent is an exclusive right granted to an
invention, a product or process that provides a new way of doing something or a
new technical solution to a problem. It provides product protection to patent
owners. The policy period is limited, which is 20 years. Patent protection
means that an invention cannot be made, used, distributed or sold without the
permission of the patentee. The patent owner has the right to decide who can or
cannot use the temporarily protected patented design. The patent owner may license
or allow other parties to use the invention under agreed terms. The owner can
also sell the manufacturing rights to someone else, who then becomes the new
owner of the patent. When a patent expires, protection ends and the invention
enters the public domain, and the owner no longer has exclusive rights to the
invention, making it available for others to commercially exploit.
2. Trademarks
A trademark is a sign that distinguishes a product or
service as the product or offering of a particular person or company. It can be
a single word, letter or number, or a combination. They may include images,
symbols, three-dimensional symbols that indicate the shape and form of the
product's packaging, sound symbols such as music or sounds, smells or colors
used as distinguishing features. It provides protection to the owner of the
mark by granting the exclusive right to use it to identify goods or services or
to allow others to use it for payment. It helps consumers to identify and
purchase a product or service because its features and quality, represented by
a unique brand, meet their needs. Trademark registration is proof of ownership,
giving the owner legal rights. Trademark rights may be retained indefinitely.
The initial registration period is 10 years; can then be updated regularly.
3. Copyrights and related rights
Copyright is a legal term that describes the rights
granted to creators over their literary and artistic works. Copyrighted works
include: literary works such as novels, poems, plays, reference books,
magazines, computer programs; databases; films, music, and dance; artistic
works such as paintings, drawings, photographs, and sculptures; walks; and
media, maps, and technical graphics. Copyright belongs to the natural work; so
registration is not mandatory. However, registering a copyright proves that the
copyright belongs to the work and that the creator owns it. Creators often sell
the copyright of their work to individuals or companies who can successfully
market their work for money. These payments are usually based on how the
service is used and are known as royalties. The duration of these economic
rights (except for photographs) is the lifetime of the author and sixty years
after the creator's death.
4. Geographical Indications (GI):
A regional label is applied to goods produced in a
specific region, with a designation or designation of origin. The product is
often region-specific and influenced by local influences such as climate and
soil. They can also identify certain characteristics of a product based on the
characteristics of the place of production, such as the production skills and
culture of the product. Regional indicators indicate the exact place of
production or region, which determines the original characteristics of the product.
What matters is the quality of the product and the origin of the name. The
place of birth can be a village or a city, a province or a city. This is a
special benefit given to the community that allows all members to share in the
benefits of registration. Recently, Chanderi Saree, Kullu Shawls, Wet Grinders
and others have registered for regional exhibitions.
5. Industrial Designs:
Industrial design refers to a design work resulting in
the decorative or formal appearance of a product, and design copyright refers
to a novel or original design granted to the legally registered owner of the
design. Industrial design is part of intellectual property rights. Under the
TRIPS Agreement, minimum standards for the protection of industrial designs are
specified. As a developing country, India has modified its national laws to
provide these minimum standards. The main purpose of design law is to promote
and protect the design elements of factory products. It also aims to promote
business innovation. The existing industrial design laws in India are contained
in the New Designs Act, 2000, which will play its role in the rapid
technological changes and international developments. India has also achieved a
mature position in the field of industrial design due to economic globalization
and the existing legislation is in line with the changing technological and
business environment and in line with the global trends in design management.
The transfer law also aims to provide a detailed classification of designs in
order to comply with the international system and to take into account the
spread of design-related activities in different fields.
6. Trade Secrets:
Confidential business information that may provide a
business with a competitive advantage is considered a trade secret. They are
usually technical or industrial secrets or trade secrets. These include sales
channels, distribution channels, customer information, marketing channels,
supplier and customer lists, and manufacturing processes. Unlike patents, trade
secrets do not require registration to be protected. Trade secrets can be
protected for a limited time, but must always be an essential part of confidentiality
so that the information is difficult to obtain except through malicious means.
Considering the amount of parental information in the country, this protection
is very effective for benefiting from such information. The secret of marketing
lies in the connection between cultural knowledge and place.
