International Business Environment - Term Paper Example

?How Firms’ Responses are Shaped in an International Business Environment With the rapid pace of globalization, more firms are participating in international business—as suppliers, producers, distributors, or marketers. This has made the environment in which these firms operate more complex and dynamic. International firms find themselves catering to more stakeholders and operating in diverse economic systems and market structures. This essay discusses the factors that affect the decisions of firms in the international business environment and how they respond to these factors. Organizational Mission Organizations are formed to pursue diverse aims depending on the values of the founders and the needs of the stakeholders. Hence, certain organizations may be formed to produce goods while others may be formed to provide services. Some organizations may also be formed with the explicit purpose of earning profits for their owners while others may not have the profit motive as their primary aim (Gaspar et al., 2005, p. 40). Charities such as The Asia Foundation and CARE International define the donations they receive as receipts rather than revenues; hence, their surplus is different from profit. Organizations such as the police force or fire department are public-sector organizations as opposed to private-sector organizations. These organizations are not formed with the intent of earning profits; rather, their purpose is to provide an essential service to citizens of the community (Gaspar et al., 2005, p. 40). The fact that they are owned by the state as opposed to private interests increases their credibility to provide essential goods or services without discrimination or bias to all citizens. Business organizations clearly exist to earn profits. At the same time, they address the needs of stakeholders who help them earn those profits. Therefore, their purpose is to identify a target market and develop goods and services to satisfy specific needs of the target segment. Organizations whose business activities extend the national boundaries are called international business organizations. Their purpose is to earn profits through efficiencies in supply chain and logistics while exploring new markets. However they may be described or categorized, organizations are influenced by their purpose or mission which defines the scope of their activities. The Influence of Stakeholders Due to the rapidly globalizing business environment, organizations have adopted a ‘stakeholder approach’ instead of the ‘shareholder approach’ (Hamilton and Webster, 2012, p. 100). The stakeholder approach encourages organizations to address the needs of those segments other than the owners whose interests are affected by the activities of the organization (Hamilton and Webster, 2012, p. 100). The stakeholders include such varied groups as customers, suppliers, competitors, media personnel, government authorities, regulators, the natural environment and the community. The manner in which the organization conducts its activities affects the interests of these segments. As organizations expand to international business, the number of stakeholders and their obligations increases substantially. Addressing the needs and interests of these stakeholders creates social capital and a positive reputation for the organization (Hamilton and Webster, 2012, p. 100). Some scholars argue that it is also economically sensible for organizations to pursue the stakeholder approach. With limited resources, organizations try to meet the needs of different stakeholders. Through its charitable causes, the Bill Gates Foundation established by the Microsoft founder helps the software giant develop a positive reputation marred by concerns about the competitive strategies pursued by the company. Another organization, British Petroleum (BP) regularly invests in green technology to protect the natural environment from pollution and destruction (BP, 2013). Nestle follows the stakeholder approach through its supply chain. The company supports sustainable sourcing by training cocoa farmers in sustainable farming techniques (Nestle, 2013). Unilever, one of the biggest global companies, builds contacts with local governments and civil society bodies to discuss solutions to environmental problems and development issues that the company can help to address (Unilever, 2013). Such activities have given these companies a certain legitimacy to pursue profit-making in international markets. Organizational Responsibilities and Responses Organizations bear responsibilities towards the stakeholders in their environment. For international business organizations, the situation becomes more challenging because not all responsibilities are as explicit and clear as others. The costs for not complying with regulations and discharging responsibilities may be quite high as some firms may discover to their loss. International business organizations have to follow different regulatory and taxation policies in the markets where they operate. They develop a range of strategies to execute these responsibilities. Organizations can learn about many of these responsibilities by studying the legal and economic systems of the countries where they operate. Regulations relating to bribery, advertising and taxation can help organizations to operate safely in the market. For instance, it may be necessary to use local language in television advertisements or get censor approval. Organizations also need to comply with the corporate tax rates applicable in different countries (Dlabay and Scott, 2011, p. 370). Some developing countries place local procurement requirements on international companies (Dlabay and Scott, 2011, p. 370). Such companies then adopt a strategy whereby low-tech items such as supplies and parts are procured from the local companies while high-tech components are imported from foreign sources. Society also imposes certain responsibilities on international firms, such as respect for cultural and religious norms. Multinational companies operating in Muslim countries, for example, show respect for local customs by offering a prayer room at their premises. Similarly, working hours are reduced during the Muslim holy month of Ramadan. However, at times, organizations face a dilemma in prioritizing their responsibilities. As the factory accidents in Bangladesh have