A – The social, political and economic context
1) The global business environment
a. Globalization – refers to the growing interdependence of countries worldwide through:
↑ trade
↑ capital flows
∞ rapid diffusion of technology
Features of Globalization (SOILED)
O – Overseas transactions are available among individuals and groups
I – Increase importance of global economy policy relative to domestic policy
L – Local manufacturing will reduce because of available products and competitions with exports
E – Emerging markets will rise and newly industrialized nations.
D – Dependent financial and globally link markets will rise to cater the financial transactions between and among countries
Global Manufacture – A company can manufacture components for a product in a number of different countries. These companies are usually called ‘Contract Manufacturer’ or ‘Outsourced Manufacturer’.
Global Sourcing – Sub-components may be purchased from countries overseas.
b. Factors encouraging the globalization of world trade (FAIL)
A – Alliances of countries and continent. One of the famous alliances is the European Union (EU) which encourage trade and tourism
I – International commodities are globally traded. Commodities are not physically exchanged, only the rights to ownership.
L – Legal Factors such as patents and trademarks, which encourage the development of technology and design
2) International environmental influences
a. Political and legal
Political factors are how and to what degree a government intervenes in the economy.
There are two types of risk in political factors:
- Political risk – a risk that a company incurs losses due to non-market factors, which are related to government policy (trade rules, investment incentives and tax regime). Currency controls also fall under this risk.
- Country risk – similar to political risk but in a specific country.
Corporate Political Activity (CPA) – refers to the involvement of companies in the political process with the aim of influencing policies towards their preferences.
Two types of CPA:
- Buffering – proactive actions like warning the government about the impact of legislation while it’s being considered, in an attempt to influence the content.
- Bridging – reactive actions that focus on ensuring the firm is aware of and meets required standards of behavior.
Rugman and Hodgetts summarized different aspects of political risk
Sources of Political Risk (Code: RUN CAL)
U – Social unrest and upheaval
N – Nationalism increased
C –Changing economic conditions
A – Alliances. New international alliances
L – Local business people vested interests
G – Government and its agencies
I – International organizations like World Bank and United Nations
F – Foreign governments that have influence
T – Terrorist groups
P – Protesters like students
O – Opposition groups
I – Influence on government by non-government groups
M – Modification or cancellation of contracts
T – Taxes increased and other financial penalties
I – Indigenisation level – restriction on foreign ownership or favouring of local firms
R – Restrictions on ways of operating
E – Expropriation (seizing) of assets, with or without compensation
D – Disruption and/or damage from terrorist activity
Jennings and Wattam devised the model to weigh up political risk
Risk Management – involves reducing the probability of the risk occurring and minimizing the impact on the organization that it will cause
Minimising the Probability of RISK (Code: PDA)
D – Develop links with relevant government departments to help shape policy
A – Abandon the project
C – Continually monitor the environment and be prepared to react quickly
C – Contingency plans
C – Country or political risk insurance should be taken out
b. Economy and economic development
G -- Is there growth or is the economy stagnating?
E – Exchange rate stable?
R – Rate of inflation? Government policy?
I -- Interest rate compare with other countries
Level of Economic Development
GDP – Value of goods and services produced by an economy in a given period. It refers to the market value of all final goods and services produced in a country in a given period.
Primary Sector of the economy -- involves changing natural resources into primary products. Most products from this sector are considered raw materials for other industries. Major businesses in this sector include agriculture, agribusiness, fishing, forestry and all mining and quarrying industries.
The secondary sector of the economy or industrial sector includes those economic sectors that create a finished, usable product: production and construction.
c. Social/cultural
A country’s culture consists of a number of factors such as beliefs, morals and how citizens behave.
National culture is important to businesses because it influences the perceptions and behavior of consumers as well as employees and managers.
Language is another important aspect of culture.
d. Technology
This is the key driver of global economic activity.
Impacts of Technology ( Code: PEEC)
P – Protection of intellectual property; patents, trademarks and copyright.
E – Standard education and technical infrastructure is important for advanced technology
E – ‘e’ methods for marketing communications (i.e., music downloads, broadband internet, mobility)
C – Communication is easy with overseas (i.e. email)
3) Economic context
a. Free trade vs protection
This discusses the free trade vs protectionism; economic liberalization vs economic nationalism.
In the global business environment a number of regional trading arrangements exist. There are:
- Free trade areas
- Custom Unions
- Economic Unions
Free Trade – encourages easy movement of goods, services labour and capital between different countries. This means, no need to pay quotas, tariffs, subsidies and discriminatory taxation.