7. Layout Design for Integrated Circuits:
Semiconductor Integrated Circuit means a product
having transistors and other circuitry elements, which are inseparably formed
on a semiconductor material or an insulating material or inside the
semiconductor material and designed to perform an electronic circuitry
function. The aim of the Semiconductor Integrated Circuits Layout-Design Act
2000 is to provide protection of Intellectual Property Right (IPR) in the area
of Semiconductor Integrated Circuit Layout Designs and for matters connected
therewith or incidental thereto. The main focus of SICLD Act is to provide for
routes and mechanism for protection of IPR in Chip Layout Designs created and
matters related to it. The SICLD Act empowers the registered proprietor of the
layout-design an inherent right to use the layout-design, commercially exploit
it and obtain relief in respect of any infringement. The initial term of
registration is for 10 years; thereafter it may be renewed from time to time.
Department of Information and Communication Technology The Department of
Information Technology is the administrative agency, responsible for
registration and other matters.
3.3
Technological and Competitive
Environment
3.3.1 Introduction to Technological
Environment
Definition of Technological environment
According to Philip Kotler,
“The technological environment consists of forces that create new technologies,
creating new product and market opportunities.’
According to Micheal Porter,
“The technological environment includes the technological advancements and
innovations that influence the ways in which companies produce, distribute, and
compete in the market.”
3.3.2 Impact of Technology on Business
Environment
·
Demand for Traditional Capital: As
technology advances, the demand for traditional capital will be greater. More
modern equipment can be purchased to facilitate business growth and
development.
·
Increase in Quality of Products: The
quality of goods and services has improved due to technological developments.
High-quality products improve people's living standards. Consumers are willing
to spend more money to buy good products.
·
Rise in Productivity: Can
increase the production of goods. With the help of high technology, we purchase
modern equipment and produce high-quality products. In addition, today's
industry also adopts new production methods and new methods. Use
capital-intensive technology instead of labor-intensive technology to produce
new products.
·
More Emphasis on R&D: Companies
are focusing more on in-house R&D as well as traditional R&D in certain
areas where India already leads and has the potential to leapfrog to developing
countries. India should export technology to these areas. Reinventing the wheel
elsewhere would be expensive in terms of talent and cost, especially since
India can easily borrow technology. In all these cases, technical knowledge
must be used.
·
Obsolescence: Some
products have become obsolete in the development of technology, such as
transistors, scooters, picture tube television images, etc. Cell phones are
replacing old landlines, watches, alarm clocks, computers, etc.
·
Demand for Skilled Labour: In
today's world, more skilled workers are needed to operate technical equipment.
The demand for skilled workers increased. It creates jobs in India. This is a
great opportunity for the new generation to become tech-savvy.
·
Organization Structure becomes Techno
Structure: Most of the organizational structures have become
technological units with wifi campuses, computer systems replacing manual
systems, electrical equipment, CCTV camera systems to control workers and
subordinates.
·
Quality Management: All
you have to do is borrow technology. Talking about the right technology only
works if we stick to local markets and work individually around the world.
·
Expectation of Customers: The
seller is considered the king of the market. Today there is a concept of fixed
income. These results are very important. As technology advances, consumer
expectations continue to rise.
3.3.3 Selecting Appropriate technology for
business
Technology issues can be daunting for any
entrepreneur, from creating a cheap website to setting up supporting tools and
cloud security. Many entrepreneurs are frustrated by the learning curve and
expense required to master a new tool, app, or service. However, when done
right, technology can fuel the growth of your business.
2. Data
Loss: Research by Price Waterhouse Coopers shows that 70% of
small businesses experience data loss within a year. This may indicate the
weakness of small companies in this sector because they do not have the
financial resources for large companies to invest in storage, storage and
security. In addition, most of our data can be stored on only a few devices,
making us vulnerable to loss, theft or damage. Fortunately, there are many
sources of information to choose from. You can save your data to an external
device, burn it to a disc, or subscribe to a cloud storage service like
Box.com. To increase your security, complete all three tasks. Whatever you
want, make sure your external data is always secure and accessible.
3. Social
Media: The problem is time constraints: marketers want to
engage with social media (recognizing its impact on marketing success), but
struggle to find time to tweet, blog or network. Rely on technology and
software to simplify and speed up your online activities. Hootsuite provides a
unique platform for tracking and measuring your social media activity on sites
like Facebook, Twitter, YouTube and LinkedIn. Every social network is
accessible through mobile devices, allowing you to share your thoughts from
your phone no matter where you are.
