International Business Environment - Essay Example

International Business Environment The new economy has brought success to many organizations. The organizations used technologies, new concept like customer focus, good values, quality services and efficient exchange mechanisms for satisfying customers needs and wants, have been proved successful in each and every part of the world. In the present world where communication technologies and networking has changed tremendously and still changing very fast, forced businesses to change accordingly. The international business environment (IBE) is multidimensional - it covers political risks, cultural differences, exchange risks, legal and taxation idiosyncrasies - scholars seeking to understand the cross-border effects have been picking from different disciplines (e.g., marketing, finance, operations, strategy, organizational behavior) the relevant theories and methods. The complexity and multidimensionality of the international business environment forced to the development of some frameworks trying to classify its components. Mascarenhas (1982) developed a perspective of multiple factors the multinational organizations faces due to environmental uncertainty and focused on foreign exchange uncertainty, political uncertainty, and employment problems. Hambrick (1982) divided the environment into four categories: administrative, engineering, entrepreneurial, and regulatory, and these categories in twenty sub-categories. Several other scholars contributed to the classification in two broad dimensions: task (competitors, customers, and suppliers) and remote (political/legal, social/cultural, technological, and economic) environment (Dess & Beard, 1984; Ebrahimi, 2000). More recently, Guisinger (2001), based on prior work, proposed the geovalent construct to comprised eight "mutually exclusive, exhaustive, quantifiable, and largely replicable" (Guisinger, 2000: 4) environmental dimensions and encapsulate some of the main features of the international business environment. These dimensions are: Culture, legal system, political risk, income profile, tax regimes, econography, exchange rate, and restrictions. Business environment have been particularly influenced by factors such as Political / Legal, Economic Social / culture, Technological and Environmental. These factors are know as PESTEL analysis and are widely used by business enterprises to audit their environment and to help them establish a strategic approach to their business activities. Organizations will be directly affected by the actions of government and other political events. Major events affecting the whole business community, such as the collapse of communism, the Iraq was etc. Similarly, businesses will be affected by the legal framework in which they operate. Example includes industrial legislation, product safety standards, regulations governing pricing etc. The economic factors can range from big to small, from local to national to international, from current to future, from rising costs of raw materials to the market entry of a new rival, from forth coming budget to the instability of international exchange rates, from the current availability of investment of funds to the likely future cash flow from a new product. Business must constantly take such factors into account when devising and acting upon its business strategy. It is normal to divide the economic environment in which firm operates into two levels. The micro economic environment that includes all the economic factors those are specific to a particular firm operating in its own particular market whereas the Macroeconomic environment includes the national and international economic situation in which business as a whole operates. Business in general will fare much better if the economy is growing than if it is in recession. In examining the macroeconomic environment, we will also be looking at the policies that governments adopt in their attempt to steer the economy, since these polices, by affecting things such as taxation, interest rates and exchange rates, will have a major impact on firms. Over the last 25 years the pace of technological change has quickened especially the communication technologies. World becomes a global village. These technological changes has a huge impact not only on how firms produce products, but also on how their business is organized. It has also created a wide range of new opportunities for businesses, many of which are yet to be realized. The information technologies revolution is also enabling much more rapid communication and making it possible for many workers to do their job from home of while traveling. The aspect like environment is making an effective impact on the business worldwide. The Kyoto protocol, Bali resolution have the potential to affect the overall business environment. Emission norms and CFC (Greenhouse) gases emission limitations affect the business environment. Finally the socio / cultural factors plays a major role in deciding/ shaping any business environment. This includes attitude towards working conditions and the length of the working day, equal opportunities for different groups of people (whether by ethnicity, gender, physical attributes etc.), the nature and purity of products, the use and abuse of animals, and images portrayed in advertising. The social / cultural environment also includes social trends, such as an increase in the average age of the population, or changes in attitudes towards seeking paid employment while bringing up small children. In recent times various ethical