INTERNATIONAL BUSINESS

• The sharing of resources like knowledge, skills, ideas, goods and

services and technologies etc is called international business
• International business is the process of linking the global resources
with global people
• It refers to the exchange of goods and services between 2 or more
countries.
EVOLUTION - from Harapan and mohenjo daro the dockyard and ships
found at the local port in Gujarat and utensils found at Harappa and
mohenjo daro prove the existence of international business during olden
times
Later in the 19th century britishers also started international trade to
theree different colonies in the world they used to take the raw materials
from their colonies and manufacture the finished goods from Britain and
sell these finished goods again to the foreigners
Features of international business
1. Large scale Operations:

To cope with the global competition in international business, all

the operations are conducted on a very huge scale and generally
using special purpose machinery and high skill labour. Production
and marketing activities are conducted on a large scale. After
satisfying the domestic market, the international market is tapped.

2. Integration of Economies:

Economic integration is an arrangement between different regions

that often includes the reduction or elimination of trade barriers,
 and the coordination of monetary and fiscal policies. Economic
integration aims to reduce costs for both consumers and
producers and to increase trade between the countries involved in
the agreement. There are seven stages of economic integration:
preferential trading area, free trade area, customs union, common
market, economic union, economic and monetary union, and
complete economic integration. The final stage represents a
complete monetary union and fiscal policy harmonization.
International business integrates (combines) the economies of
many countries. This is because It designs the product in one
country, uses finance from one country, labour from another
country, and infrastructure from another country. It sells the
product in many countries, i.e. in the international market.

3. Dominated by developed countries and MNCs:

International business is dominated by developed countries and

their multinational corporations (MNCs). Multinational
Corporations (MNCs) encompass a number of countries. Their
sales, profits, and the flow of production is reliant on several
countries at once. Such companies from large economies like the
USA, UK, Japan, China, Germany, India, etc. dominate
international trade. This is because they have large financial and
other resources. They also have the best technology and research
and development facilities. They have highly skilled employees
and managers. These high skill people are given very high salaries
and other benefits. Therefore, they produce good quality goods and
services at low prices. This helps MNCs and developed countries
to capture and dominate the global market.

4. Beneficial to Participating Countries:

International business gives benefits to all participating countries.

Developing countries get foreign capital and technology from
developed countries. They get rapid industrial development. They
 get more employment opportunities. Developing countries get
economic development from the developing countries. Hence,
developing countries open up their economies through liberal
economic policies.

5. Keen Competition:

International business increases competition in domestic markets

and introduces new opportunities to foreign markets. The
global competition encourages companies to become more
innovative and efficient in their use of resources. For
consumers, international business introduces them to a variety of
goods and services. The competition in the international market is
between unequal partners i.e. developed and developing countries.
The developed countries and their MNCs produce superior quality
goods and services at very low prices. They have many contacts in
the world market. Hence, developing countries find it very difficult
to face competition from developed countries.

6. Special Role of Science and Technology:

International business gives a lot of importance to science and

technology. Developed countries use high technologies. Therefore,
they dominate global business. International business helps them to
transfer such top high-end technologies to the developing
countries. Such technology transfers help people from developing
countries to learn from dynamic industry experts in a diverse
learning environment. It helps them to receive groundbreaking
training and unlock the door to entrepreneurship.

7. International Restrictions:

International business faces many restrictions on the inflow and

outflow of capital, technology, and goods. Many governments do
not allow international businesses to enter their countries. The
main types of trade restrictions are tariffs, quotas, embargoes,
 licensing requirements, standards, and subsidies. A tariff is a tax
put on goods imported from abroad. The effect of a tariff is to raise
the price of the imported product. It helps domestic producers of
similar products to sell them at higher prices. All this is harmful to
international business.

8. Sensitive Nature

The international business is very sensitive in nature. Any changes

in the economic policies, technology, political environment, etc.
has a huge impact on it. Similarly the culture and beliefs of that
country also play very important role in international business.
Therefore, international business must conduct marketing research
to find out and study these changes and sensitivity of the society
also. They must adjust their business activities and adapt
accordingly to survive changes.

