Chapter 1 The Business Enterprise in the International Environment

Chapter 1

The Business Enterprise in the International EnvironmentTo highlight the ways in which the international dimension in

business activities is distinctive from national and local enterprises.To appreciate the role of the entrepreneur and entrepreneurship in the international environment.To gain an overview of the ways in which enterprises organize

and adapt when they expand internationally.To gain an understanding of the key players in the international environment with which businesses interact

To identify key characteristics of international businessTo appreciate the role of entrepreneurship To gain an understanding of the nature of the company, along with roles within the companyTo identify the main business functions of the organization in the international contextTo highlight the role of co-operative arrangements in international business

To give an overview of key players in the international business environment

Chapter SummaryInternational business entails greater complexity in both organization and strategy than the national or local firm. Businesses seeking to expand internationally find that a diversity of national environments presents a host of challenges, extending across economic, political, legal and cultural dimensions. Businesses which are entrepreneurial and international in their thinking from the outset are often better placed to take advantage of new opportunities, particularly in the internet and high-tech sectors, than established

companies dominated by their home-country culture. SMEs increasingly play vital roles in international business.

Size

Cus

to-

mer

sPr

od-

ucts

Seek

ing

C

usto

mer

s

Small local firm

Countrywide organization with local and regional

units

Organization based in a home country with foreign and

regional links

Local customersDiverse custo-mers within the

national environment

Domestic and foreign

customers

Sourced through local suppliers

More complex products and distribution

Sourcing of products across national borders

Personal relations for operations

and for reaching the customers

Use of national media to reach the customers

Global media to manage

international activities and

reach customers

Local business

National business

International business

Comparison of the local, national and international business

International environment

Economic

• National economies and financial regulation

• Regional economic conditions

• International economic trends

Legal

• National legal systems

• Regional law and regulations

• International law and regulations

Cultural • National cultures

• Different languages• National social

groupings• Changing cultural

preferences due to international influences

Political

• National political systems

• Regional political ties• International relations

Dimensions of the international environment

Chapter Summary ...2

There is no single model or optimal size of the international firm. The MNE covers a range of possible organization and ownership structures. While it is generally the case that the MNE is a public company with international shareholders, many MNEs remain home-country dominated, with prominent share-holders, including governments. The company’s shareholder profile and the size of dominant stakes affect its strategy and culture. The company’s corporate governance system is linked to its ownership and is the chief determinant of how

major decisions are taken. These systems vary in their openness to outsiders and in the transparency of their processes, but, in general,

Inside Look - PepsiCo Positions For Growth

Interview and discussion with PepsiCo CEO and Chairman, Indra Nooyi. She gives her insights behind her company's success. (Bloomberg News)

Sound investorbacking

Stage 1

Innovativeideas

Research onthe viability ofbusiness model

Willingness toUndertake

moderate risk

Confidence inability to meetcustomer needs

Stage 2

Adaptation tonational markets

Financialstrategies

Innovativecapacity

New product

s

pressures for greater transparency intensify as companies become more internationalized. Similarly, companies now take greater account of stakeholder interests, extending their perspective to social and environmental issues, both globally and in national environments.

Chapter Summary …3MNEs increasingly interact with other players in the international environment. Co-operative alliances and networks are facilitated by advances in communica-tions technology and open up new opportunities, especially in emerging markets. For many companies, the international joint venture offers an opportunity to benefit from the know-how of a local partner. National governments play a crucial role, directly and indirectly, for domestic and foreign businesses within their borders. Interaction and co-operation between

government and civil society players. Managing stakeholder relations, both national and international, is key to international business success.

Dynamics of the companyDynamics of the companyForming a company offers advantages of separate legal identity to the owners.Companies are registered in particular countries, in accordance with their national laws. Private companies are often family owned.In contrast, public companies …

Have numerous shareholders and tradable sharesHave a chief executive officer (CEO) and directors who are accountable to the shareholdersAre increasingly international in their ownership profiles

Roles within the public company

Corporategoals

Lenders• Creditors of the

company• Interest in company’s

ability to repay

Shareholders• Owners of the company• Overall oversight

Chief executiveofficer• Overall responsibility

for carrying out the strategy

Directors• Strategic decision-

making• Duty to shareholders

Managers• Responsibility for

day-to-day running of the business

EntrepreneurshipSuccessful entrepreneurship involves identifying opportu-nities, pursuing new ideas and securing financial support.It includes start-up businesses, as well as the re-focusing of existing enterprises.Levels of entrepreneurial activity differ from country to country, and are influenced by culture.Governments can encourage (or discourage) entrepreneurs.

The born-global company takes an international approach from the outset.

Mumbai DabbawalaMore off-beat example of a SME is hard to find

Changing ownership of UK equities

Rest of the world

Other UK Financial

institutionsUK

Insurance companies

UK Pension funds

UK Individuals

0% 10% 20% 30%

20041994

Overall, company ownerships in the developed world are shifting, from insurance companies and pension funds to the rest of the world, individuals and other financial institutions.

