Global Environment Analysis Chapter 2 Environment Analysis

Global Environment Analysis Chapter 2

Environment Analysis Change in global business scenario is the most constant thing. It continually alters opportunities and threats situation in international business. So global players like international investors, MNCs and others keep on evaluating prevailing environment regularly. Principal dimension of environment that affect business are 1. Political & Legal environment – concerned with politicolegal regulatory factors. 2. Economic environment – related to demand-supply pattern of markets. 3. Socio-cultural environment -- People and their behaviour & 2/9/2018 Presentation by Prof. H. Ganguly 2 4. Technological environment -- Level and state of technology.

I. Political & Legal Environment All nations wish to enhance their national sovereignty ; generally foreign firms are viewed as threat to it, so nations frame politics and laws in a way to keep outsiders and foreign business always under control. So a company intending to undertake international business should carefully * study government structure in targeted country * analyse salient issues of political environment including risk * avoid sitting in judgment on their acts and structure. 2/9/2018 Presentation by Prof. H. Ganguly 3

Dimensions of Political Environment A. Host country environment B. Home country environment & C. International political environment 2/9/2018 A. Host Country Environment Host country govts. use various control tools like * Entry and Operational restrictions -- Restrictions in the form of ownership (100% equity or JV), nature of industry, products permitted to foreign players etc. * Price controls * Quotas and tariff - Tariff or non-tariff barriers * Exchange control – Release of foreign exchange * Expropriation – Confiscating full equity of foreign firms Presentation by Prof. H. Ganguly 4

B. Home Country Environment * Attitude of home-country govt. towards foreign trade in general, Foreign Trade Policy etc. * Special restriction on trade with countries – embargo. e. g. Pepsico had to come out of Mynamar because of home country political pressure though it enjoyed 85% market share. C. International Political Environment * International firms invariably get involved when their home country suffers political storms e. g. Coca-Cola and Pepsi delivery trucks had to face mob fury at India in 1998 when U. S. imposed sanction on India because of nuclear tests. * Foreign companies belonging to WTO or trade blocs abide by decisions to trade or not. 2/9/2018 Presentation by Prof. H. Ganguly 5

Dimensions of Legal Environment In addition to political environment, a firm in international business has to abide by Legal environment of Home Country : * Export related rules and regulations * Exchange control * Political relationship with host country * Any special clearance(s) that may be required Host Country : * All rules and regulations regarding imports, marketing , taxation, patents, trademark conventions, regional grouping etc. International Laws & Conventions * Firm should be conversant with international laws and conventions regarding marketing of products, packaging, pricing, 2/9/2018 Presentation by jurisdiction, adjudication etc. 6 selling, advertising, taxation, Prof. H. Ganguly

Political Risks Before doing any business abroad, the company looks at political conditions prevailing at target markets to decide whether it is worth taking the political risk. Political risk represents the impact of change in govt. policies in a nation upon company’s ability to operate effectively and profitably. Lower the political risk in target country, more is the likelihood of entering into the country with investment. Generally it is seen that political risk in a nation is inversely proportional to its economic development, per capita income etc. The proportion of political risk is considered to be high in Russia and CIS nations, recently. H. Ganguly released from communism. 7 2/9/2018 Presentation by Prof.

Companies either avoid investing in a country with high political risk or undertake steps to minimise their impact by : * behaving as good corporate citizens in furthering social goals like child education and health * forming Joint-ventures in high-technology or highcapital industries. * licensing technology or brand for a fee. * carrying out political bargaining like imposition of export quota. 2/9/2018 * providing pay-offs (extreme form of which is bribing politicians and bureaucrats). Presentation by Prof. H. Ganguly 8

Salient Aspects of International Law -- There are four major types of legal system practiced globally 1. Common Law -- derived from English law practiced in England, U. S. , Canada and other countries having English influence like India. 2. Civil or Code Law -- derived from Roman law found in Germany, Japan, France and few other nations. 3. Islamic law -- derived from Koran and found in Pakistan, Iran, Saudi Arabia and other Islamic nations 4. Marxist-Socialist system -- followed in former Soviet Union & Eastern Europe, China, Cuba etc. 2/9/2018 Presentation by Prof. H. Ganguly 9

