International Business studies
Analyse the reasons why international managers must be skilled at weighing an array of environmental factors before doing business abroad
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‘The firm in its business environment is similar to any living organism in the natural environment—survival an prosperity comes to those that are best able to adapt to their
—Palmer A. & B. Hartley (2002)
‘One thing is clear. Even if you’re on the right track you’ll get run over if you just sit there!’
—Sir Allen Sheppard (1993)
Nowadays, the acceleration of globalization has pushed international business into an era of uncertainty. Rapid developments in aspects such as political, economic, social and technological make business environment less predictable. As Bartlett and Ghoshal (1989) observed, ‘watershed’ emerged in 1980 when the trend of globalization became inevitable. Some large players survived by utilizing transnational strategy based on comprehensive environmental analyses, whereas many failed to adapt to the turbulence at macro and micro level and eventually faded away. Hence, a thorough understanding of environmental forces can be a matter of life and death. Fundamentally, three layers of environmental influence should be taken into account. Firstly, the external macro-environment which refers to the broad environment outside industries and markets (Campbell etc. al, 2008) can be of vital importance due to its incidence and intensity. Secondly, external micro-environment can be decisive because it has significant impact on particular industries and markets. Thirdly, the internal environment within specific organizations will indicate potential strengths and weaknesses (Stonehouse etc. al, 2000). This essay will analyse the external environment and argue the importance of analyzing environmental forces by using ‘PEST’ approach, ‘globalization drivers’ (Yip, 1992) and ‘five forces’ (Porter,
Political environment is the first, and for most, decisive factor which should be weighed by managers before doing businesses abroad. However, it is also widely
accepted political environment is one of the least predictable business environments because of its dynamic nature (Palmer & Hartley, 2002). Political influences deriving from subnational (e.g. local authority), national (e.g. national government) and supranational (e.g. WTO, NAFTA and EU) level will all alter the strategies and impinge considerably on both entry and profitability of specific business. Normally, MNEs (Multi National Enterprises) may benefit a lot from the multilateral agreements made to reduce trade barriers such as tariffs, quotas and subsidies. Because of the reduction of trade barriers, MNEs get the chance to achieve economies of scale (Campbell etc. al, 2008) by expanding their sales in a global market. However, in some circumstances, political environment can make it almost impossible to carry out business activities in particular parts of the world. Take China for instance, before the
‘reform and opening-up policy’ carried out in 1979, hardly can foreigners be seen in China, not to mention FDI (foreign direct investment). Because of the political ideology (Daniels etc. al, 2001) then, the whole country was isolated from external environment and the domestic market remained highly exclusive. Thus, albeit huge potential market, doors were closed no matter what kinds of business who wishes to exploit this new world. Likewise, political risk (Houston, 2008) in Lybia also makes it extremely dangerous to invest because political unstability will, more than likely, make all the investment in vain.
While political variations will certainly have a significant impact on the macro-environment, turbulence within micro-environment can be inevitable. On the one side, car industry giants such as Ford and Mercedes took the decision to form joint ventures with Shanghai Automobile Company and Beijing Jeep Company to take locational advantages of both cheap labour and the tax preference provided by local authorities. This kind of ‘government driver’ (Yip, 1992) at micro level plays a vital role in decision making. On the other side, sensitive industries like military and oil industry in many mixed economic systems are completely nationalized and owned by the government because these industries are closely connected to national security. According to Porter (2004), due to the regulatory and legal constraint produced by the
government behind, ‘the threat of new entrants’ can be minimized to a large extent and thus it becomes impossible to enter such industries. Clearly, managers should be skill at analyzing all these political factors to seize the opportunities and circumvent threats.
Also, as well as political factors, economic turmoil can be of great significance. In this era of ‘global village’ (Levitt, 1983), instead of economic fragmentation, national economies become more interdependent and countries throughout the world start to be intertwined by economic bonds (Monye, 2000). Not only economic environment change at international level such as financial turbulence and exchange rate will dramatically influence the profitability of MNEs, but also variations at national level like interest rate and cost level (labour, energy, logistic and materials) can be crucial. Obviously, some positive effects which are related to official fiscal and monetary policy do facilitate the competitiveness of MNEs. For instance, the issue of exchange rate between China and the USA has been a heated debate for a long time. One of the reasons why Chinese government opposes the appreciation of Yuan is because a relatively weak Yun compared with US dollars can make Chinese exports more competitive and thus profits as well as trade surplus can be more likely to be achieved. However, an array of negative impact also can be noticed. From ‘the great depression’ (1929-1933) and to ‘the financial crisis’ (2008), the ‘herd behavior’ resulted from economic recession will eventually lead to massive bankrupt and unemployment and not a single industry can escape from these negative impacts(Mcdonald & Burton,
2002). Despite the fact that it is the deregulation of banking industry to be blamed, systemic infection quickly became widespread and penetrated through national boundaries using robust financial markets. As a result, businesses from traditional to e-business, industries from real estate to manufacturing, markets from international to domestic were trapped into dilemma.
Similarly, economic environment change influence does not stop at macro level;
micro-environment may be affected as well. As Yip (1992) noticed, low cost of
labour, material and logistic advantages within an economy will play vital roles as
‘cost drivers’ to cut the cost and enhance profitability. Manufacturing giants like Foxconn chose to establish factories in Shengzhen (China, manufacturing hub) to benefit from locational advantages (e.g. labour and logistic advantage).Whereas in some other situations, negative economic forces can wipe out the profit easily. As the disturbing housing bubble in China becomes bigger, government has no choice but to intervene by employing interest rate. While real estate companies become more and more worried about the increasing stock and fragile capital chain, people will reconsider the rising pressure from mortgage loan. Consequently, the financial pressure and huge stock which acts as substitute threats will lead to increasing bargaining power of the buyers (Porter, 2004) and thus considerable profits will be cut. Obviously, managers must be good at distinguishing between advantages and disadvantages brought by economic changes in order to make better strategy.