REASONS FOR THE EMERGENCE OF INTERNATIONAL

BUSINESS
1. To achieve higher rate of profit
2. Expanding the production capacity
3. Severe competition in home country
4. Limited home market
5. Political stability versus political instability
6. Availability of technology and managerial competency
7. High cost of transportation
8. Availability of quality human resource at less cost
9. Liberalisation and globalization and to increase market share.
10. To achieve higher rate of economic development
STAGES OF INTERNATIONALIZATION

These are the various stages of internationalization which explained

below:

1. Domestic Company
2. International Company
3. Multinational Company
4. Global Company
5. Transitional Corporation

1. Domestic Company
First Stages of Internationalization: Most international
companies have their origin as domestic companies. The
orientation of a domestic company essentially is ethnocentric. A
purely domestic company operates domestically because it never
considers the alternative of going international.
The growing stage-one company, when it reaches growth limits in
its primary market, diversifies into new markets, and product
technologies instead of focusing on penetrating international
markets. However, if factors like domestic market constraints,
foreign market prospects, increasing competition, etc.
make the company reorient its strategies to tap foreign market
potential, it would be moving to the next stage in the evolution. A
domestic company may extend its products to foreign markets by
exporting, licensing, and franchising.
The company, however, is primarily domestic and the orientation
essentially is ethnocentric. In many instances, at the beginning
exporting is indirect.
The company may develop a more serious attitude towards foreign
business and move to the next stage of development, i.e.,
international company.
2. International Company
Second Stages of Internationalization: International company is
normally the second stage in the development of a company
towards the transitional corporation. The orientation of the
company is basically ethno centric and the marketing strategy is an
extension.
the marketing mix developed for the home market is extended into
foreign markets. International companies normally rely on
international business.

3. Multinational Company
Third Stages of Internationalization: When the orientation shifts
from ethnocentric to polycentric, the international company
becomes multinational. In other words, when a company decides to
respond to market differences, it evolves into a stage three
multinational that pursues a multi-domestic strategy.
The focus of the stage three company is multinational that pursues
a multinational or, in strategic terms, multi-domestic. The
marketing strategy of the multidimensional company is adaptation.
In multinational companies, each foreign subsidiary is managed as
if it were an independent city-state.
The subsidiaries are part of an area structure in which each country
is part of a regional organization that reports to the world
headquarters.

4. Global Company
Fourth Stages of Internationalization: The global company will
have either a global marketing strategy or a global sourcing
strategy but not both. It will either focus on global markets and
source from the home or a single country to supply these markets,
or it will focus on the domestic market and source from the world
to supply its domestic channel.
However, according to the interpretation of some others, all
strategies for product development, product marketing, etc. will be
global in respect of the global corporation.
 5. Transitional Corporation
Fifth Stages of Internationalization: The transitional corporation
is much more than a company with sales, investments, and
operations in many countries. This company, which is increasingly
dominating markets and industries around the world, is an
integrated world enterprise that links global resources with global
markets at a profit.

APPROACHES TO INTERNATIONALISATION
1. Ethnocentric Approaches: The ethnocentric orientation is an
assumption or belief that the home country i superior. Someone having
this orientation sees the similarities in markets, and thus believe that the
products and practices which succeed in the home country are superior
and, thus should be used everywhere. In the ethnocentric company,
overseas operations are viewed as being secondary to domestic and
primarily as a means of disposing off surplus domestic production. Plans
for overseas markets are developed in the home office to use policies
and procedures identical to those who are employed at home.
There is no systematic marketing research conducted overseas, there are
no major modifications to products, and also there is no real attention to
consumer needs in foreign markets. The executives at the head office of
the company make the decisions related to exports and, the marketing
personnel of the domestic company monitor these export operations
through an export department.

The company exports the same product designed for domestic markets
to foreign countries under this approach. Hence, maintenance of
domestic approach towards international business is called as
ethnocentric approach.

