International Business

The Environmental Challenges

Prof Bharat Nadkarni
 International Business : Prof Bharat Nadkarni

The Environmental challenges

Substantial challenges face any organisation intent on getting

to the future first. The first challenge, how to navigate from
here to there arises as both public and private institutions
struggle to plot a course through and increasingly inconsistent
environment where experience is rapidly devalued and familiar
landmarks no longer serve as guideposts. Never before has
the institutional terrain been changing so quickly or have
industry boundaries been so malleable. Never before have
competitors, partners, suppliers and buyers been so
indistinguishable. How, then, does one get to the future first
even when there is no map?

(C K Prahalad and Gary Hamel in the preface to Competing for the future)
 International Business : Prof Bharat Nadkarni

What makes business different are the differences in the

environment and eventually may make the international
business strategy different from the domestic one. A detailed
analysis of the business environment of the foreign countries
is, therefore, an essential prerequisite for formulating
international business strategies.

As Cateora point out “the key to successful international

business is adaptation to the differences in the environment
that usually exist from one country to another. Adaptation is not
a passive process but a conscious effort on the part of the
international player to anticipate the influences of both the
foreign and domestic uncontrollable environments on a
business strategies and then to adjust the strategies to
minimise their efforts.
 International Business : Prof Bharat Nadkarni

The root cause of most international business problems is the

“Self Reference Criterion” (SRC) in making decisions, that is,
an unconscious reference to one’s own cultural values,
experiences and knowledge as the basis for decisions. The
SRC is one of the most difficult to break … Lee.
Ex. P & G stormed into Japanese market with American
products, American managers, American sales methods and
promotion strategies. The results were disastrous until the
company learnt how to adapt product and marketing styles to
Japanese culture. Similarly, the American company, Texas
Instruments which started making semi-conductors in Japan
took an American approach to hiring, pay and benefits,
dismissing the Japanese system of offering bonuses two times
a year as impractical. The workers disagreed, morale crumbled
and the company had trouble recruiting employees.
 International Business : Prof Bharat Nadkarni

Later, when company adopted the Japanese methods of

recruiting and reward including bonuses and a promotion
system based on seniority, the situation vastly changed.

Key Environmental factors relevant to International Business

1. Social & Cultural environmental factors

include Demographic factors
2. Technological environmental factors
3. Economic environmental factors
4. Political and Government environmental factors
5. International trading environmental factors
6. Natural environmental factors
 International Business : Prof Bharat Nadkarni

1. Social & Cultural environment

• Religious factors

• Language

• Customs, Traditions & Beliefs

• Tastes & Preferences

• Buying and Consumption habits

 International Business : Prof Bharat Nadkarni

Cultural Universals
Irrespective of the religion, race, region, caste, etc., all of us have more or
less the same needs. These common needs are referred to as ‘Cultural
Universals’ and identified as – cooking, dancing, singing, education,
athletic, sports, bodily adornment, joking, kin groups, status differentiation
and dream interpretation.
The cultural universals enable businessmen to market the products in many
foreign countries with modifications. For example, TVs, cars, video games.
Culture is not a barrier to computer software.
As such, computer software industry of the USA, Europe and Australia has
been attracting most of the Indian computer software engineers. Other
examples include diamonds, gold ornaments, flowers which have worldwide
demand.
Many managers felt that Japanese would not eat ‘black food’, when
Yamazaki-Nabisco thought of introducing Oreo cookies in Japan. But Oreo
cookies became number one cookies in Japan.
Cultural Universals do not mean that two cultures are not very much close
to each other.
Safe rules in International Communication.
“Speak to the rest of the world as
if you were answering a slightly deaf,
very sick old auntie,
who just asked you how much to
leave for you in her will.”
A prolonged eye-to-eye contact is polite in the
USA and rude in Japan, Indian and Sino
cultures.
 International Business : Prof Bharat Nadkarni

Demographic environment

• Size of population, Growth rate

• Age composition

• Family size, Nature of families

• Income levels / Market Segment

• Economic Diversity
 International Business : Prof Bharat Nadkarni

2. Technological environment

• Type of technology in use

• Level of technological development / Industrialisation

• Speed with which new technology is accepted and adopted

• Technology which is appropriate

 International Business : Prof Bharat Nadkarni

3. Economic environment
• Nature and level of development of economy

• Economic resources

• Size of economy

• Economic system/ Banking / Currency

• Trends in GDP/GNP growth rate, per capita income

• Nature and trends of foreign trade

• Domestic demand and supply conditions

(Out of 200 nations, 75% are developing nations having 80% of population. Only 54
nations have high income economies.)
 International Business : Prof Bharat Nadkarni

4. Political & Government environment

• Political parties
• Radical differences
• Fundamentalists
• Govt. system
• Liberal or Conservative policies
 International Business : Prof Bharat Nadkarni

5. International trading environment

• Trade barriers

Tariffs

Non tariff barriers

• Import licensing, quotas, foreign regulations, canalisation,

quantitative restrictions --- normally applied by developing
countries.