5. Jurisdiction in International Legal Disputes * International disputes between sovereign nations (rather than between private citizens and/or companies ) are sorted out at World Court at The Hague or International Court of Justice at UN. * Disputes between Govt. and company or companies in two different nations are settled in court of one of the nations or through arbitration. * Jurisdiction for resolution of disputes between companies of two different nations or Govt. and company of another country is determined by a) ‘Jurisdiction’ clause in contract , b) where contract was signed or c) contract was performed. 2/9/2018 Presentation by Prof. H. Ganguly 10

6. Resolution of International Disputes In cases of international disputes first approach to resolve is made informally between parties. If that action fails, marketers resort to : * Conciliation – A third party is asked to mediate differences between two parties, hear both parties and confer with them in confidential manner to redress the dispute. It is a non-binding form of dispute settlement. It is also called mediation. -- This process works quite satisfactorily in case of disputes with Chinese companies. 2/9/2018 Presentation by Prof. H. Ganguly 11

* Arbitration -- If conciliation fails or have not been carried out , arbitration i. e. the involved parties select a disinterested and informed person (or persons) as referee to determine merit of the case and make a judgment that both parties agree to honour. -- In most countries, decisions arrived at through formal arbitration is enforceable by law. -- There are numerous groups of domestic and international arbitrators who undertake the job for a fee. -- So it is prudent to put the ‘arbitration’ clause at the time of drawing the contract through clauses like “ Any controversy or claim arising out of or relating to this contract shall be determined by arbitration in accordance with International Chamber of Commerce, Paris”. 2/9/2018 Presentation by Prof. H. Ganguly 12

• Litigation -- In case of failure of arbitration, as last resort companies go into lawsuites. -- Lawsuites between companies take inordinately long time, such that even a win may not mean much to rejoice. -- In addition it creates bad image of both parties. -- Quite often expenditure in legal cases outweigh the benefits. -- Unlike arbitration and conciliation, litigation procedures are not confidential. 2/9/2018 Presentation by Prof. H. Ganguly 13

Major International Legal Conflicts A. Protection of Intellectual Property Rights -- Companies spend fortunes in establishing their corporate or brand names, trade marks etc. -- But due to lax ‘Intellectual Property Right Acts’ in many nations, the products are counterfeited particularly in industries like apparel, automotive parts, chemicals, pharmaceuticals, films, computer software, music album etc, -- Companies take recourse to stipulations of “Trade Related Intellectual Property Rights” [TRIP] Agreement of WTO. -- Rate of these piracy are highest in Vietnam, China etc. (90%) and lowest in US, New Zealand etc. (22%). 2/9/2018 Presentation by Prof. H. Ganguly 14

B. Infringement of Marketing and Commercial Laws -- All nations have specific commercial laws and pertaining to marketing transactions like labeling, promotion, distribution etc. For example, Sweden, Greece, Norway, Denmark, Austria and Netherlands restrict advertising directed at children -- In Austria, premium offers, free gifts, coupons or cash discount are not permissible. -- In France, ‘Sale’ is permitted only twice in a year in January and August for not exceeding six weeks. -- In Germany, comparison in advertisements is permitted only when there exists distinct proof of superiority over competitor. 2/9/2018 Presentation by Prof. H. Ganguly 15

C. Green Marketing Legislation Green Marketing laws focus upon environmentally friendly products and packaging so that solid waste management can be made efficiently. New packaging laws in many developed nations require that crates, drums, pallets and styrofoam containers are accepted back by manufacturers and distributors for recycling. D. Antitrust Laws In U. S. , European Union, Japan and many other developed nations, laws exist to restrict Antimonopoly, price discrimination, supply restrictions and full line forcing. In cases of M & A of companies, care is taken to ensure that market-share after acquisition does not exceed 60%. 2/9/2018 Presentation by Prof. H. Ganguly 16

E. Cyberlaws There exist no boundary, political or national for internet. So existing laws do not cover issues like gambling, taxes on cross -border transaction, protection of domain names etc. European Union, U. S. and many other countries are drawing up laws (called cyberlaws ) to protect sanctity of nations. For example, cybersquatters (CSQs) buy and register numerous prospective words as web names which they do not use, only hold to sell at substantial premium later. Another dicey issue in e-commerce is jurisdiction and collection of transaction related taxes in cross-border sales and marketing. 2/9/2018 Presentation by Prof. H. Ganguly 17