Moreover, social impact can also influence the business strategy and company culture. As Palmer and Hartley (2002) argued, we are experiencing unprecedented acceleration of social changing which results in a tow-way relationship between business and society. On the one hand, emerging businesses such as Ebay and Groupon are transforming the shopping habit. Whereas on the other, social elements like cultural background are pushing forward innovations which make products more environmentally friendly. Apparently, it might be evident that socio-demographic changes can trigger a tidal wave in business environment and bring both opportunities and disasters. With the trend of global homogenization, businesses are making a big fortune by selling their standardized goods and services. According to Levitt (1983), due to inevitable trend of globalization happened in political, social, economic, technological aspects, the world has been driven towards ‘converging commonalities’. In other words, the preferences of customers tend to be the same gradually and MNEs can achieve economies of scale by providing the same goods and services all over the world. However, the constantly changing population structure may lead to reform. According to statistics done by OECD (1998), population above 65 was 12.3% in
1980 and it is estimated to be well over 21.0% by 2030. The global trend of aging population may well alter the youth-oriented dominance in market and bring in emphasis on quality and durability instead of fashion and short-life (Palmer & Hartley,
In addition, socio-demographic change can be greatly influential at micro level. Clearly, cultural assimilation does play a positive role in helping companies to penetrate through cultural boundaries. Take Japan video game industry for instance, big players like Sony and Nitendo benefit a lot from the cultural assimilation produced by the prevalence of animations and comics. Also, because of a robust industry chain from animation creation to video game production, Japan will act as a
‘leading country’ and this ‘market driver’ (Yip, 1992) will certainly benefit companies involved a lot. Nonetheless, some social trends on the other hand may act as obstacles and make it difficult to entry mature industries. With the proliferation of Americanization, it seems that fascinating products provided by Apple drive everyone crazy and make customers queue all night to buy them. While owning an i-phone4s seems to be fashionable and numerous people have become loyal to Apple, the brand loyalty and the following high switching cost make many other rivals’ efforts in vain. Hardly can potential entrants get in this market, nor can rivals come up with ideas to persuade customers to switch to their products. As Porter (2004) explained, due to the loyalty and relatively high switching cost, the threat of new entrants and substitute products can be largely minimized and again make it difficult to enter and compete. Therefore, it is vital that managers take socio-demographic factors seriously so as to seize the potential customers and predict the future trend.
Last but not the least, technological development can be essential because it generates changes in all aspects mentioned above. The history of human beings has been always accompanied with technological revolutions which were considered as engines of development. Ever since the Industrial Revolution happened in 1830s, rapid technological developments in aspects such as telecommunications, transportations
and information technology have fundamentally changed normal life as well as business environment. As Palmer and Hartley (2002) contended, it is essential for companies to keep an eye on both rivals but emerging technologies. Admittedly, almost every technological breakthrough which can be applied to normal life has brought convenience as well as profit. For example, breakthrough in developing microprocessor pushed forward the development of smaller personal computer and thus the proliferation of CAD (computer-aided design) became possible. Consequently, advanced robots in high-tech factories make mass production achievable. Similarly, the development of transportation has cut the logistic cost to a large extent and increases the profitability of many companies. However, benefits are always closely followed by potential problems and risks. As advanced information technologies are largely involved in management of business, it is not uncommon to see commercial fraud or leak of trade secret occurs frequently because of the bugs in those managing systems and software.
There is every indication that changes of technological environment at micro level can also be of immense significance. As Hayes and Abernathy (1980, p. 66-76) stated,
‘success in most industries today requires an organizational commitment to compete in the marketplace on technological grounds’. Similar idea was shared by Rosa Gomez Dierks (2001, p. 189) who pointed out we have stepped in an era of ‘survival of the smartest’. In other words, it is the investment on technological field that can be decisive. According to statistics provided by Pharmaceutical Research and Manufactures of America (PhRMA, 2004), the investment on R&D spent by pharmaceutical companies in the USA rocketed from $6 billion (1980) to $39 billion (2004). As a return, annual approvals of innovative new drugs increased dramatically from 13 to 53 which may indicate significant rise in profit in global market. This kind of ‘cost driver’ (Yip, 1992) will help companies to achieve constant innovation as well as economies of scale in order to survive in hypercompetition. Nevertheless, dilemma caused by technological variations also happens. Microprocessor oligopolies like Intel and AMD strictly restrain the information about their new researches and
outputs to ensure monopoly in IT industry. According to Porter (2004) five forces theory, this kind of resistance offered by existing companies will lead to high entrance requirement and thus to carry out business in such kind of field can be more than difficult. Apparently, managers are supposed to consider all these rapid development and keep up with the pace to perpetuate their own competitiveness.
In conclusion, as all these evidences have been shown above, it is unambiguous that environmental turbulences not matter at macro or micro level will interact and reinforce each other to bring both profitable opportunities as well as fatal catastrophes. As it can be argued that successful managers are those who have a proactive vision in rapidly changing environment and are well-prepared to meet the uncertain challenges ahead (Morrison, 2002). More importantly, environment changes can vary considerably from market to market, from industry to industry and from business to business. Therefore, managers should be aware that instead of taking a leap of faith it is strategy based on thorough and ongoing-based analyses of the external enforces that can play a significant role leading companies on the way to long-term success.
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