Business in the global environment ppt

BUSINESS IN THE GLOBAL ENVIRONMENT PART  1 The two chapters in this part form a foundation for the book as a whole. In any study of business, there is a distinction between matters relating to the enterprise itself, often termed the internal environment of the business, and matters relating to the external environment, such as markets where it aims to sell its products. Although this division is oversimplified, as we will find in later chapters, it helps to use these contexts for the initial formulation of concepts and issues, which will become nuanced in later chapters. Chapter , ‘INTRODUCTION TO THE BUSINESS ENTERPRISE’, focuses on the business itself, its goals and how it goes about achieving them. The chapter begins by looking at the most basic question of all: what does the business exist for? Many issues come into play, including what it is oering customers, the kind of organization it should set up, and how to run it. People who start a company do not take these decisions in a vacuum. As soon as they embark on a new business venture, they become involved in legal and regulatory frameworks, not just in their home countries, but in all the countries in which they wish to sell products or run operations. Today’s global environment, while posing these seemingly daunting obstacles at the outset, also oers unprecedented opportunities. For individual firms, a crucial element of success is an organization with clear goals, an ecient, smooth-functioning structure and people committed to organizational goals, whatever function they carry out in its overall operations. The last sections in Chapter  introduce the business in its external environment, setting out the dimensions which will form the basis of separate chapters. In Chapter , ‘GLOBALIZATION AND THE BUSINESS ENVIRONMENT’, we change focus to the external environment, with rapidly changing markets and production based on global supply chains. The many processes which are grouped together under the broad heading of ‘globalization’ are exam- ined critically, assessing impacts on business organizations, governments and societies. Globalization represents a range of dierent processes, from high-speed communications to converging consumer tastes. These processes are unfolding unevenly, some bringing about rapid change and some emerging only gradually. Regional and country factors come into play. Globalization has proceeded rapidly in some countries, but more slowly in others. In some countries, globalization has actually receded in recent years. Companies with international operations are attuned to the global/local distinctions, aware that national and local dierences are still influential in markets and strategy. 2 INTRODUCTION TO THE BUSINESS ENTERPRISE CHAPTER  The world at his feet: starting a business is daunting but exciting for the young entrepreneur Introduction What does the business enterprise exist to do? Purpose and goals Markets and consumers Stakeholders and corporate social responsibility (CSR) How does the enterprise carry out its goals? Entrepreneurs Companies The multinational enterprise (MNE) Who controls the organization? Functions within the enterprise The firm’s view on the world The enterprise in the international environment Multiple dimensions The multilayered environment The enterprise in a dynamic environment Conclusions  To identify the range of purposes pursued by business enterprises in the changing environment, highlighting the role of diverse stakeholders  To appreciate the diering types of ownership and decision- making structures through which enterprises pursue their goals  To gain an overview of dimensions and layers of the international business environment, together with an ability to see how their interactions impact on firms • Emerging economies – an introduction to the Brics • CSR and sustainability – an introduction to these concepts, along with that of stakeholders • International risks – the role of the entrepreneur • Multilayered environment – an overview • Multidimensional environment – an overview Outline of chapter Learning objectives Critical themes in this chapter 3 OPENING CASE STUDY T he founding father of the internet, Tim Berners- Lee, has said, ‘the web does not just connect machines, it connects people’ (Berners-Lee, ). The phenomenal rise of social networking in just a few years, allowing people to keep in touch and share information with friends, demonstrates the power of the internet as a social medium. In , Facebook, founded in  by a youthful Mark Zuckerberg in his Harvard student days, became the world’s second most popular website, behind Google. Facebook is the world’s largest online social network, with hundreds of millions of users, accessing it in  languages. Seventy per cent of these are outside the US. However, in the fast-moving world of social interaction, companies like Facebook can experience not just meteoric rise, but also precipitous falls. New competitors, such as Twitter, seem to spring up overnight, while MySpace, once considered the star of social networking, saw its popularity evaporate with the surge of Facebook. Is Facebook now threatened by Twitter? Facebook and Twitter are distinctive in their business models. Facebook allows people to keep in touch with their friends, and Twitter is a ‘micro- blogging’ site, allowing people to speak via -character tweets to anyone who cares to follow them. Twitter thus sees itself as more of an information company than a social networking one, according to its founder, Biz Stone (The Economist, ). Facebook has become a global business. Its technological expertise and innovativeness, while not immediately obvious to users in the concrete way that an iPhone’s attributes are visible to its customers, are