CHAPTER TWO

The global business environment and its

implication in foreign procurement

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 Introduction
 Firms have to think beyond their domestic
markets in order to survive and prosper.
 They have to think globally and act locally. The
task of international marketing management is
the same as the task in domestic markets.
 In all markets, customers are the driving force
of marketing and companies need to produce
products efficiently

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Elements of Global Business Environment

1.Marketing Environment
 The marketing environment consists of all factors external to an
organization that can affect the organization’s marketing
activities
 .These factors are largely uncontrollable, although marketers
can influence some of them.
 The marketing environment creates opportunities or threats in
two basic ways.
 First, changes in the marketing environment can directly affect
specific markets. A market is a group of people or organizations
with common needs to satisfy or problems to solve

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 Conts…
The second way the marketing environment
produces opportunities or threats is through direct
influences on specific marketing activities.
Many firms use environmental scanning to identify
important trends and determine if they represent
present or future market opportunities or threats. .
Identifying relevant factors and assessing their
potential impact on the organization’s markets and
marketing activities.

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 2. Social Environment
The social environment includes all factors and trends related to groups of people,
including their number, characteristics, behavior, and growth projections.
Since consumer markets have specific needs and problems, changes in the social
environment can affect markets differently.
two important components of the social environment. the demographic
environment and the cultural environment.
The demographic environment refers to the size, distribution, and growth rate of
groups of people with different characteristics. .
 A global perspective requires that marketers be familiar with important demographic
trends around the world.
 The cultural environment refers to factors and trends related to how people live
and behave.
 Cultural factors, including the values, ideas, attitudes, beliefs, and activities of
specific population subgroups, greatly affect consumers’ purchasing behavior.

marketers must understand important cultural characteristics and trends in different

markets.
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 3. Economic Environment
The economic environment includes factors and trends related
to income levels and the production of goods and services.
Whereas demographic and cultural trends generally affect the
size and needs of various markets, economic trends affect the
purchasing power of these markets.
 Economic trends in different parts of the world can affect
marketing activities in other parts of the world. .
 The gross domestic product (GDP) represents the total size of
a country’s economy measured in the amount of goods and
services produced.
Changes in GDP indicate trends in economic activity.

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 4. Political/Legal Environment
The political/legal environment encompasses
factors and trends related to governmental
activities and specific laws and regulations that
affect marketing practice.
The political/legal environment is closely tied to
the social and economic environments.
Legislation Organizations must deal with laws at
the international, federal, state, and local levels.

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 5 Technological Environment
The technological environment includes factors and
trends related to innovations that affect the
development of new products or the marketing process.
Rapid technological advances make it imperative that
marketers take a technology perspective.
These technological trends can provide opportunities for
new-product development; affect how marketing
activities are performed, or both.
 In general, the level of R&D expenditures and patents
provides an indicator of technological development.

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 6. Competitive Environment
The competitive environment consists of all the
organizations that attempt to serve similar customers
. Two types of competitors are of major concern.
1.Brand competitors: provide the most direct competition,
offering the same types of products as competing firms .
2.Product competitors: offer different types of products to
satisfy the same general need.
 The competitive environment for most firms is fierce and
often global.
 Marketers must identify their relevant brand and product
competitors in order to identify market opportunities and
develop marketing strategies
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 7. Institutional Environment
The institutional environment consists of all the organizations
involved in marketing products and services.
These include marketing research firms, advertising agencies,
wholesalers, retailers, suppliers, and customers.
. Many organizations are changing how they are structured and
managed.
These trends in the institutional environment include
reengineering, restructuring, the virtual corporation, horizontal
organizations, and empowerment.
 An organization’s adoption of any of these concepts means
that it is changing some elements of its structure and processes.

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 8. The Future
The only certainty about the future is that it will be
uncertain and change will occur at an increasing rate.
 Despite this caveat, there are hopeful signs that the world
economy will exhibit strong growth.
The world growth rate for the past three years was nearly
doubles that of the past two decades.
 The expansion of economic freedom and property rights,
more fiscal restraint by governments, increases in
investment, freer trade, and exploding technological
innovation are some of the forces supporting world
economic growth.
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 2.2 Potential Problem Areas in Foreign
Procurement
Even if it is not possible to give a complete explanation of all the
potential problem areas where worldwide purchasers face and
subsequent methods they have to use for minimizing the impact of each,
the major ones are highlighted in this unit. .
Cultural and Social Customs
 it is one of the biggest problems (barriers) to international purchasing
involves the cultural differences that arise when doing business with
other countries.
 Culture is the sum of the understandings that govern human interaction
in a society.
 Good purchasers do not focus only on economic transactions, but also
on the caused by cultural misunderstandings can lead to higher supply
chain costs.

