UNIT-I

Business Environment: components and significance – Socio Cultural,

Economic, Legal, Political, Technological and External Factors Influencing
Business Environment, Dimensions of International Business Environment
and Challenges.

Meaning of business:

“Business may be understood as the organized efforts of enterprises to

supply consumers with goods and services for a profit”.

Business may be small or big in size, but all of them aim at making profit.
Business varies in size, as measured by the number of employees or by sales
volume. Large organizations such as SAIL, TISCO count their business by
employees in the hundred thousand and their sales revenue in thousands of
crores.

But most business units in our country are small units independently
owned and managed and employing fewer than twenty employees each.

Whether a business unit has one or two people working at home,

10 operating in a retail store,

1000 employees in a factory, or

10000 operating in multiple units spread across the country, all business share
the same purpose to earn profits.

In other words, business includes all activities connected with production,

trade, banking, insurance, finance, agency, advertising, packaging and
numerous other related activities.

Business also includes all efforts to comply with legal restrictions and
Government requirements and discharging obligations to

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  consumers
 Employees
 Owners and to
 Other interesting groups which have stakes in business directly or
indirectly.

Meaning of Business Environment:-

“Business Environment consists of all those factors that have a bearing on

the business”.

Just as the survival and success of any individual depend on his innate
capability-such as the physiological and psychological factors- to cope with the
environment and the extent to which the environment is conducive to the
development of the individual, the survival and success of a business firm
depends on its innate strength-resources at its command, including

 Physical resources
 Financial resources
 Human resources
 Skill and organisation- and its adaptability to the environment and the
extent to which the environment is favourable to the development of the
organisation.

Thus the survival and success of the business depends upon to set of
factors. Those are

1. Internal factors – the internal environment

2. External factors- the external environment

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However, the term business environment often refers to the external factors.

The organizational /internal environment has two components:

Strengths and Weaknesses.

The external environment has broadly, two components:

Opportunities and Threats.

Thus, the strategy formulation is properly putting the organizational factors/

the internal environment the strengths and weakness against the opportunities
and threats in the external environment. In other words business decisions are
conditioned by two broad sets of factors, viz., the internal environment and
the external environment.

Hence, a SWOT analysis (analysis of the Strengths and Weaknesses of the

organisation and Opportunities and Threats in the environment), therefore is one
of the first steps in the strategic management process.

Components of Business Environment:

On the basis of the extent of intimacy with the firm, the environmental
factors may be classified into different types or levels. As intimated above, there
are, broadly, two types of environment.

1. Internal environment
2. External environment

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 1. Internal environment:-

The internal factors are generally regarded as controllable factors because

the company has control over these factors: it can alter or modify such factors as
its personnel, physical facilities, organization and functional means, such as
marketing mix, to suit the environment.

2. External environment:

The external environment, on the other hand, is by and large, beyond the
control of a company. The external or environmental factors such as the

 Economic factors
 Socio-cultural factors
 Government and legal factors
 Demographic factors
 Geographical factors etc., are therefore, generally regarded as
uncontrollable factors.

Some of the external factors have a direct and immediate impact on the firm
(like the Suppliers and distributors of the firm). These factors are classifies as
micro environment also known as task/operating environment.

There are other external factors which affect an industry very generally
(such as industrial policy, demographic factors etc.,). They constitute the Macro
environment, general environment or remote environment.

We may, therefore consider the business environment at 3 levels.

1. Internal environment
2. Micro environment/task/operating environment
3. Macro environment/general/remote environment

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 Although the business environment consists of both the internal and
external factors/ environments, many people often confine the term to the
external environment of the business.

Internal Environment:

The important internal factors which have a bearing on strategy

formulation are

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1. Value system:

The value system of the founders has important bearing on the

 Choice of the business

 The mission and objectives of the organization
 Business policies and practices.

The value system which is shared by all in the organization is an

important factor contributing to success.

Eg:-the vale adopted by JRD Tata the voluntary in corporation in the

Articles of Association of TISCO its moral & social responsibilities to
consumer, employees, shareholders, society and the people.

The liquor business of EID Parry group was sold by the Murugappa group
after takeover, because the value system did not match by the Murugappa
group.

The value system and ethical standards are also among the factors evaluated
by many companies in the selection of suppliers, distributors, collaborations
etc.,

2. Mission and Objectives:

The business domains of the company priorities direction of development,

business philosophy, business policy etc., are guided by the mission and
objectives of the company.