nonetheless far-reaching. Its software engineers have been skillful at building systems that can handle increased volume quickly and eciently, allowing the network to add millions of new users easily. Its innovations encourage greater sharing of data. Facebook Connect, launched in , lets users take their identity and network of friends to other websites and to other devices, such as game consoles. Facebook has also been skilful in tapping into the creative talent of independent developers of new applications, or ‘apps’. The developers benefit from gaining access to a huge audience of users, and users enjoy a directory containing over , apps. Although the cost of hardware for storing and processing data has fallen sharply, investment in new technologies is costly. Being relatively young companies started by enthusiasts, where are Facebook and other social networks finding the money needed to propel social networking to global success? Developing a sustainable business model, which will provide services that users desire and generate profits in the long term, is the dream of every young business. A social networking platform such as Facebook, which holds huge amounts of personal data and is widely accessed globally, would seem to be in a commanding position to be a successful international business. But translating popularity among users into profits is a major challenge. Although Facebook had not yet made a profit, Microsoft invested  million in the company in , and a Russian company, Digital Sky Technologies (DST), invested  million in . DST thus acquired a .% stake, which would imply The rise of the social web sees Facebook soar in popularity Figure Facebook users worldwide (millions of users) Source: Facebook website, at www.facebook.com 450 400 350 300 250 200 150 100 50 0 2006 2007 2008 2009 2010 4 Business in the global environment More online … For information about the company, go to Facebook’s website at www.facebook.com and click on ‘about’. that Facebook is worth  billion. Facebook aimed to take in  million in revenues in , but it was spending more than that on its technology (Gelles,  July, ). In contrast to Google, which has grown rich on selling the targeted advertising that appears alongside its search results, a site such as Facebook faces hurdles in attracting advertising. Because the content is user generated, and possibly in doubtful taste, many advertisers are reluctant to sign up to advertising on social networks. On the other hand, the Facebook audience is far bigger than that of any television network in the world, and, because of the enormous amount of personal data Facebook holds, advertisers can target particular groups of possible customers precisely. Moreover, users often recommend products to friends, and this can be a powerful marketing tool– which costs far less than a traditional marketing campaign. Although the business prospects look bright from the owners’ perspective, an international business strategy depends on numerous other factors – many external to the organization. As other software and internet companies have found, legal regulation must, sooner or later, be taken into account. Microsoft and Google were both founded by young, talented individuals with an ambitious focus on building a global force. Both have encountered regulatory hurdles and setbacks. Facebook has soared to fame, but faces down-to-earth regulatory hurdles, such as privacy laws which protect users’ personal data. The company encountered resistance from users when it relaxed its privacy rules, allowing updates of personal data to be viewed publicly unless the user chose to restrict access. Mark Zuckerberg has said that privacy is no longer a ‘social norm’ (The Telegraph, ). However, the imposition of stricter privacy settings by regulators, including the European Commission, is a possibility. The world of social networking is helping to democratize the web, but it is also, perhaps paradoxically, concentrating power in the hands of new corporate actors, presenting challenges as well as opportunities for the -year-old head of Facebook and others following in his footsteps. Sources: The Economist () ‘Profiting from friendship’,  January; Gelles, D., ‘What friends are for’, Financial Times,  July ; Gelles, D., ‘Facebook draws criticism for privacy changes’, Financial Times,  December ; The Telegraph () ‘Facebook’s Mark Zuckerberg says privacy is no longer a “social norm”’,  January; Berners-Lee, T., speech before the Knight Foundation, Washington, DC,  September , at www.webfoundation.org Questions for discussion Why has Facebook grown so rapidly and become an international force so quickly? What are the risks to the continued success of Facebook? What are the impacts of social networking for international business? Introduction to the business enterprise 5 Introduction Business activities shape the daily lives and aspirations of people all over the world, from the farmer in rural Africa to the executive of a large American bank. Business enterprises present a rich variety of dierent organizations and goals, catering for customers ranging from the shopper purchasing a loaf of bread to the giant oil company agreeing to carry out exploration for a government. Business enterprises and their environments have become more complex in recent years, with expanding and deepening ties between societies and between the many organizations within those societies. Many organizations now see themselves as global players, in both their outlook and operations. Yet even the global company must adapt to diering environ- ments and changing circumstances. These changes may be subtle adjustments or radical overhauls, altering the organization’s goals, structure and ways of doing things. Understanding the dynamic interaction between the organization and the changing environment is key to business success in today’s global competitive landscape. All business organizations, whatever their size and geographical scope, are faced with key questions to which they must respond, whether consciously or simply by carrying on. We begin this chapter by identifying these key questions behind the business enterprise, which are, ‘What do we exist to do?’ and ‘How should be carrying out our goals?’ We find that goals and means to accomplish them are intertwined, and that success for the enterprise depends on being able to deliver value to customers in a variety of dierent ways in diering environments. Increasingly, companies are looking at international expansion, to reach more customers and to deliver more e- cient performance. We find that operating internationally does not mean simply copying a formula that has worked successfully in the home country. It promises great rewards, but presents new challenges, risks and organizational uncertainties. Why do some firms falter internationally despite being successful in their home countries? Dierences in culture influence how firms engage with organizations and communities in other countries. Similarly, responses to the changing environment dier from firm to firm. There is now a wider range of companies and countries engaged in global business, and changes, especially those involving technological advances, proceed at a rapid pace. We highlight two cross-cutting views of the inter- national environment. The first is the diering dimensions of the environment, including economic, cultural, political, legal, financial, ecological and technological. The second is that of spheres, from the local, through to the national, regional and global. We thus provide a practical framework for understanding how enterprises interact through each dimension in multiple geographical environments. What does the business enterprise exist to do? Business refers to any type of economic activity in which goods or services (or a combination of the two) are supplied in exchange for some payment, usually money. This definition describes the basic exchange transaction. The types of activity covered include trading goods, manufacturing products, extracting natural resources and farming. International business refers to business activities that straddle two or more countries. Businesses nowadays routinely look beyond the bounds of their home country for new opportunities. Moreover, although it used to be mainly firms in the more advanced regions of the world (such as North America, Europe and business any type of economic activity in which goods or services (or a combination of the two) are supplied in exchange for some payment, usually money international business business activities that straddle two or more countries 6 Business in the global environment Japan) which aspired to expand into other countries, now we see businesses from a much wider range of countries ‘going global’. These include Chinese, Indian, African and Latin American firms. Consequently, in most countries, there are likely to be both domestic and foreign companies competing alongside each other. Business has been around a very long time. Ancient societies grew prosperous largely because of thriving business activity, chiefly through trade with other coun- tries, which brought economic power. The urge to do business seems to be universal, taking place in all societies, even under communism, which is avowedly against private enterprise. The small business that operates informally is very dierent from the ambitious company that seeks to compete in the cut and thrust of today’s market economies. The basic questions and concepts that follow help to illuminate how businesses work in a variety of dierent contexts. Purpose and goals A business enterprise does not simply come into existence of its own accord. It is created by people, who may emerge in any society or geographic location, and who bring their own values and experience to bear on it. Businesses are founded in partic- ular national environments, with their distinctive values and social frameworks. The founders could well envisage an overarching purpose or mission of contributing to society through employment and wealth creation. They will have some idea of what type of entity they wish to create in terms of organization. They will also focus on more immediate goals of providing specific goods or services to customers. These goals might change frequently, while broader goals are more enduring. Both the decision-makers and the circumstances will change, but the continuing question confronting them is ‘What purpose are we fulfilling or should we be fulfilling?’ Most of the world’s businesses aim to make money, and are sometimes referred to as for- profit organizations, to distinguish them from not-for-profit organizations, such as charities. A third category exists, the social enterprise, which lies somewhere between the two: it aims to make money, but the money is mainly for social causes. (The social enterprise is discussed in Chapter 12.) Although for-profit enterprises aim to make a financial gain, most founders would say that the profits are for some other purpose. Admittedly, in some businesses, the purpose might be crudely expressed as simply to enrich the owners. But most busi- nesspeople would describe their goal as, for example, oering products which will satisfy customers. It need not be a wholly new product, but one that is more innova- tive technologically, a better design or cheaper than rivals’. It could be a ‘greener’ product than those of rivals, such as a more fuel-ecient car. No firm would realisti- cally aim to outperform competitors on all criteria. Goals can be mutually exclusive: the low-cost product is unlikely to have the latest technology. These are issues of strategy, which are discussed more fully in Chapter 5. There is considerable variety in the way the company can position itself competitively, which tells us much about its expertise, culture and broader goals in society. In today’s global consumer markets we find competing companies from a variety of national backgrounds. One of the most rapidly growing products globally is the ‘smartphone’, which oers a variety of mobile internet services. The iPhone, made by US company Apple Computers, took the world by storm with its launch in 2007. But a number of competitors have entered the smartphone market, eyeing the good prospects for growth. They include Nokia, the Finnish company which has long dominated the mobile handset market (see the closing case study in Chapter 2); the for-profit organizations businesses that aim to make money not-for-profit organizations organizations such as charities, which exist for the purpose of promoting good causes, rather than to make a profit social enterprise an enterprise that lies somewhere between the for-profit and not-for- profit organization, aiming to make money, but using it mainly for social causes Introduction to the business enterprise 7 More online … For corporate information on Apple, go to www.apple.com/investors Research in Motion’s website is www.rim.net. Interesting headings are ‘company’ and ‘investors’. Asus’s website is www.asus.com. Click on ‘about asus’ for corporate information. Canadian firm Research in Motion, with its Blackberry products; and the Taiwanese firm Asus. These firms dier markedly in background and culture: their origins are in dierent continents (America, Europe and Asia), and their organizations have evolved in distinctive national cultures, while growing into global businesses. Apple Computers, famous for its design and technology, has been guided by the vision of its charismatic founder, Steve Jobs, a veteran of tough competitive battles with larger rivals in North America. Nokia has built a position of dominance in global mobile phone markets, relying on a strong corporate culture rooted in its Scandina- vian environment. By contrast, Research in Motion focuses on the Blackberry, which is a premium product favoured especially by business customers. Asus, with its rapidly growing strength in the computer market, is aiming to combine technolog- ical expertise with low-cost production in Asia to oer the consumer better value than global rivals. Summary points Business purpose and goals The business enterprise has a broad purpose in society, as well as shorter-term goals of providing products or services for customers. Over time, the business will need to rethink its goals as the competitive environment changes and the firm evolves. Firms stem from roots in national environments, which influence their culture even when they serve global markets. Markets and consumers The market as a concept is an old one, referring to a location where exchange trans- actions take place, either with formal standing or informally. Today, the notion of a market is used in many contexts, and can cover a number of phenomena, although all stem from the core notion of exchange transactions. A market can be defined in four main ways: • A country, in terms of its consumers – A country’s consumers usually have simi- larities in product preferences, due to shared culture and history. National markets are the mainstay of the many companies which focus on their home markets. • A type of trading – Trading can take place globally and not be confined to a specific place. Financial markets, for example, exist to carry out financial transac- tions, such as the stock market. • A country in terms of its economy – This rather recent use of the word usually occurs in the context of emerging markets, a term that has become widely used, but is rather loosely defined. It refers to fast-growing developing countries, the most notable of which are the ‘Bric’ countries (Brazil, Russia, India and China). Their rapid economic rise has made them the centre of attention for many busi- nesses, largely because of their growing ranks of middle-class consumers (see the case study on them which follows). • A group of consumers with similar characteristics and preferences. In marketing, a group of identifiable consumers, such as people aged 18 to 30, is known as a segment. An important market for many companies is urban, middle-class consumers, numbers of which are growing fastest in the large emerging markets. There are prob- market a location where exchange transactions take place, either with formal standing or informally emerging economies/ markets fast-growing developing countries bric countries collective reference to Brazil, Russia, India and China, which are grouped together loosely as emerging economies segment in marketing, a group of identifiable consumers, such as an age group, socio-economic group or culturally distinctive group 8 Business in the global environment ably one billion middle-class consumers globally, but there are over four billion other people further down the ‘pyramid’ whose needs also matter. Their importance has been highlighted in C.K. Prahalad’s book, The fortune at the bottom of the pyramid (2009). Increasingly, companies have broadened their focus to include products for this much broader spectrum of consumers, often living in poor countries where infrastructure is weak and levels of education are low. In these markets, price is crucial: a few cents more or less representing a major factor in the consumer’s ability to buy a product. Why would a global company such as Procter & Gamble (P&G), whose beauty products cultivate a glamorous image, seek to sell basic soap in di- cult