shown (Burke, 2013), international organizations may compromise on their responsibility to source their products from safe manufacturing facilities. The Influence of Economic Systems International business organizations are invariably affected by the economic systems of different countries. The economic systems affect how organizations use their resources (Cherunilam, 2010, p. 104). They also define the scope for their activities. In capitalist economies, such as the United States and the United Kingdom for example, the economies operate on the principle of laissez-faire with the government choosing not to interfere in the activities of business operations (Cherunilam, 2010, p. 104). This leaves the organizations free to allocate their resources as they deem fit. The underlying belief is that the invisible hand of the free market will remove any inefficiency in the economy as producers and consumers align their resources in response to demand and supply. Capitalist systems are mainly consumer economies; hence, there are fewer restrictions on what organizations can produce or how they can raise capital. By far, capitalism is the dominant economic system of the world despite major challenges such as the global financial crisis and the Euro debt crisis. Control economies exist in countries where the state has considerable influence in economic decisions and the use of resources (Cherunilam, 2010, p. 104). In many instances, economic resources are owned and controlled by the state. Some organizations such as airlines and oil exploration companies may also be owned by the state. Generally common in developing countries such as those of Latin America and Asia, control economies strive to create efficiency in resource allocation by making resources available to all by preventing private interests to control them. These activities are supported by rationing and subsidized pricing (Cherunilam, 2010, p. 104). The Influence of Fiscal and Monetary Policies Organizations respond to the fiscal and monetary policies in force within their markets by complying with them. Fiscal policies determine the tax to be paid by the citizens. When tax rates are increased, businesses respond by reducing the prices of their goods or by developing low-priced substitutes of their existing products. This helps firms to respond to the reduced purchasing power of consumers (Adekola and Sergi, 2012). Some firms may even decide to exit those markets if they perceive that the situation is likely to evolve into a poverty trap. Governments also use the fiscal policy to influence consumer demand in the economy (Adekola and Sergi, 2012). As part of the fiscal policy, the government may decide to increase or decrease spending to influence consumer demand. In this way, the government affects the market for business organizations that can develop strategies to increase revenues when the government increases stimulus spending. In recent times, governments in capitalist economies such as the US have provided stimulus packages to bail out large corporations in the manufacturing and finance industries. Organizations also respond to monetary policies of the government. Governments initiate monetary policy changes to control the supply of money and credit in the economy (Adekola and Sergi, 2012). These decisions affect organizations’ strategies in important ways. When the monetary policy brings about an increase in interest rates, organizations can find it difficult to raise funds through bank loans. Organizations respond to these changes by using equity financing and issuing shares to raise capital. Changes in the exchange rates can also influence the prices of local supplies and imported goods. Firms respond to devaluation of the local currency and increased local aggregate demand by increasing their local output (Adekola and Sergi, 2012). Effect of Competition Policy and Regulatory Mechanisms Competition policies and regulatory mechanisms affect how organizations compete in the market. Governments develop competition policies to promote competition in the economy by preventing firms from engaging in uncompetitive practices (Utton, 2006). Such policies ensure that firms do not collude to form cartels or oligopolies. Regulatory mechanisms ensure that organizations do not charge excessively high prices for their products or build artificial barriers to the entry of new firms. They also see to it that companies are complying with quality standards and safety regulations (Utton, 2006). Competition policy also strives for greater market liberalization to remove barriers to entry in the industry (Utton, 2006). As a result, new firms enter the market which results in greater competition. Issues such as mergers are also investigated if it is suspected that mergers between two large companies would result in greater control over the market. A well-known example of competition policy affecting an organization’s activities is the European Union’s case against Microsoft (European Commission, 2012). The competition law of the European Union prevents dominant companies from using their position to prevent competition in the market. In 1993, Novell filed a complaint under the competition law alleging that Microsoft was earning commissions even when suppliers were selling computers without Microsoft software. The case extended for several years and complaints that Microsoft withheld information about its products that prevented competitor software to be run on Microsoft operating systems. As a result, Microsoft was asked to make that information available to the public. In 2008, the EU fined Microsoft €899 million for not complying with an antitrust decision in 2004 (European Commission, 2012). Effect of Market Structures The way markets are structured affects the products manufactured by organizations and the prices charged to consumers. Market structures reflect the composition of firms in the market and the power of individual firms to control prices. The common market structures include monopoly, oligopoly and perfect competition (Hamilton and Webster, 2012, p. 70). Absolutely perfect competition does not exist despite attempts to increase competition in capitalistic economies. In a monopoly, a single firm dominates the market. Other firms may not be present because of the high cost of entry. The reasons for high barriers may be because the monopoly firm enjoys sole access and control of the key