Eg: Ranbaxy’s thrust into the foreign markets and development has been
driven by its mission.

“To become a research based international pharmaceutical company”.

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 Arvind Mills mission:

“To achieve global dominance in select businesses built around our core
competencies through continuous product and technological innovation,
customer orientation and focus on cost effectiveness”.

3. Management structure and nature:

The organisational structure, the composition of the Board of Directors,

extent of professionalization of management etc., are important factors
influencing business decisions. Some management structures and styles delay
decision making while some others facilitate quick decision making.

The Board of Directors being the highest decision making body which stets
the direction for the development of the organisation and which oversees the
performance of the organisation. The quality of BOD is very crucial in this
respect.

Eg: the shareholding pattern is very large share by the promoters like wipro and
Tata group of companies.

The financiers/Institutions have large share holding in many Indian

Companies like IDBI & ICICI.

4.Internal power relationship:

Factors like the amount of support of top management enjoy from different
levels of employees shareholders and Board of Directors has important
influence on the decisions and their implementation. The relationship between
the BOD and Chief Executive Officer are also crucial factors.

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5.Human Resources:

The characteristics of the human resources like skill, quality, morale,

commitment, attitude etc., could contribute to the strength and weakness of an
organisation.

The involvement initiative etc., of people at different levels may vary form
organisation to organisation.

6.Comapny image and Brand equity:

The image of the company matters while raising finance, forming joint
ventures or owner alliances, soliciting marketing intermediaries, entering
purchase or sale contracts, launching new products etc.,. Brand equity is also
relevant in several of these cases.

7.Miscellaneous factors:

There are number of other internal factors which contribute to the business
success/failures or influence the decision-making. They include the following:

a. Physical assets and facilities like the production capacity, technology and
efficiency influences the competitiveness of the firm.
b. Research and Development and technological capabilities determine a
company’s ability to innovate and compete.
c. Marketing resources like the organisation for marketing, quality of the
marketing men, brand equity and distribution channel have direct bearing
on marketing efficiency. They are important also for brand extension,
new product introduction etc.,
d. Financial factors like financial policies, financial position and capital
structure are also important internal environment affecting business
performance strategies and decisions.

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EXTERNAL ENVIRONMENT:

As stated earlier, the external business environment consists of a Micro

environment and Macro environment.

Micro environment:

The micro environment is also known as the Task environment/operating

environment because the micro environmental forces have a direct bearing on
the operations of the firm.

The micro environment consists of the factors in the company’s immediate

environments that affect the performance of the company. These include the

 Suppliers
 Marketing intermediaries,
 Competitors,
 Customers and
 The Public.
1. Suppliers:

An important force in the micro environment of a company is the suppliers

i.e. those who supply the inputs like raw materials and components to the
company. Supply of raw materials is important for the smooth functioning of
the business. Uncertainty regarding the supply or other supply constraints often
compels companies to maintain high inventories causing high inventories.

2. Customers:

The major task of a business is to create and sustain customers. A business

exists because of its customers monitoring the customer sensitivity is, therefore,
a pre-requisite for the business success.

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 Eg. A company may have different categories of customers like

 Individuals
 Households
 Industries
 Government and
 Other commercial establishment.
3. Competition:

A firm’s competitors include not only the other firms which market the
same or similar products but also all those who compete for the discretionary
income of the consumers.

Eg: A TV manufacturer not only competes with other TV manufacturer

but also two wheelers, refrigerators, cooking ranges, stereo sets and so on.

4. Marketing Intermediaries:

The immediate environment of a company may consist of a number of

marketing intermediaries which are “firms that aid the company in promoting
selling and distributing its goods to final buyers”.

Company Marketing intermediaries Consumers

Agents, Retailers etc.,

5. Financiers:

Another important micro environmental factor is the financiers of

the company. Financiers include, financial institutions, non-banking

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 financial corporations, industrial development banks, small scale industrial
development banks like SIDBI etc.,

6. Publics:

A company may encounter certain publics in its environment.

“A public is any group that has an actual or potential interest in or impact on

an organisations ability to achieve its interests”.

 Eg: Media Publics,

 Citizen action publics, and
 Local publics.
 Environmental pollution,
 Child Labour,
 Sweat Labour,
 Environmental problems,
 Deindustrialisation resulting from imports cruelty against animals by
NGO’s.