conditions in Africa? Part of the answer lies in the dilemma faced by many large companies: weighing up the tremendous growth possibilities of new markets against the safety of existing mature markets where growth is minimal. Summary points Markets and consumers A market can be a whole country, but it is usual, especially in a large emerging market such as China, to target particular products to identifiable groups of consumers, such as the urban middle class. Many large companies, finding expansion possibilities limited in the developed economies, are targeting consumers in developing countries. In these countries, economic growth and changing lifestyles create business opportunities for both domestic and foreign firms. A large company might design products to serve dierent markets, from basic goods in developing countries to premium branded products in developed countries. Stakeholders and corporate social responsibility (CSR) In answer to the question posed at the end of the last section – on why P&G would target African markets – we could simply cite the response suggested earlier: to make money. But this is only part of the story. The large company seeks success in a number of markets, both in terms of countries and types of consumer. It is driven by a desire to satisfy those consumers’ needs, and also to provide worthwhile economic activity for its employees. These considerations are part of the answer to the ques- tion, ‘What do we exist to do?’ In recent years, companies have come to recognize that they are participants in society generally. In the same vein, managers have become more aware of the interrelationships between the internal and external environment of the company. These perspectives bring the company into relationships with stakeholders. Figure 1.1 identifies a variety of stakeholders across home and foreign environments. A stakeholder may be anyone, including individuals, groups and even society generally, who exerts influ- ence on the company or whom the company is in a position to influence (Freeman, 1984). The impacts may be direct or indirect, identifiable people or a more general notion of the community as something distinct from its current members. Stake- holders who have direct relations with the company include owners, employees, customers, suppliers and business partners. These might be located in any country where the firm does business. The government can be a direct stakeholder, especially if it has an ownership stake (discussed in the next section), or it can be an indirect stakeholder, framing the legal environment in which the firm operates. stakeholder broad category including individuals, groups and even society generally, that exerts influence on the company or that the company is in a position to influence Introduction to the business enterprise 9 EXPLORING THE GLOBAL BUSINESS ENVIRONMENT T he ‘Brics’ is a term first used by economists at the US bank Goldman Sachs, who highlighted the large emerging markets for future growth (Goldman Sachs, ). Looking at trends extending until , they concluded that the size and growth of the four economies – Brazil, Russia, India and China – were overshadowing today’s developed nations, thus representing a shift in the balance of power in the world. The bank’s economists did not see them necessarily forming a bloc which would become cohesive in itself, like the EU. In fact, apart from size and growing influence, they have little in common with each other, but in a twist of fiction becoming reality, the four have begun organizing their own summit meetings to discuss global issues. Do the Brics as a group represent a new force in the global economy, or is the term simply a way of drawing attention to four emerging markets? The four are all large countries and economies. Together they occupy over % of the world’s land area, and are home to % of the world’s people. Their economies and political systems are very dierent. China and Russia are authoritarian states, while India and Brazil are turbulent democracies. All four countries have histories of closed economies and strong state guidance, and all have put in place reforms which have made them more market oriented and more welcoming to foreign investors, to varying degrees. However, in all, there are tensions between market reforms and the role of the state. Of the four, China is the most authoritarian, but its communist leaders have also been highly successful in guiding liberal market reforms. Its export-oriented economy has benefited from foreign investment and know-how. It is moving up the economic ladder, from the low-level, labour-intensive industries that are prevalent in developing countries, to higher technology industries. China’s economy is by far the largest of the four, and its growth rate is the most impressive. Its ranks of growing middle-class consumers are now the fastest growing markets for consumer goods. Furthermore, the wealthy Chinese consumer is younger than in Japan or the US (see Figure), splashing out on aspirational lifestyle purchases, such as luxury home furnishings and luxury cars, in contrast to the more conservative spending habits of rich Japanese consumers. India, with its billion-plus inhabitants, aspires to emulate China, but its still predominantly rural population, poor infrastructure and lumbering bureaucracy pose challenges for its democratically elected government to raise economic growth above –% annually. Its exports pale beside China’s, and it remains ambivalent about foreign investors in numerous sectors, such as retailing. Brazil, like India, is a democracy, characterized by social and cultural divisions, in addition to widespread poverty. Brazil’s government has done much in recent years to improve the lives of its  million inhabitants. And