International Business The Environmental Challenges

The Environmental challenges

Substantial challenges face any organization intent on getting to the future first. The first challenge, how to navigate from here to there arises as both public and private institutions struggle to plot a course through and increasingly inconsistent environment where experience is rapidly devalued and familiarlandmarks no longer serve as guideposts. Never before has the institutional terrain been changing so quickly or have industry boundaries been so malleable. Never before have competitors, partners, suppliers and buyers been so indistinguishable. How, then, does one get to the future first even when there is no map?

(C K Prahalad and Gary Hamel in the preface to Competing for the future)

What makes business different are the differences in the environment and eventually may make the international business strategy different from the domestic one. A detailed analysis of the business environment of the foreign countries is, therefore, an essential prerequisite for formulating international business strategies.

As Cateora point out “the key to successful international business is adaptation to the differences in the environment that usually exist from one country to another. Adaptation is

not a passive process but a conscious effort on the part of the international player to anticipate the influences of both the foreign and domestic uncontrollable environments on a business strategies and then to adjust the strategies to minimise their efforts.

The root cause of most international business problems is the“Self Reference Criterion” (SRC) in making decisions, that is, an unconscious reference to one’s own cultural values, experiences and knowledge as the basis for decisions. The SRC is one of the most difficult to break … Lee.Ex. P & G stormed into Japanese market with American products, American managers, American sales methods and promotion strategies. The results were disastrous until the company learnt how to adapt product and marketing styles to Japanese culture. Similarly, the American company, TexasInstruments which started making semi-conductors in Japan took an American approach to hiring, pay and benefits, dismissing the Japanese system of offering bonuses two timesa year as impractical. The workers disagreed, morale crumbled and the company had trouble recruiting employees.

Later, when company adopted the Japanese methods of recruiting and reward including bonuses and a promotion system based on seniority, the situation vastly changed.

Key Environmental factors relevant to International Business

1. Social & Cultural environmental factorsinclude Demographic factors

2. Technological environmental factors3. Economic environmental factors4. Political and Government environmental factors5. International trading environmental factors6. Natural environmental factors

1. Social & Cultural environment

• Religious factors

• Language

• Customs, Traditions & Beliefs

• Tastes & Preferences

• Buying and Consumption habits

Cultural UniversalsIrrespective of the religion, race, region, caste, etc., all of us have more or less the same needs. These common needs are referred to as ‘Cultural Universals’ and identified as – cooking, dancing, singing, education, athletic, sports, bodily adornment, joking, kin groups, status differentiation and dream interpretation. The cultural universals enable businessmen to market the products in many foreign countries with modifications. For example, TVs, cars, video games. Culture is not a barrier to computer software. As such, computer software industry of the USA, Europe and Australia has been attracting most of the Indian computer software engineers. Other examples include diamonds, gold ornaments, flowers which have worldwidedemand. Many managers felt that Japanese would not eat ‘black food’, when Yamazaki-Nabisco thought of introducing Oreo cookies in Japan. But Oreo cookies became number one cookies in Japan. Cultural Universals do not mean that two cultures are not very much close to each other.

Safe rules in International Communication.“Speak to the rest of the world as

if you were answering a slightly deaf, very sick old auntie,

who just asked you how much to leave for you in her will.”

A prolonged eye-to-eye contact is polite in the USA and rude in Japan, Indian and Sino

cultures.

Demographic environment

• Size of population, Growth rate

• Age composition

• Family size, Nature of families

• Income levels

2. Technological environment

• Type of technology in use

• Level of technological development

• Speed with which new technology is accepted and adopted

• Technology which is appropriate

3. Economic environment• Nature and level of development of economy

• Economic resources

• Size of economy

• Economic system and policy

• Trends in GDP/GNP growth rate, per capita income

• Nature and trends of foreign trade

• Domestic demand and supply conditions(Out of 200 nations, 75% are developing nations having 80% of population. Only 54 nations have high income economies.)

4. Political & Government environment

• Political parties• Radical differences• Fundamentalists• Govt. system• Liberal or Conservative policies

5. International trading environment

• Trade barriers

Tariffs

Non tariff barriers

• Import licensing, quotas, foreign regulations, canalisation, quantitative restrictions --- normally applied by developing countries.

• Voluntary export restraint (VER) – which is normally applied by developed countries (protection for those companies who have lost international competitiveness)

Objectives of Trade Barriers1.To protect home industries from foreign competition2.To promote new industries and Research & Development3.To conserve Foreign exchange reserves4.To maintain favourable Balance of Payment5.To protect economy from dumping6.To curb conspicuous consumption7.To make economy self reliant8.To mobilise public revenue9.To counteract Trade barriers imposed by other countries

6. Natural environmental factors

• Natural Resources

• Absolute advantages

• History: Learning and adaptation (ex North and South Indians)

Can Negative Perceptions Dampen International Business Relations?Japan and China would seem to be natural economic partners, given that they are geographically so close to each other. However, Japanese companies currently lag behind both the US and Europe in terms of trade with China. Although the Japanese auto industry has had enormous success in other countries, including US, the top selling foreign cars in China are produced by GM and Volkswagen and not Toyota or Nissan. Also, Japan’s booming electronics industry currently captures only 5 percent of the Chinese market. But who or what is to blame for the dismal business relationship between Japan and China? The perceptions of the people – in both countries – may be the answer. For example, many Chinese citizens are still angered about a report that employees of a Japaneseconstruction company hired Chinese prostitutes for a corporate

party. And many Japanese citizens believe that Chinese immigrants are to blame for many of the violent crimes taking place in Japan. In addition to these recent events, historically relations between the two countries have been strained. Beijing is still upset about Japan’s military invasion of China in the 1930s and 1940s, for which Japan refuses to make amends.These negative perceptions may be difficult to reverse if perceptual errors such as fundamental attribution error and the halo effect are operating. That is, both countries blame each other for their behaviours and both countries tend to view each others actions negative. Because of these errors, future behaviours, even if they are ambiguous, may be perceived negatively by the other country.

Capitalism, Socialism and Communism Compared

Characteristics Capitalism Socialism Communism

Economic Markets Freedom to compete with right to invest.

Limited competition with state owned industries.

Absence of competition with state owned markets and industries.

Individual incentives Profits and wages in relation to one’s ability and willingness to work.

Profits recognised. Wages fairly in relation to efforts.

Profits not allowed. Workers urged to work for the glory of the state.

Capital Sources Capital invested by owners who may also borrow on credit. Capital may be re-invested from profits.

Obtained from owners and from state – issued bonds for state-owned industries.

State provides all the resources to start business owned by the state.

Capitalism, Socialism and Communism Compared

Characteristics Capitalism Socialism Communism

Labour Workers are free to select an employer and an occupation.

Workers allowed to select occupation. State planning encourages employment.

The state determines one’s employer and employment.

Management Managers are selected on the basis of ability. Managers have freedom to make decisions.

Managers in state-owned industries are answerable to the state. Non monetary rewards emphasised

Key managres must be party members. Absence of freedom to make decisions.

Business Ownership Individuals have a right to own a business and to contract with others.

State owns the basic industries. Other businesses may exist.

State owns all productive capacity.

Capitalism, Socialism and Communism Compared

Characteristics Capitalism Socialism Communism

Risk Assumption Losses assumed by owners. May transfer business risks to other businesses through insurance.

People assume risks of state-owned industries. Losses taken from taxes.

Economic production owned by the state. Risks assumed by the state. Losses reduce standard of living.

Class Exercise• Country Evaluation & Selection - Criteria• Select one country (Not India) and

project the salient features of attractiveness for International Business.

• Recommendations.

Thank you