II. Economic Environment -- Economic factors of a nation influence global marketing approach, perhaps, the most. Without money, marketing comes to a nought. -- Study of Economic environment comprise of : A. Trend of World Economy B. Economic Systems C. Stages of Market Development D. Stages of Economic Development E. Balance of Payment F. Income & Purchasing Power Parity G. Economic Co-operation H. Population , Distribution & Growth Rate I. Infrastructure J. Other Economic Presentation by Prof. H. Ganguly Factors. 2/9/2018 18

A. Trend of World Economy World economy is changing fast in new millennium, being driven by : * Movement of capital rather than trade * Fast growth of trade and commerce via internet is reducing roles of national boundaries * World economy is gradually overcoming importance of national economies * Production is getting uncoupled from employment 2/9/2018 Presentation by Prof. H. Ganguly 19

B. Economic Systems Based on resource allocation and market trends, economy of nations are generally classified into: * Capitalist system -- when entities of market i. e. people and companies decide what shall be produced and consumed by whom ; role of state remain restricted to promote competition and ensure customer protection. U. S. , most of west European nations, Japan etc. represent this type of system * Socialist system -- when people and companies are free to spend their money on what is available but what shall be produced and made available is decided by state planners as is the case in China, former U. S. S. R. , Cuba etc. 2/9/2018 Presentation by Prof. H. Ganguly 20

* Mixed system – a combination of two systems which practically most of the national markets actually are. National economic systems are classified as free, unfree or repressed based on following parameters : Trade Policy Taxation Policy Govt. consumption of economic output Monetary Policy Capital flows and foreign investments Banking Policy Wage and Price controls Property Rights Prevailing Rules and regulations & Black Market. 2/9/2018 Presentation by Prof. H. Ganguly 21

C. Stages of Market development Using GNP as base, global markets are classified into four categories : 1. Low – Income Countries Nations with per capita GNP of less than $786 are called low income countries. These countries constitute 37% of world population but only 3% of world GNP. These countries represent limited market. 2. Lower Middle Income Countries [also called Less-developed countries (LDCs)] These are nations with per capita GNP between $786 to $3125. These nations constitute 39% of world population with only 11% of GNP. These are at early stages of industrialisation. 2/9/2018 Presentation by Prof. H. Ganguly 22

3. Upper Middle Income Countries [also known as industrialising countries] Per capita GNP of these nations are between $3126 to $9655. These nations comprise of 7% world population and GNP. Level of urbanisation is high and population engaged in agriculture is very less. Generally these nations are accounting for rapid export-driven economic growth. 4. High Income countries [also known as advanced, industrialised, or First World countries] These nations have per capita GNP above $ 9655. These nations have 16% of world population but 80 % of world GNP. More than 50% of these nations’ GNP comes from services. 2/9/2018 Presentation by Prof. H. Ganguly 23

D. Stage of Economic Development -- Economic development of a nation indicates the increase in national production that leads to increase in average per capita Gross Domestic Product (GDP)** -- Walt Rostow in 1971 indicated that economic development of a nation is function of cost of labour, technical capability of buyers, scale of operation, interest rate and level of product sophistication. ---------------------------------------**Gross Domestic Product (GDP) is the measure of market value of all goods and services produced within boundaries of a nation, regardless of asset ownership. Whereas, Gross National Product (GNP) indicates sum of GDP with receipt from nation’s business operation abroad as well as share of reinvested earningsby Prof. H. Ganguly affiliates of domestic cos. in foreign 2/9/2018 Presentation 24

-- Walt Rostow’s stages of economic development are Stage 1 : The traditional society -- Countries in this stage lack capability of increasing productivity, lacks methods of modern science and technology. Stage 2 : The preconditions for take-off -- Those nations who are in process of transition to take-off where technology, infrastructure etc. are getting infused. Stage 3 : The take-off -- Next nations take to growth as normal condition. Physical and business infrastructure also starts growing in step. Stage 4: The drive to maturity -- Sustained progress and economy of scale is achieved with modern technology. Stage 5 : The age of high mass consumption -- Per capita real 2/9/2018 Presentation mass consumption of durable goods. 25 income rises with by Prof. H. Ganguly

