1

Environment of Business

Two Determinants of Profitability

Environmental Attractiveness

CompetitivePosition

Advantage

Disadvantage

Low High

2

External EnvironmentWhat the Firm Might Do

Internal EnvironmentWhat the Firm Can Do

SustainableCompetitiveAdvantage

Business Environment

External & internal conditions effecting the firm

• Firm trades & competes within an economy, & an industry

• Constant changes require systematic monitoring• Environmental changes destroy & create business

opportunities

3

External and Industry Environment Analysis

External Environment

• Outside forces which impact on the firmo Economyo Technologyo Societyo Governmento Competitorso Customerso Suppliers

4

Internal Environment

• Conditions & forces within the firmo Ownerso Managerso Employeeso Cultureo Physical resources

Environmental Uncertainty

Level of uncertainty depends on 2 dimensions:

• Degree of change within the industryo Stable to dynamic

• Degree of Homogeneity within industryo Simple to complex

5

Questions to Ask in Environmental Analysis

• What are the current and emerging trends in each segment?

• What are the indicators of these trends?• What is the historic evolution of these trends?• What is the degree of change within these

trends?• How will competitors deal with these trends?• How will these trends impact my organization?

GLOBALIZATION

6

Learning Objectives

• To explain the concept of globalization

• To elucidate factors influencing globalization

• To discuss global business expansion strategy for emerging market

• To explain the strategy for managing business in the globalization era

Globalization of Business:A Historical Perspective

In the initial years of human history, there were hardly any formal barriers, such as tariffs or non-tariff restrictions, for the movement of goods or visa requirements for the people.

7

Concept of Globalization

The process of integration and convergence of

economic, financial, cultural and political

systems across the world.

Globalization: A Holistic Approach

•Economic Globalization

The increasing integration of national economic systems through

growth in international trade, investment and capital flows.

•Financial Globalization

The liberalization of capital movements and deregulations,

especially of financial services that led to a spurt in cross-border

capital flows.

8

• Cultural GlobalizationConvergence of cultures across the world.

• Political GlobalizationConvergence of political systems and processes around the world.

Economic Globalization

• General economic system• Market conditions• Factor endowments• Indicators

– Growth– Inflation– Surpluses– Deficits

9

Economic System

• Market Economy: resources are primarily owned and controlled by the private sector, not the public sector– Consumer sovereignty is the right of

consumers to decide what to buy– Prices are determined by supply and demand

Economic Freedom, con’t

• Command Economy (Centrally Planned Economy): all dimensions of economic activity, including pricing and production decisions, are determined by a central government plan– Government owns and controls all resources– Prices are determined by government

10

Economic Freedom, con’t

• Mixed Economy: Some degree of government ownership and control

• No economy is purely market or command• Economic systems are along a spectrum

of freedoms• Most command economies are moving

towards a market economy

Factor Conditions

• Inputs to the production process– Human resources– Physical resources– Knowledge– Capital– Infrastructure

• Factor conditions are especially critical for the production of goods

11

Demand Conditions• Market potential

– Composition of home demand (nature of buyer needs)

– Size of home demand– Growth of home demand– Internationalization of demand

• Demand conditions critical for investments

Composition?Size?

Growth?Internationalization?

Dimensions of Economic Globalization

• Globalization of production

• Globalization of markets

• Globalization of technology

• Globalization of corporations and industries

12

Globalization of MarketsThe merging of distinctly separate national markets into a global marketplace– Falling barriers to cross-border trade

have made it easier to sell internationally

– Tastes and preferences converge onto a global norm

– Firms offer standardized products worldwide creating a world market

Globalization of Markets

• Difficulties that arise from the globalization of markets– Significant differences still exist among

national markets– Country-specific marketing strategies– Varied product mix

13

Globalization of Production

• Refers to sourcing of goods and services from locations around the world to take advantage of– Differences in cost or quality of the factors of

production• Labor• Land• Capital

Globalization of Production

• Historically this has been primarily confined to manufacturing enterprises

• Increasingly companies are taking advantage of modern communications technology, and particularly the Internet, to outsource service activities to low-cost producers in other nations

14

US$ 55 million investment towards one of the world’s largest two wheeler parts.