resources. State owned organizations are examples of monopolies. Markets for capital-intensive industries in the private sector also tend to be structured as monopolies. Firms in a monopoly market structure are capable of earning supernormal profits by charging higher prices because of the absence of substitutes or competing products (Hamilton and Webster, 2012, p. 70). They can also reduce supply to raise prices. However, even in capitalist markets, regulatory mechanisms work to ensure that organizations do not exploit their monopoly power. In oligopolies, the market is dominated by a few large players. They may collude to raise barriers to entry of new firms (Hamilton and Webster, 2012, p. 70). Instead of competing with another, firms in oligopolies collude to control process and output (Hamilton and Webster, 2012, p. 70). Such arrangements are known as cartels. Firms cannot unilaterally raise prices or change output for fear of retaliatory action by rivals. In an ideal perfect competition environment, the power of individual firms to change prices or output is further constrained by virtue of a large number of competitors and the presence of an informed market. In such environments, individual firms cannot benefit by taking unilateral decisions on price or output. Influence of Market Forces The market forces of demand and supply affect the pricing and volume decisions of organizations. Supply and demand interact to determine the optimum price and volume for the market and individual firms. Demand has a tendency to move in the opposite direction of price. Therefore, if firms increase the price of a good, consumers will demand less of it (Dlabay and Scott, 2011). On the other hand, reducing the price of the good will result in an increase in quantity demanded. However, elasticity also plays an important role in determining the effect on total revenue for a firm. The prices of goods with inelastic demand can be increased relatively easily with a net increase in prices (Dlabay and Scott, 2011). Increasing the prices of goods with elastic demand is likely to result in a reduction in revenues for the firm. The forces of supply also affect firms’ decisions. Supply is affected by the price for goods and services in the market. If the price for a good increases, firms will supply less of it in the market. The opposite happens when the price increases (Dlabay and Scott, 2011). The price and output that firms eventually produce depends on the interaction of supply and demand in the market. Demand and supply respond continuously to changes in price and quantity. Kulkarni (2013) notes that the prices of dry fruit in India decline as the supply immediately after the Diwali festival exceeds the demand. Similarly, World Cement (2013) reports that a surplus of cement output in Uganda has resulted in a decline in prices. Buckley (2013) notes that as the prices of Wii U gaming console were reduced sales increased by 200%. Donville (2013) reports that Potash Corp, a supplier of fertilizer experienced a price reduction after its main competitor increased its output leading to surplus in the market. Influence of Business and Cultural Environments The business and cultural environments affect the business decisions of an organization. The business environment includes the competitors, suppliers, and customers of an organization while the cultural environment includes the laws, norms, values and attitudes of the society. Business organizations need to balance all these factors when developing plans and strategies. For international business organizations, the situation becomes more complex because of the unique business and cultural environments of each country. An example of such an organization is the Oxford University Press, the oldest university press in the world. Because it operates in several countries of the world, it has to publish content in local languages to cater to consumer needs. It also has to consider religious sensitivities and avoid publishing controversial material, particularly in school textbooks. Furthermore, because of the low price of paper in India, the Press sources paper from local suppliers. In neighboring Pakistan, on the other hand, the poor quality of locally manufactured paper encourages the Press to import paper for printing. Similarly, the Press produces more English Language Teaching material in Asian and African markets than for North American markets. Conclusion The international business environment offers great opportunities for business growth as well as significant challenges. This paper identified some of the significant issues that firms have to face in the international environment. The integration of national and regional economies is likely to continue in the future. Firms that are flexible in their strategies and structures, as well as adept at allocating resources are in a better position to reap the fruits of a globalized business environment. References Adekola, A., and Sergi, B. S., 2012. Global Business Management: A Cross-Cultural Perspective. Ashgate Publishing. BP, 2013. Alternative energy. [online] Available at: [Accessed 30 October 2013]. Buckley, S., 2013. Wii U sales jump in wake of price cut, increased by 200 percent in September. Engadget. [online] Available at: < http://www.engadget.com/2013/10/17/wii-u-sales-jump/> [Accessed 30 October 2013]. Burke, J., 2013. Bangladesh factory collapse leaves trail of shattered lives. The Guardian. [online] Available at: < http://www.theguardian.com/world/2013/jun/06/bangladesh-factory-building-collapse-community> [Accessed 30 October 2013]. Cherunilam, F., 2010. International Business: Text and Cases. 5th ed. PHI Learning Private Limited. Dlabay, L., and Scott, J. C., 2011. International Business. 4th ed. Cengage Learning. Donville, C., 2013. Potash Corp. Posts 28% drop as Uralkali ups output. Bloomberg. [online] Available at: < http://www.bloomberg.com/news/2013-10-24/potash-corp-reports-28-price-slump-as-uralkali-raises-output.html> [Accessed 30 October 2013]. European Commission, 2012. Microsoft case. [online] Available at: [Accessed 30 October 2013]. Gaspar, J., Bierman, L., Kolari, J., Hise, R., and Smith, L. M., 2005. Introduction to Business. Cengage Learning. Hamilton, L., and Webster, P., 2012. The International Business Environment. 2nd ed. New York: Oxford University Press. Kulkarni, M., 2013. 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