E. Balance of Payments -- Balance of payment of a nation is an important cause and effect of activities of the nation abroad. -- Increased economic activities due to accumulation of BOP helps in global marketing of nations. F. Income and Purchasing Power Parity (PPP) -- For most of products’ successful marketing in different nations, it is essential that customers’ income is sufficient. 2/9/2018 -- Per capita GNP (in US dollars) is generally used for comparing incomes i. e. purchasing power of customers in various nations. -- But it may not yield right picture as it uses exchange rate of local currency with US dollar to compute the same. -- Therefore, per capita GNP of nations should be adjusted Presentation by Prof. 26 for Purchasing Power Parity. H. Ganguly (PPP).

G. Economic Co-operation -- Since World War II, interest among nations is on the rise to integrate for securing greater economic results. -- Economic integration or co-operation between nations may be classified as per their degrees viz. 2/9/2018 i) Free Trade Area -- the group of nations who have agreed to abolish all internal trade barriers among themselves is known as Free Trade Area. For example, European Economic Area [EEA] comprising of European Union with Norway, Iceland Liechtenstein; North American Free Trade Area [NAFTA] comprising of US, Canada and Mexico; Association of South East Asian Nations [ ASEAN] comprising of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Presentation by Prof. H. Ganguly 27 Singapore, Thailand Vietnam.

ii) Customs Union -- The group of nations who have agreed to eliminate internal trade barriers and in addition establish common external tariff to non-member countries are Customs Union e. g. France & Monaco; Italy & San Marino; Switzerland & Liechtenstein etc. EU was a Custom Union before becoming Common Market. iii) Common Market -- When a group of nations eliminate all internal trade barrier, adopt a set of common external tariff in addition remove all restrictions on free flow of capital and labour among member nations, it is called Common Market. For example, Central America Common Market [CACM]; Southern Cone Common Market [Mercosur]; Andean Common Market etc. all in South America. 2/9/2018 Presentation by Prof. H. Ganguly 28

iv) Political Union -- It involves complete political and economic integration of nations. It is the most fully integrated form of regional cooperation formed voluntarily or enforced, e. g. Germany out of East & West Germany, India & Sikkim ; Council for Mutual Economic Assistance [COMECON], an enforced political union by erstwhile Soviet Union before its dissolution. COMECON has been disbanded now. ------------------------------------------------------------ Commonwealth of Nations – It is not a trade bloc or Economic integration. At best it may be described as a loose relationship of Britain and its erstwhile colonies. 2/9/2018 Presentation by Prof. H. Ganguly 29

H. Population – its Distribution and Growth People have inhabited the earth for over 2. 5 million years. During Christ’s time, the population was much small about 300 million (approx. one – fourth of India’s present population) Every individual of population is a potential customer ; so it is essential to learn their growth, distribution and other characteristics for efficient marketing internationally. For low-priced products, population and its distribution is more important variable than income. In 2000, top 10 populous nations had 59% of world population. And their total GNP was 52% of world GNP. Present population of world is about 7. 2 billion and is projected to rise to 8. 5 billion by 2020. Presentation by Prof. H. Ganguly 2/9/2018 30

Population Trends : International marketer shall take heed of changing trend of population globally. 1. Industrialised nations’ population is rapidly aging and is in process of decline. 2. Population is growing at fast rate in developing and less developed nations. 3. As result of above, composition of product and service mix is undergoing significant changes. 4. In India population between 0 -19; 20 -54; and greater than 55 years are likely to change from 45%, 44. 9% and 10. 1% in 2001 to 36%, 51% and 13% in 2016. 5. United Nations has estimated that world over people between 65 to 84 years age shall grow from 400 million at present to 1. 3 billion in 2050 ( more. Prof. H. Ganguly 2/9/2018 Presentation by than 200% rise). 31

I. Infrastructure -- Presence of suitable infrastructure in international markets facilitate international marketing operations. -- Infrastructure are facilities that serve and support activities of a number industries and businesses e. g. , power supply, roads, banks, transport companies etc. -- Quality of a nation’s infrastructure pave its way for economic development through trade, commerce and industry. -- Infrastructures may be classified into : * Physical Infrastructure - like roads, railways, seaports, telecom networks, hospitals, Power generation systems, etc. * Business Infrastructure - like banks, insurance companies, stock exchanges, advertising agencies, market 2/9/2018 Presentation consultants 32 research firms, advisers andby Prof. H. Ganguly etc.

