Understanding the International Business Environment

A Key Challenge: Understanding New Environments
(Frynas & Mellahi 2011: Ch 2; Stonehouse et al 2004: Chs 2 and 5)

n  Many barriers to understanding exist:

n  language

n  customs

n  secrecy – so local partners may be needed

n  Helpful analytical tool at macro level:

n  PESTEL – can help identify national differences

n  Political, Economic, Socio-cultural, Technological, Environmental (including Demographic) and Legal

n  Ghemawat’s CAGE framework (2001) adds the dimension of distance:

n  Geographic as well as Cultural

n  Administrative: includes systems as well as policies

n  Economic: Technology can bring us together, but infrastructure and incomes may keep us apart

Carrefour Example

n  Rugman & Collinson 2006: 21 and Bartlett et al 2008: pages 195 (Farrell) and 71 (Ghemawat); further detail in Mellahi et al (2005: 182-3)

n  French hypermarket retailer, biggest in Europe and second largest worldwide (after WalMart)

n  Driven to expand internationally by French law restricting hypermarket growth 1973

n  Failed early ventures in Belgium and UK

n  Now focuses on emerging economies with a growing urban middle-class population

n  Contrast WalMart: most successful within NAFTA zone: USA, Canada and Mexico (Ghemawat, Rugman)

n  Carrefour offers choice (meeting local cultural preferences), plus standardised global brand strengths (self-service, free parking and low prices)

n  Carrefour prefers to grow by acquisition

n  failed joint venture in Mexico contrasts with WalMart’s successful acquisition there (Farrell)

Tools for Assessing the Attractiveness of New Markets

n  Research and analysis can help you choose which country or countries to invest in or trade with first:

n  Consider PESTEL trends in the national macro business environment

n  Consider both PESTEL and CAGE factors to assess the fit between existing and new locations

n  Use Porter’s Diamond to identify and evaluate national industry and market forces – and to assess the strength of your own home base (Frynas and Mellahi 2011: 60-66)

Porter’s Five Forces: Industry-Level Focus

Porter’s Diamond: National and Industry-Level Focus

Compared to 5 Forces, the Diamond…

n  Adds in Factor Conditions

n  Link to the search for raw materials (e.g. Chinese investment in African oil/mining industry) and skilled workers (e.g. US/UK IT offshoring to India and Eastern Europe)

n  Keeps a strong emphasis on Customers

n  Downplays the threat from Substitutes and New Entrants

n  Link to emerging theories of networks and strategic alliances: stress on clusters providing a strong supply-side support system

n  “Nations succeed not in isolated industries ... but in clusters of industries connected through vertical and horizontal relationships” (Porter 1998: 73)

n  Focuses on place

n  may be only the MNE’s home country (Porter 1990, 1998) or

n  both the home and ‘target’ market locations, the ‘Double Diamond’ (Dunning, Rugman and D’Cruz (1993) Management International Review  33, Special Issue 2)

Porter’s Diamond: The Complete System

The Complete System

n  By adding in government:

n  Reminds us of PESTEL and the environmental factors that differ between nations

n  Highlights the support offered to clusters as well as the risk to firms of taxation and regulation

n  By adding in chance:

n  Reminds us of complexity, turbulence and uncertainty

n  Where many different organisations are interacting at local and global levels, results are often unpredictable

Question

n  How does the external environment look to Late Movers?

n  Late Movers: emerging MNEs from middle-income nations outside the ‘triad’ (the United States, North-Western Europe, and Japan)

n  The challenges of distance may well be greater across the ‘triad’/’non-triad’ divide

n  But non-triad nations are the world’s current growth centres: click on the link below

http://www.mckinsey.com/Insights/Urbanization/Urban_world_The_shifting_global_business_landscape?cid=other-eml-alt-mgi-mck-oth-1310

17 Triad Countries and 18 Fast-Growing Nations Compared
(Source: World Bank Key Development Data and Statistics, available via LIS Information Database: World Bank Documents and Reports)

n  The Triad 17:

n  USA, Canada; Japan; Denmark, Finland, Norway, Sweden, UK, Ireland, Germany, Austria, Switzerland, France, Belgium, Holland, Italy, Spain

n  13% of world population in 2003 and 2008; 74% of world Gross Domestic Product in 2003 and 62% in 2008

n  Accounted for 70% of world exports in 1990 and 60% in 2003

n  The Fast-Growing 18:

n  China, Taiwan, South Korea; India; Indonesia, Malaysia, Singapore, Thailand; Brazil, Mexico; Australia, South Africa, Saudi Arabia, Turkey; Czech Republic, Hungary, Poland, Russian Federation

n  53% of world population in 2003 and 2008; 17% of world GDP in 2003 and 26% in 2008

n  14% of world exports in 1990 and 23% in 2003

Example of Emerging-Economy Growth: Malaysian Palm Oil
(Martin (2004) The UP Saga : Ch 8)

n  Early 1970s: Government led by Tun Abdul Razak launched policy of export-led industrialization

n  Palm oil refineries added value to local raw material

n  New applications, e.g. vanaspathi, were designed for Asian not European markets

n  Break with colonial trading patterns

Demand Growth Outside the Triad

n  Total Malaysian exports of palm oil (crude and processed) grew from 400,000 tonnes (T) in 1970 to 9 million T in 2000 (www.mpob.gov.my)

n  Global market share doubled: from 30% to  60%

n  Triad (N America, W Europe, Japan): share of Malaysian exports fell from 66% to 18%

n  In August 2002 the Malaysian firm IOI Corporation  bought up Unilever’s oils and fats division, Loders Croklaan – including the world’s second largest refinery, based in Rotterdam

n  By 2009, Triad’s share had recovered only slightly, to 21%; China took 25% and India/Pakistan a further 20% of Malaysia’s total exports (16m T)