International business environment lesson 02

21 Macro Environment and Micro Environment LESSON MACRO ENVIRONMENT AND MICRO ENVIRONMENT CONTENTS 2.0 Aims and Objectives 2.1 Introduction 2.2 2.1.1 Concept of Economic Advancement 2.1.2 Structure of Consumption 2.1.3 Economic Systems 2.1.4 Mutual Economic Dependence Micro Economic Environment 2.2.1 Sources of Competition 2.2.2 Competitive Advantage 2.3 Macro Environment 2.4 Trade and Investments 2.5 Let us Sum up 2.6 Lesson End Activity 2.7 Keywords 2.8 Questions for Discussion 2.9 Suggested Readings 2.0 AIMS AND OBJECTIVES After studying this lesson, you should be able to: z Understand the micro and macro environment z Study the trade investment z Know the difference between the micro and macro 2.1 INTRODUCTION A country’s economy includes sources of domestic livelihood and the allocation of resources Because not all of the world’s economies operate at the same level of efficiency, it is necessary to form a clear idea of the economic situation of a particular host country in order to develop an appropriate marketing strategy 2.1.1 Concept of Economic Advancement Developing countries are becoming important markets According to the concept of international product life cycle more and more and more developing countries may be expected to become significant markets It would be desirable for a marketer, therefore, to keep abreast of countries slowly reaching that point where market potential becomes worthwhile GNP per capita should not be relied on as the sole 22 International Business Environment measure of the economic viability of a market, although it does provide a resole estimate of the market in cases where detailed analysis is not feasible Economic advancement is characterized by such factors as comparatively small allocation of labor force to agriculture; energy available in large amounts at low cost per unit; high level of gross national product and income; high levels of per capita consumption; relatively low rates of population growth; complex modern facilities for transportation, communication, and exchange; a substantial amount of capital for investment; urbanization based on production as well as exchange; diversified manufacturing that accounts for an important share of the labor force; numerous tertiary occupations; specialization of both physical and mental labor; surpluses of both goods and services; and a highly developed technology that includes ample media and methods for experiment These factors can be utilized to examine economic standing Needless to say a large variety of information is needed to categorize countries on an economic development scale For many characteristics, hard data may not be available and judgment becomes the determining factor As a generalization, the conditions in underdeveloped economies would be the mirror image, or reverse, of those that characterizes economic advancement This raises an interesting question Can poor countries be converted into advanced countries through reversing the conditions that hamper economic progress the answer to such a question is far from simple because economic development is not a simple, discrete process? Many historical, geographic, political, and cultural factors are intimately related to the economic well being of nation For example extent helped the United States Achieve its present economic greatness The impact of this factor has been thoroughly covered elsewhere 2.1.2 Structure of Consumption Nations’ overall patterns of consumption can be viewed not only on the basis of potential but also on the basis of structure While it is important to measure the volume of consumption among various cultures, nations, and societies, the characteristics of the consumption reveal its structures Particularly conspicuous in this respect are differences in emphasis Depending on economic factors, a country may have to emphasize producer goods over consumer goods Also, what are considered necessities in one economy may be luxuries in another? In addition, consumption in most advanced countries is characterized by a higher proportion of expenditures devoted to capital goods than consumption in poor countries, where substantially more is spent on consumer goods However, proportionate expenditures for producer goods within a given economy are only moderately high if that economy enjoys the benefits of past (preferably longterm) capital accumulation When a less-developed economy decides to become technically and economically more advanced, an extraordinary percentage of national income must be diverted to producer goods, especially if that economy is unable to attract substantial amounts of foreign currency in the form of direct investment, loans, or other aid This is one important reason why less developed economies find the transition period to technical advancement so difficult The structural differences with regard to expenditures among nations can be explained by a theory propounded by the German statistician Engle The law of consumption (Engle’s law) States that poorer families and societies tend to spend a greater proportion of their incomes on food than well-to-do people It shown is the percentage of per capita income spent for food, housing, clothing, and other purposes in selected countries Third World Countries like the Philippines and Kenya are shown to