J. Other Economic Factors -- Global marketers study how economic policies are working in target countries through factors like * Inflation Rate * Exchange Rate * Nature and trend of Foreign Investments * Role of Govt. in trade and commerce * Influence of Trade unions etc. -- In an integrated manner these factors and their comparison with other nations indicate the state of economic growth of the country. 2/9/2018 Presentation by Prof. H. Ganguly 33

III. Socio-Cultural Environment -- Politico-legal and economic factors of environment may indicate ability of customers in target nation to buy. -- But actual act of buying is dependent upon Social and cultural environment factors. -- So to understand consumer behaviour in target country, global marketer should study host country culture. Culture is integrated sum of learned behavioural traits shared by members of a society. In simple terms, Culture is the behaviour pattern of people of a country which they have learned from members of society. 2/9/2018 Presentation by Prof. H. Ganguly 34

Fundamentals of Culture 1. Culture is learned not inborn. 2. It depends upon environment not heredity. 3. It is approved and shared behaviour of the group of people called Society. Major Elements of Culture A. Material Culture and Technology -- These are related to the way, a society organises its economic activities of generating wealth. -- The way members of society work and how effectively they work is determined by technology and material culture. -- Material culture of societies using different technologies are different; e. g. culture of societies using Bicycles and automobiles as mode of transport are obviously different. 2/9/2018 Presentation by Prof. H. Ganguly 35

-- A MNC before initiating manufacturing or marketing in target countries identify their material culture for suitability, i. e. they probe for availability of requisite raw material, mode of promotion, logistics etc. B. Language -- Language is mirror of culture. It reflects the nature and value system of the culture. -- Hindi as spoken by Amitabh Bachchan, Amir Khan (‘Thanda Matlab Coca-Cola’), Laloo Yadav, Mulayam Singh Yadav depict their culture (i. e. pattern of their behaviour). 2/9/2018 “BIMARU” states divorced English for obvious reasons; today that is one of their major cause of backwardness in industry and business; because Hindi has rich legacy of literature but industry and business profile is in English in India. Presentation by Prof. H. Ganguly 36

-- In Congo (Zaire), they have four important tribal languages for communication among themselves, but they have retained French the language of their erstwhile rulers as ‘National Language’ and they are prospering fast. . -- Knowledge and fluent use of English is a major competitive strength of India and Indians in international trade and commerce. -- Americans not only retained the language of their rulers, but in two centuries adapted the language in a way that world today knows it as “American English”. -- Indications are that by Twenty-second century world culture shall adopt Chinese and ‘Hinglish’ languages as it has adopted English, French, German or ‘American English’ now. 2/9/2018 Presentation by Prof. H. Ganguly 37

C. Aesthetics -- It refers to ideas and principles that express beauty, good taste depicted in arts, music, drama, dance, literatures, architecture, colour selection etc. -- Aesthetic aspect of Culture have immense application in international marketing and business in fields of * Product or any creative designing * Selection of Brand corporate names * Selection of colours * Choosing right words for expressing ideas etc. D. Education -- It is the process of transmitting skills, ideas, attitudes, culture and traditions beside training in different disciplines. -- Nature of education in nations help in harnessing managerial 2/9/2018 Presentation by Prof. H. Ganguly 38 skills for success in trade and commerce.

E. Religion -- Elements discussed so far are outward manifestation of culture. The dimension that provides insight into human behaviour is Religion. -- So global marketers should expose themselves with prevailing religions in target countries, so that marketing and PR policies and strategies are in consonance with local religious sensitivities. F. Attitudes and Values -- Our thinking as to what is right , appropriate or desirable are conditioned by our attitudes and concept of values. -- According to Douglas North, “People act on the basis of their ideologies and religious views. ” So a study of it is 2/9/2018 Presentation by Prof. H. Ganguly 39 essential.