• Voluntary export restraint (VER) – which is normally applied

by developed countries (protection for those companies
who have lost international competitiveness)
 International Business : Prof Bharat Nadkarni

6. Natural environmental factors

• Natural Resources

• Absolute advantages

• History: Learning and adaptation

(ex North and South Indians)
Can Negative Perceptions Dampen International Business
Relations?
Japan and China would seem to be natural economic partners,
given that they are geographically so close to each other.
However, Japanese companies currently lag behind both the
US and Europe in terms of trade with China. Although the
Japanese auto industry has had enormous success in other
countries, including US, the top selling foreign cars in China are
produced by GM and Volkswagen and not Toyota or Nissan.
Also, Japan’s booming electronics industry currently captures
only 5 percent of the Chinese market. But who or what is to
blame for the dismal business relationship between Japan and
China? The perceptions of the people – in both countries – may
be the answer. For example, many Chinese citizens are still
angered about a report that employees of a Japanese
construction company hired Chinese call girls for a corporate
party. And many Japanese citizens believe that Chinese
immigrants are to blame for many of the violent crimes taking
place in Japan. In addition to these recent events, historically
relations between the two countries have been strained. Beijing
is still upset about Japan’s military invasion of China in the
1930s and 1940s, for which Japan refuses to make amends.
These negative perceptions may be difficult to reverse if
perceptual errors such as fundamental attribution error and the
halo effect are operating. That is, both countries blame each
other for their behaviours and both countries tend to view each
others actions negative. Because of these errors, future
behaviours, even if they are ambiguous, may be perceived
negatively by the other country.
 Organisational Culture

1.Hofstede's cultural dimensions theory

2.Pankaj Ghemawat’s CAGE Theory

3.Organisational Culture
 Hofstede's cultural dimensions theory
Hofstede's cultural dimensions theory is a framework for cross-
cultural communication, developed by Geert Hofstede. It
describes the effects of a society's culture on the values of its
members, and how these values relate to behaviour, using a
structure derived from factor analysis.
Hofstede developed his original model as a result of using factor
analysis to examine the results of a world-wide survey of
employee values by IBM between 1967 and 1973. It has been
refined since.
The original theory proposed four dimensions along which
cultural values could be analyzed:
1.Individualism-collectivism;
2.Uncertainty avoidance;
3.Power distance (strength of social hierarchy)
4.Masculinity-femininity (task orientation versus person-
orientation).
Independent research in Hong Kong led Hofstede to add a fifth
dimension, long-term orientation, to cover aspects of values not
discussed in the original paradigm. In 2010, Hofstede added a
sixth dimension, indulgence versus self-restraint.

Hofstede's work established a major research tradition in cross-

cultural psychology and has also been drawn upon by
researchers and consultants in many fields relating to
international business and communication. The theory has been
widely used in several fields as a paradigm for research,
particularly in cross-cultural psychology, international
management, and cross-cultural communication. It continues to
be a major resource in cross-cultural fields. It has inspired a
number of other major cross-cultural studies of values, as well
as research on other aspects of culture, such as social beliefs.
Pankaj Ghemawat’s CAGE Theory
The cultural, administrative, geographic, and economic (CAGE)
distance framework helps managers identify and assess the
impact of distance on various industries.

The more two countries differ across these dimensions, the

riskier the target foreign market. By contrast, similarities along
these dimensions suggest great potential. Common currency,
for example, boosts trade more than 300%. Also, types of
distance affect industries differently. Religious differences, for
instance, shape people’s food preferences but not their choices
of cement or other industrial materials.