spend a larger percentage on food than countries like the United States Further, in any country, rural people spend a larger percentage on food than urban dwellers Housing, in particular, receives a much smaller share of income in underdeveloped countries than in the advanced nations The structure of consumption varies among developed countries too While the average American home covers 1583 square feet and the typical European dwelling is more than 1050 square feet, Japanese families manage with 925 square feet The U.S nuclear family boasts 2.2 cars on average; comparable households in the European community average 1.3 cars In Japan, the average is 0.88 And while food costs absorb 26 percent of the typical Japanese household’s income, the amount is less than 15 percent for the average American family, and about 20 percent for the Europeans 2.1.3 Economic Systems The economic system of a country is another important economic factor that a marketer must understand Traditionally, there are two types of economic systems, capitalist systems and state-owned systems The United States comes close to being a pure capitalist system The state-owned, or Marxist, system is pursued in communist countries where all activities related to production and distributions are controlled by the state Between the two extremes are many countries that flow mixed economic systems where certain industries are allowed to run freely while others are strictly or partially controlled The nature of economic systems affects the political/regulatory control of the economy Today, the pure capitalistic system propounded by Adam Smith is a thing of the past Even in the United States, there are some laws and conditions imposed on various businesses The nature of the laws and other government regulations and controls will be examined An interesting development of the recent past appears to have given rise to an economic system that is new to the modern would and links economic life with religion Some Moslem countries have adopted a national economic perspective based on Islam While the trend, led by Iran, is still emerging, it is difficult to say how far it will go or what impact it will have on marketer interested in doing business with Moslem countries, although insights into the Islamic type of economic system are provided by Pakistan’s efforts 2.1.4 Mutual Economic Dependence The U.S economy is profoundly related to the economies of other nations, particularly those of the advanced countries The U.S market is so large that despite its ability to supply most of its needs from domestic output, it is also a dominant factor in international trade For example, what happens in Western Europe cannot be ignored by the United States While there may be a time lag, happenings there are bound ultimately to affect the U.S economy It has been estimated that a recession in Western Europe affects the United States after a lag of about six months Thus, when performing an economic analysis, an international marketer needs to consider the economic perspectives of the overall world economy, particularly those of its major trading partners and the host country The depth of economic analysis varies from case to case For example, if the enterprise concerns Saudi Arabia, economic development in the Pacific region can be discounted On the other hand, if a project is related to Japanese industries, the economic environment in emerging countries of Southeast Asia must be reviewed 2.2 MICRO ECONOMIC ENVIRONMENT Microeconomic environment refer to the environment surrounding a product and or market of interest to accompany An examination of microenvironment indicates 23 Macro Environment and Micro Environment 24 International Business Environment whether the company can successfully enter the market Essentially the micro economic environment concerns competition 2.2.1 Sources of Competition A U.S company may face competition in an international market from three different sources: local business, other U.S corporations, and other foreign companies For example, if Chrysler Corporation were to consider entering the German market, it would compete against General Motors, Volkswagen, and Honda Motors of Japan, Different competitors, however, may satisfy different type demand existing demand, latent demand, or incipient demand Existing demand refers to a product bought to satisfy a particular need Latent demand applies in a situation where a particular need has been recognized, but no products have been offered Incipient demand describes a projected need that will emerge when customers become aware of it sometime in the future To illustrate the point, consider demand in the computer industry Overall, IBM may be strong in, let us say, Spain But a firm like Next Inc avoids direct confrontation with IBM and Apple, at least in the short run Competition can also be analyzed by the characteristics of products Three product categories are considered here breakthrough products Competitive products, and improved products A breakthrough product is a unique innovation that is mainly technical in nature, such as a digital watch, a color television ort a jet plane A competitive product is one of many brands currently available in the market and has no special advantage over the competing products An improved product is not unique but is generally superior