Assembly plant in Indonesia

Assembly of Scooters/ motorcycles from CKD units.

Proposed Columbian JV in which TVS Motors has 26% stake, 2006

TVS Motors

Assembly and autocomponentsSubsidiaries in Italy, South Africa and Uruguay

Export focused JV with Renault for manufacture of Logan sedan which was launched in India in 2007

JV with Renault France, 2005

Autocomponent manufacturerStokes Group, UK, 2005

Branch Office and assembly operations.Mahindra Australia, 2005Mahindra and Mahindra

Assembly of CKDs exported to these countries.

Assembly plants in Malaysia, Spain, Ukraine and Russia

21% stake in leading bus/coach manufacturerHispano Carrocara, Spain, 2005

Manufacture and assembly of fully built buses and coaches

Marco Polo, Brazil,2006

MOU to manufacture passenger vehicles, engines and transmissions for the Indian and Overseas market

Global JV with Fiat, Italy,2006Tata Motors

DescriptionGlobal Acquisition/JV/Subsidiar

y

OEM

Globalization of Production• Outsourcing of productive activities to

different suppliers results in the creation of products that are global in nature

• Impediments to the globalization of production include– Formal and informal barriers to trade– Barriers to foreign direct investment– Transportation costs– Issues associated with economic risk– Issues associated with political risk

15

Globalisation of Technology• Lowering of trade barriers

made globalization possible; technology has made it a reality

• Since the end of World War II the world has seen advances in– Communication– Information processing– Transportation technology

16

Internet Usage GrowthFigure 1.3: Internet Users per 1000 People, 1990-

2003

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Inte

rnet

Use

rs p

er 1

000 pe

ople

Japan United States European Monetary Union World

Measuring Globalization

• Trade Data Understanding

• Analysis/ Identifying Indexes of Globalisation

• A.T. Kearney/ Foreign Policy Globalization Index

17

Historical development of trade theory

• Mercantilism– positive trade balance

• Absolute advantage (Adam Smith)– Countries benefit from exporting what they

make cheaper than anyone else• Comparative advantage (David Ricardo)

– Nations can gain from specialization, even if they lack an absolute advantage

Absolute Cost Advantage Theory (Adam Smith)

Assumptions: 1) Labour Theory of Value2) Free Trade

Country 1 Unit of A 1 Unit of B

I 10 20

II 20 10

Labour Cost of Production (in Hours)

The Difference on absolute cost of producing the commodities between the two countries in isolation will serve a useful basisfor opening up of mutually gainful international trade between two countries.

18

Theory of Comparative Cost Advantage: David Ricardo

Basis of International Trade is the comparative costdifferences between two countries. According to this theory, Adam Smith’s Absolute Cost Advantage Theory is not quite unambiguous proposition. Cases may arise where any one country may enjoy absolute advantage over other country in both the goods. Under such circumstances still trade may occur given that there exists comparative cost difference.

ExampleLabour Cost (in Hours) for 1 unit of production

Country Wine ClothPortugal 80 90England 120 100

Portugal has absolute advantage in both cloth and wine over England. According to Ricardo trade is still worthwhile due to comparative cost difference. In Portugal, 1 unit of wine= 8/9 units of cloth, where as it is 12/10 in England. So, opportunity cost of production of 1 unit of wine in Portugal is 8/9 units of cloth but in England it is 12/10. So, Portugal enjoys comparative cost advantage in production of wine.

19

Country Wine ClothPortugal 80 90England 120 100

Reference Table

Country Wine ClothPortugal 8/9 9/8England 12/10 10/12

Opportunity Cost* for

*The opportunity cost for good X is the amount of other goods which have to be given up in order to produce one additional unit of good X.

Thus Portugal has lower opportunity cost of the two countriesin producing wine while England has lower opportunity cost in producing cloth. So, Portugal has a comparative advantage inproduction of wine and England has an advantage in production of cloth.

So, in this case Comparative cost serve as an useful basis for opening up of a gainful international trade between Countries. Each country seeks here to specialise in production and export of the commodity in which it has comparative advantage and wants to import the other commodity from its trading partner.

