Business Environment with reference to Global Integration

Global integration refers to the process of increasing the degree of economic and political
integration among countries around the world. This can be done through a variety of means,
including treaties, trade agreements, and infrastructure projects.

The business environment is the set of factors that affect how businesses operate. This includes
things like the economic conditions, the legal and regulatory environment, and the social and
cultural environment.

The business environment in India has undergone a tremendous change in the last few years.
Although there are several factors responsible for this, global integration is one of the most important
ones. Liberalization, privatization, and globalization (LPG) are three crucial components of this
factor.

The economy of India has developed drastically since independence from the British rule. The
government’s priorities immediately after 1947 were to focus on social upliftment of people and
eradicating poverty. The economy them was largely agrarian and industries were scarce.

Gradually, the government started establishing its own industries. There were several public sector
corporations operating in many industries. The government ensured that they flourished by creating
monopolistic markets. Hence, private companies were heavily regulated and controlled.

This approach did not last very long because the government ended up with a balance of
payment crisis in 1991. When India approached international institutions like the World Bank for
help, they asked the government to open up its economy.

As a result, India adopted radical measures to integrate its economy with that of other nations.
These measures, thus, are broadly termed as global integration of the Indian business environment.

Elements of Global Integration

Global integration means the process with which the local Indian market opens up to the global
economy. Consequently, it amounts to letting foreign factors influence India’s local business
environment.

The process of global integration of India’s business environment began in 1991. The following
elements were largely responsible for this:

1. Liberalization

2. Privatization

3. Globalization

Liberalization

Every government imposes restrictions on the way its citizens conduct business activities. One way
of doing this is by making it compulsory for people to obtain several licenses and permissions for
business. This process, for example, was called ‘License Raj’.

Liberalization basically refers to the removal of these restrictions. This happens when the
government removes unnecessary license requirements, allows more freedom in conducting
business, dilutes regulation and reduces taxes. Another way to do it is by making imports and
exports easier.

Liberalization has been responsible for several large MNCs coming to India. The government has
been able to attract crores of Rupees as foreign capital because of it.

Privatization

Privatization simply means allowing private players and companies to conduct business. This did
not happen commonly before 1991 because the government controlled many industries. It also
implies withdrawal of the state’s interference in business.
The main objectives of privatization are to reduce the burden on tax-payers, encourage private
competition, facilitate capital inflow, etc. Some common modes by which a government indulge in
privatization include disinvestment, franchising, public-private partnerships and liquidation of
public sector undertakings.

Due to privatization, there are very few government companies remaining in India now. The ones
that remain do not even enjoy a monopoly. Government companies like Air India, ONGC, LIC and
HAL have to compete with private companies and MNCs. As a result, India’s economy has become
more diverse and growth-oriented.

Globalization

The restricted nature of India’s economy before 1991 had made it over-dependant on local
companies. Indian firms only competed amongst each other. Foreign companies, thus, could not
even think of working here. This finally changed when India adopted globalization.

Globalization, in simple words, means growing inter-dependence between countries with regards to
business and trade. Modern means of communication and transportation technology have made this
possible. Even international organizations and treaties between countries have played a big role in
globalization.

There are several benefits of globalization. For example, many new markets like insurance,
transportation, and banking services have grown due to it. Furthermore, people now have access to
more choices and international brands because of free trade between countries.

International forces in Business Environment

The business environment is greatly influenced by global forces and trends that tend to define
how organizations interact with customers and respond to competition. From advances in
technology to religious fundamentalism, business culture has come to be defined by events
dictated by these forces, leaving companies with little choice but adapt to their dynamics.
Globalization has brought with it both uniformity and fierce competition and businesses have to
devise strategies that enhance compliance with prevailing market trends.

Focus on Sustainability and the Environment

In an effort to mitigate global warming, governments, manufacturing industries and small

businesses worldwide are focusing on sustainability by encouraging environmentally friendly
practices. Going green is a powerful global force that comes at a cost to small business. Every
company product must have a stamp of approval proclaiming its production and disposal
processes are green. The service industry must observe stringent environmental laws that add to
administrative overheads. The net effect is a rise in production costs incurred by the
manufacturing sector and the business community as a whole.

Advances in Technology

Advances in technology have led to the current global grid driven by one thing: information.
Information technology is a strong force that continues to enhance communications in all sectors.
Companies are wise to take advantage of various marketing platforms driven by the Internet,
such as dedicated websites, social networks, smartphone apps and email. Small businesses are in
a unique position to leverage the power of technology to expand their market base through
affordable advertising on these media and reach a sizable number of potential customers.