By analyzing the possible impact of distance—in all its

dimensions—you sweeten the odds of investing in profitable
foreign markets.
The complete article reference is here:
Application of the CAGE framework requires managers to
identify attractive locations based on raw material costs, access
to markets or consumers, or other key decision criteria. For
instance, a firm maybe most interested in markets with high
consumer buying power, so it uses per capita income as the first
sorting cue. This would result in some type of rank­ing. Any
international expansion strategy would still need to be backed
up by the specific re­sources and capabilities possessed by the
firm, regardless of how rosy the CAGE analysis paints the
picture. Think of international expansion as a movement along a
continuum from known markets to less-known markets; a firm
can move to more CAGE-proximate neighbors before venturing
into markets that are portrayed as very different from a CAGE-
framework perspective. Each dimension of CAGE is described
below.
Cultural Distance. Culture happens to be the first facet of
CAGE, in terms of the acronym, but it also can be the most
practically perplexing facet for managers. Culture is sometimes
referred to as the software of the mind, in that it has a
sometimes invisible but indelible in­fluence on people`s values
and behaviors.Cultural distance, then, has to do with the possi­
ble differences existing in relation to the way individuals from
different countries observe certain values and behaviors.
A number of researchers have identified significant cultural
differences among coun­tries. Distinct cultural differences are
observed around the following dimensions: power distance (the
extent to which indi­viduals accept the existence of inequalities
between subordinates and superiors within a hierarchical
structure); uncertainty avoidance (individuals` willingness to
coexist with uncertainty about the future); individualism (how the
individuals in a society value indi­vidualistic behaviors as
opposed to collective ones); predominant values (regarding
quan­tity or quality of life, that is, whether more importance is
given to material aspects or a stronger emphasis is laid on
interpersonal relationships); and long-term or short-term
orientation (the focus on future rewards or the concern about
the maintenance of the sta­bility related to the past and the
present).
Administrative Distance. Administrative distance reflects the
historical and present polit­ical and legal associations between
trading partners; for example, colonial ties between trad­ing
partners, or participation in common trading blocs. This facet of
CAGE asks you to ex­amine whether there are historical or
current political factors that might favor or impede a business
relationship between a company and a new country market.
NAFTA, for instance, decreased the administrative distance
between U.S. firms and Mexico and Canada. Similarly, historical
political hostilities between the United States and Cuba make it
virtu­ally impossible (and illegal) for most U.S. firms to do
business there. Trade practices between countries can be
significantly affected by laws and regulations enacted at the
national or international level. Because they affect fundamental
business practices, they often affect the competitive position of
firms as well.
Geographic Distance. How far apart are trading partners in
physical terms: the size of the country, differences in climates,
and nature of transportation and information networks? You can
think of geographic distance as absolute, in terms of the miles
or kilometers that sep­arate a firm from another market or
supplier. Technology and the Internet, however, has shrunk
distance in terms of transportation time, and now with digital
products and services, almost entirely eliminated geographic
distance as a constraint of trade between some markets.
Economic Distance. Finally, economic distance captures
fundamental differences relating to income, the distribution of
wealth, and the relative purchasing power of segments of a
geographic market. This has been one of the biggest barriers,
for instance, in the way of U.S. firms` success selling products
in emerging markets. In global terms, this is the four billion
people who live on less than $2 per day. The phrase “bottom of
the pyramid” is used in par­ticular by people developing new
models of doing business that deliberately target that mar­ket,
typically using new technology. An example of a product
that is designed with the needs of the very poor in mind is that
of a shampoo that works best with cold water. Such a prod­uct is
marketed by Hindustan Lever (part of the Unilever family of
firms).
 
Managing Organizational Culture

Prof Bharat Nadkarni

Organisational Culture
1. The set of shared values and norms that controls organisational
member’s interactions with each other and with people outside
the organisation.

2. Controls co-ordination and motivation: shapes behaviour of

people and the organisation.

3. Is shaped by people, ethics and organisational structure

4. Evolves as organisation grows and differentiates.

5. Can be managed and changed through the process of

organisational design.
Ten key cultural characteristics
• Individual initiative. The degree of responsibility, freedom, and
independence that individuals have.
• Risk tolerance. The degree to which employees are
encouraged to be aggressive, innovative, and risk-seeking.
• Direction. The degree to which the organization creates clear
objectives and performance expectations.
• Integration. The degree to which units within the organization
are encouraged to operate in a co-ordinated manner.
• Management support. The degree to which managers provide
clear communication, assistance, and support to their
subordinates.
6. Control. The number of rules and regulations, and the amount
of direct supervision that are used to oversee and control
employee behaviour.
7. Identity. The degree to which members identify with the
organization as a whole rather than with their particular work
group or field of professional expertise.
8. Reward system. The degree to which reward allocations (i.e.,
salary increases, promotions) are based on employee
performance criteria in contrast to seniority, favoritism, and so
on.
9. Conflict tolerance. The degree to which employees are
encouraged to air conflicts and criticism openly.
10. Communication patterns. The degree to which organizational
communications are restricted to the formal hierarchy of
authority.
Types of Culture