to many existing brands The nature of the competition that a company faces in entering an overseas market can be determined by relating the three types of products to the three type of demand Upon examining the competition, a company should be able to ascertain which product/market it is most capable of pursuing For example, let us assume Procter & Gamble is interested in manufacturing hair shampoo in Egypt and seeks entry into the emerging Arab market The company finds that in addition to a number of local brands, Johnson & Johnson’s baby shampoo and Helene Curtis Industries Suave shampoo are the competitive products in the is considered an improved product Most of the competition appears to be addressing the existing demand No attempts have been made to satisfy latent demand or incipient demand After reviewing various considerations, Procter & Gamble may decide to fulfill latent demand with an improved offering through its Head & Shoulder brand Based on market information, the company reasons No brand had addressed itself to that problem Even Gillette’s new entry mainly emphasizes silkiness of hair Thus, analysis of the competition with reference to product offerings and demand enables Procter & Gamble to determine its entry point into the Arab market 2.2.2 Competitive Advantage The above analysis indicates an open space in the market for entry But this in itself is not enough Competitors may follow right on the heels of Procter & Gamble’s entry steps Thus, further analysis is needed to figure out the competitive advantage the company has over rivals, existing and potential The following questions could be raised to analyze the competition: z Who are the competition now, and who will they be in the future? z What are the key competitor’s strategies, objectives, and goals? z How important is a specific market to the competitors, and are they committed enough to continue to invest? z What unique strengths the competitors have? z Do they have any weaknesses that make them vulnerable? z What changes are likely in the competitors’ future strategies? z What are the implications of competitors’ strategies on the market, the industry, and one’s own company? While it may be relatively easy to pinpoint current competition in an international market, analysis of competition in the future is difficult because there is no way to figure out which companies from different parts of the world may become interested in the market in the future In any event, the best way to examine competition is to draw up a demographic profile of the industry Markets dominated by small singleindustry businesses or small national competitors differ significantly from those dominated by multi-industry companies, and those in turn are different from those controlled by multinational or foreign companies Obviously a U.S MNC with multi-industry interests would have certain inherent strengths that a single-industry foreign national company could not match For example, MNC’s can often provide consumers with better and cheaper products or services, react faster to changing economic conditions, and more adroitly overcome or capitalize on market distortions created by governments than can national firms These large companies have the resources to sacrifice profits in one country in order to penetrate or gain position there while using profits from another country to support this aggressiveness They have the ability to work with governments, select the least costly source of supply, and even negotiate favorable trade concessions However, it is a mistake to believe that MNCs always have superior leverage Local foreign competitors may be small, but they can be helped by their governments For example, governments can require that foreign competitors reduce profitability in order to increase local employment levels or maintain the balance of trade Governments can also ban a multinational firm from obtaining supplies in low-cost areas Further discussion on the role of the government will be takes up A simple listing of major competitors is no enough It is also important to learn about their goals and aspirations In fact, an attempt should be made to know competitors total financial situations, including their serious problems as well as their advantages and opportunities Further, the competitor’s relative strengths and weaknesses should be examined Note that most areas of strength either are related to the excellence of personnel or are resource based Not all factors have the same the critical factors that could directly or indirectly bear on a product’s performance in a given market For example, adequate distribution may be critical in a developing country with inadequate means of transportation and communications, while research and development would be strategic to gain the competitive edge in Western Europe An example of strength is provided by BMW Car Company It is commonly know that selling foreign cars in Japan is not easy Yet, in 1987, BMW sold almost 50,000 cars to the Japanese, and the number was expects to be four times as high in 1990 With Japanese consumers’ increasing interest in luxury car, a new market segment has been emerging that was not being tapped by the Japanese companies BMW took advantage of the situation Avoiding the pitfalls that make doing business in Japan difficult, it established a comfortable