Emerging Markets

One clear aspect of globalization has been the drive toward international commerce. Businesses
are virtually interlinked, creating a powerful force in the form of a market without borders. As
small business enterprises gain a global foothold, a contradiction emerges: on one end is market
potential in various parts of the world; on the other, every financial catastrophe occurring in one
part of the world reverberates globally. This is compounded by emerging markets that have seen
an increase in manufacturing industries and buying power, and companies have to compete for
raw materials and customers.
Cultural and Religious Ideologies

Differing ideologies can be a force that defines how businesses conduct their affairs. Ideologies
seem to compete for people’s attention, time and resources. Whether political, cultural or
religious, individuals hold strong convictions and are deeply committed to maintaining and
defending them, sometimes by force and intimidation. Particularly for small businesses
transacting outside the United States, ideologies often dictate how, when and where they conduct
business; thus, they have to devise strategies for operating within this world setting. Some
products or services may be decreed in some countries due to religious reasons, even if there is
clear potential for the market

Liberalization, Privatization, Globalization (LPG Model)

Liberalization

The basic aim of liberalization was to put an end to those restrictions which became hindrances
in the development and growth of the nation. The loosening of government control in a country
and when private sector companies’ start working without or with fewer restrictions and
government allow private players to expand for the growth of the country depicts liberalization
in a country.

Objectives of Liberalization Policy

• To increase competition amongst domestic industries.

• To encourage foreign trade with other countries with regulated imports and exports.

• Enhancement of foreign capital and technology.

• To expand global market frontiers of the country.

• To diminish the debt burden of the country.

Privatization

This is the second of the three policies of LPG. It is the increment of the dominating role of
private sector companies and the reduced role of public sector companies. In other words, it is
the reduction of ownership of the management of a government-owned enterprise. Government
companies can be converted into private companies in two ways:

• By Disinvestment

• By Withdrawal of governmental ownership and management of public sector companies.

Forms of Privatization

• Denationalization or Strategic Sale: When 100% government ownership of productive assets is

transferred to the private sector players, the act is called denationalization.

• Partial Privatization or Partial Sale: When private sector owns more than 50% but less than
100% ownership in a previously construed public sector company by transfer of shares, it is
called partial privatization. Here the private sector owns the majority of shares. Consequently,
the private sector possesses substantial control in the functioning and autonomy of the company.
• Deficit Privatization or Token Privatization: When the government disinvests its share capital
to an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization.

Objectives of Privatization

• Improve the financial situation of the government.

• Reduce the workload of public sector companies.

• Raise funds from disinvestment.

• Increase the efficiency of government organizations.

• Provide better and improved goods and services to the consumer.

• Create healthy competition in the society.

• Encouraging foreign direct investments (FDI) in India.

Globalization

It means to integrate the economy of one country with the global economy. During Globalization
the main focus is on foreign trade & private and institutional foreign investment. It is the last
policy of LPG to be implemented. Globalization as a term has a very complex phenomenon. The
main aim is to transform the world towards independence and integration of the world as a whole
by setting various strategic policies. Globalization is attempting to create a borderless world,
wherein the need of one country can be driven from across the globe and turning into one large
economy.

Outsourcing as an Outcome of Globalization

The most important outcome of the globalization process is Outsourcing. During the outsourcing
model, a company of a country hires a professional from some other country to get their work
done, which was earlier conducted by their internal resource of their own country.

The best part of outsourcing is that the work can be done at a lower rate and from the superior
source available anywhere in the world. Services like legal advice, marketing, technical support,
etc. As the Information Technology has grown in the past few years, the outsourcing of
contractual work from one country to another has grown tremendously. As a mode of
communication has widened their reach, all economic activities have expanded globally.
Various Business Process Outsourcing companies or call centres, which have their model of a
voice-based business process have developed in India. Activities like accounting and book-
keeping services, clinical advice, banking services or even education are been outsourced from
developed countries to India.

The most important advantage of outsourcing is that big multi-national corporate or even small
enterprises can avail good services at a cheaper rate as compared to their country’s standards.
The skill set in India is considered most dynamic and effective across the world. Indian
professionals are best at their work. The low wage rate and specialized personnel with high skills
have made India the most favourable destination for global outsourcing in the later stage of
reformation.

LPG Model in India

After Independence in 1947 Indian government faced a significant problem to develop the
economy and to solve the issues. Considering the difficulties pertaining at that time government
decided to follow LPG Model. The Growth Economics conditions of India at that time were not
very good. This was because it did not have proper resources for the development, not regarding
natural resources but financial and industrial development. At that time India needed the path of
economic planning and for that used ‘Five Year Plan’ concept of which was taken from Russia
and feet that it will provide a fast development like that of Russia, under the view of the
socialistic pattern society. India had practiced some restrictions ever since the introduction of the
first industrial policy resolution in 1948.

Liberalization is defined as making economics free to enter the market and establish their
venture in the country.