Needs of Environment – X axis

Strategic focus- Y axis
Flexibility – Stability –X axis
Internal – External – Y axis

1. Adaptability Culture – Flexi – External

2. Mission Culture - Stability – External
3. Clan Culture – Flexi – internal
4. Bureaucratic Culture – Stability - internal
 TYPES OF CULTURES

• CLAN CULTURE(Flexibility, Freedom, Ownership)

• BUREAUCRATIC (Rules, Policies, SOP’s)

• ADAPTABILITY (Entrepreneurial)

• MISSION (Market share, Profits, Competitive)

• Culture and Organizational Effectiveness
Successful organization will achieve a good external fit- its
culture will be shaped to its strategy and environment.
• Culture : A substitute for formalization.
Result of a strong culture is it increases behavioural consistency,
and therefore, they can be a powerful means of implicit control
and can act as a substitute for formalization.
• Create, sustain and transmit culture.
• Keeping culture alive.
a. Selection
b. Top management
c. Socialization
When cultures collide.
• Mergers and Acquisitions
Strong cultures and weak cultures, degree of differences.

There is more to a successful merger or acquisition than a

favourable financial statement or product synergy.

Cultural fit can be best assessed by comparing the two merger

candidates on their key cultural characteristics.

Ten point key cultural characteristics.

Are cultures manageable?
• Farmers to hunters.
From protected environment to dynamic environment.
A dramatic crisis.
Leadership turnover. Since leadership is a major factor in
transmitting culture, a change in the organization’s key
leadership positions facilitates imposition of new values.
Life cycle stage. Cultural change is easier when the organization
is in transition from the formation stage to the growth stage,
and from maturity into decline.
Age of the organization. The younger the organization is, the
less entrenched its values will be.
Size of the organization.
 KURT LEWIN : FIELD FORCE THEORY :
• 1] increase the driving forces : generally seen that
restraining forces also increase simultaneously
thereby returning to the equilibrium state
•  
• 2] decrease the restraining forces : a change is less
resisted when those affected by it participate in the
change

• Involves 3 steps
 KURT LEWIN : FIELD FORCE THEORY
• A] unfreezing : creates motivation for change, if people
feel uncomfortable with the present situation, they may
see the need for change
•  
• B] change : assimilation of new information, exposure to
new concepts, development of a different perspective
•  
• C] freezing : stabilises the change. Change to be effective
has to be congruent with a person’s self concept and
values.
•  
Thank You
 International Business : Prof Bharat Nadkarni
Capitalism, Socialism and Communism Compared
Characteristics Capitalism Socialism Communism

Economic Markets Freedom to Limited competition Absence of

compete with right with state owned competition with
to invest. industries. state owned
markets and
industries.
Individual incentives Profits and wages in Profits recognised. Profits not allowed.
relation to one’s Wages fairly in Workers urged to
ability and relation to efforts. work for the glory of
willingness to work. the state.

Capital Sources Capital invested by Obtained from State provides all

owners who may owners and from the resources to
also borrow on state – issued bonds start business
credit. Capital may for state-owned owned by the state.
be re-invested from industries.
profits.
 International Business : Prof Bharat Nadkarni
Capitalism, Socialism and Communism Compared
Characteristics Capitalism Socialism Communism

Labour Workers are free to Workers allowed to The state

select an employer select occupation. determines one’s
and an occupation. State planning employer and
encourages employment.
employment.

Management Managers are Managers in state- Key managres must

selected on the basis owned industries are be party members.
of ability. Managers answerable to the Absence of freedom
have freedom to state. Non monetary to make decisions.
make decisions. rewards emphasised

Business Ownership Individuals have a State owns the basic State owns all
right to own a industries. Other productive capacity.
business and to businesses may
contract with others. exist.
 International Business : Prof Bharat Nadkarni
Capitalism, Socialism and Communism Compared
Characteristics Capitalism Socialism Communism
Risk Assumption Losses assumed by People assume risks Economic
owners. May of state-owned production owned
transfer business industries. Losses by the state. Risks
risks to other taken from taxes. assumed by the
businesses through state. Losses reduce
insurance. standard of living.
Thank you