20

Trade Data Analysis

• The two main systems in use today for international trade statistics are the Harmonised System (HS) and the Standard International Trade Classification (SITC). WTO negotiations are based on HS codes of trade data and more and more countries are adopting their HS system to report the same.

2 digit HS Codes: An Overview– Animal & Animal Products

06-15 Vegetable Products16-24 Foodstuffs25-27 Mineral Products 28-38 Chemicals & Allied Industries 39-40 Plastics / Rubbers 41-43 Raw Hides, Skins, Leather, & Furs44-49 Wood & Wood Products50-63 Textiles 64-67 Footwear / Headgear68-71 Stone / Glass 72-83 Metals 84-85 Machinery / Electrical86-89 Transportation 90-97 Miscellaneous 98-99 Service

• Disaggregated Codes: An Example• 03 FISH & CRUSTACEANS• 0301 fish, live• 0302 fish, fresh or chilled (no fillets or other meat)• 0303 fish, frozen (no fish fillets or other fish meat)• 0304 fish fillets & other fish meat, fresh, chill or froz• 0305 fish, dried, salted etc, smoked etc, ed fish meal• 0306 crustaceans, live, fresh etc, and cooked etc.• 0307 molluscs & aquatic invertebrates nesoi, live etc• The each of 4-didgit codes can further be expanded to 6-digit or 8-digit level.

21

22

Basic Trade IndicatorsIt is not always necessary to calculate indicators. There are various online databases which

provide a number of trade performance indicators of value for use by policymakers. Below is a short-list of these “over-the-counter” trade indicators for illustrative purposes only.• ITC http://www.intracen.org/menus/countries.htm

Country-level statistics provides trade and market profiles and benchmarks for national trade performance and indicators on export supply and import demand. More detailed and specialized datasets are available from the ITC on a subscription basis (www.trademap.org and www.macmap.org).

• WORLD BANK – http://www.worldbank.org/globaloutlook• UNCTAD – Handbook of Statistics – Part VIII on Special studies

http://stats.unctad.org/handbook/ReportFolders/ReportFolders.aspx includes some relevant indices on trade performance and competitiveness.

• OECD - http://stats.oecd.org/wbos/default.aspx?DatasetCode=TRADEINDMACRO

• APTIAD – http://www.unescap.org/tid/aptiad• ARIC - http://aric.adb.org/indicator.php• Moreover, there is now a long list of empirical literature that provides a good source for

various trade performance indicator results. For economies in Asia and the Pacific of special interest is the literature available on the World Bank website: http://lnweb18.worldbank.org/eap/eap.nsf/Sectors/PREM/7E6DC202606E30C485256DFF0062B362?OpenDocument. This site includes trade data on East Asia.

Acknowledgement: Mia Micic and John Gilbert

23

The A.T. Kearney/FOREIGN POLICY Globalization Index

The A.T. Kearney/FOREIGN POLICY Globalization Index tracks and assesses in four key components of

• global integration, • movement of people across borders, • volume of international telephone calls, Internet usage,

and • participation in international organizations.• The 72 countries ranked in the 2007 Globalization Index

account for 97 percent of the world’s gross domestic product (GDP) and 88 percent of the world’s population. Major regions of the world, including developed and developing countries, are covered to provide a comprehensive and comparative view of global integration.

Factors Influencing Globalization

24

Movers of Globalization• Technological breakthrough

• Multilateral institutions

• International economic integrations

• Rising research & development costs

• Global expansion of business operations

• Emergence of the global customer segment

Factors Restraining Globalization

• Regulatory controls

• Emerging trade barriers

• Cultural factors

• Nationalism

• War and civil disturbances

25

Reasons for Support of Globalization

• Maximization of Economic Efficiencies

• Enhancing Trade

• Increased Cross-border Capital Movement

• Improves Efficiency of Local Firms

• Increases Consumer Welfare

Criticism of Globalization• Developed versus Developing Countries: Unequal Players in

Globalization:• Widening Gap between the Rich and the Poor• Wipes out Domestic Industry• Leads to Unemployment and Mass Lay-offs• Increased Volatility of Markets• Diminishing Power of Nation States • Loss of Cultural Identity• Shift of Power to Multinationals