Macro Environment:

A company and factors in its micro environment in a larger environment

of forces that shape opportunities and pose threats to the company. As stated
earlier, the macro environment is also known as general environment and
remote environment.

The macro forces are generally more uncontrollable than the micro forces.
When the macro environment is uncontrollable, the success of a company
depends on its adoptability to the environment.

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Important macro environment factors include

 Economic environment
 Political and regulatory environment
 Socio/cultural environment
 Demographic environment
 Technological environment
 Natural environment and
 Global environment.
1. Economic environment:

Economic environment refers to all forces which have an economic

impact on business. There is close relationship between business and its
economic environment. Some of the major macro-economic factors which have
considerable influences on business. Such factors are:

 Economic systems
 Economic planning
 Industrial growth
 Agriculture
 Growth strategies
 Infrastructure
 Finance and other fiscal factors
 Removal of regional imbalances
 Economic reforms
 Per capita and national income
 Price and distribution controls etc.

Gross Domestic Product (GDP): GDP is the market value of all officially
recognised final goods and services produced within a country in a given period
of time.

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Net National Product (NNP): the total market value of all final goods and
services produced by citizens of an economy during a given period of time (-)
Depreciation.

2. Political and regulatory environment:

Political environment refers to the influence exerted by the 3 political

situations,

 Legislature
 Executive
 Judiciary in shaping, directing, developing and controlling business
activities.

The Legislature decides on a particular course of action;

The Executive also called Government, implements whatever was decided

by the parliament and the Judiciary functions as the watch dog in order to
ensure that both the legislature and the executive function in public interest and
within the boundaries of the constitution. A stable and dynamic political
environment is indispensible for business growth.

3. Socio-cultural environment:

Socio-cultural environment refers to the influence exercised by certain

factors which are beyond the company’s gate. Such factors include people.

 Attitude to work and wealth

 Role of family
 Marriage
 Religion and education
 Ethical issues and
 Social responsiveness of business.

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 Social and cultural environment is highly relevant for a business unit as the
variety of goods it produces, the type of employees it gets and its obligation to
society depend on the cultural milieu in which the firm operates.

4. Demographic environment:

The importance of demographic factors to business is clear from the facts

that “management men” and “market is people”.

It is conveniently said that management is

 Men
 Material
 Machinery and
 Money

Market is people in the sense that the demand depends on the people and
their characteristics- the number, levels of income, tastes & preferences, beliefs,
attitudes and sentiments and a host of other demographic factors. No wonder,
demography is an important basis of market segmentation.

Important demographic bases of market segmentation include the following:

 Age structure
 Gender
 Income distribution
 Family size
 Family life cycle (eg: young, single: young, married no children, young
married with children....)
 Occupation
 Education
 Social class
 Religion

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  Race
 Nationality etc.,

The demographic environment differs from country to country and

forms place to place within the same country or region. Demographic factors
such as size of the population, population growth rates, age composition, ethnic
composition, density of population, rural-urban distribution, family size, nature
of the family, income levels etc., have very significant implications for
business.

5. Technological environment:

Technological environment exercises considerable influence on business.

Technology is understood as the systematic applications of scientific or other
organised knowledge to practical tasks. It is through business that technology
reaches people. Technology changes fast and to keep pace with it, businessmen
should be ever alert to adopt changed technology in their businesses.

Eg: latest equipments in production process. Flipcart.com,

Amazon.com, e-bay.com, Jabong.com etc.,
6. Natural environment:

Manufacturing which is one of the aspects of business depends on

physical environment for inputs.

Eg: the manufacturer of a tractor

A tractor requires for its manufacture, iron and steel, rubber and plastic,
non-ferrous metals, labour of various skills, factory machinery, materials, and
water and so on.

Of these take an example of steel, for its production requires iron, coal,
furnaces, water, labour, materials and so on. Although the location of a

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particular industry or a particular plant may be the result of the initiative of one
man or a small group of men, many types of industries, especially heavy, cannot
be located too far from the source of raw materials or from a place to which raw
materials can brought easily and expensively.

Natural environment consists of

 Agriculture
 Mining, drilling and quarrying the raw materials,
 Raw materials availability

Eg: Saffron in Kashmir,

Coffee in Coorg,

Tea in Assam,

Cotton in Maharashtra and

Jute in West Bengal

 Transportation and communication.

