INTERNATIONAL

BUSINESS
ENVIRONMENT
Intan N. Awwaliyah
TM 02b
Chapter Outline
• Organizational Boundaries & Environments

• The Economic Environment

• The Technological Environment

• The Political-Legal Environment

• The Socio-cultural Environment

• The Business Environment

• Redrawing of Corporate Boundaries

Organizational Boundaries
& Environments
• External Environment

• Factors beyond an organization’s boundaries

• Organizational Boundary
• That which separates the organization
from its environment
Dimensions of the External Environment

Economic environment

Technological environment

Sociocultural environment

Business environment

Global environment

Political-Legal environment

Emerging challenges and opportunities

• Outsourcing
• Viral marketing
• Business Process Management
The Economic Environment
• The conditions of the economic system in which an
organization operates
• Key economic goals:
• Economic Growth
• Aggregate Output & Standard of Living
• Gross Domestic Product
• Productivity
• Balance of Trade
• National Debt
The Economic Environment (cont’d)
• Economic Stability

• Inflation

• Measuring Inflation: The CPI

• Full Employment vs.

• Low unemployment
Economic Growth
• Business cycle
• The typical pattern of short-term
ups and downs in an economy
(peak, recession, trough and recovery)
• Recession = a period during which aggregate output declines
• Depression = severe and prolonged recession

• Aggregate output
• Measure of economic growth
• Total quantity of goods & services produced by an economic system during a
given period
• Standard of living
• Total quantity & quality of goods & services that a country’s citizens can
purchase with their currency
 Measuring Economic Growth
Main
• Gross Domestic Product (GDP)
• value of all goods & services
produced by a national economy
within a given period
through domestic factors of
production
• Gross national product (GNP)
• value of all goods & services
produced by a national economy
within a given period
regardless of production location
Other
• Real Growth Rates
• Adjust for inflation & currency
fluctuations
• GDP per Capita
• Real GDP
• Purchasing Power Parity
Productivity: measure of economic
growth that compares production with the
resources required
Increases in productivity = increases in
standard of living
Growth reflected in real GDP growth
 Measuring Economic Growth
• Balance of Trade
• Value of all exported products minus the value of imported products
• Positive balance = more exports = economic growth
• National Debt
• Amount of money that a
government owes its creditors
• Increases by amount of budget deficit
• Can decrease when have budget surplus
• Lower debt = more $ for private investment
Economic Stability
• Condition in an economic system in which the amount of money
available and the quantity of goods and services produced are
growing at about the same rate
Threats to economic stability
• Inflation
• widespread price increases in an economic system
• Consumer Price Index (CPI)
• Measures the changes in prices of typical products purchased
by consumers
• Deflation
• A period of generally
falling prices
When Did the Cost of a Hamburger Go Up?
Unemployment
• Level of joblessness among people actively seeking
work in an economic system
• Types of Unemployment
• Frictional
• Seasonal
• Cyclical
• Structural
The Technological Environment
• Technology:
• All the ways firms create value for their constituents
• Knowledge, methods, equipment, systems, etc.

• Research and Development (R & D)

• Basic (pure)
• Applied

• Product and Service Technologies

• Technologies employed for creating
products—both physical goods and
services—for customers
• R&D intensity = % of sales spent on R&D
• Technology Transfer = getting new technology out of lab and into the
marketplace
Process Technologies
• Enterprise Resource Planning (ERP)

• a large-scale information system for organizing and managing a firm’s

processes across product lines, departments and geographic locations
• Applications examples
• Supply-Chain Management
• Forecasting
• Purchasing
• Distribution
• Accounting and Finance
• Accounts payable and receivable
• Asset management
• Manufacturing
• Material requirements planning
• Scheduling
The Political-Legal Environment

• Reflects the relationship between business &

government, e.g. regulations
• Pro- or anti-business sentiment
• Canadian government has put a halt to bank mergers
• Political stability
• International relations
The Legal Environment:
Differences in Legal Systems
• Rule of law
• Role of lawyers
• Burden of proof
• Right to judicial review
• Laws

Brink’s ran afoul of Belgium’s labor

laws
The Legal Environment:
Differences in Legal Systems
• Common Law
• Civil Law
• Religious Law
• Bureaucratic Law
The Legal Environment:
Domestically Oriented Laws

Firm’s domestic operations

Impact

International competitiveness of domestic

firms

Business practices of foreign firms

operating outside the country’s borders
The Legal Environment:
Laws Directly Affecting International
Business Transactions
• Sanctions
• Embargos
• Export control of dual-use products
• Extraterritoriality
The Legal Environment:
Laws Directed against Foreign Firms
• Nationalization
• Expropriation
• Confiscation
• Privatization
• Repatriation
The Legal Environment:
Impacts of MNCs on Host Countries

Positive
-Economic Effects
-Political
-Cultural Negative
Effects
The Legal Environment:
Dispute Resolution in International
Business
4 Questions
Which country’s law applies?