Advantages of Free Trade (Code: BEGELS)
E – Exports
G – Economic growth and encourages entrepreneurship
E – Efficient production makes countries to develop and invest in resources
L – Less conflict between countries that trade and communicate with each other
S – Specialization by countries in the production of the goods and services they are best suited to producing
S – Single product in one country tend to monopolize the supply (i.e., the oil exporting countries of the Middle East)
Q – Quite prevent the new industries to develop and become established
U – Undermine or weaken the local culture (i.e., Americanization of Europe)
I – Increases consumer expectation and encourages inefficiencies
D – Dependencies of less developed countries to other countries for some products
Protectionism – restrict trade with one or more other country to protect home country producers from overseas suppliers. This is also known as economic nationalism
Protective Trade Measures:
Quotas – restricting the quantity able to be imported
Tariffs – taxing import making them more expensive
Subsidies – helping local producers giving them an advantage over overseas competition
Campaigns – encouraging locals to buy locally produced goods
Technical barriers – implementing string quality, environmental, health and safety and packaging regulations that restrict imports
b. The move towards free trade
In the mid to late twentieth century, economic libreatlisation took place. Governments moved aways form the single minded view of looking after their own economies, towards working with others in groups for the good of all members.
The three forms of training group:
- Free trade areas
- Customs unions
- Economic unions/common markets
c. Free trade areas
Members in these arrangements agree to lower barriers to trade amongst themselves. They enable free movement of goods and services, but not always the factors of production such as materials and labour.
d. Custom unions
Provide the advantages of free trade areas and agree a common policy on tariff and non-tariff barriers to external countries. They attempt to harmonize tariffs, taxes, and duties amongst members
e. Economic unions/common markets
Members become one for economic purposes. There is free movement of the factors of production. The EU has economic union as an aim, although not all members, including the UK, necessarily see this goal as desirable.
4) Emerging economies
a. Absolute advantage and comparative advantage
- Absolute advantage is Adam Smith’s theory which he proposed that each nation should specialize in producing those goods that it could produce most efficiently.
- This is the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labour as the only input.
- Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost.
- Comparative advantage is David Ricardo’s theory that contradicts the absolute advantage, which means that relative opportunity costs were most relevant when considering economic activities in relation to other countries.
- The law of comparative advantage says that two countries (or other kinds of parties, such as individuals or firms) can both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods (absolute advantage), it can still gain by trading with a less-efficient country, as long as they have different relative efficiencies.
b. Competitive advantage – Porter’s diamond
Competitive advantage is Michael Porter’s theory that argues that comparative advantage is too general. This suggests that some nations’ industries are more internationally countries than others.
Michael Porter identifies the four principal factors that impact on the competitiveness of organizations – the form the Porter’s diamond.
D – Demand conditions
I – Industries’ competitive success is linked to success of related industries
S – Strategy, structure and rivalry
C – Conditions
China is one of the perfect examples that apply the Porter’s diamond:
Factors conditions – China is the most populated country with 6.9 billion people. This is the same source of resource that it has that they can leverage. They have the enough skilled people, they have the available location to construct factories and they have capital from the government to be successful.
Demand conditions – Since the emerge of factories in China that manufacture different gadgets, the demand on all sorts of gadgets that you wouldn’t think of exist, are available here.
Related and supporting industries – all companies Foxconn, for example, like Hewlett-Packard, Apple, Nokia, are successful. This makes Foxconn also successful
Firm strategy, structure, rivalry – apart from being the worldwide manufacturer, China is also known for making knock-offs. This brings the rivalry among factories in China.
Factor conditions
These relate to those factors used as INPUTS in the production of goods and services.
(Code: PRICK)
R – Human Resources like skills, price, motivation, industrial relations. The skills of the people in Singapore are professionally equipped and the market for jobs are competitive.
I – Infrastructure like transport, communication, housing. The transportation in Singapore is considered one of the best, from buses to trains and even to getting taxi cabs. Communication and housing are never been outdated. These are always available to its advanced capability.
C – Capital like amounts available for investments. Singapore government has so many funds to support the inventors.
K – Knowledge like scientific and technical know-how, education institutions. Singapore has one of the best educational system in the world. They believe in producing the young and smartest citizens.
Demand conditions: the home market
The home market determines how organizations perceive, interpret and respond to buyer needs.
N C I – No cultural impediments to communication
S -- Segmentations of the home market shapes an organization’s priorities
S – Sophisticated and demanding buyers at home encourage high quality standards
A – Anticipation of buyer needs
G – Growth rate
E – Early saturation of the home market encourage an organization to export
c. Influencing the diamond
d. Offshoring and outsourcing
Cost reduction is the primary reason for offshoring and outsourcing.
Offshoring is the relocation of some part of an organization’s activities to another country. The most common motivation for offshoring is to make cost savings by taking advantage of lower labor or other costs.
Example of this is the Center of Excellence that companies established to low-cost locations. This means that the scopes of job (i.e., accounting, IT support) are centralized to one area.