Thus, the natural environment is particularly important to man in two aspects:

1. Source of raw materials and

2. Physical and biological conditions.
7. Global environment:

The global environment refers to those global factors which are relevant
to business. The global environment refers to those global factors which are
relevant to business, such as the WTO (World Trade Organization) principles
and agreements:

o International conventions
o Treaties
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 o Agreements
o Declarations and
o Protocols etc.,

Eg:

Hike in oil prices which have global impact.,

Imports seriously impact the business
Patent rights impact the business.
Economic conditions in other countries may affect the business
International political factors
Recession in other countries
Development in information and communication
Technology facilitates fast cross border spread of cultures.
These are having significant implications for business.
These are having significant implications for business.

Legal Environment

This refers to set of laws, regulations, which influence the business

organizations and their operations. Every business organization has to obey, and
work within the framework of the law. Legal system of a country has a
profound impact on decisions concerning both investment and operations in
business as it touches the very existence and legality of business firms. It gives
permanent effect to economic policies and provides a sense of security and
safety to business enterprises. It establishes codes and procedures from various
types and aspects of business and deals with deviations or infringement law like
bribery, product counterfeiting, gray markets, black markets, consumer
deception and tax evasion. The coverage, efficiency and efficacy of the legal
system determine adequacy, cost and speed of economic justice and these

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factors are of great importance of the growth of business. The important
legislations that concern the business enterprises include:

1. Companies Act, 1956

2. Foreign Exchange Management Act, 1999
3. The Factories Act, 1948
4. Industrial Disputes Act, 1972
5. Payment of Gratuity Act, 1972
6. Industries (Development and Regulation) Act, 1951
7. Prevention of Food Adulteration Act, 1954
8. Essential Commodities Act, 2002
9. The Standards of Weights and Measurement Act, 1956
10. Trade Marks Act, 1999
11. Bureau of Indian Standards Act, 1986
12.Consumer Protection Act, 1986
13.Competition Act, 2002

Besides, the above legislations, the following are also form part of the
legal environment of business.

1. Provisions of the Constitution:

The provisions of the Articles of the Indian Constitution, particularly

directive principles, rights and duties of citizens, legislative powers of the
central and state Government also influence the operations of business
enterprises.

2. Judicial Decision:

The judiciary has to ensure that the legislature and the government
function in the interest of the public and act within the boundaries of the

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constitution. The various judgements given by the court in different matters
relating to trade and industry also influences the business activities.

3. Industrial development and regulation: covering licensing and

registration of industries; price and output regulation; mergers
acquisition and takeovers of industries; location of industries;
4. Foreign exchange management: covering transactions in foreign
currency and security, current account transactions, capital account
transactions, foreign exchange realization, foreign currency accounts,
foreign trade and investment transactions, borrowings and lending in
foreign exchange;
5. Consumer protection, covering consumer rights, consumer disputes and
complaints and grievance redressal system;
6. Essential commodities covering their supply, prices and quality;
7. Weights, measures and packaging covering standard units, packaging
norms and declaration; and inspection;
8. Patents, covering application procedure, life of a patent; rights of
patentee, exclusive marketing rights, infringement of patents, claim
procedure and settlement.
9. Copyright, covering ownership and licenses of copyright, rights of
copyright owners and others, registration procedure and infringement.
10. Labour, covering apprenticeship, employees’ insurance, payment of
gratuity; disputes, bonus, employees’ provident fund, compensation
and disciplinary matters.
11. Corporate management, covering formation of companies, management
of companies, governance of companies, raise of capital and liquidation
of companies.

Changes in legal environment are caused by legislative changes and

amendments and introduction of new economic laws. Business firms are

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 equally concerned with the speed and efficiency with which justice is
delivered.

Professionally managed companies give importance to legal

conformity to their business operations as this is important to protect
their goodwill assets. Changes in legal environment are often associated
with changes in government and social movements. The firms which are
not aware of such changes could face crises in the usual course of
business and could be driven out of the market in competition.

Thus, external environment consists of

i) Micro environment/ Task/ Operating environment and
ii) Macro environment/General/Remote environment.

This is uncontrollable environment because of factors which are changed

externally.

Labour environment

Labour environment consists of labour laws for the sake of the employees’
interest. India has several acts which are applicable for all sectors particularly
relates to the labour.

Labour law also known as employment law is the body of laws,

administrative rulings, and precedents which address the legal rights of, and
restrictions on, working people and their organizations.