This approach is suitable for the companies during the early days of
internationalisation and also to the smaller companies.
2. Polycentric Approach: The polycentric approach is the unconscious
belief that each host country is unique and different and that the way to
succeed in each country is to adapt to each country’s unique differences.
In the polycentric stage, subsidiaries are established in the overseas
markets. Each subsidiary operates independently from the others and
establishes its own marketing objectives and plans. Marketing is
organised on a country by-country basis, where each country has its own
unique marketing policy. The domestic companies that are exporting to
foreign countries using the ethnocentric approach find at the latter stage
that the foreign markets need an altogether different approach.
The company establishes a foreign subsidiary company and thus
decentralises all the operations and delegates decision-marking and
policy making authority to its executives.

In this approach, the company appoints executives and personnel

including a chief executive who reports directly to the managing director
of the company. Company appoints the key personnel from the home
country and all the remaining vacancies are filled by the people of the
host country.

3. Regiocentric Approach: The company as it is operating successfully

in a foreign country thinks of exporting to the neighbouring countries of
the host country. At this stage, the foreign subsidiary considers the
regional environment to formulate policies and strategies. But it markets
more or less the same product which has been designed under
polycentric approach in other countries of the region, but with different
market strategies.
4. Geocentric Approach: Under this approach, the entire world is same
as a single country for the company. They select the employees from the
entire globe and thus operate with a number of subsidiaries. The
headquarter co-ordinates activities of the subsidiaries and each
subsidiary functions like an independent and autonomous company in
the formulation of policies, strategies, product design, human resource
policies, operations, etc.
In this approach, the multinational environment takes a global approach
to its global operations which recognises that subsidiary and corporate
makes unique contribution with its unique competency. This is
accompanied by a worldwide integrated business & where nationality is
ignored to favour ability.

ADVANTAGES OF INTERNATIONAL BUSINESS

1. Obtaining Valuable Forex: A country can earn valuable Forex by
exporting its goods to other countries.
2. Division of labor: International business leads to the specialization of
product production. Therefore, high-quality products that you have the
greatest advantage.
3. Optimal use of available resources: International businesses reduce
the waste of domestic resources. It helps countries make the best use of
their natural resources. Each country produces those products that have
the greatest advantage.
4. Improving the standard of living of people: The sale of surplus
products from one country to another leads to increased income and
savings for people in the first country. This will improve the standard of
living of the population of the exporting country.
5. Consumer Benefits: Consumers also benefit from international
business. They are free to use a variety of better-quality products at a
reasonable price. Therefore, consumers in the importing country have a
variety of products, which is an advantage.
6. Promotion of industrialization: The exchange of technical
knowledge allows developing and developing countries to establish new
industries with the help of foreign aid. Therefore, the international
business helps the industry develop.
7. International Peace and Harmony: International business eliminates
competition between different countries and promotes international
peace and harmony. Build interdependence and increase mutual trust
and integrity.
8. Cultural Development: International business encourages the
exchange of cultures and ideas between more diverse countries. You can
adopt a better way of life, clothing, food, and more from another
country.
9. Economics of large-scale production: International business leads to
large-scale production due to high demand. Every country in the world
can benefit from large-scale production.
10. Product price stability: International business reduces large
fluctuations in product prices. It leads to stable product prices around the
world.
11. Expanding the product market: International business expands the
product market around the world. As the scale of the business expands,
the profits of the business will increase.
12. Benefits in an emergency: International business allows you to face
emergencies. In the event of a natural disaster, we can import goods
according to your needs.
13. Creating Employment Opportunities: International companies
promote employment opportunities in export-oriented markets. It raises
the standard of living of countries dealing with international business.
14. Increasing public income: The government imposes import and
export taxes on this transaction. Therefore, the government can make a
lot of money from international business.
DISADVANTAGES OF INTERNATIONAL BUSINESS
1. Negative economic impact: One country affects the economy of
another through international business. In addition, large-scale exports
hinder the industrial development of importing countries. As a result, the
economies of importing countries are suffering.
2. Competition with developed countries: Developing countries
cannot compete with developed countries. Unless an international
business is managed, it impedes the growth and development of
developing countries.
3. Competition between nations: Fierce competition and the desire to
export more products can create competition between nations. As a
result, international peace can be hampered.
4. Colonization: Due to economic and political dependence and
industrial recession, importing countries may be colonized.
5. Exploitation: International business leads to exploitation from
developing countries to developed countries. Prosperous and dominant
nations regulate the economies of poor nations.
6. Legal Issues: The different laws, regulations, and customs procedures
that different countries follow to have a direct impact on import and
export trade.
7. Unwanted fashion promotion: Cultural values and heritage are not
the same in all countries. There are many aspects that may not be
suitable for our environment, culture, traditions, etc. This obscenity is
often created in the name of cultural exchange.
8. Language Issues: Different languages in different countries create
barriers to establishing business relationships between different
countries.
9. Dumping policy: Developed countries tend to sell their products to
developing countries at prices below production costs. As a result,
industries in developing countries have been closed.
10. Complex technical steps: International business is very technical
and has complicated procedures. It contains various uses for important
documents. Expert service is required to handle complex procedures at
various stages.
11. Shortage of commodities in exporting countries: Traders may
prefer to sell commodities to other countries instead of their own in
order to make more profits. As a result, there is a shortage of products in
the country of origin.
12. Negative impact on the domestic industry: International business
represents a threat to the survival of early and early industries. Foreign
competition and unlimited imports can disrupt our country’s future
industry.
EXTERNAL FACTORS AFFECTING BUSINESS
There are five main types of external factors affecting business:

• Political
• Economic
• Social
• Technological
• Environmental
• Competitive.

Political factors affecting business

Political influence on business refers to new legislation that

affects consumers', employees, and businesses' rights.

Some examples of business-related legislation include:

• Anti-discrimination
• Intellectual property
• Minimum wage
• Health and safety
• Competiton
• Consumer protection.
Generally, these are grouped into three categories:

• Consumer laws - These are laws that ensure businesses will

provide consumers with quality goods and services.
• Employment laws - These are laws that protect employee rights
and regulate the relationship between employees and consumers.
• Intellectual property law - These are laws that protect creative
work within the business world, e.g. copyrights of music, books,
films, and software.
Economic factors affecting business

Businesses and the economy have a mutual relationship. The success of

businesses results in a healthier economy, whereas a strong economy
allows businesses to grow faster. Thus, any changes in the economy will
have a significant impact on business development.
Economic activities can deeply be affected by changes in:
• Tax rates
• Unemployment
• Interest rates
• Inflation.
One measure of economic performance is aggregate demand. Aggregate
demand is the total demand for goods and services within an economy
(including consumer and government spending, investing, and exports,
minus imports). The higher the aggregate demand, the more robust an
economy is. However, too much demand can lead to high inflation,
resulting in higher prices for consumers.
Changes in tax, interest rates, and inflation can result in a rise or fall in
aggregate demand, which affects economic activity. For example, with
lower taxes, individuals and households have more income at their
disposal to spend on goods and services. This contributes to higher
demand, resulting in more production and jobs created. As a result,
business activities grow and the economy flourishes.

Social factors affecting business

Social factors affecting business refer to changes in consumer tastes,

behaviour, or attitude that might affect business sales and revenues. For
example, nowadays, consumers are paying more attention to
environmental issues such as climate change and pollution. This puts
pressure on firms to adopt eco-friendly solutions to their production and
waste disposal.
Social influence also includes the ethical side of a business, such as how
a company treats its employees, consumers, and suppliers.

An ethical business is one that considers the needs of all shareholders,

not just owners. Typically, business ethics comprise three main aspects:
• Employees - Ensure work-life balance as well as the physical and
emotional well-being of the employees.
• Suppliers - Stick to the agreed contract and pay suppliers in a
timely fashion.
• Customers - Provide quality products at a fair price. Businesses
should not lie to consumers or sell products that do serious harm to
consumers.
In a perfect world, companies would comply with all ethical policies and
contribute to the betterment of society. However, in reality, this is
unlikely to happen, as ethics tend to be at the opposite end of
profitability. For example, a company that paid everyone a living wage
might end up with lower profits.