Small-to-medium size enterprise (SME)

An SME is usually defined as an organization employing fewer than 249 employees.SMEs provide the bulk of jobs in most countries.The franchise provides a means for an SME to benefit from the brand and support of an established MNE.Franchising is often

used by MNEs as a means of international expansion.

Strategic Crossroads 1.1: McDonald’s (page 11)

What reasons lie behind the comparative success of McDonald’s franchise outlets over the company-owned ones?

How does the development license fit in with McDonald’s overall revitalization program?

In the franchise outlets, the franchisee invests more of his or her own resources and has a more entrepreneurial approach to the business. Managers of the company-owned outlets, by contrast, have less sense of ownership and a lower level of entrepreneurial drive. This question can be broadened into a discussion of an entrepreneurial approach generally, which can bring in country differences in entrepreneurial environments.

The nature of the new developmental licenses should be highlighted at the start. They provide that the underperforming outlets should be sold to local entrepreneurs, who would invest their own capital to a greater extent than under McDonald’s usual arrangements. The new owners would be imbued with a greater entrepreneurial approach, but would still benefit from the

strong brand and supply chain arrangements. Whether

these new owners deliver improved financial performance depends on their competitiveness in their local markets.

McDonald’s executives are stressing the importance of the revitalization program to win new customers. They look to the new owners to deliver these improvements, reflectingthe success of the revitalization program in the US.

NASDAQDOWS&P-500

McDonald’scommon shares

Jan 06

+100%

+50%

-50%Jan 07 Jan 08 Jan 09 Jan 10

PostscriptThe continuing depressed state of the world economy has had an interesting effect on McDonald's market-performance. Note how the McDonald's shares have almost doubled in these past 5 years, at a time when the market has barely recouped its losses!

The multinational enterprise (MNE)

Pursues opportunities and co-ordinates businesses across national borders.As it grows in size, it evolves a more complex organizational structure, often based on parent company and subsidiaries.

MNEs differ in the degree of centralized control or local autonomy in various locations.

Divisions in this multi-tiered ownership structure of a MNE may themselves be parent companies that own a number of subsidiaries.

Aa Ab Ab Ba Bb Bb Ca Cb Cb

Parentcompany

Division A Division B Division C

International business functions

International operationsAccounting and finance for international businessInternational marketingInternational HRMResearch and development (R&D)

These functions may be centralized or decentralized, depending on the organization’s overall culture and strategy.

Finance, HRM and marketing are the functions that are often centralized, but Head Office usually coor-dinates with the functionaldepartments in subsidiaries for the day-to-dayactivities.Operations and R&D are the functionsthat are increasinglybeing handledby the localsubsidiaries.

Business functions in the international context

Corporate governance concerns the company’s decision-making structures and processes.‘Shareholder’ model predominates in the US and UK: It has a single-tier board that focuses on maximizing the shareholder value‘Stakeholder’ model is prevalent in the 2-tier boards in Europe and Japan: It takes a wider perspective, encompassing the em-ployees in particular.Wider stakeholder interests are now recognized in most companies, as corporate social responsibility (CSR)

impacts on governance.

DominantshareholdersSuppliersCreditorsCustomersCorporate partnersEmployees

Nationalregulators

Internationalorganizations

ConsumersNearby

residentsHost

communitiesTrade unions

Executivemanagement

Primarystakeholders

Secondarystakeholders

Joint ventures offer international opportunities through the formation of a new enterprise, benefiting

from thestrengths ofboth

foundingpartners.

Alliances, networks and joint ventures Alliances, networks and joint ventures are the are the co-operative arrangements that co-operative arrangements that contribute to a firm’s international contribute to a firm’s international strategy.strategy.

Company B

Company C

Company AAlliance

Network

Company D, joint

venture, owned

50/50 by the com-panies A

& C.

Alliances (often called strategic alliances) offer opportunities for pooling resources and skills in differing environments.Networks may be intra-firm or inter-firm; both organizations and individual staff can benefit. They can be important for SMEs in their strategic expansion.

National governments, which play both direct and indirect roles.Regional institutions, such as the NAFTA, EU, Asean, Mercosur etc.International governmental organizations like the WTO, OECD etc.Voluntary organizations like trade unions, non-governmental organizations (NGOs).Stakeholders in the MNE. MNE

OECD WTO Other inter-governmentalorganizations

Nationalgovernments

Regionalgovernmental

institutionsNGOs

Businesses change in their organization and strategy as they become more international.

As more countries become integrated into global business, MNEs face challenges in adapting to diverse cultural environments.

Firms’ interactions with business partners, governments, international organizations and groups in society grow as their operations develop in different locations.

Managing stakeholder interests, includingshareholders, customers andcommunities, is a key challenge for today’s international managers.

Clearly, …