The Global BusinessEnvironment

Topics

. Free trade (and its alternatives)

. National sources of competitive advantage

. Outsourcing and offshoring

. Globalisation

. Fiscal policy

. Cross-cultural management

. Corporate social responsibility (CSR)

. Corporate governance

. Regulation

. Country and political risks

Key LearningSystem Questions

Chapter 1 (end) Questions 1&2Chapter 6 B4(a), (b) and (c)

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Free trade (and its alternatives)

Free trade

Movement of goods, services, labour & capitalwithout barriers likely to distort the exchange

Alternatives to Free Trade policies

� ‘Balanced trade’: country tries to maintain an evenrelationship between respective imports &exports so that neither country runs a large tradedeficit

� Protectionism (economic nationalism) trying toprotect the local market by restricting imports byone country, or trade bloc

Protectionism methods (barriers)

� Tariffs: customs duty imposed on goods whenthey are moved across a political boundary,effectively increasing the cost, making thosegoods more expensive than locally producedgoods, and would discourage their purchase.(also a source of national revenue)

� Quota systems (restrict imports to a particularlevel)

� ‘‘Buy national’’ advertising campaigns

� Technical barriers. Standards of quality, health &safety, packaging, etc. to restrict imports

� Subsidies for local manufacturers

The Global Business Environment

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Free trade (and its alternatives)

Free trade

Advantages

� Society richer, allows for local specialisation

� Nations can develop resources to gain acompetitive advantage

� Communication between nations reduces conflict

� Quality of the goods generally should improve

� Gaining mutual benefits through trade

� Encourages entrepreneurship & investment

� Encourages exports

� Advances political motives

Disadvantages

� Countries concentrate on particular products & donot develop alternatives

� Less developed countries lacking technology aredisadvantaged

� Can undermine national cultures (e.g. growingAmericanisation)

� Multinationals can undermine political systems

� Encourages outsourcing abroad (off-shoring): withjobs lost at home & possible exploitation of labourabroad?

� Compromises national security by reducingborder controls

� Cost of transporting goods: damage to theenvironment?

� No protection for young firms in emergingindustries

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The Global Business Environment

National sources of competitive advantage

Firm strategy, structure

and rivalry

Demandconditions

Factor conditions

Related andsupportingindustries

(Porter’s Diamond) Michael Porter asks:

� Why do certain nations host so many successfulinternational firms?

� How do these firms sustain superior performancein a global market?

� What are the implications of this for governmentpolicy & competitive strategy?

Conclusion

Nations do not have particular competitive advantages,but firms in specific industries use their national back-grounds to lever world-class competitive advantages

Porter’s Diamond explained

Demand conditions

� If home market is substantial firm gets economiesof scale & experience

� If falling sales: an added incentive to export

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National sources of competitive advantage

Related & supporting industries

� Support of world-class producers of components/related products

� Success in a related industry may be due toexpertise accumulated elsewhere

Factor conditions

� Advanced factors (e.g. infrastructure, levels oftraining, skill, R&D experience) help sustainablecompetitive success. (Not basic factors such asraw materials, semi-skilled/ unskilled labour,capital availability, etc.)

Firm structure, strategy & rivalry

� National cultures & competitive conditions createdistinctive business focuses

Other events

� Role of government (e.g. subsidies, legislation,education can benefit of the industrial base)

� Chance events (e.g. wars, civil unrest, chancefactor discoveries, etc.)

National competitive advantage

� Successful firms from a particular country havelinkages between them (‘clustering’) which allowsfor the transfer of expertise (e.g. through staffmovement, concentration of advanced factors,better supplier/customer relations within thevalue chain, etc.)

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The Global Business Environment

Outsourcing and offshoring

Definition

A competence: activity or process through whichan organisation deploys its resources. Somethingthe organisation does, rather than has.