5. Emerging
Technology in Business: Information technology has changed
the social and business environment. Technology generally includes techniques
or tools used to collect, transform, store and transmit information. Many
companies have adopted customer-driven technologies to reduce costs and improve
the efficiency and effectiveness of their manufacturing processes. Companies
are leveraging technology to build multiple business areas internally and
externally. New technology includes new hardware or software.
3.3.4 Introduction to Competitive
environment
In a competitive environment, many companies compete
for market share through different marketing strategies, support channels, and
pricing strategies. It studies the impact of competition on business and how
companies adjust their strategies to remain competitive. This usually refers to
a company offering comparable products or services to the same target market.
As more and more businesses begin to offer similar products or services, the
environment becomes more competitive. Most of the time, competing companies
follow the rules that are established in this process. Businesses usually have
two competitors:
·
Direct Competitors: They
offer the same or similar products. For example, jewelry companies compete
directly with each other because they provide the same level of satisfaction to
their customers.
·
Indirect Competitors: These
are companies that offer different products or services to compete. For
example, companies that produce smartphones and cameras compete indirectly
because consumers often use smartphones as cameras.
Definition of Competitive Environment
According to Micheal Porter,
“A competitive environment is shaped by the five forces that determine the
intensity of competition: the threat of new entrants, the bargaining power of
buyers, the bargaining power of suppliers, the threat of substitute products or
services, and the intensity of rivalry among existing competitors.”
According to Philip Kotler, “The competitive
environment consists of all the actual and potential rival offerings and
substitutes that a buyer might consider.”
3.3.5 Types of Competitive Environment
There are four main types of competitive environments
1. Pure/
Perfect Competition:
2. Monopolistic
Competition:
It refers to the type of market in which many small
companies compete. Products and services vary, with prices set based on supply
and demand. A good example is the food industry. Each restaurant offers a
unique combination of cuisine, customer service, atmosphere and dining
environment to the same customer group while competing for the same customers.
Although there is competition, each restaurant has a lot of control over prices
because of the unique atmosphere it offers.
3. Oligopoly:
In this market structure there are several large
companies fighting for competition. The automobile industry is a good example
of the great diversity of products and services that are not determined by
price and the forces of supply and demand. Toyota, Volkswagen, Ford and General
Motors have a large influence on market prices, developments and regulations.
High costs make it difficult for new competitors to enter the market and the
number of participants is limited.
Monopoly:
This marketing strategy involves only the presence of
the company. It is not just based on supply and demand that determines the
price, but also includes large differences between goods and services. In some
areas, a person may work for a water or electric company. Management always
monitors these groups to avoid abuse of power and supports fair prices for
consumers. For example, a nearby power company may become the sole supplier of
electricity in a certain area, creating a market monopoly.
Any competitive situation directly affects consumers, businesses and the
economy, pricing structures, product quality, and market innovation.
3.3.6 Factors affecting Competitive
Environment
Numerous variables can influence the competitive
landscape. Hence, thriving companies strategically assess these factors to
outdo the intense competition in their designated market. Let's take a closer
look at them-
1. Number
firms in industry: If there are many small businesses, the
market can be either perfectly competitive or perfectly competitive. If there
are only a few large firms, then the market is an oligopoly or monopoly.
2. Nature
of Industry: If the industry is capital intensive, the
market structure is oligopoly or monopoly. If the firm is doing well, the
market structure is perfect or competitive.
3. Size
of firms in industry: If all firms are small, the market
structure is perfect or pure competition. If there are few large firms and many
small firms, the market structure is monopolistic competition. If all firms are
large, the market structure is oligopoly or monopoly.
4. Level
of differentiation: If there is little or no differentiation
between products and services, the market structure is perfectly competitive or
pure competition. If the difference is different, the market structure is
monopolistic competition. If the difference is large, the market structure is
oligopoly or monopoly.
5. Level
of entry and exit barriers: A market structure can be oligopoly
or monopoly if there are significant barriers to entry. If there are few
barriers to entry, the market structure can be efficient or competitive. A
market structure can become an oligopoly or monopoly if there are too many exit
barriers. Market conditions can be efficient or competitive if there are few
obstacles to avoid.
6. Nature
of product: If profit is important, the market
structure is oligopoly or monopoly. If the product is a luxury, the market
structure is monopolistic competition.