incuses, especially concerting the protection of the environment, have had a big impact on the actions of business and the image that many firms seek to present/. Now it is nevertheless important to recognize that there is a great overlap and interaction among all those factors. Laws and government policies reflect social attitudes; technological factors determine economic ones such as costs and productivity; technological progress often reflects the desire of researchers to meet social needs and so on. We must also be aware of the fact that the business environment is constantly changing. Some of these changes are gradual some are revolutionary. One of the most important and influential elements of the business environment is the structure of the industry. How a firm performs depends on the state of its particular industry and the amount of competition faces. Knowledge of the structure of an industry is therefore crucial if we are to understand business behavior and its likely outcomes. The classification of productions into primary, secondary and tertiary allows us to consider broad changes in the economy. Similarly an industry refers to a group of firms that produce a particular category of products classifying firms into industrial groupings and sub groupings has a number of purpose perhaps the most importantly, it helps economists and business people to understand and predict the behavior of firms that are in direct competition with each other. Apart from the above factors there are crucial differences in strategic thinking between a domestic business and multinational business concerns the geographic spread of the multinational corporation. The multinational will need to focus its strategy not only in global terms but also possibly within the context of each international market within which it operates. Depending upon the diversity of these markets, this may require a quite distinct strategic approach. Strategic choices also depend on the business environment. Different strategic models such as Porters forces models, Value chain analysis and sustainable competitive advantage, SWOT, Strategic choices and Core competencies are the few which has to be implemented by different organizations in different geographical settings. In many respects, a firm’s global strategy is simply, an extension of its strategy within its own domestic market. However, opening up to global markets can present many new business opportunities, access to new markets, new customers, new supply sources, new ideas and skills. In addition such opportunities the global market place can also present competitive threats, as new market entrants from abroad arrive with lower costs, innovative products and marketing, or some other core competency, which the domestic firm finds difficult to match. The ubiquitous liberalization is resulting in the emergence of a borderless world for business. Recent, worldwide political, cultural, social, and military developments have valid reasons for a larger emphasis on the international business environment. The IBE is changing rapidly under the influences of globalization of some markets, the progress in information technologies, the modifications in the national and supranational institutions (e.g. WTO, UN, EU, NAFTA), the emergence of non-governmental organizations (NGOs), the economic growth of emerging economies, the attention to the natural environment and business ethics, and the recent terrorist events. The last quarter of the twentieth century witnessed sweeping political and economic changes. The privatization strategy heralded by Prime Minister Margaret Thatcher in the U.K.; economic changes in people Republic of China in 1978 marked the beginning of revolutionary changes in economic polices in the communist world. Most of the developing countries too have substantially liberalized and reformed their economic regimes. The world trade organization (WTO) is a profound environmental factor in global business: its principles and agreements foster, monitor and regulate the emerging borderless business world. In the era of globalization more and more companies have adopted a global outlook in which the world becomes their market. For example, numerous major corporations such as Coca-Cola, Hoover, IBM, Pfizer and Gillette, receive over half of their earnings from foreign operations, while many others also have significant international markets. Such situations require the appreciation both of cultural differences among international markets and of their influence on consumer behavior. Culture, which is a very intriguing and complex factor, is often a very critical component of business environment. Proper understanding of the cultural dimensions is very important for product development, promotion, business negotiations, human resource management, management of social and political environment etc. An important problem is that several dimensions of culture are not easily explicit. Companies, which set out to do business in unfamiliar cultural environment, may therefore encounter several problems if proper homework is not done. Many multinational businessmen agree that cultural differences are the most significant and trouble some variables encountered by the multinational company. The failure of managers to comprehend fully these disparities has led to most international business blunders (Ricks, 1999). E. B. Tylor has defined culture, as “culture of civilization is that complex whole which included knowledge belief, art morals, law, custom and other capabilities and habits acquired by man as a member of society”. As