Challenges of Offshoring: (Code: DELETE)
E – Exchange rates
L – Language barrier
E – Exercising control from a distance
T – Time zones Differences
E – Example is India, as one popular offshoring country.
Outsourcing involves organization sub-contracting business activities to external providers.
Example of this is from the previous discussion on Foxconn as Global Manufacturer.
Outsourcing is appropriate for peripheral, non-core activities. If the strategic or core competencies are outsourced, this might lead to loss of competitive advantage.
Cox’s Types of competence:
Advantages of Outsourcing
C – Remove uncertainty about COST
F – Flexibility.
E – Increase in EFFECTIVENESS where the supplier deploys higher levels of expertise
E – Access to specialist knowledge and innovations in technology is made EASIER
S – Save on cost by making use of a supplier’s economies of scale
S – Service Level Agreement
L – Loss of control over quality
A – Area of threshold competence that may be difficult to reacquire
C – Competitors might have the same outsourcing services
Newly industrializing and emerging nations (NIEs ) – countries grouped together by virtue of the fact that their economies have grown significantly in recent years and they are becoming increasingly important in the world economy.
• BRIC – Brazil, Russian, India and China – when combined, they have bigger share of the world trade than the USA
• Second tier emerging nations (Emerging Nations) – Vietnam, Indonesia, Columbia and Ukraine. South Korea, Taiwan and Mexico
e. Transition economies
This applies to countries that abandoned the Soviet-type political and economic system at the end of the 20th century. Countries included that most of which have completed their transition to a market economy and become members of EU are Russian Federation, Poland, Hungary, Romania, the Czech Republic, Ukraine, Kazakhstan, the Slovak Republic, Bulgaria and Belarus.
f. Industrialization strategies
Three main strategies:
- Export of natural commodities
- Import-substitution
- Export-led industrialization
- FDI – Foreign Direct Investment, growth of the Russian economy has been stimulated by multinational companies such as Coca-Cola establishing bases in the country
5) Different types of organization
a. The public and private sectors
b. Private sector organizations
Private Sector Organizations – also called businesses, are owned and operated by private individuals or institutions.
1) Not-for-profit organizations – they seek to avoid generating a surplus of funds, but the generation of wealth for their owners is NOT THE PRIMARY PURPOSE of their existence. Primary objective is to provide a service.
Examples are:
• Co-operatives
• Charities
• Unincorporated clubs
• Societies
• Associations
2) Mutual organizations – the essence of their nature is that they are commercial operations owned by their customers, rather than having capital and associated shareholders for whom they have earn profit.
3) Profit seeking organizations -- Businesses are of two main types, distinguished by the extent to which the owners are liable for the debts of the undertaking
a. Owners have UNLIMITED LIABILITY for the debts of their businesses
b. The legal systems of most countries provide for some form of limited liability enterprise.
4) Multinational corporations (MNCs) – These organizations have the capacity to produce in more than one country, usually with a centrally located head office.
c. Public sector organizations – two main groups:
Provide public services – such as hospitals, schools, the police and armed forces
State owned industries
6) Culture and the global organization
a. Management culture
Culture embodies the common set of values: ‘the way things are done around here’.
Factors that influence the Organization Culture (Code: Oil Ash)
O – Org’s Founder
I – Industry
L – Leadership and management style
A – Area/location of office
S – Structure and system
H – History
Management Culture – part of overall organizational culture and relates to the prevailing view within management about HOW TO DO ITS JOB.
b. Managing across borders
Geert Hofstede – identified dimensions that contributed to cross-cultural differences in beliefs and values. (Code: PUMICE)
U – Uncertainty avoidance – able to tolerate ambiguity and uncertainty
M – Masculinity versus femininity – masculine ones is competitive and assertive while feminine ones are concern for others, attention to quality of life or to the environment
I – Individualism versus collectivism – do you like to work on your own or as member of a group?
C – Confucian dynamism – position influences behavior and relationships between individuals.
E – Example that applies this is McDonalds. Countries have absorbed the influences of McDonalds and have grown familiar with the nature of the brand and what it has to offer.
Trompenaars and Hamden Turner – Seven Dimensions of Culture model
U – Universalism vs particularism – in universalistic cultures, rules are more important than personal relationships.
I – Individualism vs collectivism – Does the culture value and encourage self-orientation and decision making or group orientation and decision making?
S – Specific vs diffuse – whether people change the way they act and related to each other in specific situations or whether behavior and relationships are consistent.
A – Achievement vs ascription – is status based on achievement or on other factors such as age and years and experience?
