Factors Influencing

International Business and Risk

Analysis
 Risk Analysis
• Before entering any new country , most MNCs do a risk analysis of the
concerned country.
• The risk analysis are on the main risks which the company can face in the
new country. The risks are
• Political
• Economic
• Socio cultural
• Financial
• Legal
• Technological
• Competitive
• Infrastructural
• Labour
 1) Economic environment :
• Before entering any country, the economic study is of vital importance

• A) Size of the market :

most companies are looking at India because of the
huge potential.
• A case in point is HP which is now focusing on India to sell their range of
laptops and printers in India.
• India’s middle class and upper class population is more then the
population of Europe.

• B) Gross Domestic Product (GDP) :

If a constant good rate is maintained , MNCs would definitely
look at such countries.
• India is maintaining around 7-8% growth rate. In the 1990’s it was
Malaysia and Indonesia.
 1) Economic environment :

• C) Purchasing Power: Higher PP leads to a highly potential

market.
• D) Banking : is
the only channel through which remittances take place and
hence is a major infrastructure for IB.
• Europe and American and the Far east economies have a
highly effective banking system.
• On the other hand, Africa and CIS are not able to provide
good banking services to the International business
community.
 1) Economic environment :

• E) Foreign exchange :
countries with sufficient foreign
exchange reserves, a liberal policy on
repatriation and which have demand for the
products and services are an ideal destination
for any company to do IB
 1) Economic environment :

• F) Income levels:
Economies are classified into low and high income
economies.
• Industrialised nations are high income economies and enjoy a
high per capita income.
• Companies marketing premium quality or high technology
products have an easy entry into such advanced economies
with the proper strategy e.g IPOD and Playstations.
• Similarly developing countries which are low income
economies are price sensitive.
• Accordingly foreign companies will think of cheaper or
middle level products for these economies.
 2) Social Environment:

• 1) national taste: In
Thailand , people prefer black shampoo.
• Nestle brews different varieties of instant coffee as people in different
countries have different taste.
• Green is a favourite colour in Middle east countries.
• 2) Language
• 3) demographic profile:
A number of demographic factors such as age, sex ratio, family
size and occupation influence the business of many companies.
• Different companies concentrate on different segments. e.g Barbie
generates huge revenues through the children’s segment of affluent
countries. Also brands like Osh Kosh B’Gosh and Jini and Joni can do well
in India considering the huge children population.
 2) Social Environment:

• 4) Literacy rate: Countries

with a high literacy rate experience a better standard of
living .
• Here the need is for standardised goods, supported by
technical services.
• For a country with an educated population , the amount of
training required for the staff will be far less than in the case
of a country which has a low literacy rate.
• This is an important parameter as it influences the costs
incurred.
 2) Social Environment:

• 5) Female workforce:
With economic independency in countries like China, India ,
women no longer depend on men to make decisions about what to buy.
• As they have the required purchasing ability, they make decisions on
their own.
• In India , china , Thailand and Russia, there is a huge demand for
categories like Jewellery, Cosmetics, vehicles, ready to eat foods, primarily
because of the working women.
• 6) Double Income families (from to nuclear families):_ As the household
income increase the demand for the number of products, increases
proportionately.
 Political Environment :

• Host country political environment :

The political parities in each country have different
ideologies.
• It is imperative to know these ideologies before entering any
country.
• Both Coke and IBM had to leave India , when in 1977 , Janata
party came to power in India.

• Global Political environment :

formation of strategic alliances like EU helps companies in
that region to enter any country in that alliance as it benefits
them more than companies form non EU.
 Legal Environment :
• This relates to the laws and
regulations governing the conduct of business
activities in a country .
• Before entering any country , firms avail of the
services of local legal firms to understand
business interpretations pertaining to labour
legislation, taxes, environment, pollution etc.
 Infrastructural Environment
• : This relates to power
scenario, roads, railways , airports , the
connectivity across the country,
communication facilities.
• This a major area of concern for India .
• Some foreign companies have still not come
to India for this reason.
 Labour Environment
• This relates to number of white and blue
collar workers, their attitude towards work,
their militant behaviour (if present it has a
negative impact), their skill sets in various
fields etc.
• Foreign companies enter West Bengal and
Kerala with high degree of caution because of
militant labour.
 Porter’s 5 Forces- Determining Segment
Structural Attractiveness

Potential Entrants

Suppliers
Buyers
(Supplier Power) Industry (Buyer Power)
Competitors
Substitutes
(Threat of
substitutes)
 Threat of Entry
• Barriers To Entry :

• )Economies of scale

• )Product Differentiation of existing firms

• )Huge capital requirements

• )Switching costs

• )Access to distribution channels

• )Govt. Policy
 Bargaining Power of Buyers
• Buyers compete with the industry by forcing down prices , bargaining
for higher quality or more services and playing competition against
each other

