3. Managing the Business environment
- 1. Managing the Environment “Environmental Forces & Managing Globally”
- 2. Learning Objectives • Describe how economic and cultural factors influence organizations. • Identify the five competitive forces that affect organizations in an industry. • Describe the political and legal strategies used by managers to cope with changes in the environment. • Explain how technological forces influence changes in industries.
- 3. Learning Objectives (Contd) • State characteristics of the global economy. • Explain the impact of political–legal forces on international business.
- 4. The Environment • General Environment - sometimes called the macro-environment, includes the external factors that usually affect all or most organizations; – Economic system: capitalism, socialism or communism – Economic conditions: expansionary & recessionary cycles and general standard of living
- 5. The Environment – Political system: democracy, dictatorship or monarchy. – Condition of ecosystem: extent of land, water & air pollution – Demographics: age, gender, race, ethnic origin, education level of population – Cultural background: values, beliefs, language, & religious influences
- 6. Forces Impacting Organizations (adapted from Figure 3.1) EconomyEconomy Country Cultural Values Country Cultural Values TechnologyTechnologyDemographicsDemographics Politics Organization Macroenvironment Competitors
- 7. The Economy • Economics is the discipline that focuses on understanding how people or nations produce, distribute, and consume various goods and services; – Important economic issues; • Wages • Inflation • Taxes paid by employees & organizations • Cost of material used in production • Selling price of goods & services • FDI • Tax Regime (GST) • GDP Growth • Skill Availability & Gap – Employment Generation & Distribution
- 8. The Economy – The government (part of political system) acts as regulator/watch dog over business • Legislature • Executive • Judiciary – Government ownership of enterprises is the exception rather than the norm
- 9. The Economy • Value Matters: value has shifted from tangible to intangible (industrial wealth to Knowledge wealth) e.g. – steel mills to know-how – Manufacturers use more software/technology & less unskilled labour – more automated, networked, and integrated than ever before – Value creation thru knowledge
- 10. The Economy • Borderless Competition: shortest distance between customer & company – single mouse click • Customer Convenience – ecommerce, e-banking, etc • Human capital :Biggest demographic advantage to India • The Environment; – Environmental stewardship is a policy that an organization adopts to protect or enhance the natural resources in the conduct of its activities – Trade-offs involved in both economic & environmental survival. – Stringent environmental standards.
- 11. Demographics • Demographics are the characteristics of a work group, an organization, a specific market, or various populations. • Some current demographic changes include: – Increasing Diversity- people with disabilities, gays, lesbians, women, nationalities – equal rights – Education and Skills – knowledge workers – Managerial Challenges – increase in number of contingent workers, employees who are independent contractors (how to manage people) – Age vs Ageing
- 12. Cultural Forces • Not as visible as other environmental forces learning continues all through life and learnt from birth. • Culture refers to the unique pattern of shared characteristics, such as values, that distinguish the members of one group of people from those of another. – A value is a basic belief about a condition that has considerable importance and meaning to individuals and is relatively stable over time. – A value system comprises multiple beliefs that are compatible and supportive of one another.
- 13. Cultural Forces • Values can effect how a manager ; – Views other people and groups, thus influencing interpersonal relationships – Perceives situations and problems – Goes about solving problems – Determines what is and is not ethical behavior – Leads and controls employees
- 14. Cultural Differences – Geert Hofstede Model: 5 dimensions: 1.Power distance 2.Uncertainty avoidance 3.Individualism vs collectivsm 4.Masculinity vs feminity 5.Long-term vs short-term orientation ( will be explained separately)
- 15. Competitive Forces in the Task Environment (adapted from Figure 3.3) Threat of substitute goods or services Supplier bargaining power Rivalry among existing firms in industry Customer bargaining power Threat of new competitors
- 16. Competitive Forces in the Task Environment • Competitors: are the single most day to day force facing organizations. • New Entrants: refer to relative ease with which new firms can compete with existing firms. – Factors working as “Barriers to Entry”; Economies of scale Product differentiation: uniqueness in quality, price, design, brand image or customer service, etc Capital requirement Government Regulation : e.g. defence sector, science & technology, etc
- 17. Competitive Forces in the Task Environment • Substitute Goods & Services: Photography, fast food industry, Desk-top, Lap-top, Tabs, Mobiles, emails vs telephone calls, etc • Customers: issues regarding price fixation, quality, services, – The customer purchases large volume relative to supplier’s total sale – The product or service represents significant expenditure by the customer
- 18. Competitive Forces in the Task Environment – Large customers pose a threat of backward integration ( as cost cutting or quality enhancing strategy) – Customers have readily available alternatives for the same services or products • Suppliers: bargaining power of suppliers controls how much they can raise prices above their costs or reduce the quality before losing customers