In which country should the issue be resolved?

Which technique should be used to resolve the

conflict: litigation, arbitration, mediation, or
negotiation?

How will the settlement be enforced?

The Political Environment:
Political Risk
Ownership
Risk

Political Operating
Risks Risk

Transfer
Risk
The Political Environment:
Political Risk

Macropolitical
Political
risks
Micropolitical
The Political Environment:
Political Risk
The Accounting Environment:
The Roots of National Differences
The Accounting Environment:
Differences in Accounting Practices
• Valuation and Revaluation of Assets
• Valuation of Inventories
• Dealing with the Tax Authorities
• Use of Accounting Reserves
• Other Differences
The Accounting Environment:
Impact on Capital Markets
• Evaluating the performance of firms incorporated in
different countries
• Assessing the riskiness of potential loans
The Socio-Cultural Environment
• Customs, values, attitudes & demographic characteristics of the
society in which an organization functions

• Customer preferences and tastes

• vary across & within national boundaries
• vary within the same country
• change over time
• affects job significance
• Ethical Compliance and Responsible Behaviour
Characteristics of Culture
• Learned behavior
• Interrelated elements
• Adaptive
• Shared
Elements of Culture

Language

Social Structure Communication

Culture

Values/ Attitudes Religion

Yes and No Across Cultures
• Latin America
• meaning of “manana”
• Japan
• meaning of “yes” versus “yes, I understand”
Caterpillar has
developed its own
simplified language
instruction program
–Caterpillar
Fundamental
English
Religion
• Christianity
• Catholicism
• Protestant
• Eastern Orthodox 72% of the world
• Islam adheres to one of
these four religions!
• Hinduism
• Buddhism
Values and Attitudes
• Values: accepted principles and standards
• Attitudes: actions, feelings, and thoughts
that result from values
• Time
• Age
• Education
• Status
Theories of Culture
• Hall’s Low-Context, High-Context Approach
• Cultural Cluster Approach
• Hofstede’s Five Dimensions
Hall’s Low-Context,
High-Context Approach
• Low-context: words used by speaker explicitly convey
speaker’s message
• High-context: the context in which a conversation occurs
is just as important as the words spoken; cultural clues
are critical to communication
 Low
German

Context
Swiss
Scandinavian
U.S./ Canadian
Britain
Italian
Spanish
Greek
Arab
Vietnamese
Japanese
Korean
Chinese
Figure 4.2 High- and Low-Context Cultures

Context
High
Table 4.2 Cultural Differences in Negotiating Styles
Hofstede’s Five Dimensions
• Social Orientation
• Power Orientation
• Uncertainty Orientation
• Goal Orientation
• Time Orientation
©2004 Prentice Hall 4-42

Figure 4.4 Social Orientation

and Power Orientation
Patterns
The Business Environment
• Porter’s five forces model is used to analyze the
competitive situation in an industry.
• Rivalry Among Existing Competitors
• Threat of Potential Entrants
• Suppliers
• Buyers
• Substitutes
Emerging Challenges and Opportunities in the
Business Environment
• The most successful firms are getting leaner by focusing
on their core competencies
• Core competencies
• the skills and resources with which an organization competes best
and creates the most value for owners
Emerging Challenges and Opportunities in the
Business Environment
• Outsourcing
• paying suppliers & distributors to perform certain business
processes
• Viral marketing
• using the Internet and word-of-mouth marketing to spread
product information
• Business process management
• moving away from department-oriented organizations toward
process-oriented teams
Redrawing Corporate Boundaries
• Acquisitions and Mergers
• Horizontal, vertical or conglomerate mergers

• Friendly or hostile takeovers

• Poison pill defence against hostile takeover

• Divestitures and Spinoffs

• Selling part of existing business or setting it up as a new
corporation
Redrawing Corporate Boundaries
• Employee-Owned Corporations
• Employee stock ownership programs (ESOPs)

• Strategic Alliances
• Two or more companies temporarily join forces

• Subsidiary and Parent Corporations

• Parent corporations own subsidiary corporations
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