7. Nature
of customer: If customers are price sensitive, the
business model will be perfect or merely competitive. If consumers are not
price sensitive, the business structure is likely to be oligopoly or
monopoly.
8. Government
regulations: When the government controls an industry,
the market structure becomes an oligopoly or monopoly. When the government
loosely regulates an industry, the market structure is essentially competitive
or pure competition.
1. SWOT
Analysis:
SWOT analysis is a
strategic planning tool used to evaluate the internal and external factors that
influence an organization's success. It identifies strengths, weaknesses,
opportunities and threats. Following is a brief description of each factor:
Strengths: These are the internal strengths and factors that make a
competitive organization effective. Examples include a good brand name,
knowledgeable staff, or innovative products.
Weaknesses: These are the internal factors that put an organization at a
disadvantage compared to its competitors. This could include low costs,
outdated technology, or poor customer service.
Opportunities: These are external factors that the organization can
control. Opportunities may arise from market conditions, changes in customer
needs, or technological advances.
Threats: These are external threats that may disrupt the operations of
the organization. For example, increased competition, regulatory changes, or an
economic downturn.
SWOT analysis assists organizations in determining strategic options,
maximizing strengths and opportunities, and minimizing weaknesses and threats.
2. Porter’s
Five Forces Model
Porter's five forces model is a framework developed by
Michael E. Porter for analyzing the competitive forces that shape industries
and determine productivity. The model identifies five key forces that influence
competition and strategic decisions.
Threat of new entrants: the ease or difficulty with which new
competitors enter an industry. Low barriers to entry (eg, high capital
requirements, strict regulations) increase the threat of new entrants and thus
increase competition.
Bargaining power of suppliers: buyers must raise prices or reduce the
quality of goods and services. If there are few suppliers or special entry
offers, the influence on the companies in the sector will be greater.
Bargaining power of the buyer: ability of the buyer to demand a lower
price or a higher quality product. If customers are few or can easily switch to
competitors, marketing power increases.
Threat of substitutes: Risk that customers will switch to substitute
products or services that satisfy needs. The greater the number of substitutes,
the greater the threat to the industry.
Competition between existing competitors: The intensity of competition
between existing companies in the sector. High competition can result in low
profitability due to too many competitors, slow market growth, or
undifferentiated products.
3. Value
Chain Model
Michael E. Porter
developed the value chain model in 1985. It’s a part of microeconomic theory
that examines a company’s activities to create customer value.
The value chain model has
two main components-
1. Primary activities
These core activities are
necessary to produce and deliver a product or service. They can be divided into
four categories-
- Inbound logistics: This
refers to activities such as receiving, storing, and handling raw
materials.
- Operations: This
refers to assembling, manufacturing, and packaging a product.
- Outbound logistics: This
refers to activities such as warehousing and distributing a product.
- Marketing and sales: This
refers to advertising, promoting, and selling a product.
- Service:
Post-sale activities like customer support, maintenance, and repairs to
enhance customer satisfaction.
2. Support activities
These activities help
primary activities but are optional to produce and deliver a product or
service. They can be divided into four categories-
- Procurement:
This refers to activities such as purchasing raw materials.
- Human resources management: This refers to activities such as recruiting, training, and managing employees
- Technology development: This refers to activities such as researching and developing new technologies.
- Firm infrastructure:
This refers to activities such as accounting, finance, and legal
compliance.
4. PESTLE
Analysis:
PESTLE analysis is a strategic tool used to analyze
external environmental factors that affect an organization. It helps businesses
understand the wider environment in which they operate and see potential
opportunities or threats. This abbreviation stands for:
Political: Refers to the impact of government policies, laws, and
political stability on an organization. These include the tax system, trade
prices, labor laws and government stability.
Economic: deals with economic events that affect business, such as
inflation, exchange rates, interest rates, economic growth and unemployment.
These factors affect the purchasing power of consumers and their spending
patterns.
Social: Includes social and cultural factors such as population,
lifestyle changes, education and consumer behavior. Social changes can affect
the value of a company's products or services.
Technology: refers to advances in technology, innovation, automation,
and research and development (R&D) that affect production efficiency,
product innovation, and market growth.
Legal: deals with laws and regulations that affect the business
environment, including labor laws, health and safety laws, consumer protection
laws and corporate laws.
Environment: Focus on environmental and environmental issues such as
climate change, sustainability, waste management and environmental regulations.
Companies may have to adapt their practices to meet environmental standards.