- 19. Political – Legal Forces • Societies try to resolve conflicts over values and beliefs through their political and legal systems. • For many industries government regulation is a central aspect of their environments e.g. pharma, chemicals, atomic energy, etc • Managers can use 5 basic political strategies to cope with turbulence in environment ( next figure)
- 20. Managerial Political Strategies (adapted from Figure 3.4) • Negotiation • Lobbying • Alliance • Representation • Socialization • Political action • committees (PACs) • Laws • Government • Labor unions • NGOs, Others Political Strategies Political-Legal Forces
- 21. Political Strategies • • Negotiation: process by which two or more individuals or groups having common and conflicting goals, present & discuss proposals in an attempt to reach an agreement. • Lobbying: attempt to influence government decisions by providing officials with information on the likely effects of legislation or regulatory rulings
- 22. Political Strategies • Alliance: a combined effort involving tow or more organizations, groups, or individuals to achieve common goals with respect to a particular issue • Representation: involves membership in an outside organization that serves the interests of member’s organization or group e.g CII, other employers’ organizations, ILC, etc
- 23. Political Strategies • Socialization: process by which people learn the values held by an organization and the broader society
- 24. Technological Forces • Many new technologies are radical enough to force organizations to reconsider their purposes and methods of operation or face extinction • IT creates new options for managers which were not available earlier; – CAD linked to CCM (computer controlled machines) leads to short production runs with large scale mfg facilities
- 25. Technological Forces – Shopping on internet – Online financial management systems – daily P&L A/C, – Retail banking operations from remote locations – Online ordering, distribution, and sales – Advances in design & manufacturing technology – Mass customization – ability to produce wide variety of products by using same basic design & production equipment – Use of CAD by Levi Strauss to help design customized leather outfits & jeans for customers – Robots replacing employees on assembly lines
- 27. Pressures faced by MNCs • Several global forces force many companies; – Pressures on prices – Need for cost cutting – Global expansion and – Impact of changes in the financial arena on profitability
- 28. Global Economic Trends (adapted from Table 4.1) 1. Foreign exchange rates 2. Importance of exports and imports 3. Expanding nature of trade 4. Worldwide communication 5. Borderless organizations 6. Worldwide labour pool
- 29. Culture • 5 aspects of a culture have direct implications for international management (figure on next slide)
- 30. Culture Five Aspects of Culture (adapted from Figure 4.1) Cultural Distance Social Change Value Systems Language Time Orientation
- 31. Culture Defined • “ the collective programming of the minds which distinguishes the members of one human group from another ……. Culture in this sense, includes systems of values; and values are among the building blocks of culture”. -Geert Hofstede
- 32. Culture Defined • “ Habitual and traditional ways of thinking, feeling and reacting that are characteristic of the ways a particular society meets its problems at a particular point of time”. - Robert Kluckhohn & Leighton Working Definition: • “ As a system of values and norms that are shared among a group of people and that, when taken together, constitutes a design for living”. – Values mean abstract ideas about what a group believes to be good, right & desirable. Values are shared assumptions about how things ought to be.
- 33. Culture Defined – Norms mean social rules & guidelines/laws that prescribe appropriate behavior in particular situations. – Society means a group of people who share a common set of values & norms.
- 34. 5 Aspects of Culture 1. Views of Social Change: – People of many non western countries ( India, China & Saudi Arabia) take change as a part of evolution of human beings, whereas western cultures view change as shaped & controlled to achieve their goals & aspirations & – try to introduce innovations too rapidly. Whereas, there is high resistance to change in non western countries
- 35. 5 Aspects of Culture (contd) 2. Time Orientation: – Western countries view time as money, need to set deadlines & sticking to them. In some cultures, time is viewed as more of an unlimited & unending resource. 3. Language 4. Values System: – Power distance – Uncertainty avoidance – Individualism – Masculinity – Long-term & Short-term Orientation 5. Cultural Distance
- 36. Hofstede’s Framework 1. Power Distance – the degree to which less powerful members of society accept that power is unequally divided. 2. Uncertainty Avoidance – the extent to which members of a culture feel threatened by risky or unknown situations. 3. Individualism – is a combination of the degree to which society expects to take care of themselves and their immediate family and the degree to which people believe they are masters of their own destinies. 4. Masculinity – the degree to which assertiveness and the acquisition of money and material things are valued. 5. Long-Term/Short-Term Orientation – reflects the extent to which a culture stresses that its members accept delayed gratification of material, social, and emotional needs.