in niche for itself After buying its won dealer network and expanding it, the company advertised heavily, set up a service-and-parts system, and lowered interest rates to single digits (5 %), when consumer interest rates were 15 percent In brief, despite the fact that Japan is difficult market to enter, analysis of the microeconomic environment showed that BMW could successfully seek entry into the Japanese market Japanese auto companies, in turn, have captured a major share (in 1985, approximately 24 percent) of the U.S auto market Let us assume Ford Motor Company decides to retaliate by exploring the possibility of entering the Japanese 25 Macro Environment and Micro Environment 26 International Business Environment market Despite all its strengths and experience in international business, how ever, Ford may find itself greatly constrained in its endeavors by one weakness—cost structure Studies show that because of U.S wage-price and managerial efficiency differentials, the Japanese companies can, at 1984’s exchange rate, build a car and ship it to the United States for $2,000 to $2,300 less than it costs Detroit to produce an equivalent vehicle Thus, even if Ford were to assemble cars in Japans, other things being equal, it would still be severely handicapped because of the cost advantage of the local companies Granted Ford will pay lower wages in Japan, but this advantage would be wiped out by the experience that the Japanese have in Japan In this instance, analysis of the microeconomic environment paints a discouraging picture for Ford’s entry into the Japanese market 2.3 MACRO ENVIRONMENT There are many factors in the macro-environment that will effect the decisions of the managers of any organisation Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change To help analyse these factors managers can categorise them using the PESTEL model This classification distinguishes between: z Political factors: These refer to government policy such as the degree of intervention in the economy What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system z Economic factors: These include interest rates, taxation changes, economic growth, inflation and exchange rates As you will see throughout the "Foundations of Economics" book economic change can have a major impact on a firm's behaviour For example: ™ higher interest rates may deter investment because it costs more to borrow ™ a strong currency may make exporting more difficult because it may raise the price in terms of foreign currency ™ inflation may provoke higher wage demands from employees and raise costs ™ higher national income growth may boost demand for a firm's products z Social factors: Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work In the UK, for example, the population has been ageing This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer It also means some firms such as Asda have started to recruit older employees to tap into this growing labour pool The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines has increased whereas demand for toys is falling z Technological factors: New technologies create new products and new processes MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances Online shopping, bar coding and computer aided design are all improvements to the way we business as a result of better technology Technology can reduce costs, improve quality and lead to innovation These developments can benefit consumers as well as the organisations providing the products z Environmental factors: Environmental factors include the weather and climate change Changes in temperature can impact on many industries including farming, tourism and insurance With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities z Legal factors: These are related to the legal environment in which firms operate In recent years in the UK there have been many significant legal changes that have affected firms' behaviour The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation's actions Legal changes can affect a firm's costs (e.g if new systems and procedures have to be developed) and demand (e.g if the law affects the likelihood of customers buying the good or using the service) Different categories of law include: z Consumer laws: These are designed to protect customers against unfair practices such as misleading descriptions of the product z Competition laws: These are aimed at protecting small firms against bullying by larger firms and ensuring customers are not exploited by firms with monopoly power z Employment laws: These cover areas such as redundancy, dismissal, working hours and minimum wages They aim to protect employees against the abuse of power by managers z Health and safety legislation: These laws are aimed at ensuring the workplace is as safe as is reasonably practical They cover issues such as training, reporting accidents and the appropriate provision of safety equipment Typical PESTEL factors to consider include: Table 2.1 Factor Could include: Political e.g EU enlargement, the euro, international trade, taxation policy Economic e.g interest rates, exchange rates, national income, inflation, unemployment, Stock Market Social e.g ageing population, attitudes to work, income distribution Technological e.g innovation, new product development, rate of technological obsolescence