Strategic classification of competences:

� Threshold: the level of competence necessary foran organisation to survive in a given industry

� Core: something different the organisation doesthat underpins a source of competitive advantage

Supply chain management classification of competences:

� Core: competences that give a competitiveadvantage. Therefore should neveroutsource instead make or do in house

� Complementary: should outsource to trusted keysuppliers who have the right skills & develop astrategic relationship

� Residual: should outsource by means of an ‘armslength’ relationship – a simple ‘buy’ decision

Tests for whether to outsource (Quinn & Hilmer):

� What is the potential for gaining competitiveadvantage from this activity? (The lower thepotential, the more sensible it is to outsource)

� What is the potential vulnerability to market failurethat could arise if the activity was outsourced?(The lower the potential, the more sensible it is tooutsource)

� What can be done to reduce these risks bystructuring arrangements with suppliers in such away as to protect ourselves? (The greater thepotential to protect, the more sensible it is tooutsource)

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Outsourcing and offshoring

Advantages of outsourcing

� Accurate prediction of costs & improvedbudgetary control

� Specialist nature of the external provider meansservices received will be higher standard

� Supplier should be able to provide a cheaperservice, due to economies of scale

� Relieved of managing specialist staff in an areathat the organisation does not really understand

� Supports the concept of the ‘flexible firm’

Disadvantages of outsourcing

� difficulty managing ‘service level agreements’

� might prevent the organisation from exploitingnew developments

� impossible to revert to in-house provision.

Offshoring

Definition

Transferring some of the organisation’s activitiesto another country, to exploit differentials in wagerates either by setting up in another country or byoutsourcing.

Issues

� Language barriers

� Time differences

� Exchange rate effects

� Cultural differences (see later)

� Maintaining service levels

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The Global Business Environment

Globalisation

Definition

Growing economic interdependence of countriesworldwide through cross border trade in goods/services, freer international capital flows & rapid,widespread diffusion of technology

Features

� Ability of multinationals to exploit opportunitiesacross different tax regimes

� Lowering of transaction costs by developments incommunications & transport

� Rise of the financial service industries

� Reduction of the importance of manufacturing

� Rise of the newly industrialised nations by theexploitation of cheaper labour

� Increasing importance of global economic policyover national sovereignty

Definition

Foreign direct investment (FDI): the investment offoreign companies (‘multinational enterprises(MNEs)’), eager to share in the growth of acountry that become more competitive

� FDI is often the ‘trigger’ to an economy & canlead to rapid growth in wealth & skills

� Countries that are beginning to benefit from FDIare known as ‘transition’ economies. Theeconomic gain can lead to the development of alocal pool of highly skilled labour, allowing somelocal organisations to grow, until they too enterthe world stage

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Globalisation

Foreign direct investment

Main types of FDI

� Acquisitions. The MNE acquires the shares of the local company. Control of the assets & markets of theacquired firm are transferred to the new parent

� Greenfield investment. Where a company creates new facilities in the host country

Four significant emerging world economies: Brazil, Russia, India and China (the ‘BRIC’ economies), all have:

� Large, rapid growth rates

� Large and increasing wealth disparities between rich & poor

� Consumer-led growth (which is creating powerfully resourced organisations which are now taking ownership ofmajor Western businesses)

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The Global Business Environment

Fiscal policy

Relates to the levels of taxation & spending that agovernment decides upon

� Direct tax: normally a % deducted from earningsor profits

� Indirect taxes (consumption taxes): levied onexpenditure. Examples: A value added tax, leviedon all goods, Hydrocarbon tax on vehicle fuel,Tobacco tax, etc.

Decisions to be made for a government:

� Levels of revenue required

� The balance of direct or indirect tax

� The balance of source of tax revenue (individualsor businesses)

Drivers for international trade expansion:

� Industrial production processes decreasing theimportance of labour as the prime source of skills& expertise

� Improved transportation systems: goods can bemoved easily & quickly to markets

� Improvements in the financial systems: efficientand safe transfer of funds from the buyer to theseller

� Technology advances to communicate and tradeelectronically

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Fiscal policy

Monetary policy

Relates to the supply & price of money

Ways in which the money supply can be increased

� Consumer uses some of their savings

� Foreign currency is changed into the localcurrency (through tourism or exports)

� Businesses or individuals borrowing to invest andkeep their free cash for consumption

� Government releases reserves into the economyby spending money by building roads, hospitals orinfrastructure

Ways in which the money supply can be reduced(or ‘leak’ out of the system)

� Consumers decide not to buy but to save

� People make investments using cash, shares incompanies or even government savings bonds

� Goods are imported, or people go on foreignholidays, and money leaves the country

� Tax payments to the government

Real growth: the rate of increase in the economy’s outputminus the rate of inflation over the same periodmeasured by:

� The Gross Domestic Product (GDP). The totaleconomic activity of a country measured asincomes earned, as expenditures made or as thelevel of production

� The Gross National Product. GDP plus any netoverseas earnings. (A better reflection of thewealth of a developed nation?)

