3 International Business Environment: Internal Environment

Shafali Nagpal

 

Learning Outcome:

 

After completing this module the students will be able to:

  • To understand various components of business environment faced by global companies.
  • To know about various components of the internal environment of a firm aspiring to do overseas business.

 

Introduction 

 

In the present times, characterized with economic slowdown and intense competition, the necessary conditions for success of business are much more complex and uncertain than they were before. With globalization of business the business firms have to imbibe the capacity to face global competition for survival and growth. Any strategy formulation exercise entails establishing a proper firm environment that highlights the critical importance of analysing the international business environment. The essence of any successful business strategy is its environmental orientation. Since, there are some fundamental differences between the business operations in the domestic and the international markets, for a successful strategy, there is a need to understand the complexities of the international markets. It is more than unlikely that a firm can extend its domestic strategies into the foreign markets. Mere understanding of the customer requirements is not enough. A company has to go beyond its internal strategies, understanding customer requirements. What makes a business strategy successful in one market and a failure in another is because of the difference in the firms’ capabilities to understand and respond to the international business environment.

 

Business Environment: The Conceptual Framework 

 

The most simple way to explain the environment of business is to conceptualize it as comprising of the ‘surroundings’ which have direct and indirect influence on the business. The traditional view of business is to look upon the same as a closed system, which is not influenced by the external and internal factors. However, after Hawthrone experiments, it was realised that business cannot be run by mere economic rationality and there are internal and external factors which can influence the functioning and performance of the business. Business is no longer seen as a closed system, but is looked upon as an open system, which is influenced by the factors within and outside the organization. Business Environment as described by Richman and Copen “Environment consists of factors that are largely if not totally, external and beyond the control of individual industrial enterprise and their managements. These are essentially the ‘givers’ within which firms and their management must operate in a specific country and they vary, often greatly, from country to country”.

 

Business environment is becoming very complex day by day as there is intense competition between the firms. Moreover, many issues related to business, such as environmental issues such as deforestation, global warming, depletion of the ozone layer, pollution of land, air and water, inclusiveness of growth, etc. are no longer strictly the issues related to books and conferences. They are the things of discussion in the public domain. The businesses are challenged today to develop creative ways to make profits without unduly harming the existing environment. Considering the variety of these sources of change in the environment, global managers are challenged to keep themselves abreast and adjust as needed.

 

Gone are the days when business was heavily protected and subsidized, licenses, quotas and restrictions were the order of the day. Now competition is the name of modern business. Businessmen always stand on the brink of a fear to eliminate from the market. They stand on their feet to cut down costs, to eliminate deficiencies and incessant improvement in the quality is order of the day. But by the competition, consumer is obviously benefited by the diverse openings of different competitors. According to Micheal Porter “aggressive home based suppliers and demanding local suppliers competing domestic rivals will keep each other honest in obtaining government support”. Nowadays competition is not only from rival firms but also from the ever improving technology. For example, with the emergence of smart phones, many products such as – cameras, walkman, cassettes, video recorders, personal diaries, telegrams, watches, alarm clocks, calculators, etc. are out of business. So, today’s business is witnessing the manifolds competition which was not prevalent in the past and this competition is created out of the changes that have taken place in various components of the business environment. In order to survive and grow in this complex situation, the firms have to understand and even forecast these changes and their possible influence on the business and devise strategies for survival and growth.

 

Components of international business environment: 

 

Environment is a complex mix of components, which interact with each other and produce situations which can  be favourable  or unfavourable for business. Wiiliam F. Gluck has defined  business environment set of factors, described as, “Business environment is a the process by which strategists monitor the economic, governmental, market, supplier, technological, geographic, and social settings to determine opportunities and threats to their firms”.

 

Depending upon their proximity to a firm, various components of business environment can be divided into two categories:

 

a) Internal environment

b) External environment

 

Both these factors have varying degree of influence on the business firm. There is varying degree of control of a firm on these environmental components. The internal environment comprises of the components which are related to direct achievement of the objectives and have a direct bearing on a firm’s  performance.  Since they  relate  to  the  achievement  of  tasks  and  activities  within  the organization, they are also called task environment. A firm’s management can assert control on these factors. Hence, the internal environment is also connoted as controllable environment.

 

The external environment comprises of the components which lie outside a firm. These components have a remote or indirect influence on a firm’s activities. These components do not intervene with the day to day activities, but assert an influence. Hence, the other name given to external environmental components is the remote environment. Since these components lie outside the firm, the management of the firm cannot exercise a direct control on them. So, the external environment is also considered to be uncontrollable.

 

Exhibit.1 shows various components of the external and internal environment of a firm venturing into overseas markets.