Environmental e.g global warming, environmental issues Legal e.g competition law, health and safety, employment law By using the PESTEL framework we can analyse the many different factors in a firm's macro environment In some cases particular issues may fit in several categories For example, the creation of the Monetary Policy Committee by the Labour government in 1997 as a body that was independent of government but had the ability to set interest rates was a political decision but has economic consequences; meanwhile government economic policy can influence investment in technology via taxes and tax credits If a factor can appear in several categories managers simply make a decision of where they think it best belongs However, it is important not to just list PESTEL factors because this does not in itself tell managers very much What managers need to is to think about which factors are most likely to change and which ones will have the greatest impact on them i.e 27 Macro Environment and Micro Environment 28 International Business Environment each firm must identify the key factors in their own environment For some such as pharmaceutical companies government regulation may be critical; for others, perhaps firms that have borrowed heavily, interest rate changes may be a huge issue Managers must decide on the relative importance of various factors and one way of doing this is to rank or score the likelihood of a change occurring and also rate the impact if it did The higher the likelihood of a change occurring and the greater the impact of any change the more significant this factor will be to the firm's planning It is also important when using PESTEL analysis to consider the level at which it is applied When analysing companies such as Sony, Chrysler, Coca Cola, BP and Disney it is important to remember that they have many different parts to their overall business - they include many different divisions and in some cases many different brands Whilst it may be useful to consider the whole business when using PESTEL in that it may highlight some important factors, managers may want to narrow it down to a particular part of the business (e.g a specific division of Sony); this may be more useful because it will focus on the factors relevant to that part of the business They may also want to differentiate between factors, which are very local, other which are national, and those, which are global For example, a retailer undertaking PESTEL analysis may consider: z Local factors such as planning permission and local economic growth rates z National factors such as UK laws on retailer opening hours and trade descriptions legislation and UK interest rates z Global factors such as the opening up of new markets making trade easier The entry of Bulgaria and Rumania into the European Union might make it easier to enter that market in terms of meeting the various regulations and provide new expansion opportunities It might also change the labour force within the UK and recruitment opportunities This version of PESTEL analysis is called LONGPESTEL This is illustrated below: Table 2.2 LOCAL NATIONAL GLOBAL POLITICAL Provision of services by UK government policy World trade agreements local council on subsidies e.g further expansion of the EU ECONOMIC Local income SOCIAL Local population growth Demographic change Migration flows (e.g ageing population) TECHNOLOGICAL Improvements in local UK wide technology e.g technologies e.g UK online services availability of Digital TV International technological breakthroughs e.g internet ENVIRONMENTAL Local waste issues Global climate change LEGAL Local licenses/ planning UK law permission UK interest rates UK weather Overseas economic growth International agreements on human rights or environmental policy In "Foundations of Economics" we focus on the economic environment We examine issues such as the effect of interest rate changes, change in exchange rates, changes in trade policy, government intervention in an economy via spending and taxation and economic growth rates These can be incredibly important factors in a firm's macroenvironment The growth of China and India, for example, has already had massive effects on many organisations Firms can relocate production there to benefit from lower costs; these emerging markets are also providing enormous markets for firms to aim their products at With a population of over billion, for example, the Chinese market is not one you would want to ignore; at the same time Chinese producers should not be ignored either However, the relative importance of economic factors compared to other factors will depend on the particular position of a business Exchange rate fluctuations may be critically important to a multinational but less significant to a local window cleaner Rapid economic growth or economic decline may be very significant to a construction business that depends heavily on the level of income in the economy but may be slightly less significant to a milk producer whose product is less sensitive to income So whilst the economy is important to all firms on both the supply side (e.g unemployment levels affect the ease of recruitment) and demand side (e.g income tax affects spending power) the relative importance of specific economic factors and the relative importance of the economy compared to, say, regulation