Technological factors affecting business

Technology is used extensively in modern business, from production to

product selling and customer support. Technology allows a company to
save time and labour costs while achieving more efficiency, which, in
the long run, can result in a competitive advantage.

Three key areas of technology in business are automation, e-

commerce, and digital media.

Automation is the use of robots to perform repetitive tasks formerly

done by humans.
Automation is applied throughout the supply chain of many industries,
including electronics manufacturing, automotive, retail, online services,
banks, etc.
The manufacturing of cars and trucks is carried out by big, automated
robots instead of human workers. These robots can perform a wide range
of tasks including welding, assembling, and painting. With automation,
production becomes safer, more efficient and more accurate. Companies
can hire fewer workers for menial work and focus more on quality-
improving activities.
In addition to automation, there is a trend towards e-commerce.

E-commerce is the buying and selling of goods and services on the

internet.
Many companies set up an e-commerce shop to accompany their brick-
and-mortar stores, while others operate 100% online.

Some examples of e-commerce include:

• An online bookstore
• Buying and selling through Amazon or eBay
• An online retailer.
The key incentive for businesses to move online is to reduce fixed costs.
While physical businesses have to pay healthy monthly fees for rent,
warehousing, and electricity on-site, an online business pays little to no
fixed costs.

For example, an Etsy shop selling cooking recipes and printables can
avoid costs of warehousing, hiring workers to work on-site, and renting
out a location. Without the burden of fixed costs, the business owner can
focus more on product development and promotion.

Finally, there is the extensive use of digital media.

Digital media are online channels that get businesses in contact with
their customers.
Some examples include websites, blogs, videos, Google ads, Facebook
ads, emails, social media, etc.

While traditional marketing methods like billboards and banners are

restricted to local areas, online channels allow companies to
communicate their marketing messages across the globe in a matter of
seconds.

Environmental factors affecting business

Environmental influence refers to changes in the natural world, such as

weather conditions, that might affect business operations.

The production of goods and services is the major cause of climate

change, pollution, and waste. For example, the generation of electricity
in coal-fired plants releases a tremendous amount of carbon dioxide into
the atmosphere, which causes global warming and acid rain. The fashion
industry is another CO2 emitter, contributing to around 8-10% of the
total greenhouse gas emission each year.

The good news is that many companies nowadays have been adopting
eco-friendly solutions to mitigate their impacts on the environment.
Some examples include:

• Recycling packaging
• Offsetting carbon footprint
• Introducing energy-saving plans
• Adopting more energy-efficient equipment
• Switching to fair-trade suppliers.
Competitive factors affecting business

Competitive influence refers to the impact of competition in the business

environment. The impact can come from changes in price, product, or
business strategy. For example, if a company selling similar products at
a similar price to your business suddenly drops its price to attract more
customers, you may have to reduce the price as well or risk losing
customers.

To avoid the impact of competitive influence, a company can

develop competitive advantages. These are attributes that allow the
company to outperform its rivals. A business can gain a competitive
advantage by investing in a high-quality labour force, exceptional
customer support, stellar products, extra services, or a reputable brand
image.

The competitive advantage of Starbucks is that it is a global company

with strong brand recognition, premium product quality, and a cosy
environment that makes customers feel at home. Starbucks is not only a
coffee store but a place where you hang out and have a good time with
friends and family.

How do changes in the external environment affect business?

In the modern world, external factors are changing at a rapid rate,

causing competition to become more intense than ever. Businesses that
underestimate competition or are too slow to adapt will get replaced by
more innovative firms.

Changes in the external environment are often caused by:

• A shift in consumer behaviour

• Introduction of new technology
• Entry of new competition
 • An unpredictable event such as war, economic crisis, global
pandemic, etc.
• Adoption of new legislation, e.g. tax policy, minimum wage.
Before 2007, the world was oblivious to the 'swipe and touch' device, as
the mobile phone industry was dominated by Nokia. The introduction of
touch screens by Apple changed all of this. Nowadays, most people own
a smartphone and spend countless hours communicating, working, and
entertaining via their mobile devices. The increased mobile usage also
forces companies to adapt sales and marketing tactics to be more
mobile-friendly.
Changes in the external environment bring both opportunities and
challenges for businesses.