Privatization is defined as when the control of economic is sifted from public to a private
hand. Globalization is described as the process by which regional economies, societies, and
cultures have become integrated through a global network of communication,
transportation, and trade.
 Factors affecting international business environment

International business:

International business refers to all commercial activities such as the trade of goods, services,
technology, knowledge, and capital across national borders. The cross-border transactions take
place between individuals, business firms and government agencies (International Business,
2019). Thus, international business refers to cross-border transactions of goods and services
taking place between two or more countries. Also, International business occurs in different
forms:

 Cross border transactions of goods and services from one country to another

 Contractual agreements to use products, services and processes of other nations

 Operating sales, manufacturing, research and development activities in foreign markets.

 Political factors:

Various political factors affect the international factors. Political factors such as changes in tax
rates, policies and actions of government, political stability of country, foreign trade regulations
etc. affects the working of an international business firm. Lack of political stability in the country
directly impacts the operations of business firm. Also, various tax policies and government
initiatives sometimes hinders the expansion of business in other countries. Thus, effective
political environment of business influences the growth of business firm (Shaw, 2018).

 Economic factors:

Economic factors relates to the economic system of the country where the firm has its operations.
Various economic factors such as inflation rate, interest rate, income distribution, employment
level, allocation of government budget, etc., directly impacts the operations of business firm
(NDUNGU, 2012). Various economic factors such as purchasing power of customers also
determines the demand of various products and services.
 Legal factors:

Legal factors relate to the legal environment of the country in which firm operates. Different
laws prevail in different countries and international business firms have to abide by the laws of
each country. Laws relating to age and disability discrimination, wage rates, employment and
environment laws affects the working of business firms. Along with this, various international
lending agencies affects the legal culture and working policies of business firm

 Social factors:

Social factors such as education, awareness and trends and status of people in the society affects
the consumer behavior to purchase various goods and services. Also, Social environment and
culture such as customs, lifestyles and values differs from country to country which further
directly impacts the international business.

 Environmental factors:

Environment factors such as weather, climate change, temperature etc. affects the business firm
and the demand pattern of various goods and services. increasing environment awareness has
made this external environment factor a significant issue to be considered by business firms.
Move towards environment friendly products and services also has affected the demand pattern
of various goods and services.

 Technical factors:

Technological changes in the industry has both positive and negative impacts on the working of
business firms. Technological changes and development of automated work processes helps in
increasing the efficiency of business processes. However, technological changes also threaten the
demand of various products and services in the industry.
Definition of Competitive Strategy
As mentioned above, competitive strategy is a long-term action plan of firms so as to gain a
competitive advantage over its rivals in the industry. This strategy is focused to achieve above
average position and generate a superior Return on Investment (ROI). This strategy is very
important when firms having a competitive marketplace and several similar products available
for consumers.

Four Types of Competitive Strategy

Michael Porter divided competitive strategy in four different types of strategies.
Cost Leadership Strategy
Cost leadership strategy is difficult to implement for small scale businesses as it involves making
long term commitment for offering products and services at lower prices in the market. For this
purpose firms need to produce products at low cost otherwise it will not make profit.

Since the cost leadership means to become low cost producer or provider in the industry, Any
large-scale business which can provide and manufacture products at low cost by attaining
economies of scale. There are many cost leadership factors such efficient operation, large
distribution channels, technological advancement and bargaining power. Here Walmart is a good
example.

Differentiation Leadership Strategy

Identifying attribute of a product which are unique from competitors in the industry is the driving
factor in the differentiation leadership strategy. When a product is able to differentiate itself from
other similar products or services in the market through superior brand quality and value added
features it will be able to charge premium prices to cover the high cost.

There are few business examples who successfully differentiated their brands e.g. Apple, Clif
Bar and Company, Ben & Jerry’s and T Mobiles.

Cost Focus Strategy

This strategy is quite a resemblance to the cost leadership strategy; however, a major difference
is that the cost focus strategy businesses target a particular segment within the market and that
segment is offered the lowest price of the product or service. This type of strategy is very useful
to satisfy your consumer and increase brand awareness.

For example, beverage companies manufacturing mineral water can target market segment like
Dubai, where people need and use only mineral water for drinking, can be sold at a lower than
competitors.
Differentiation Focus Strategy
Similar to the cost focus strategy, differentiation focus strategy targets a particular segment
within the market; however, instead of offering lower prices to consumer; firms differentiate
itself from its competitors. Differentiation strategy offers unique features and attributes to appeal
its target segment. For example, Breezes Resorts, is a company having several resorts and caters
only couple having no children and offer peaceful environment without any children disruption.

Case Study of Apple

Apple Inc. is the manufacturer and marketer of computers and consumer electronic products
including tablets, smartphones, and music players. The company has attained a distinct position
in the industry through its competitive strategy which is innovation and premium pricing policy.
Apple has a consistent practice of developing new products and its ability to make product
complement with each other and strengthens customer loyalty and helps in creating a barrier for
competitors in the market.

The company also sets premium prices for its products. The aim of the company is to offer a
high-quality product with unique features and uses higher prices to reinforce the perception of
added value along with maintaining profitability.