As such, it mediates any aspects of the relationship between trade unions,

employers and employees. In other words, labour law defines the rights and
obligations as workers, union members and employers in the work place.
Generally, labour law covers:

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Industrial relations:

Certification of unions, labour-management relations, collective bargaining

and unfair labour practices; work place health and safety, employment
standards, including general holidays, annual leave, working hours, unfair
dismissals, minimum wage, layoff procedures and severance pay.

There are two broad categories of labour law.

First, labour law relates to the tripartite relationship between employee,

employer and union.

Second, individual labour law concerns employee’ rights at work and

through the contract for work.

The legislations can be categorised as follows:

1. Labour laws enacted by the Central Government, where the Central

Government has the sole responsibility for enforcement.
2. Labour laws enacted by Central Government and enforced both by
Central and State Governments.
3. Labour laws enacted by Central Government and enforced by the State
Governments.
4. Labour laws enacted and enforced by the various State Governments
which apply to respective states.

The other laws are

1. The Employees’ State Insurance Act, 1948

2. The Employees’ provident fund and Miscellaneous Provisions Act, 1952
3. The Mines Act, 1952
4. The Child Labour (Prohibition and Regulation) Act, 1986

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 5. The Building and other constructions workers’ (Regulation of
Employment and Conditions of Service) Act, 1996
6. The Contract Labour (Regulation and Abolition) Act, 1970
7. The Industrial Disputes Act, 1947
8. The Maternity Benefit Act, 1961
9. The Minimum Wages Act, 1948
10.The payment of Bonus Act, 1965
11.The Payment of Gratuity Act, 1972
12.The Payment of Wages Act, 1936
13.The Factories Act, 1948
14.The Trade Unions Act, 1926.

ECONOMIC ENVIRONMENT

The survival and success of each and every business enterprise depend
fully on its economic environment. The main factors that affect the economic
environment are:

(a) Economic conditions:

The economic conditions of a nation refer to a set of economic factors

that have great influence on business organizations and their operations. These
include gross domestic product, per capita income, markets for goods and
services, availability of capital, foreign exchange reserve, growth of foreign
trade, strength of capital market etc., and all these help in improving the pace of
economic growth.

(b)Economic policies:

All business activities and operations are directly influenced by the

economic policies framed by the Government from time to time. Some of the
important economic policies are:
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 1. Industrial policy
2. Fiscal policy
3. Monetary policy
4. Foreign investment policy
5. Export – Import policy(EXIM Policy)

The government keeps on changing these policies from time to time in

view of the developments taking place in the economic scenario, political
expediency and the changing requirement. Every business firm has to function
strictly within the policy framework and respond to the changes therein.

Important Economic Policies:

1. Industrial policy:

The industrial policy of the Government covers all those principles,

policies, rules, regulations and procedures, which direct and control the
industrial enterprises of the country and shape the pattern of industrial
development.

2. Fiscal policy:

It includes Government policy in respect of public expenditure, taxation

and public debt.

3. Monetary policy:

It includes all those activities and interventions that aim at smooth supply
of credit to the business and a boost to trade and industry.

4. Foreign Investment policy:

This policy aims at regulating the inflow of foreign investment in various

sectors for speeding up industrial development and take advantage of the
modern technology.
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 5. Export -Import Policy:

It aims at increasing exports and bridges the gap between export and
import. Trough this policy, the Government announces various duties/levies.
The focus now-a-days lies on removing barriers and controls and lowering the
custom duties.

6.Economic Systems:

The word economy is primarily governed by three types of economic

systems viz.,

1. Capitalistic economy
2. Mixed economy
3. Socialistic economy

India has adopted the mixed economy system which implies co-existence of
public sector and private sector.

Significance of Business Environment

There is a close and continuous interaction between the business and its
environment. This interaction helps in strengthening the business firm and using
its resources more effectively.

As stated above, the business environment is multi faced, complex and

dynamic in nature and has a far-reaching impact on the survival and growth of
the business.

To be more specific, proper understanding of the social, political, legal and

economic environment helps the business in the following ways:

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 (a) Determining Opportunities and Threats:

The interaction between the business and its environment would identify
opportunities for and threats to the business. It helps the business enterprises for
meeting the challenges successfully.

(b) Giving direction for growth:

The interaction with the environment leads to opening up new frontiers of

growth for the business firms. It enables the business to identify the areas for
growth and expansion of their activities.