Geert Hofstede (1980) has nicely defined culture as software of the mind the social programming that runs the way we think, act and perceive ourselves and other in other words, brain is simply the hardware that runs the cultural programming. The implication is that culture is not innate. It is learned behavior and hence can be changed (Mitchell, 2000). National culture as emanating from societal variables (not necessarily restricted by national boundaries) such as Language, religion and history, as well as national variables (which are clearly associated with national boundaries) such as government, laws and regulations geography and economic conditions. National culture is also seen as being influenced by current events both with in the country and in the world at large. National culture is, this relatively stable but does change over time in response to circumstances. National culture is depicted as playing a fundamental role informing culture valves. In turn these values interact with the needs, attitudes and norms of individuals and group and results in behavior that contribute to organizational effective ness or lack there of. Additional influences are the values derived from corporate culture and the individuals professional (or trade) culture; thus individuals and groups with in organizations can be expected to share some values, but they can also be expected to differ with respected to others. The organizations effectiveness will increase to the extent that the factors influencing behaviours is understood by managers. An international firms performance is likely to enhanced when systems are in place that are congruent with the various influences that determines behaviours. While it is clearly impossible to understand all of the factors influencing behaviour, national cultures and attendant values appear to be important starting point. It is certainly the case that nations and cultures are not the same; nevertheless, it seems appropriate from an international organization view point consider national cultures. Organizations are usually legal entities that exist within a defined national legal framework, that is, their activities are legally constrained by national requirements rather than cultural ones. This means that international firms identify their activities with national boundaries. Human resource laws and other similar conditions encourage firm’s to take the national perspective. The firms have to function within the national legal systems. Laws and regulations may differ quite dramatically from country to country- for example holidays and legislated benefits are substantially different even in Canada & US. Therefore it is appropriate to begin cultural analysis at the national cultural level. A study of almost 12,000 managers around the world found that although changes were occurring in every country, culture and corporation, there is still no common culture of management. Moreover managers’ views tend to correspond more to their country’s cultural heritage and less to its geographical locations (Kanter, 1991). The diversity among cultures is reflected not only in management but also in marketing and consumer behaviours. When Americans venture abroad, they experience what anthropologists call culture shock that, a series of psychological jolts when they encounter new customer, value system, attitudes, and work habits; the shock reduced their effectiveness in foreign commercial environment (Stressin, 1971). Therefore it is crucial to effective operations that the managers be well schooled in the host culture. A lack of understanding of the host cultures (National cultures) will lead the managers to think and as he would in his home cultures. Such a self-reference criterion that is, the unconscious reference to ones own cultural values-has been termed the root cause of most international business problems abroad. The goal should be to eliminate this cultural myopia (Lee, 1966). The following view effectively express the payoff from understanding low culture may influence cross cultural executives: “A general comparative analysis of cultures nay help marketing executives to anticipates the responses of their rivals, understand more accurately their customs in business transactions and deal with colleagues of different nationalities in joint decision making. Culture makes a difference in problem identification and in the objectives motivating choice. Culture may also make a difference in the communication of problems and recommendations and particularly in the decisiveness of recommendations. Failure to understand these differences may lead to noisy communication, misinformation and misunderstanding. Culture also makes a difference in individual strategies to adjust decision situations to facilitates choice and mitigate undesirable consequences for the organization and the decision maker” (Tse et al., 1988). Major sources of misunderstanding among cultures are the differences in values and priorities. Differences in cultural factors and improper understanding play havoc in cross-cultural management and communication (Knott, 1989). There are a variety of cultural value models, which has been practically applicable in the international business settings. The Kluckhonn and Strodtbeck (1961) model has been used by a number of international managers and provides a means of assessing national culture that many people find it helpful. Varying ways of coping different social problems illuminates cultural differences and this model provides a means of assessing national culture. Societies that view themselves as