5. Growth
Share Matrix
The growth-share matrix is a framework developed by
BCG in the 1970s. The Growth-Share Matrix, also known as the BCG (Boston
Consulting Group) Matrix, is a tool used to analyze a company's portfolio of
products or business units based on market growth rate and relative market
share. It helps in resource allocation by categorizing business units into four
quadrants:The market growth rate is the overall market growth rate for a
particular product or service.
The growth-share matrix has four quadrants
Stars: Stars are
businesses or products with a high market share in a high-growth market.
Cash Cows:
Cash cows are businesses or products with a high market share in a low-growth
market.
Question Marks:
Question marks are businesses or products with low market share in a
high-growth market.
Dogs: Dogs are
businesses or products with low market share in a low-growth market.
3.4 Framework for Analysing International
Business Environment
Analyzing the international business environment
involves taking into account various external factors that affect how
businesses operate in global markets. The process of detailed environmental
analysis focuses on five important areas: geographic, economic, social,
political and legal. Each of them plays an important role in the development of
international business strategies. Here is a breakdown of each section:
1. Geographical
Environment: Environment refers to the conditions and
environment of the place that affect international business activities. This
includes factors such as climate, environment and infrastructure that influence
operations, management and market dynamics.
·
Climate and Weather:
Weather affects industries such as agriculture, tourism, and transportation.
Businesses need to consider the impact of climate on product design, product
distribution and product demand (e.g. seasonal items).
·
Natural Resources:
The availability of raw materials, energy and minerals affects production and
marketing costs. Countries with natural resources can attract businesses that
depend on those resources.
·
Topography and Transportation:
Topography (mountains, rivers, coasts) affects transportation, transportation
costs, and market access. Good infrastructure (roads, ports, railways) makes it
easier to do business.
·
Proximity:
Location affects trade routes, transportation costs, and ability to access
major markets. Countries that are close to major international markets or trade
centers tend to have a competitive advantage in trade.
2. Economic
Environment: The economic environment includes how the
economy and economy of a country or region affect business activities. It
determines the market potential, the purchasing power of consumers and the
overall potential for market penetration.
·
Economic system:
Different countries use capitalist, socialist or hybrid systems. The economic
structure determines the degree of state intervention, secrecy and freedom of
the market.
·
Gross Domestic Product (GDP):
A country's GDP reflects its economic health and market growth. Higher GDP
usually means greater business opportunities. Rising prices and interest rates:
Rising prices reduce purchasing power, while rising interest rates affect
lending and purchasing decisions.
·
Exchange rate and currency stability:
Changes in exchange rates can affect profits, pricing strategies and exchange
rates. Fixed income reduces the risk of currency fluctuations.
·
Labor and labor market conditions:
The availability of skilled workers, wage rates, and labor productivity play a
major role in determining what businesses choose to do.
·
Trade Taxes and Traiffs:
Trade restrictions, tariffs, and other trade barriers affect the ease and cost
of importing and exporting goods and services.
3. Socio-Cultural
Environment: Social culture includes the beliefs, values, customs and behaviors
of people in different communities. Understanding cultural differences is
critical for companies to improve product development, marketing strategies,
and product management.
·
Population:
Population size, age distribution, gender inequality, education level, and
income distribution affect the demand for goods and services. Younger people
may increase the need for technology and entertainment, while older people may
increase the need for health care.
·
Cultural Attitudes and Values:
Different cultures have different ideas about leadership, time, communication,
risk, and self-interest. Companies must adjust their management and marketing
practices accordingly.
·
Language:
Communication is key in international business, and language barriers can
affect negotiations, marketing and customer service. Multinational companies
often adapt their communication to local languages and dialects.
·
Religion:
Religious beliefs influence consumer preferences, purchasing behavior and
business practices. For example, traders must respect dietary restrictions in
some regions (for example, Muslim countries do not eat pork).
·
Consumer Behavior:
Preferences, preferences and brand loyalty vary across cultures. Businesses
must research and adapt their products to fit the cultural expectations and
buying habits of different markets.
4. Political
Environment: Political environment refers to the
impact of government policies, political stability, international relations,
etc. on corporate business activities. Political issues can affect everything
from regulation and taxation to market access and security.
·
Political Stability:
Countries with stable governments are attractive to businesses because they
offer predictable political conditions. Political unrest, coups, or unstable
leadership may increase a company's risks.