(c) Continuous learning:

Environmental analysis makes the task of managers easier in dealing with

business challenges. The managers are motivated to continuously update their
knowledge, understanding such skills to meet the predicted changes in realm of
business.

(d) Image building:

Environmental understanding helps the business organisations in

improving their image by showing their sensitivity to the environment within
which they are working.

Eg: In view of the shortage of power, many companies have set up

captive power plants in their factories to meet their own requirement of power.

(e) Meeting competition:

It helps the firms to analyse the competitors’ strategies and formulate their
own strategies accordingly.

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 (f) Identifying firm’s strengths and weakness:

Business environment helps to identify the individual strengths and

weaknesses in view of the technological and global developments.

*****
INTERNATIONAL BUSINESS ENVIRONMENT
International business refers to the trade of goods, services, technology,
capital and/or knowledge across national borders and at a global or
transnational scale. It involves cross-border transactions of goods and services
between two or more countries.

Transactions of economic resources include capital, skills, and people for the
purpose of the international production of physical goods and services such as
finance, banking, insurance, and construction. International business is also
known as globalization.

To conduct business overseas, multinational companies need to bridge separate

national markets into one global marketplace. There are two macro-scale factors
that underline the trend of greater globalization. The first consists of
eliminating barriers to make cross-border trade easier (e.g. free flow of goods
and services, and capital, referred to as "free trade"). The second is
technological change, particularly developments in communication, information
processing, and transportation technologies.

International Business environment is the sum total of all external and

internal factors that influence an international business. You should keep in
mind that external factors and internal factors can influence each other and
work together to affect a business. For example, a health and safety regulation
is an external factor that influences the internal environment of business
operations. Additionally, some external factors are beyond your control. These

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factors are often called external constraints. Let's take a look at some key
environmental factors.

External Factors
Political factors are governmental activities and political conditions that
may affect your business. Examples include laws, regulations, tariffs and other
trade barriers, war, and social unrest.

Macroeconomic factors are factors that affect the entire economy, not
just your business. Examples include things like interest rates, unemployment
rates, currency exchange rates, consumer confidence, consumer discretionary
income, consumer savings rates, recessions, and depressions.

Microeconomic factors are factors that can affect your business, such
as market size, demand, supply, relationships with suppliers and your
distribution chain, such as retail stores that sell your products, and the number
and strength of your competition.

Social factors are basically sociological factors related to general society

and social relations that affect your business. Social factors include social
movements, such as environmental movements, as well as changes in fashion
and consumer preferences. For example, clothing fashions change with the
season, and there is a current trend towards green construction and organic
foods.

Technological factors are technological innovations that can either

benefit or hurt your business. Some technological innovations can increase
your productivity and profit margins, such as computer software and
automated production. On the other hand, some technological innovations pose
an existential threat to a business, such as Internet streaming challenging the
DVD rental business.

International Business:

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 Various economies including the former communist and socialist
countries opened their economies to the rest of the globe. The shifts in
globalization and international business have been at a fast rate after 1990s.
The external environmental factors have been contributing significantly for the
remarkable strides in global business. The drivers of globalization/factors
contributing to the globalisation include establishment of World Trade
Organization (WTO), emergence and growth of regional integration, decline in
trade barriers, decline in investment barriers, increase in FDI, technological
changes and growth of MNCs.

International Business Model

Stages of Internationalisation:

Generally a domestic company become international company by the below

said stages,

1. Domestic company:

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 Domestic company limits its operations, mission and vision to the national
political boundaries. This company focuses its view on the domestic market
opportunities, domestic suppliers, domestics financial companies, domestic
customers etc.,

The domestic company never thinks of growing globally. If it grows, beyond

its present capacity, the company selects the diversification strategy of entering
into new domestic markets, new products, technology, etc. the domestic
company does not select the strategy of expansion, penetrating into the
international markets.

2. International company:

Some of the domestic companies, which grow beyond their production

and/or domestic marketing capacities, think of internationalizing their
operations. Those companies who decide to exploit the opportunities outside the
domestic country are the stage two companies. These companies remain
ethnocentric or domestic country oriented. These companies believe that the
practices adopted in domestic business, the people and products of domestic
business are superior to those of other countries. The focus of these companies
is domestic but extends the wings to the foreign countries.

These companies select the strategies of locating a branch in the foreign

markets and extends the same domestic operations into foreign markets. In other
words, these companies extend the domestic product, domestic price, promotion
and other business practices to the foreign markets.