For example, the emergence of online marketing channels such as

Facebook and Google ads allows businesses to market and sell their
products more effectively. However, their competitors will also have
access to the exact same tools and customer base.

To gain a competitive advantage, businesses cannot rely solely on

external technology. They need to invest in their own assets such as
internal databases, human resources, and intellectual property.

Another way to gain this advantage is to become more socially

responsible.

Corporate Social Responsibility (CSR) refers to the positive

contribution of a company to the environment, economy, and
community.
With the external environment changing and the business landscape
being taken over by technology, businesses stand a better chance if they
are seen in a positive light. This does not mean companies should put on
a show. Instead, they should put in a genuine effort to better society.
Some CSR activities include reducing carbon footprint, allocating part
of the profit to developing economies, purchasing eco-friendly materials,
and improving labour policies.

Starbucks's CSR: Starbucks aims to create a positive impact on the

communities it works with by partnering with local non-
profit organisations. For each partner, Starbucks donates $0.05 to $0.15
per transaction. The company also provides jobs for veterans and
military workers while emphasising diversity and inclusion in the
workplace.
As you can see, there are many external factors influencing businesses
operations, including globalisation, technological, ethical,
environmental, economic, and legal influences. These factors are
changing all the time, and to survive, businesses must adapt and react to
these changes. Failing to do so will put them at the risk of losing
customers and closing down.
 INTERNAL ENVIRONMENT OF A BUSINESS
Factor 1# Value System:
The value system of an organisation means the ethical beliefs that guide
the organisation in achieving its mission and objective. The value system
of a business organisation also determines its behaviour towards its
employees, customers and society at large. The value system of the
promoters of a business firm has an important bearing on the choice of
business and the adoption of business policies and practices. Due to its
value system a business firm may refuse to produce or distribute liquor
for it may think morally wrong to promote the consumption of liquor.

The value system of a business organisation makes an important

contribution to its success and its prestige in the world of business. For
instance, the value system of J.R.D. Tata, the founder of Tata group of
industries, was its self-imposed moral obligation to adopt morally just
and fair business policies and practices which promote the interests of
consumers, employees, shareholders and society at large. This value
system of J.R.D. Tata was voluntarily incorporated in the articles of
association of TISCO, a premier Tata company.

Infosys Technologies which won the first national corporate governance

award in 1999 attributes its success to its high value system which
guides its corporate culture. To quote one of its reports, “our corporate
culture is to achieve our objectives in environment of fairness, honesty,
transparency and courtesy towards our customers, employees, vendors
and society at large” Thus value system of a business firm has an
important bearing on its corporate culture and determines its behaviour
towards its employees, shareholders and society as a whole.

Factor 2# Mission and Objectives:

The objective of all firms is assumed to be maximization of long-run
profits. But mission is different from this narrow objective of profit
maximization. Mission is defined as the overall purpose or reason for its
existence which guides and influences its business decision and
economic activities.
The-choice of a business domain, direction of its development, choice of
a business strategy and policies are all guided by the overall mission of
the company. For example, “to become a world-class company and to
achieve global dominance has been the mission of ‘Reliance Industries
of India’. Similarly “to become a research based international pharma
company” has been stated as mission of Ranbaxy Laboratories of India.

Factor 3# Organisation Structure:

Organisation structure means such things as composition of board of
directors, the number of independent directors, the extent of professional
management and share -holding pattern. The nature of organisational
structure has a significant influence over decision making process in an
organisation. An efficient working of a business organisation requires
that its organisation structure should be conducive to quick decision
making. Delays in decision making can cost a good deal to a business
firm.

The board of directors is the highest decision making body in a business

organisation. It takes general policy decisions regarding direction of
growth of business of the firm and supervises its overall functioning.
Therefore, the managerial capability of the board of directors is of
crucial importance for the functioning of a business firm and for
achievement of its overall mission and objectives.