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 Cont……..
 purchasers need to have cross- cultural skills and must adjust top
their suppliers’ customs if they are to be effective in communicating
and negotiating with suppliers. This issue has impact on international
negotiation.
 Various barriers may be present that can affect international
negotiation.
 In order of importance, major obstacles to language, time limitations,
cultural differences, and limited authority of the international
negotiators, which can help overcome these obstacles.
 These characteristics include patience, knowledge of the contract
agreement, and honest and polite attitude, and familiarity with
foreign cultures and customs.

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 Conts…
 In general, the following guidelines should be followed:
1. Even if English is spoken, speak slowly, use more communication
graphics, and avoid the use of metaphor and jargon.
2. Bring an interpreter to all but the most informal meetings. Allow
extra time to educate interpreters on issues.
3. Document in writing the main conclusions and decisions.
4. Learn about the countries history and taboos.
5. Do not use first names unless invited to do so.
6. Get cultural advice from professionals or your won companies, not
from supplier representatives in the United States.
7. Expect negotiations to last longer with some cultures as the supplier
learns to accept you and your company as a customer.

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 Source Location and evaluation
 The key to effective purchasing is, of course,
selecting responsive and responsible suppliers.
This is sometimes difficult to do, because
obtaining relevant evaluation data is both
expensive and time- consuming.
 The problem is intensified when the potential
suppliers are located far away.

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 Logistics and Transportation
• Logistics presents some of the biggest problems for buyers
involved in international sourcing.
• The trend toward integrated logistics on the domestic side
is mirrored by similar move in global purchasing.
• Integrated logistics refers to the coordination of all logistics
functions the selection of modes of transportation and
carriers, inventory Management policies, Customer service
levels and other management policies, Logistics companies
that provide a wider base of services, thereby allowing
firms to coordinate logistic functions, should enable more
cost effective and competitive international sourcing.

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 Legal Problems
• If potential legal problems are a risk in domestic
buying, they are several times greater in
international buying.
• If delivery time is critical, a penalty or
liquidated damages clause tied to late delivery
may be advisable.
• Purchasers should consider carefully the laws
under which an international contract is
governed.
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 Currency Fluctuations
 Countries in different corners of the world
have their own currencies.
 Currency fluctuations are a natural outcome of
floating exchange rates.

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 Conts…

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 Conts…
 Should payment be made in the buyer’s currency or that of
the country in which the purchase is made?
 If payment is to be made in a short period of time, there may
be less of a problem.
 However, if payment is not due for several months or if the
supply relationship lasts for a long time, the exchange rates
could change appreciably making the price substantially
higher or lower than at the time of agreement was signed.
 This means that the buyer when contracting also must make
a forecast of how the exchange rates likely will move
between now and the time of payment.

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 Expending

• Because of distance, expending an offshore

firm’s production shipment is more difficult.
This places premium on knowing a supplier’s
personnel and ensuring that they are
responsive.

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 Tariffs and Duties
• A tariff or duty (the words are used interchangeably) is a tax levied by
governments on the value including freight and insurance of imported
products. Different tariffs applied on different products by different
countries.
• Even though theoretically the world is running to tariffs through various
world Trade organizations (WTO) agreements, they still exist.
• Argentina, Brazil, Paraguay, Uruguay, and Bolivia Created a custom
association called Mercosur.
• Examples of WTO agreements are NAFTA and Mercosur.
• The North American Free Trade Agreement (NAFTA) is established by U.S
Canada and Mexico.
• The end result of NAFTA will be the elimination and reducation of tariffs
and no tariffs barriers among the 3 member counties

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 Paperwork Costs
• Paperwork costs organizations hundreds of thousands
of dollars each year.
• Worldwide sourcing requires additional documentation
such as reshipment, inspection certificates. Export
Declaration, Inspection Report and clean Report and
clean report of findings), Bill of exchange, shipment
instruction, Delivery .Note/ Collection, Letter of credit,
import License are few to mention among several them.
• These documents are mainly used for duty and customs,
logistics activities, payment and financing transaction.

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Management of Foreign Procurement Risks

• International sourcing has ample potential for

organizations, but some of these benefits can also
translate into downfalls and risks.
• The risks associated with international sourcing
versus local sourcing are often the reason why many
organizations do not branch out from local suppliers.
• So what are the common risks, and how can we
minimize these and optimize the benefits of
international sourcing for organizations?

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 Conts…
• Price/Cost Risks: The varying and competitive
price of goods and services purchased
internationally is one of the key advantages,
but it can also translate into a risk factor.
There are several issues that contribute to the
overall cost and price risk:

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 Conts…
• International exchange rates; these often fluctuate
and what was once a lower cost could soon rise.
• Higher shipping costs and cost of delays/ loss in
transit; depending on the customs, taxes, security
measures and sheer distance these costs can soon make
a low cost transaction into a much higher one.
• High transaction costs; complexity of
documentation, time zone differences, contract
management, staff training, etc. can all contribute to
rising costs of international sourcing.
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 CONTS…
• Minimizing these risks involves spending time
and money thoroughly researching not only
the suppliers but the country they reside in
and the associated costs with doing business
in this or that country.
• The risks can be best minimized by making a
detailed comparison of the price/cost risks of
suppliers in different countries.