subjugated or harmony or mastery to nature, time oriented towards past, present or future, basic human nature i.e., evil, good or changeable, activity oriented i.e., being, doing, controlling and containing, human relationships like individualistic, lineal or co-lineal and space such as private and public, behave differently and understanding these aspects of culture can provide international organization to adapt their own style and adjust their practices to accommodate differences. One of the important cultural value models has been developed by Hofstede (1980), which has been widely discussed in international business environment. The model proposed initially four dimensions of culture and a fifth dimension was later added based on research in the far east (Chinese culture connection 1987) The five dimensions are; individualism, (IDV), uncertainty avoidance index (UAI), power distance (PDI), masculinity (MAS) and Confucian dynamism (CD). As we know, the cultural values that are typical of a particular society can influence what is effective in terms of the management process. Similarly lots of cultural traits, complexes and patterns differ from community to community and nation. It is often necessary to know the process and nature of the cultural environment for a successful formulation of business strategies. Some national cultures adopt new ideas, techniques and products more easily and fast than others. So understanding cultural adaptation is one of the important aspects in international business environment. The nature and process of cultural transmission and diffusion in a society is important to business decision-making. Knowledge of the nature and extent of cultural conformity and deviance will sometimes be helpful in business decision-making. International business arena is replete with cases of cultural lag. The factors that contributes to cultural lag include ignorance, wrong notions, conservatism, sentimental and political factors and vested interests etc. this concept indicates that different markets may be in different levels of readiness to accept a new product or idea. To successful market a new idea (including product, service, technique) it is necessary to identify the actors causing the lag and to overcome them by taking appropriate measures. Cultures have some important traits and understanding of these cultural dimensions will be helpful in understanding international business environment. The traits like low context-high context, masculine-feminine, monochromic-polychromic, universalism-particularism, individualism-communitarianism, neutral-emotional, specific-diffuse and achievement-ascription always plays a crucial role in deciding and understanding the national cultural context. Better understanding of national cultural traits improves the chances of success and adoption of organizations in international business environment. Models of cultural values are helpful in understanding cultural similarities and differences. In essence, however, they are stereotypes. Any culture is far more complex than such models would suggest and it is important that this complexity be recognized to understand international business environment holistically. But a focus simply on national culture can be somewhat misleading if one limits consideration to this level. There are clear cases where cultures transcend national boundaries (for example, the British culture in many former colonies) and other cases where several cultures are evident in one nation (for example, multiculturism in Canada). Equally, cultures change in response to the environment, degrees of similarity and difference change overtime. But on the whole, from the organizations viewpoint, a focus on national cultures is an appropriate beginning within this framework, subcultures, overlapping cultures and forces for convergence and divergence need to be considered. International businesses need to understand and appropriate a variety of differences among nations. Among other differences, nations exhibits varying cultural profiles; thus understanding the cultural environment is a component of the professionals working in international arena. The cultural environment affects virtually all the activities. Through the relationship between national culture and international business environment is an extremely complex one. However, a basic understanding of national cultural issues and cultural understanding will certainly enhance international operations. Openness to the possibility that the world is not the world as we know and accept is constantly necessary. Culture is complex and so the successful organizations in international business environment needs to go beyond “Sophisticated stereotyping” to make sense of apparent cultural paradoxes that can occur (Osland & Bird, 2000). *********************************************************** References: 1. Dess. G. & Beard, D. 1984. Dimensions of Organizational Task Environments, Administrative Science Quarterly, 29: 52-73. 2. Ebrahimi, B. 2000. Environmental Complexity, Importance, Variability and Scanning Behavior of Hong Kong Executives, International Business Review, 9: 253-270. 3. Guisinger, S. 2000. A Curmudgeons View of the Discipline of International Business, paper presented at the Academy of International Business, Phoenix, AZ. 4. Guisinger, S. 2001 From OLI to OLMA: Incorporating Higher Levels of Environmental and Structural Complexity into the Eclectic Paradigm, International Journal of the Economics of Business, 8: 257-272. 5. Hambrick, D. 1982. 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