Components of Business Environment

 

Internal Environment

 

An organization’s internal environment is composed of the elements within the organization, including current employees, management, and specially corporate culture, which defines employee behavior. Although some elements affect the organization as a whole, others affect only the manager. A manager’s philosophical or leadership style directly impacts employees. Traditional managers give explicit instructions to employees, while progressive managers empower employees to make many of their own decisions. Changes in philosophy and/or leadership style are under the control of the manager. In other words, Internal driving forces are those kinds of things, situations, or events that occur inside the business, and are generally under the control of the company. Various components of internal environment of a firm are:

  • Value Systems
  • Vision and Mission
  • Objectives & Strategy
  • Core Competences
  • Resources
  • Organizational Structure

 

These are explained in the following discussion.

 

Value Systems

 

According to business dictionary, the value systems are comprehended as a coherent set of values adopted and/or evolved by a person, organization, or society as a standard to guide its behavior in preferences in all situations.

 

They represent the individuals’ and consequently the firm’s commitment to abide by the self defined set of norms and values. These norms and value define a firm’s conceptualization of righteousness and wrongfulness of its actions and they set the standards for the range of deviations that they would allow to themselves while earning the profits. These value systems tell us purpose of doing the business and the basic values for which a firm stands for. All the subsequent actions of a firm are translated on the basis of their value systems.

 

For example, purpose and values of Tata group are stated as under:

 

Purpose and Values of Tata Group

 

Purpose

 

At the Tata group we are committed to improving the quality of life of the communities we serve. We do this by striving for leadership and global competitiveness in the business sectors in which we operate.

 

Our practice of returning to society what we earn evokes trust among consumers,  employees, shareholders and the community. We are committed to protecting this heritage of leadership with trust through the manner in which we conduct our business.

 

Core values 

 

Tata has always been values-driven. These values continue to direct the growth and business of Tata companies. The five core Tata values underpinning the way we do business are:

  • Integrity: We must conduct our business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny.
  • Understanding: We must be caring, show respect, compassion and humanity for our colleagues and customers around the world, and always work for the benefit of the communities we serve.
  • Excellence: We must constantly strive to achieve the highest possible standards in our day-to- day work and in the quality of the goods and services we provide.
  • Unity: We must work cohesively with our colleagues across the group and with our customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation.
  • Responsibility: We must continue to be responsible, sensitive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.

 

We see a strong sense of purpose, which shows the group’s commitment to improving the quality of life of all the stakeholders. All the businesses of the group have been built on these core values and we see that even the present times of low ethical behaviour even highly reputed firms, Tata group has never come in any kind of controversy.

 

Vision and Mission 

 

The vision of an organization outlines what the organization wants to be, or how it wants the world in which it operates to be (an “idealised” view of the world). It is a long-term view and concentrates on the future. It can be emotive and is a source of inspiration. It is a long term view of the self and tells what the stakeholders of a firm see for themselves after doing the business. It sets a framework for the business to develop a roadmap of activities to translate into the vision.

 

The firm’s mission decides the course of action that a firm will follow in order to survive and grow. In the present times, the firms develop a few core competences and develop their entire global business plan on its basis. They do not dissipate their resources by venturing into too many businesses, but concentrate on their core strengths and do not mind outsourcing the rest. The mission is the roadmap to achieve the framework defined by the vision.

 

Let us understand the concept from an example of global company “Coca-Cola’. The mission and vision of Coca Cola group are as under:

 

Mission and Vision of Coca Cola Group 

 

The world is changing all around us. To continue to thrive as a business over the next ten years and beyond, we must look ahead, understand the trends and forces that will shape our business in the future and move swiftly to prepare for what’s to come. We must get ready for tomorrow today. That’s what our 2020 Vision is all about. It creates a long-term destination for our business and provides us with a “Roadmap” for winning together with our bottling partners.

 

Our Mission 

 

Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions.

  • To refresh the world…
  • To inspire moments of optimism and happiness…
  • To create value and make a difference.

 

Our Vision 

 

Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth.

  • People: Be a great place to work where people are inspired to be the best they can be.
  • Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people’s desires and needs.
  • Partners: Nurture a winning network of customers and suppliers, together we create mutual, enduring value.
  • Planet: Be  a  responsible  citizen  that  makes  a  difference  by  helping  build  and  support sustainable communities.
  • Profit: Maximize  long-term  return  to  shareowners  while  being  mindful  of  our  overall responsibilities.
  • Productivity: Be a highly effective, lean and fast-moving organization.

 

Objectives and Strategy 

 

Business Dictionary defines the objective of a firm as a specific result that a person or system aims to achieve within a time frame and with available resources. In general, objectives are more specific and easier to measure than goals. Objectives are basic tools that underlie all planning and strategic activities. They serve   as the basis for creating policy and evaluating performance. Some examples of business objectives include minimizing expenses, expanding internationally, or making a profit. In other words, objectives are the quantified and measurable steps to achieving the mission of a firm.