Brazil has been active in international forums, voicing the concerns of developing nations and urging rich countries to bring down trade barriers which keep out imports from developing countries like itself. Of the four countries, Russia is arguably the one which seems out of place. It is ocially classified as an industrialized economy under the Kyoto climate change treaty, while the other three are developing economies. Historically, Russia was the superpower rival of the US during the cold-war era following the Second World War. Cold-war ideology has been buried, but the legacy of rivalry with the US lives on. Russia remains one of the world’s heaviest military spenders, but behind China; and both are far behind The Brics take the stage Figure Wealthy consumers by age group Annual household income of over $70,000, 250,000 renminbi, 8 million yen Source: Financial Times, 10 October 2009 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Japan 45 to 66 years of age US China 18 to 44 years of age 10 Business in the global environment [...]... international business, the coming together of global and local forces is one of the 34  Business in the global environment aspects of the business environment which is becoming most challenging International markets offer opportunities for the MNE, but they also pose risks When rethinking long-term strategy, especially in times of economic downturn, some MNEs find it prudent to curb international expansion... has been influential in the growth of consumer societies across the world They have adapted to local differences in different countries, while maintaining a focus on their global brands These companies are now pursuing growth strategies in the large emerging markets of China and India In their home market, where growth has slowed, they are seeking innovations in healthier alternatives to their traditional... aspects of the business environment are inevitably moving towards the global, but this would be a mistake Some aspects of the international environment seem to be moving towards global governance, such as financial regulation, but each layer of the environment has its own characteristics and players Although they are becoming interconnected, they are not melding together into a whole, but retain distinctiveness,... elements, including the legal environment as a separate dimension, the financial environment and the ecological environment   Each of the dimensions of the environment covers a range of phenomena, including institutions, processes and historical legacies   The PEST analysis is a rather blunt instrument in that it underestimates changes over time and interactions with other dimensions Introduction to the business. .. approach involves the sustainability of the firm’s business, which is the notion that today’s business should be carried out in ways which do not cause a detriment to the ability of future generations to fulfil their needs Sustainability takes into account the firm’s impacts on communities and the natural environment (see Chapter 11) In a sense, the principle of sustainability encourages a business to think... feature mainly in manufacturing firms, whereas all firms have need of finance, HRM and marketing functions They cover the entire life of a product, from the design stage to the delivery of a final product to the customer They even extend beyond the sale, to include after-sales service and recycling The main functions are set out in Figure 1.4 In Figure 1.4, the headings in the rectangles represent the co-ordinating... aspects of the management of people in the organization, including recruitment, training, and rewarding the workforce marketing satisfying the needs and expectations of customers; includes a range of related activities, such as product offering, branding, advertising, pricing, and distribution of goods • Finance and accounting – This function concerns control over the revenues and outgoings of the business, ... decision-making and management of the company The CEO must answer to the board, maintain the confidence of shareholders, inspire the company’s workforce and deal with an array of stakeholders Whenever the company’s fortunes take a turn for the worse, the CEO is in the firing line We highlight a wide variety of CEOs, in differing corporate and market environments, in the feature ‘Meet the CEO’ in each chapter... observable in each of these layers   In some areas, such as financial regulation, international rule-making is becoming more important, but national and regional institutions remain pivotal, often acting in conjunction with international organizations Introduction to the business enterprise  33 Critical thinking The multilayered environment The MNE must be attuned to the changing environment at local,... stakes in other companies, often as a means of participating in a network of firms, rather than for purely ownership motives This constant reconfiguration of companies and businesses has become a prominent feature of the international business environment In these ways, companies can grow relatively quickly internationally and adapt their businesses organizationally as changes in the competitive environment . countries 6 Business in the global environment Japan) which aspired to expand into other countries, now we see businesses from a much wider range of countries ‘going global . These include Chinese, Indian,. generally, that exerts in uence on the company or that the company is in a position to in uence Introduction to the business enterprise 9 EXPLORING THE GLOBAL BUSINESS ENVIRONMENT T he ‘Brics’. operations in one or more countries other than its home country, including both companies and unincorporated enterprises 16 Business in the global environment degrees) the international business