International Marketing environment refers to the controllable and uncontrollable forces that influence upon the marketing decision making of a firm globally.
International Marketing environment is comprised of those components which shape policies, programmes and strategies of an international marketer.
An international firm must resort to systematic study of international marketing environment to collect the inputs of marketing decision making. To serve the international markets effectively, a firm is in need of understanding international marketing environment properly.
The needs, preferences and expectations of buyers in different overseas markets are not necessarily similar. The environmental differences influence the international marketing decisions of a firm
The international marketing environment surrounds and impacts upon the organisation. Marketers aim to deliver value to satisfied customers, so they need to assess and evaluate the internal environment and the external environment which is subdivided into micro and macro.
International Marketing environment opportunities vary among the nations. Some economies have enormous potentials of growth while other has not.
The knowledge of economic environment helps an international marketer to understand which market to select for reaping lasting benefits.
Learn about:- 1. Introduction and of International Marketing Environment 2. Components of International Marketing Environment 3. Importance 4. Factors Affecting 5. Reasons for Increasing Exports.
International Marketing Environment: Meaning, Components, Importance, Factors and Reasons for Increasing Exports
International Marketing Environment – Introduction and Meaning
International Marketing environment refers to the controllable and uncontrollable forces that influence upon the marketing decision making of a firm globally. International Marketing environment is comprised of those components which shape policies, programmes and strategies of an international marketer. An international firm must resort to systematic study of international marketing environment to collect the inputs of marketing decision making.
To serve the international markets effectively, a firm is in need of understanding international marketing environment properly. The needs, preferences and expectations of buyers in different overseas markets are not necessarily similar. The environmental differences influence the international marketing decisions of a firm.
Such strategic decisions as whether a company should enter a given foreign market or not, what market entry strategy should it employ, what strategy it should adopt in respect of product, promotion, pricing and distribution, etc. are based on two sets of factors, viz., the company related factors and the foreign market related factors. The decision as to whether to go international or not is based, in addition to the above two, on yet another set of factors, viz., the domestic marketing environment.
The company related factors refer to such factors as the company objectives, resources, and international orientation. The domestic marketing environment consist of factors like growth prospects including the competition, government policies etc. The foreign market related factors which are relevant to the international business strategy formulation or which affect the international business are often described as the international business environment.
What makes a business strategy which is successful in one market a failure in another market is often the differences in the business environment.nte In other words, the differences in the business environment may call for changes in the business strategies, i.e., there should be adaptation of the business strategy to suit the environment of the market. In short, it is the differences in the marketing environment which may make the international business strategy different from the domestic one.
International Marketing Environment – 2 Main Components: Internal and External Environment
The international marketing environment surrounds and impacts upon the organisation. Marketers aim to deliver value to satisfied customers, so they need to assess and evaluate the internal environment and the external environment which is subdivided into micro and macro.
Thus, there are mainly two components of international marketing environment:
1. Internal Environment
2. External Environment
Component # 1. Internal Environment:
Internal environment refers to the firm related factors. The firm related factors are referred to as controllable variables because the firm has control over them and can (relatively easily) change them as may be thought appropriate as its personnel, physical facilities, organisation and functional means such as marketing mix, to suit the environment.
The internal environment of the company includes all departments, such as management, finance, research and development, purchasing, operations and accounting. Each of these departments has an impact on international marketing decisions. For example, research and development have input as to the features a product can perform and accounting approves the financial side of marketing plans.
The ability of a firm to do international business depends on a number of internal factors like the mission and objectives of the firm; the organisational and management structure and nature; internal relationship between employees, shareholders and Board of Directors, etc.; company image and brand equity; physical assets and facilities; R&D and technological capabilities; personnel factors like skill, quality, morale, commitment, attitude, etc.; marketing factors like the organisation for marketing, quality of the marketing men and distribution network; and financial factors like financial policies, financial position and capital structure.