·
Government policy:
Government interventions such as subsidies, taxes, and investment incentives
can encourage or hinder business growth. Trade policies, including import and
export taxes and quotas, directly affect international trade.
·
International Relations:
Diplomatic relations between countries influence trade agreements, prices, and
the distribution of goods and services. Strong international relationships can
increase market access, while trade sanctions can create barriers.
·
Corruption and Fraud:
Levels of corruption and bureaucratic inefficiency can create obstacles for
businesses by increasing operating costs and delays. Countries with high
transparency and well-established institutions are more attractive to foreign
investors.
·
Nationalism and Protectionism:
An increase in nationalist or protectionist policies, such as
"takeover" measures or restrictions on foreign ownership, may reduce
the competitiveness of foreign companies in certain markets.
5. Legal
Environment: The legal field includes laws and
regulations that govern business operations in different countries. Legal
issues can include everything from trade regulation laws to consumer protection
laws, labor laws and intellectual property rights.
·
Trade regulations:
Trade regulations, such as tariffs, import/export restrictions, and quotas,
affect trade opportunities and administrative costs. Free trade agreements can
reduce barriers and encourage international trade.
·
Labor Laws:
Each state has specific labor laws that relate to wages, working conditions,
collective bargaining and workers' rights. These rules apply to salaries,
employee benefits and all business practices.
·
Protection of Intellectual Property
(IP): Protecting patents, trademarks and copyrights is
important for businesses and industries such as technology, medicine and
entertainment. Weak IP laws increase the risk of fraud and piracy.
·
Contract Law:
Knowledge of contract law is important for negotiating contracts and resolving
disputes in international markets. Each country's legal system may interpret
contracts differently, so businesses should be aware of local regulations.
·
Environmental Laws:
Many countries are implementing strict environmental laws to combat climate
change and air pollution. It is important for business, especially in
industries like manufacturing and energy.
·
Consumer Protection Regulations:
These regulations ensure that products meet safety and quality standards.
Companies must comply with local regulations to avoid legal consequences and to
maintain customer confidence.
· This affects businesses through factors
such as GDP growth, inflation, interest rates and consumer purchasing power.
Government policies also play an important role in shaping business outcomes.
· Political stability, government policies
and regulations significantly affect business activities. The business world
must understand the legal system, taxes and trade agreements to be successful
internationally.
· Cultural values, norms, language and
religion influence consumer behavior and business practices. Understanding
different cultures is essential for effective marketing and communication in
international markets.
· International businesses must comply with
the legal framework, including contract law, intellectual property rights and
regulatory compliance. The legal environment provides protection and ensures
healthy competition.
·
Rapid technological development affects
business efficiency, product innovation and global competitiveness. In order
for businesses to remain competitive, it is very important to keep up with the
latest technological developments.
·
Companies face competition from direct and
indirect competitors. Understanding market dynamics, differentiation and
industry structure helps businesses strategize and maintain market share.
·
Tools such as PESTLE, SWOT, Porter's Five
Forces and Growth Share Matrix are useful for analyzing the global business
environment and making strategic decisions.
Exercises
Short Answers
- Define the economic environment in international business.
- What are key economic indicators in assessing business environments?
- Mention two impacts of economic policies on business environments.
- What is meant by the political environment in international business?
- Define cultural environment in the context of international business.
- What are two important aspects of the legal environment?
- State two factors that affect the competitive environment.
- Explain any 2 framework of Competitive Environment
- List two types of political ideologies.
- Explain the significance of the political environment in shaping international business operations.
- Discuss the importance of the cultural environment and how it impacts international business.
- Describe the role of the technological environment in business decision-making.
- Apply your understanding of economic policies to explain how recent economic reforms in any country impacted the international business environment.
- Consider a company entering a new market. Explain how the cultural environment would affect its marketing strategy.
- Analyse how different political systems (e.g., democracy vs. authoritarianism) affect international business operations and decision-making.
- Compare and contrast the competitive environments of two industries, and discuss how businesses adapt to these environments.
- A multinational company is planning to expand its operations into a new country. Identify and explain the key economic and political factors that the company should consider before making this decision.
- Evaluate the impact of legal regulations on multinational corporations operating in countries with differing legal systems. Provide examples to support your evaluation.
- Design a framework for analysing the international business environment, incorporating economic, political, and technological factors.
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