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 Conts…
• Quality Risk: As different countries will have
their own quality standards and legislation,
this can cause issues with purchasing goods
and services internationally.
• There are a number of factors from which
quality risks can arise:

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 Conts…
• Difficulty obtaining pre-qualification information from supplier; due to
the distance and difference in regimes, it can prove difficult obtaining this
vital information.
• Difficulty monitoring suppliers’ quality management systems; distance
again causes issues with monitoring and sampling outputs.
• Difficulty ‘drilling down’ through suppliers’ own supply chains; different
countries may often have lapse or complete lack of communication
infrastructure and supply chain documentation.
• Perceived emphasis on price competition; this can lead to international
suppliers cutting corners on quality in order to keep prices low.
• Differences in regulation of consumer protection; this can impact quality
control areas such as labelling.
• Differences in quality standards; this can include work conditions,
technology infrastructure, perceptions of quality and quality standards.

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 CONTS…
• The keys to minimizing the quality risks
involved with international sourcing lie in
rigorous supplier pre-qualification and
monitoring, specification of quality
requirements, contract incentives/penalties
for quality performance and the employment
of third party local consultants to appraise
supplier quality performance.

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 Conts…
• Supply Risks: Time, quantity and place are three
main factors that define supply risks.
• The right quantity is defined by how often it is used
and how soon it is needed, the right time then must
take into account how long it will take for the
supplier to produce/obtain and provide the items
needed, which is then impacted by the place where
the items need to be sent to, taking into account
handling times, etc.
• Supply risk factors include:
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 Conts…
• Potential disruptions to supply; internationally this can be caused
by war, political instability, civil unrest, war, terrorism, changes to
trade policy or even natural disaster.
• Transport risks; this can include loss, deterioration, damage or
theft in transit, or weather/natural disasters disrupting transport.
• Increased lead times; due to the distance the goods must travel, the
lead time compared with local supply can be significantly increased.
• Misunderstanding of requirements; due to language difference
and misinterpretation, the supplier can misunderstand the quantity,
place or time factors or contract negotiations.
• Communication delays; due to time zone differences and the need
for interpretation, communication can often be delayed

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 Conts…
• Minimization of these supply risks comes down to:
• Proactive demand forecasting; taking into account extended lead times and risks
associated with international sourcing.
• Proactive transport planning; taking into account customs/security issues and
timescales for delivery.
• Rigorous identification of risk, and regular monitoring and assessment to ensure
plans are always in place to minimize risks.
• Contingency planning; ensuring plans are always in place for the unlikely but
potential risk events, such as having alternative local suppliers that can be used in the
event of issues occurring.
• Purchase of appropriate insurance; this should cover likely and/or high impact
contingencies.
• Collaboration with suppliers to minimize identified risks.
• Use of local consultants or agents for interpretation services when negotiating
contracts.

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 Conts…
• Negotiation and Relationship Risks: Cross cultural
communications can lead to misunderstandings, and it can be
difficult to build strong supplier relationships.
• The main risk factors with negotiating overseas are:
• Language differences; the need for interpretation during
negotiations on contracts and agreements. 
• Differences in values, tastes and culture; there is often differences
in the way businesses are run and the core values, communication
styles, etc
• In order to overcome these issues, it is vital to have a third party or
member of the team on board who understands the country your
chosen supplier operates in.

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 Conts…
• Compliance, Legal and Reputational Risks:
Different countries operate different standards
and regulations within their supply chains,
which can have an impact on your
organization’s reputation down the line.
• The key risk factors of this include:

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 Conts…
• Differences in legal frameworks; contract law, health and safety,
employment law, environmental protection, etc.
• all differ from country to country. For example, if poor labor
standards or adverse environment impacts are found to be linked to
your supply chain, this could have a negative effect on your
organization’s reputation.
• Issues around ‘applicable law’; in the event of disputes within
international contracts, there are issues in determining which country’s
law are applicable in relation to the dispute. 
• Differences in ethical standards; there are high costs associated with
managing ethical standards in countries where they differ from our
own, as well as the reputational impact should there be poor ethical
standards exposed within the organization’s supply chain

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 Conts….
• Minimizing these risks requires setting
common policy guidelines at the contract
negotiation stage, as well as putting strategic
level sourcing professionals in place to ensure
these policy guidelines are followed.
• The guidelines should be mutually agreeable,
but above all they should protect your
organization’s reputation.

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