For efficient and transparent working of the board of directors in India it

has been suggested that the number of independent directors be
increased. Many private corporate firms in India are managed by family
members of their promoters which is not conducive to the efficient
working of these firms.
It is therefore highly desirable to increase the extent of professional
management of private corporate companies. The share holding pattern
has also an important implication for business management. In some
Indian companies the majority of shares is held by the promoters of the
company themselves.In some others share-holding pattern is quite
diversified among the public. In India financial institutions such as UTI,
LIC, GIC, IDBI, IFC etc. have large share holdings in prominent Indian
corporate companies and the nominees of these financial institutions
play a critical role in making major business policy decisions of these
corporate companies.

Technically, shareholders elect directors who make up the board of

directors. The directors then appoint company’s top managers who take
various business decisions. However, most of the shareholders delegate
the voting rights to the management or do not attend the general body
meeting.

Thus, most of the shareholders regard ownership of the company as a

purely financial investment. However, in recent years in developed
countries like the United States the shareholders have come to wield a
great influence.
The bankruptcy of business giants such as Enron, World Com. in the
United States have created great awareness as well as mistrust among
shareholders. In the last few years there has been frequent law suits filed
by shareholders against directors and managers for ignoring the interests
of shareholders or in fact cheating them by not declaring dividends. That
is why there is worldwide debate on proper corporate governance of
business firms.

Factor 4# Corporate Culture and Style of Functioning of Top

Management:
Corporate culture and style of functioning of top managers is important
factor for determining the internal environment of a company. Corporate
culture is generally considered as either closed and threatening or open
and participatory.

In a closed and threatening type of corporate culture the business

decisions are taken by top-level managers, while middle level and work-
level managers have no say in business decision making. There is lack of
trust and confidence in subordinate officials of the company and secrecy
pervades throughout in the organisation. As a result, among lower level
managers and workers there is no sense of belongingness to the
company.

On the contrary, in an open and participatory culture, business decisions

are taken at lower levels of management, and top management has a
high degree of trust and confidence in the subordinates. Free
communication between the top level management and lower-level
managers is the rule in this open and participatory type of corporate
culture. In this open and participatory system the participation of
workers in managerial tasks is encouraged.

Closely related to corporate culture is the style of functioning of top

management. Some top managers believe in just giving orders and want
them to be strictly followed without holding consultations with lower
level managers. This style of functioning is not conducive to the
adaptability and flexibility in dealing with the changing external
environment of business.

Factor 5# Quality of Human Resources:

Quality of employees (i.e. human resources) of a firm is an important
factor of internal environment of a firm. The success of a business
organisation depends to a great extent on the skills, capabilities, attitudes
and commitment of its employees. Employees differ with regard to these
characteristics.

It is difficult for the top management to deal directly with all the
employees of the business firm. Therefore, for efficient management of
human resources, employees are divided into different groups. The
manager may pay little attention to the technical details of the job done
by a group and encourage group cooperation in the interests of a
company. Due to the importance of human resources for the success of a
company these days there is a special course for managers how to select
and manage efficiently human resources of a company.

Factor 6# Labour Unions:

Labour unions are other factor determining internal environment of a
firm. Unions collectively bargain with top managers regarding wages,
working conditions of different categories of employees. Smooth
working of a business organisation requires that there should be good
relations between management and labour union.

Each side must implement the terms of agreement reached. Sometimes,

a business organisation requires restructuring and modernisation. In this
regard, the terms and conditions reached with the labour union must be
implemented in both letter and spirit if cooperation of workers is to be
ensured for the reconstruction and modernisation of business.

Factor 7# Physical Resources and Technological Capabilities:

Physical resources such as plant and equipment, and technological
capabilities of a firm determine its competitive strength which is an
important factor determining its efficiency and unit cost of production. R
and D capabilities of a company determine its ability to introduce
innovations which enhance productivity of workers.

It is however important to note that rapid technological progress,

especially unprecedented growth of information technology in recent
years has increased the relative importance of ‘intellectual capital and
human resources as compared to physical resources of a company. The
growth of Bill Gates Microsoft Company and Murthy’s Infosys
Technologies is mostly due to the quality of human resources and
intellectual capital than to any superior physical resources.