G. Social Organisations -- It refers to the manner in which people of host country relate to other people. It differs from society to society. -- A family or extended family may provide mutual protection, support or security to each other. -- Furthere may be special interest groups of caste, creed, religion, hobby, profession etc. which may cast influence in different kind of decision making. -- These should be studied in depth before initiating marketing in host nations. -- In today’s world, the four social organisations that cast strongest influence on people from time they were infant are : * Family -- Members of family and extended family influence for mutual safety and security from infancy 2/9/2018 Presentation by Prof. H. Ganguly 40

* School – Perhaps the most powerful among social institutions i. e. education which influences culture of people. According to World Bank, no country has been economically successful without 50% literacy rate. * Religion -- The impact of religion and exposure to temple, mosque, church etc. upon value system of society is very high. In turn it shapes consumer behaviour. * Media – The influence of this institution is very much on the rise. In some nations, infants and adolescents have greater influence upon their behavior of TV and other stars than their parents and family members. 2/9/2018 Presentation by Prof. H. Ganguly 41

H. Dimensions of Culture -- Hofstede and Bond have identified following as cultural dimensions of nation : 1. Individualism vs. Collectivism -- In many nations, prominence is observed in culture and goal achievement of individuals and their immediate families; it is termed as individualistic culture as for example in India, Bangladesh, Pakistan etc. -- Whereas, there are nations where culture emphasises upon group’s goal over that of individuals. And persons think that they belong to a group. It is called collective culture e. g. in Japan, the company where one works come before him. 2/9/2018 Presentation by Prof. H. Ganguly 42

2. Power Distance -- In many nations, members of a society accept that power is distributed unequally among the members. It is called power distance. -- Nations like India, Japan, Mexico, Brazil etc. are high power- distance societies where people accept that superior shall not consider subordinates as equal. -- Thus, subordinates tend to prefer autocratic or paternalistic behaviour from leaders -- Whereas, in low power distance societies like US, Germany, Canada etc. superiors and subordinates have a sense of equality among them. -- So subordinate may approach superior for consultation easily in these nations. 2/9/2018 Presentation by Prof. H. Ganguly 43

3. Gender of Society -- The rigidity in roles played by members of a society decides its gender. -- Those nations where men are more assertive, competitive, ambitious and achievement-oriented whereas, women are supposed to be modest, tender and concerned with life are termed as masculine culture. -- Whereas, in Feminine cultures both men and women are supposed to be modest, tender and concerned with quality of life. 2/9/2018 -- In masculine cultures like Japan, Germany, UK, US, Mexico etc. employees “live in order to work”. But in feminine cultures like in Sweden, Norway, Denmark, Thailand etc. employees “work in order to live”. Presentation by Prof. H. Ganguly 44

4. Uncertainty Avoidance -- The extent of tolerance of uncertainty and ambiguity by a society indicates its uncertainty avoidance culture. -- Generally, rules and norms are not very clear-cut or rigid in low uncertainty avoidance societies like India, Hong Kong, Singapore, Great Britain etc. . These nations are more open and willing to explore anything new and foreign. -- Whereas, high uncertainty avoidance cultures are more formal in rules and regulations and less tolerant to deviant ideas and behaviour e. g. Japan, Portugal, Greece etc. 5. Cultural Homogeneity -- It indicates the manner in which communications and commitments are viewed in the nation. 2/9/2018 Presentation by Prof. H. Ganguly 45

-- In high context societies, implicit communications are viewed as important i. e. verbal commitments are given greater sanctity as in China, Korea or Japan. -- Whereas, in low context societies, communications are more explicit i. e. they rely more on written ones like Germany, Switzerland, Scandinavia etc. 6. Cultural Homogeneity -- Nations where people share same beliefs, speak same language, practice same religion are said to have Homophilous Culture as in Japan, Korea and Scandinavian countries 2/9/2018 -- Countries having appreciable difference in belief, religion and language are called Heterophilous Culture, as exists in India, China etc. Presentation by Prof. H. Ganguly 46

IV. Technological Environment -- Today’s trade, commerce and industry in nations are technology-driven. So global marketers should study foreign nations for : 2/9/2018 * Type of technology used in target nation * State of technological development in foreign nation * Extent of adaptation of technology * Technology policy of nation * Labour content of technologies used * Prevalence of technology and ‘economy of scale’. -- Schumacher introduced the concept of combining ‘traditional technology’ with elements of ‘modern technology’ called Appropriate technology. Developing nations are fast adapting capital intensive Prof. H. Ganguly technologies for labour 47 modern Presentation by intensive purposes.