N –
C – Context or internal vs external or low context – high context includes tradition and ritual, the environment controls behavior. Low context is controlled by individuals rather than the environements
E
S – Sequential vs Synchronic – do individuals work on one at a time or on several things at once
Ronen and Shenker – four key characteristics at national culture
G – Work goals
R – Relationships
O – Organization and managerial factors
S – Job Satistfaction
c. Management structure
Local conditions and the scale of operations will influence the organizational structure of companies operating internationally. Very large and complex companies may be organized as a HETERACHY
- Some HQs functions are diffused geographically
- Subsidiary managers have a strategic role for the corporation as a whole
- Co-ordination is achieved through corporate culture and shared value
- Alliances can be formed with other parts of the company and with other businesses, perhaps in joint ventures or consortia
d. Influences on structure and methods
Management processes and decision making typical problems:
- Poor information systems and communication
- Interpretation of information
- Meetings
e. Human resource management
Balance between local and expatriate staff must be managed. There are number of influences:
E – Experience on product and company
A – Availability of technical skills such as financial management
C – Control
E – Expats demand more costs
C – Cultural factors
Expats favoured over local stuff:
1) Poor educational opportunities in the market may require the import of skilled technicians and managers
2) Business run by expats is easier to control than one run by local staff
3) Better to communicate with the corporate center
4) Expats may know more about the organization overall, which is especially important if they are fronting a sales office
Disadvantages of choosing expats:
1) They cost more
2) Culture shock – if they fail to adjust, they will poorly manage the people effectively
3) Substantial training program might be needed: basic facts and immersion training
B – Governance and regulation
1) Government intervention in business
Country’s government has a major role to play in the success or failure of it economy
a. The macroeconomic environment
b. Legal and market regulation
c. Corporate governance and social responsibility
2) Government and the macroeconomic environment
Macroeconomic environment is concerned with factors in the overall economy.
a. The balance of trade – is the difference, in financial terms between the value of imports and exports
Factors affecting the balance of trade (CAT PIE)
C – Business cycle – nations looking for export-led growth require sufficient demand in overseas markets for their products
A – Trade agreements – affect the volume of imports and exports between nations.
T – Taxes, tariffs and trade measure – making them less attractive to buy
P – Availability, price and quality of goods produced by local producers – competitively priced goods
I – Inflation – higher than its competitors, producers in that country will face higher costs which will cause the price of their products to rise
E – Exchange rates – if currency weakens against those which export to it, then the goods it imports become more expensive
b. Fiscal policy – refers to government policy on taxation and government spending. This is based on the theories of British economist, John Maynard Keynes, that government can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending
c. Monetary policy – refers to government policy on the money supply, the monetary system, interest rates, exchange rates and the availability of credit.
i. Interest rates – attempt to influence the level of expenditure in the economy and the rate of inflation. Increase on interest rates increases the price of borrowing for both companies and individuals.
ii. Exchange rates – when it falls, exports become cheaper to overseas buyers and so the nation becomes more competitive in export markets
3) Market regulation
a. Regulation and Competition policy –could involve regulating demand, supply, price, profit, quantity, entry, exit, information, technology, or any other aspect of production and consumption in the market
b. The Competition Commission – role to promote competition
c. The Restrictive Practices Court – has jurisdiction to declare that certain agreements are contrary to the public interest and to restrain parties from enforcing them
d. European Union competition policy – intended to ensure free and fair competition in the EU
e. Self-regulation - in order to try to avert the imposition of government controls
f. Cost of regulation – EUR
i. Enforcement cost – setting up and running of the regulatory agencies
ii. Regulatory capture – regulator becomes dominated and controlled by the regulated companies, such that it acts increasingly in the latter’s interests, rather than those of consumers
iii. Unintended consequences of regulation – try to limit their effectiveness
g. Deregulation – removal or weakening of any form of statutory regulation of free market activity. This allows free market forces more scope to determine the outcome.
Advantages of deregulation:
1) Improved incentives for internal/cost efficiency
2) Improved allocative efficiency
Disadvantages of deregulation:
1) Loss of economies of scale
2) Lower quality or quantity of service
3) Need to protect competition
4) Corporate governance – companies and other entities are directed and controlled
a. Stakeholders – persons or groups that have a legitimate interest in a business’s conduct and whose concerns should be addressed as a matter of principle
b. Failures of corporate governance
i. Domination by a single individual – boards dominated by a single senior executive with other board members merely acting as a rubber stamp
ii. Lack of involvement of board
iii. Lack of adequate control function
iv. Lack of supervision
v. Lack of independent scrutiny
vi. Lack of contact with shareholders
vii. Emphasis on short-term profitability
viii. Misleading accounts and information
c. Benefits of improving corporate governance
i. Risk reduction
ii. Performance
iii. External support
iv.
d. The UK Corporate Governance Code
5) Corporate social responsibility
a. Caroll and Buchholtz’s layers of corporate social responsibility (PEEL)
P – Philanthropic – desired rather than being required of business
E – Economic -
b. Corporate Citizenship
c. Corporate social responsibility in developing nations
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