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The Global Business Environment

Cross-cultural management

� Managers need some insight into the complexityof managing international teams

� Firms need to understand local cultures to dobusiness

Ronen and Shenkar (1985)

Created a set of clusters based on an analysis of four keycharacteristics:

� Importance of work goals

� Job satisfaction

� Impact of managerial and organisational variables

� Work roles and interpersonal orientations

Main groupings/states that display shared characteristicson these dimensions

� Nordic – Finland, Norway, Denmark, Sweden

� Germanic – Austria, Germany, Switzerland

� Latin European – France, Belgium, Portugal, Italy,Spain

� Latin American – Mexico, Peru, Argentina, Chile,Venezuela

� Arab – Bahrain, Abu Dhabi, Saudi Arabia, UnitedArab Emirates, Oman, Kuwait

� Near Eastern – Turkey, Iran, Greece

� Anglo – the USA, Canada, New Zealand,Australia, UK, Ireland, South Africa

� Far Eastern– Singapore, Malaysia, Hong Kong,Philippines, Vietnam, Indonesia, Taiwan, Thailand

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Cross-cultural management

Geert Hofstede

Looked at the role of national culture within anorganisation. Five dimensions account for cross-culturaldifferences in people’s belief systems & values

� Individualism versus collectivism: Is the individualthe basis of society or does society give meaningto the individual? (Individualistic¼USA, UK.Collectivistic¼Pakistan, Taiwan).

� Masculinity versus femininity: Masculine empha-sise ‘assertiveness’ compared to ‘nurturance’ forfeminine cultures (Masculine¼Japan, Italy;Feminine¼Denmark, Sweden)

� Power-distance: The extent to which individualstolerate an unequal distribution of power inorganisations/society (Low¼Denmark, Austria;High¼France, India)

� Uncertainty avoidance: The extent to whichpeople tend to feel threatened by uncertain,ambiguous, risky or undefined situations(Low¼Denmark, Sweden; High¼Japan, France)

� Confucian dynamism: The extent to whichconformity according to ‘position’ is stable & elicitspredictable behaviour between individuals. Highlyvalued behavioural attributes: obedience, defer-ence, maintaining the status quo & trouble-freesocial relations (Low¼USA, Australia;High¼China, Japan)

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The Global Business Environment

Cross-cultural management

Trompenaars/Hamden-Turnerdimensions of culture

Relationships with other people

� Universalism versus particularism – rules versusrelationships. Universalistic cultures: emphasis onrules & drawing up contracts. Particularisticcultures focus on the relationships

� Collectivism versus individualism, valuingself-orientation or group orientation?

� Neutral versus emotional (affective), emotionspeople are able to express openly

� Specific versus diffuse – how people adjust theirbehaviour in different settings

� Achievement versus ascription how status isaccorded

Orientation in time & attitudes towardsthe environment

� Sequential time versus synchronic time –difference between a sequence of events orsimultaneous events

� High context and low context – high contextbehaviour will have a form of ritual behaviour ineveryday life. Priorities, status and so on will beimportant. Low context will see little in the way ofritual behaviour and can generally cope with anumber of events happening at any one time

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Corporate social responsibility (CSR)

Stakeholders: persons & organisations that have aninterest in the strategy of an organisation:

� Internal stakeholders (employees, management,etc.)

� Connected stakeholders (shareholders, customer,suppliers, etc.)

� External stakeholders (governments, community,pressure groups, etc.)