or social trends will vary Whilst we hope this book provides a good insight into the economy and the possible effects of economic change on a business these must be considered in the light of other macro and micro factors that influence a firms' decisions and success Check Your Progress 1 What you understand by microeconomic environment? …………………………………………………………………………… …………………………………………………………………………… Mention some examples of macro environment …………………………………………………………………………… …………………………………………………………………………… 2.4 TRADE AND INVESTMENTS Foreign trade and foreign direct investment (FDI) are mutually influential FDI in the natural resource sectors, including plantations, in developing countries increases trade FDIs in several other sectors also increase international trade in many cases Due to factors like foreign production by FDI substitutes foreign trade in many cases Due to factors like foreign exchange problems, desire to industrialize fast, etc The polices of many developing countries prefer foreign investment (for import substitution) to imports As pointed out in the sales of firms established by FDI fat exceed the world exports A part of this represents substitution of foreign production for trade and a part of this generates trade—about one-third of the world trade in manufactures is intra-company trade Due to the protectionism and some other factors, large amounts of FDI have been taking place in the developed countries leading to substitution of foreign production for substitute production for trade For example, many foreign companies have been setting up manufacturing and assembly facilities in the European Community to overcome the fortress EC-92 It may also be pointed out that, to a considerable extent, such investments are made possible by the past trade; the funds generated by trade are ploughed back to investment n the foreign markets The massive foreign investments made by the Japanese companies since the mid-1980s deserve a special mention in this context While the international investment replaces international trade in certain products, it may generate trade in some other products Drucker, who observes that although traditionally investment has followed trade, trade is increasingly becoming dependent on investment, points out that US exports in the years of the over-valued dollar would have been even lower had the European subsidiaries of American companies and American joint ventures in Japan not continued to buy machinery, chemicals, and 29 Macro Environment and Micro Environment 30 International Business Environment parts from the US Similarly, the foreign subsidiaries of America’s financial institutions, such as the major banks, accounted for something like one half of US service income during those dismal years Foreign investment has been significantly contribution to the export performance of some countries The case of China deserves a special mention here Check Your Progress Fill in the blanks: environment refers to the environment surrounding a product and or market of interest to accompany FDI stands for 2.5 LET US SUM UP Microeconomic environment refer to the environment surrounding a product and or market of interest to accompany An examination of microenvironment indicates whether the company can successfully enter the market Essentially the micro economic environment concerns competition 2.6 LESSON END ACTIVITY Prepare a study note on the micro and macro environment in international business 2.7 KEYWORDS Political factors: It refers to government policy such as the degree of intervention in the economy Economic factors: These include interest rates, taxation changes, economic growth, inflation and exchange rates 2.8 QUESTIONS FOR DISCUSSION Distinguish between the trade and investment What is the micro economic environment? Check Your Progress: Model Answers CYP 1 Microeconomic environment refer to the environment surrounding a product and or market of interest to accompany An examination of microenvironment indicates whether the company can successfully enter the market Essentially the micro economic environment concerns competition Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change CPY Microeconomic Foreign trade and foreign direct investment 2.9 SUGGESTED READINGS Daniels, D and Radebangh H., “International Business”, Pearson Education Asia, New Delhi, 2002 Griffin and Pustay, “International Business”, Pearson Education Asia, New Delhi, 2002 Subba Rao, “International Business”, Himalaya, Mumbai, 2001 Schaffer, “International Business Law and its Environment”, Thomson, 2002 Onkwist and Shaw, “International Marketing” Philip R Careora, “International Marketing” 31 Macro Environment and Micro Environment ... Radebangh H., ? ?International Business? ??, Pearson Education Asia, New Delhi, 2 002 Griffin and Pustay, ? ?International Business? ??, Pearson Education Asia, New Delhi, 2 002 Subba Rao, ? ?International Business? ??,... Schaffer, ? ?International Business Law and its Environment? ??, Thomson, 2 002 Onkwist and Shaw, ? ?International Marketing” Philip R Careora, ? ?International Marketing” 31 Macro Environment and Micro Environment. .. microenvironment indicates 23 Macro Environment and Micro Environment 24 International Business Environment whether the company can successfully enter the market Essentially the micro economic environment