 

The mission translates into more operational paradigm in the form of strategy, which operates at various levels. A strategy is a long-term plan, formulated by the top management to achieve the goals within the framework of environmental uncertainty. Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations. Strategies exist at several levels in any organisation – ranging from the overall business (or group of businesses) through to individuals working in it.

 

Corporate Strategy – is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a “mission statement”.

 

Business Unit Strategy – is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

 

Operational Strategy – is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.

 

While understanding the tools for strategic analysis are beyond the scope of this lesson, it is pertinent to mention some of the tools:

 

a) PEST analysis

b) Scenario planning

c) Five force analysis

d) Market segmentation

e) Directional policy matrix

f) Competitor analysis

g) Critical success factor analysis

h) SWOT analysis

 

Core Competences 

 

The core competences are the main strengths or strategic advantages of a business. Core competencies are the combination of  pooled  knowledge and technical  capacities  that  allow a  business  to be competitive in the marketplace. Theoretically, a core competency should allow a company to expand into new end markets as well as provide a significant benefit to customers. It should also be hard for competitors to replicate. The term “core competency” is relatively new. It originated in a 1990 Harvard Business Review article. In it, the authors suggest that business functions not enhanced by core competencies should be outsourced if economically feasible. The term was coined by CK Prahlad as an alternative tool to competitiveness, in addition to Porter’s model of generic strategy. Since core competences are difficult to imitate, they are also called as distinctive competences.

 

Firms often develop core competences, but only a few are able to convert it into successful business. The classical case of Cannon vs Xerox is an example. Both the companies started by developing core competence in optical scanning, but over a period of time, Xerox outsmarted the former by its superior strategy. Cannon, at one time, had practically driven Xerox even out of its home country i.e. USA. But, Xerox developed a very comprehensive marketing and customer service strategy and regained its leadership in the photocopier industry. Similarly, Honda developed the core competence in the field of petrol engine and this led it to become a market leader in the products based on the same. Honda is the leader in cars, generator sets, and now two wheelers also. The formidable competitive advantage dwells upon the core competence.

 

Resources 

 

Firm’s access to exclusive resources is a big source of competitive advantage. The resources can be in the form of raw material, cheap labour, technology, networks, cheap power, infrastructure, etc. These resources enable a firm to achieve effective strategy implementation resulting into a characteristic distinctiveness. For example, Chinese manufacturers have access to good infrastructure, cheap power and other  inputs.  Further,  they have exclusive  knowledge  of materials science and  are  able  to reengineer the products to reduce the costs, without significant reduction into the operational performance of the products. This makes them the low cost producers of the world, unmatched by any country in the world, eroding the competitive advantage of several developed nations. In the present times, the intangible resources, such as knowledge, technology, etc. are also playing an important role in imparting competitiveness to the firms.

 

Organizational Structure 

 

Certain firms have organizational characteristics, including the structure and systems, which can be a good source of competitive advantage. Japanese firms have very strong systems of planning and collective decision making, organizational commitment and high degree of operational competence to produce zero defect products. Such an output is the result of the organization-wide efforts. In the present times, several firms have developed lean and efficient organizational structures, which help them to produce unmatched quality. Properly designed organizational structures facilitate hassle free communication between individuals, reduces conflict and helps in achieving better coordination between various departments. Similarly, organizational culture helps in motivating employees and achieving better productivity. The systems of multinational companies have helped them to survive for centuries, in diverse business environments. The recent example of strike and violent protests in Maruti were the results of the organizational problems. The top management failed to anticipate the brewing problem within the organization and the firm had to face labour protests, shut down of production and loss of market position. Maruti will have to work very hard to come out of this regain its leadership position in the automobile industry.

 

Summary

 

Business environment is a complex combination of various surrounding components, both within and outside an organization. The internal components of business environment are the factors within in an organization and can be within the control of the management of the firm. These internal components include organizational values, vision and mission, objectives, strategies, core competence, resources and organizational characteristics of the firms. By carefully crafting each of these factors, the firms can build the systems, which can help them to remain competitive. The firms must have effective systems for assessing the internal conditions of the firms to avoid sudden uncertainties.

 

Suggested Readings

Books

  • Cateora Philip R (1997), International Marketing, 9th Edition, Irwin/McGraw HIU,
  • Terpestra , Vern (1972) International Marketing, Halt, Reinhart and Winsten Inc.
  • Sundaram, Anant K. and J. Stewart Black (2000) The International Business Environment: Text and Cases, Prentice Hall of India Pvt. Ltd., New Delhi.
  • Keegan, Warren J. (1997) Global Mar keting Mangement, Prentice Hall of India Pvt. Ltd., New Delhi.
  • Cherunilam Francis (2004) International Business: Text and Cases, Prentice Hall of India Pvt. Ltd., New Delhi