Let’s look at an example of how the internal environment would impact a company such as Wal-Mart. In this case the immediate local influences which might include its marketing plans, how it implements customer relationship management, the influence of other functions such as strategy from its top management, research and development into new logistics solutions, how it makes sure that it purchases high-quality product at the lowest possible price, that accounting is undertaken efficiently and effectively, and of course its local supply chain management and logistics for which Wal-Mart is famous.
A useful tool for quickly auditing the internal environment is known as the Five Ms which are Men, Money, Machinery, Materials and Markets. Some might include a sixth M, which is minutes, since time is a valuable internal resource. All these factors are company related factors which are fully controllable. All these have to be considered while entering in the international market.
Component # 2. External Environment:
External environment refers to the factors outside the firm. These factors are uncontrollable or we can say that these are beyond the control of a company. The external environmental factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors, geographical factors etc. are generally regarded as uncontrollable factors.
The external environment may further be divided in two parts:
a. Micro Environment and
b. Macro Environment.
The micro environment is made from individuals and organisations that are close to the company and directly impact the customer experience. They can be defined as the actors in the firm’s immediate environment which directly influence the firm’s decisions and operations. These include, suppliers, various market intermediaries and service organisations, competitors, customers, and publics. The micro environment is relatively controllable since the actions of the business may influence such stakeholders.
Wal-Mart’s micro environment would be very much focused on immediate local issues. It would consider how to recruit, retain and extend products and services to customers. It would pay close attention to the actions and reactions of direct competitors. Wal-Mart would build and nurture close relationships with key suppliers. The business would need to communicate and liaise with its publics such as neighbours which are close to its stores, or other road users. There will be other intermediaries as well including advertising agencies and trade unions amongst others.
i. Suppliers:
Marketing managers must watch supply availability and other trends dealing with suppliers to ensure that product will be delivered to customers in the time frame required in order to maintain a strong customer relationship.
ii. Marketing Intermediaries:
Marketing intermediaries refers to resellers, physical distribution firms, marketing services agencies, and financial intermediaries. These are the people that help the company promote, sell, and distribute its products to final buyers. Resellers are those that hold and sell the company’s product. They match the distribution to the customers and include places such as Wal-Mart, Target, and Best Buy.
Physical distribution firms are places such as warehouses that store and transport the company’s product from its origin to its destination. Marketing services agencies are companies that offer services such as conducting marketing research, advertising, and consulting. Financial intermediaries are institutions such as banks, credit companies and insurance companies.
iii. Customers:
Another aspect of microenvironment is the customers. There are different types of customer markets including consumer markets, business markets, government markets, international markets, and reseller markets. The consumer market is made up of individuals who buy goods and services for their own personal use or use in their household. Business markets include those that buy goods and services for use in producing their own products to sell.
This is different from the reseller market which includes businesses that purchase goods to resell as is for a profit. These are the same companies mentioned as market intermediaries. The government market consists of government agencies that buy goods to produce public services or transfer goods to others who need them. International markets include buyers in other countries and includes customers from the previous categories.
iv. Competitors:
Competitors are also a factor in the micro environment and include companies with similar offerings for goods and services. To remain competitive a company must consider who their biggest competitors are while considering its own size and position in the industry. The company should develop a strategic advantage over their competitors.
v. Publics:
The final aspect of the microenvironment is publics, which is any group that has an interest in or impact on the organisation’s ability to meet its goals. For example, financial publics can hinder a company’s ability to obtain funds affecting the level of credit a company has. Media publics include newspapers and magazines that can publish articles of interest regarding the company and editorials that may influence customers’ opinions.
Government publics can affect the company by passing legislation and laws that put restrictions on the company’s actions. Citizen- action publics include environmental groups and minority groups and can question the actions of a company and put them in the public spotlight. Local publics are neighborhood and community organisations and will also question a company’s impact on the local area and the level of responsibility of their actions.