- 37. Definition of Cultural Dimensions (GLOBE Study) 1. Power distance: The degree to which organizations and societies accept power. 2. Institutional collectivism: The degree to which organizational and institutional practices encourage collective action. 3. In-group collectivism: The degree to which individuals in societies reflect collectivist behavior. 4. Uncertainty avoidance: The degree to which organizations and societies avoid uncertainty by relying on practices and procedures. 5. Performance orientation: The degree to which upper management in organizations and leaders in societies reward group members for performance excellence.
- 38. Definition of Cultural Dimensions (GLOBE Study) 6. Assertiveness: The degree to which individuals in organizations or societies are assertive in social relationships. 7. Future orientation: The degree to which individuals in organizations or societies plan for the future. 8. Gender egalitarianism: The degree to which organizations or society promote gender equality. 9. Humane orientation: The degree to which individuals in organizations or societies reward individuals for positive behavior. Exercise: What are your cultural values? Reply the questionnaire – Page 77
- 39. Cultural Profile (GLOBE Study) • Power distance: o India: 5.47 (rank 16). o Morocco : 5.80 (highest score). • Institutional collectivism: o India : 4.38 (rank 25). o Sweden: 5.22 (highest score). • In-group collectivism: o India: 5.92 (rank 4). o Philippines: 6.36 (highest score). • Uncertainty avoidance: o India: 4.15 (rank 29). o Switzerland: 5.37 (highest score) . Source: Chhokar, J., Brodbeck, F., & House, R (Eds) .(2007). Culture and leadership across the world. The GLOBE book of in-depth studies of 25 societies. Lawrence Erlbaum Associates. Mahwah, New Jersey.
- 40. Cultural Profile (GLOBE Study) • Performance orientation: o India: 4.25 (rank 9). o Switzerland : 4.94 (highest score). • Assertiveness: o India: 3.73 (rank 53). o Albania : 5.80 (highest score). • Future orientation: o India : 4.19 (rank 15). o Singapore: 5.07 (highest score). • Gender egalitarianism: o India: 2.90 (rank 55). o Hungary: 4.08 (highest score). • Humane orientation: o India: 4.57 (Rank 9). o Zambia: 5.23 (highest score).©SHRM 2008 40
- 41. Political-Legal Forces • Political risk is the probability that political decisions or events in a country will negatively affect the long-term profitability of an investments.
- 42. Political Mechanisms/Policies 1. Protectionism - refers to the many mechanisms designed to help home-based industries or firms, and avoid or reduce potential or actual competitive threats from abroad. – A tariff is a government tax on goods or services entering the country. – A quota is a restriction on the quantity of a country’s imports and sometimes exports. – A subsidy is a direct or indirect payment by a government to domestic firms to make selling or investing abroad cheaper for them. – A cartel is an alliance of producers engaged in the same type of business that is formed to limit or eliminate competition and control production and prices.
- 43. Political Mechanisms 2. Bribe is an improper payment made to induce the recipient to do something for the payer. 3. Extortion is a payment made to ensure that the recipient doesn’t harm the payer in some way.
- 44. Global Trade Agreements • Earlier global competition was considered country against country. • Now it is shaped by regional trading agreements; 1. The World Trade Organization was established in 1995 as an outgrowth of the General Agreement on Tariffs and Trade (GATT) (150 member countries) • Key functions of WTO; √ Administrating WTO trade agreements √ Providing a forum for trade negotiations √ Handling trade disputes between nations √ Monitoring national trade policies √ Providing technical assistance & training to developing countries
- 45. Global Trade Agreements 2. North American Free Trade Agreement (NAFTA) among US, Canada & Mexico - free trade zone 3. European Union - 27 members. Common currency since 2001 – goal of creating single market & beyond i.e. social changes, educational degrees, etc. Britain decides to exit 4. SAARC (South Asian Association for Regional Cooperation): Bangladesh, bhutan, India, Maldives, Nepal, pakistan & sri lanka 5. ASEAN (Association of Southeast Asian Nations): 10 countries 6. ISO: international organization for standardization issues certification standards for excellence in quality
- 46. Strategies for International Business 1. Exporting strategies: Maintaining facilities in home country & shipping goods abroad for sale 2. Licensing strategy: right to use license, patent, technology in other country for payment of royalty/fee 3. Franchising strategy: parent organization granting other Cos/individuals right to use its trademarked name & produce/sell its goods
- 47. Strategies for International Business 4. Alliance strategy: involves agreement between two or more Cos to pool physical, financial, and human resources to achieve common goals. 5. Multi-domestic strategy: involves adjusting products, services & practices to individual countries or regions (e.g. PepsiCo) 6. Global strategy: stresses worldwide consistency, standardization and relatively low cost. Subsidiaries are highly interdependent e.g. Intel’s Pentium Chips, American Express, Apple)
- 48. Thanks…..