• Buyer group is powerful under the following conditions

• )It is concentrated or purchases large volumes relative to
seller sales
• )The product it purchases from the industry represent a
significant fraction of the buyer’s costs
• )The product it purchases from the industry are standard or
undifferentiated: Buyers, sure that they can find alternate
suppliers , may play one company against other to extract
maximum mileage.
Bargaining Power of Buyers
• )Faces few switching costs: switching costs, lock the
buyer to particular sellers. Lower the cost better for
buyer to bargain
• )Buyers pose a credible threat of backward
integration---- if buyers are partially integrated or pose
a credible threat of backward integration, they are in a
position to demand bargaining concessions.
• )The industry’s product is unimportant to the quality of
the buyer’s product
• The buyer has full information
 Bargaining power of suppliers

• A supplier group is powerful if the following apply

• )The supplier’s product is an important input to the buyer’s

business
• )The supplier’s products are differentiated or it has built in
switching costs
• )Supplier poses a serious threat of forward integration
• )The industry is not an important customer of the supplier
group.:== When a supplier sells to a number of industries and
a particular industry doesn't represent a significant fraction of
sales , suppliers are much more prone to exert power.
 Three Generic Strategies
Strategic Advantage
Uniqueness perceived Low cost position
by customer

Industry Overall cost

Differentiation
wide leadership

Focus Focus
Particular Differentiation cost
segment
• To cope with the 5 competitive forces--- there
are 3 generic strategies

 1. Overall cost leadership

 2. Differentiation
 3. Focus
Overall Cost Leadership

 Requires construction of efficient – scale facilities

 Cost minimization in areas like R&D, ADVERTISING,
SERVICE, SALES FORCE ETC.
• How does low cost help fight the 5 forces

• )gives the firm a defense against rivalry from competitors ,

because its lower costs gives the company certain returns.
• )Defends against powerful buyers because buyers can exert power
only to drive down prices to the level of next most efficient
competitor.
• )Defends against powerful suppliers by providing more flexibility
to cope with input cost increases.
• )Defends against new entrants --- entry barriers in terms of scale
or cost advantages.
• To achieve cost leadership --- upfront capital investment in
state-of-the –art equipment/plant is required.
• e.g --- Texas instruments, DU PONT, Black & Decker, Bic,
Kodak etc.

• Timex has specialised in manufacturing simple low cost

watches for the mass market.
• Differentiation ---- creating something that is perceived industrywide
as unique.
• Differentiation can take many forms ----
 Design / brand image--- Mercedes
 Technology--- Bose -- speakers and sound system
 Service--- Maruti
 Dealer Network – caterpilar, Videocon
 Quality-- Maytag
 Rolex watches are handmade of gold and stainless steel and
are subjected to strenuous tests of quality and reliability
 Nikon , HP, Cross
• How does differentiation help fight the 5 forces

 Provides insulation against competitive rivalry because of

brand loyalty and resulting lower sensitivity to price
 Customer loyalty and need for the competitor to overcome
uniqueness provides entry barrier –for new entrants
 Yields higher margins with which to deal with supplier power
 Mitigates buyer power , since buyers lack comparable
alternatives and are therefore less price sensitive.
• Focus---
• Focusing on a particular buyer group , segment of the product
line,, or geographic market

• The strategy rests on the premise that the firm is able to

serve the narrow strategic target very well, more effectively
and efficiently then competitors who are competing more
broadly.
• Focus Differentiation --- Longines makes high jeweled
watches to wealthy female consumers
• Focus Cost – Fiat sells its automobiles only in Italy and
selected regions of Europe
• Focus differentiation- Alpha Romeo sells high –performance
cars in the same market (as above)
 Risks of Generic Strategies

• Overall Cost Leadership:

 Technological change that nullifies past investments or

learning--- e.g – cassettes- CD- VCD-DVD
 Low cost learning by industry newcomers through
imitation or through their ability to invest in state-of –
the art facilities
 Inability to see required product or marketing change
because of attention placed on cost.
• e.g--- Ford Motor company—1920s --- achieved unchallenged
cost leadership through limitation of models and varieties
(only black colour) , backward integration and highly
automated facilities
• As incomes rose, Americans wanted more style, colours, ---
GM (Sloan) gave them what they required.

• Ford faced enormous costs of strategic readjustment given

the rigidities created by heavy investments in cost
minimization of an obsolete model.
• Risks of Differentiation

 Cost differential between low-cost competitors and the

differentiated firm becomes too great for
differentiation to hold brand loyalty. Buyers thus
sacrifice some of the features, services or image
possessed by the differentiated firm for large cost
savings.
 Imitation narrows perceived differentiation, a common
occurrence as industries mature.
• Risks of Focus

 The cost differential between broad range competitors and the

focused firm widens to eliminate the cost advantages of serving a
narrow target or to offset the differentiation achieved by focus.
 Differences in desired products or services between the strategic
target and the market as a whole narrows.
 Competitors find submarkets within strategic target and outfocus
the focuser.