Normally, internationalisation process of most of the global companies

starts with this stage two process. Most of the companies follow this strategy
due to limited resources and also to learn from the foreign markets gradually
before becoming a global company without much risk.

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 3. Multinational company:

A multinational corporation (MNC) has facilities and other assets in at

least one country other than its home country. A multinational
company generally has offices and/or factories in different countries and a
centralized head office where they coordinate global management. Sooner or
later, the international companies learn that the extension strategy (i.e.,
extending the domestic product, price and promotion to foreign markets) will
not work. The best example is that TOYOTA exported TOYOPET cars
produced for Japan in Japan to the USA in 1957. TOYOPET was not successful
in the USA. TOYOTA could not sell these cars in the USA as they were
overpriced, underpowered and built like tanks. Thus, these cars were not
suitable for the US markets. The unsold cars were shipped back to Japan.

TOYOTA took this as a rich learning experience and as a source of

invaluable intelligence but not as failure. TOYOTA based on this experience
designed new models of cars suitable for the US market. The international
companies turn into multinational companies when they start responding to the
specific needs of the different country markets regarding product, price and
promotion.

4. Global Company:

A global company is the one, which has either global marketing strategy or
a global strategy. Global company either produces in home country or in a
single country and focuses on marketing these products globally, or produces
the products globally and focuses on marketing these products domestically.

Eg: Harley designs and produces super heavy weight motorcycles in the USA
and markets in the global market. Similarly, Dr. Reddy’s Lab. Designs and
produces drugs in India and markets globally. Thus, Harley and Dr. Reddy’s
Lab. Are examples of global marketing focus.
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 5. Transnational company:

Transnational company produces, markets, invests and operates across the

world. It is an integrated global enterprise that links global resources with
global markets at profit. There is no pure transnational corporation. However,
most of the transnational companies satisfy many of the characteristics of a
global corporation.

Eg: Coca-Cola, Pepsi etc.,

Dimensions of international business environment

Introduction of economic reforms, many Indian Business firms are

expanding their business activities to the international level that is to other
countries crossing borders of the country.

1. Ethnocentric dimension:-

The domestic companies normally formulate their strategies, their product

design and their operations towards the national markets, consumers and
competitors. But the excessive production more than the demand for the
product, either due to competition or due to changes in customer preferences
push the company to export the excessive production to foreign countries. The
domestic company continues the exports to the foreign countries and views the
foreign markets as an extension to the domestic markets just like a new region.
The executives at the head office of the company make the decisions relating to
exports and, the marketing personnel of the domestic company monitor the
export operations with the help of the export department.

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

Organisational Structure of Ethnocentric Dimension

2. Polycentric dimension:

The domestic companies using ethnocentric approach first concentrating

upon domestic markets later enter into foreign markets by the form of
exporting.

Then the company establishes a foreign subsidiary company and

decentralises all the operations and delegate decision making power, policy
making powers and its execution. In fact, 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 form the home
country and all other vacancies are filled by the people of the host country.

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 Organisation structure of Polycentric Dimension

The executives of the subsidiary formulate the policies and strategies, design
the product based on the host country’s environment (culture, customs, laws,
government policies etc.), and the preferences of the local customers. Thus, the
polycentric approach mostly focuses on the conditions of the host country in
policy formulation, strategy implementation and operations.

3. Regiocentric dimension:

The company after operating successfully in a foreign country later thinks

to export to the neighbouring countries of a host country. At this stage the
foreign subsidiary considers the regional environment. However, it markets
more or less the same product designed under polycentric approach in other
countries of the region, but with different market strategies.

Organisational structure of Regiocentric Company

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 4. Geocentric dimension:

Under this approach, the entire world is just like a single country for the
company. They select the employees for the entire globe and operate with a
number of subsidiaries. The headquarters coordinate the activities of the
subsidiaries. Each subsidiary functions like an independent and autonomous
company in formulating policies, strategies, product design, human resource
policies, operations etc.,

Organisational Structure of Geocentric Dimension

So, an international business will be successful if it only creates and sustain the
image of a good corporate citizenship the two hall marks are honesty and social
responsiveness.

Challenges of International business

Now globalisation is a fact of life. The newspapers on a daily basis report

about the global focus of companies- big and small. It is being reported how
American firms are making on roads into Japanese markets and how Japanese
companies seek to invade American markets. Indian businessmen are not sitting
pretty. They are scouting around for new partners, suppliers and buyers.