Definition

Social responsibility: taking more than just theinterests of shareholders into account whenmaking a business decision

Issues:

� Environmental pollution from production orconsumption of products

� Standards of factory, product safety

� Non-discrimination in employment & marketingpractices

� Avoidance of the use of non-renewable resources

� Non-production of socially undesirable goods

� Production of non-degradable packaging/products

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The Global Business Environment

Corporate social responsibility (CSR)

CSR:

� Refers to a firm’s obligation to maximise positive &minimise negative impacts upon stakeholders

� A key element in the management of anorganisation’s relationships with governments/regulatory agencies

� Dimensions: economic, legal, ethical, philanthropic

Society can:

� Require business to discharge its economic &legal duties

� Expect business to fulfil its ethical duties

� Hope business exercises philanthropicresponsibilities

Note: CSR is not business ethics (Business ethicscomprises principles & standards that governbehaviour in business. Actions can be judged tobe right or wrong, ethical or unethical byindividuals 0.

The extent to which stakeholders judge that busi-nesses meet responsibilities placed on them bytheir various stakeholders will determine the degreeof corporate citizenship exhibited by the firm

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Corporate governance

System to direct & control companies (According tothe Cadbury report) governance is an issue for allorganisations

Rationale:

� Protect stakeholders such as shareholders,employees, pensioners

� Remind directors of the limitations of their power

� Enforce the primary agency relationship ofbusiness (directors work on behalf ofshareholders)

The UK Combined Code: principles

� Directors. Listed companies should be led by aneffective board, with a balance of executive andnon-executive directors so that no individuals/small groups can dominate decision-making.Divide responsibilities for running the board

(Chairman) & running the business (ChiefExecutive)

� Directors’ remuneration. Without paying morethan is necessary, the level should be necessaryto recruit & retain directors of the right calibre

� Accountability & audit. The board is responsiblefor presenting a balanced, understandableassessment of financial position & prospects

� Relations with shareholders. The Board isresponsible for ensuring that a dialogue withshareholders based on the mutual understandingof objectives. The Board should use the annualgeneral meeting (AGM) to communicate withinvestors & encourage them to participate

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The Global Business Environment

Corporate governance

Good corporate governance

� Reduces risk. Helps ensure that personal objectives of the board are aligned with those of stakeholders. Helpsreduce the risk of fraud

� Stimulates performance through clear accountability & effective links between performance & rewards

� Improves access to capital markets by reducing risk as perceived by outsiders (e.g. investors)

� Enhances marketability of goods /services by creating confidence among stakeholders

� Improves leadership. Allows increased expertise upon strategic decision-making, with the influence ofnon-executive directors & encouragement for critical examination of board members

� Demonstrates transparency & social accountability which can foster support & public confidence

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Regulation

Government policy & regulation that shape business.

Examples

prices, wages, market entry, size of firms in anindustry & the control they can exercise, employ-ment conditions, pollution, quality standards, etc.

Methods

� Standards & statements of expectations, publicstatutes

� Registration/licensing to permit/approve theservice/product

� Inspection to ensure compliance to standards

Definition

Corporate Political Activity: a firm’s involvement inthe political process to influence policy

� Important to gain competitive advantage, particu-larly international trade, where domestic producersseek to disadvantage foreign competitors

� Can benefit firms directly, e.g. a firm’s sales togovernment or amount of defence contracts

Types of corporate political behaviour:

� ‘Buffering’: proactive actions, e.g. informinggovernment decision-makers about the impact ofpossible legislation, campaign contributions, toinfluence legislative/regulatory processes

� ‘Bridging’: more reactive, includes trackingdevelopment of regulation in order to have com-pliance in place when legislation is passed

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The Global Business Environment

Country and political risks

Risks

� Expropriation of assets (compensation?)

� Unfavourable laws

� Restriction of operating freedom

� Cancellation or revision of contracts

� Damage to property/personnel from riots, etc.

� Loss of freedom e.g. ability to repatriate profits

� Increased taxes & financial penalties

Sources of risk

� Political philosophies that are changing

� Changing economic conditions

� Social unrest/rising nationalism

� Armed conflict/terrorism

� Impending political independence/newly createdinternational alliances

� Vested interests of local business people

� Competing religious groups

Groups

� Current government, departments, agencies

� Opposition groups that have political influence

� Organised interest groups (e.g. unions)

� Terrorists operating in the country

� International organisations (e.g. World Bank)

� Foreign governments with alliances

Assessment tools

� Porter’s diamond

� PESTLE analysis for home country

� Political risk analysis

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