It is not just large companies that have a global focus. Increasingly small
businesses are also going global. The Small Scale Industries (SSI) sector in our
country accounts for 44% of our total exports.

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 Increasing globalisation poses its own challenges to trading countries. There
are 5 areas in which each country must excel in order to emerge as a strong
global player.

Challenges before international business include:

1. Maintaining competitiveness,
2. Government and trade regulations,
3. Developing international perspective,
4. Managing diversity,
5. Need to maintain good corporate citizenship.

1. Maintaining competitiveness:

Many factors contribute to the competitiveness of a nation. It is being

argued that labour costs, interest rates, exchange rates and economies of scale
make a nation competitive. These traditional factors, no doubt, contribute to the
competitiveness of a country but not to be ignored are other sources which
make a nation enjoy competitive advantage over others. The best way for
companies to achieve competitive advantage is with innovation’

Michael Porter has emphasised that the key to gain competitive advantage
is with the ability to innovate continually. Most successful MNCs have proved
this claim.

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 a. Factor conditions:

According to basic international trade theory, a nation will export these

goods that make best use of the factor conditions with which the country is
relatively well endowed. These factor conditions include

 Land
 Labour
 Capital

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Eg: if a country has large uneducated work force, it will seek to export goods
that are highly labour intensive with the unskilled labour and skilled labour like
Japan.

b. Demand conditions:

A nation’s competitive advantage, according to porter, is strengthened if

there is strong local demand for its goods and services.

Eg: Denmark, has gained leadership in the world market in water-pollution

control equipment and windmills because of the high environmental concern of
Danish people.

Strong local markets benefits sellers in two ways,

 It helps the sellers to understand what buyers want,

 If buyers want any change, local sellers can quickly respond before
distinct competitors can react
c. Related and supporting industries:

The 3 rd major determinant is the presence of related and supporting

industries that are globally competitive.

Eg: Suppliers must be nearer to the producer, to provide low cost inputs.

A Shoe producer has continuous interaction with leather supplier.

d. Environment:

Management practices vary across countries. Nations tend to do well in

industries where the management practices match their industries sources of
competitive advantage.

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Eg: In Italy, successful firms are small and medium size firms serving small
market for niches, and operate in fragmented industries such as lighting,
furniture, footwear and packaging industries.

Some nations expect quick results. Others tend to expect long-term

development.

2. Government and trade regulations:

The Government of any country can influence its international business

significantly.. Government intervention for the purpose of protecting domestic
industries usually results in less movement of goods and services across
borders.

Eg: In US, people question why the Japan is allowed to set up auto plants.

Negotiations among countries to ease trade regulations and prevent unfair

trade practices are ongoing. The Wold Trade Organisation (WTO) is a major
trade organisation that has been established to negotiate trade concessions
among member countries. The member meets periodically and discusses the
ways of minimising trade barriers.

3. Developing an International perspective:

Firms operating in cross border markets need to develop an international

perspective. Three areas need special attentions:

 Experience
 Focus and
 Attitude.

Experience of people: to get success in international perspective MNCs to hire

people with global exposure.
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Focus on the Human Resource: The 2nd way to develop an international
orientation is by emphasising global orientation to human resource activities
such as hiring, remuneration, performance appraisal, promotions and the like.

Attitude: A 3rd way to develop an international perspective is by changing the

attitude of managers towards their work.

4. Managing diversity:

Diversity is the outcome of globalisation. Work force of any MNC

comprises people from different countries. Within this diversity of national
origins, there is even wider diversity of

 Cultures, Values, age, race

 Religions
 Languages
 Educational attainment
 Skills
 Genders and
 Other differentiating variables.

Managing such cosmopolitan work force is a challenging task for any

executive.

5. Need to maintain good corporate citizenship:

As MNCs dispense their activities worldwide they become highly visible

and are required to operate under diverse compulsions such as cultural, political,
economic and legal factors of different host countries.

An international business will be successful if only it creates and sustains

the image of a good corporate citizenship- the two hall marks of which are
honesty and social responsiveness.

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Eg: It was on Dec 2, 1984 that disaster caused by Methyl Isocynate (MIC)
leaked from the pesticide plant of Union Carbide killing 4000 in the night of
Dec 2, 1984 and crippling life of more than 1,00,000 people. They developed an
advance safety system in West Virginia in US, but set up plant in India by not
taking any precautionary measures.

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