The general public can greatly affect the company as any change in their attitude, whether positive or negative, can cause sales to go up or down because the general public is often the company’s customer base and finally those who are employed within the company and deal with the organisation and construction of the company’s product.
The macro environment is less controllable. The macro environment consists of much larger all-encompassing influences (which impact the micro environment) from the broader global society. The macro environment includes culture, political issues, technology, the natural environment, economic issues and demographic factors amongst others.
Again for Wal-Mart the wider global macro environment will certainly impact its business, and many of these factors are pretty much uncontrollable. Wal-Mart trades mainly in the United States but also in international markets. For example in the United Kingdom Wal-Mart trades as ASDA. Wal-Mart would need to take into account local customs and practices in the United Kingdom such as bank holidays and other local festivals etc.
A number of factors constitute the international environment: social, cultural, political, legal, competitive, economic, and technology. Each should be evaluated before a company makes a decision to go international.
i. Social/Cultural Environment:
The social/cultural environment consists of the influence of religious, family, educational, and social systems in the marketing system. Marketers who intend to market their products overseas may be very sensitive to foreign cultures. While the differences between home country and those of foreign nations may seem small, marketers who ignore these differences risk failure in implementing marketing programmes. Failure to consider cultural differences is one of the primary reasons for marketing failures overseas.
This task is not as easy as it sounds as various features of a culture can create an illusion of similarity. Even a common language does not guarantee similarity of interpretation. For example, in the US customers purchase “cans” of various grocery products, but the Britishers purchase “tins”. A number of cultural differences can cause marketers problems in attempting to market their products overseas.
These include:
(a) Language,
(b) Colour,
(c) Customs and taboos,
(d) Values,
(e) Aesthetics,
(f) Time,
(g) Business norms,
(h) Religion, and
(i) Social structures.
Each is discussed in the following sections:
(a) Language:
The importance of language differences cannot be overemphasised, as there are almost 3,000 languages in the world. Language differences cause many problems for marketers in designing advertising campaigns and product labels. Language problems become even more serious once the people of a country speak several languages. For example, in Canada, labels must be in both English and French. In India, there are over 200 different dialects, and a similar situation exists in China.
(b) Colours:
Colours also have different meanings in different cultures. For example, in Egypt, the country’s national colour of green is considered unacceptable for packaging, because religious leaders once wore it. In Japan, black and white are colours of mourning and should not be used on a product’s package. Similarly, purple is unacceptable in Hispanic nations because it is associated with death.
(c) Values:
An individual’s values arise from his/her moral or religious beliefs and are learned through experiences. For example, in America people place a very high value on material well-being, and are much more likely to purchase status symbols than people in India.
Similarly, in India, the Hindu religion forbids the consumption of beef, and fast-food restaurants such as McDonald’s and Burger King would encounter tremendous difficulties without product modification. Americans spend large amounts of money on soap, deodorant, and mouthwash because of the value placed on personal cleanliness. In Italy, salespeople call on women only if their husbands are at home.
(d) Aesthetics:
The term aesthetics is used to refer to the concepts of beauty and good taste. The phrase, “Beauty is in the eye of the beholder” is a very appropriate description for the differences in aesthetics that exist between cultures. For example, Americans believe that suntans are attractive, youthful, and healthy. However, the Japanese do not.
(e) Time:
Americans seem to be fanatical about time when compared to other cultures. Punctuality and deadlines are routine business practices in the US. However, salespeople who set definite appointments for sales calls in the Middle East and Latin America will have a lot of time on their hands, as business people from both of these cultures are far less bound by time constraints. To many of these cultures, setting a deadline such as “I have to know next week” is considered pushy and rude.
(f) Business Norms:
The norms of conducting business also vary from one country to the next.
Here are several examples of foreign business behaviour that differ from Indian business behaviour:
(1) In France, wholesalers do not like to promote products. They are mainly interested in supplying retailers with the products they need.
(2) In Russia, plans of any kind must be approved by a seemingly endless string of committees. As a result, business negotiations may take years.
(3) In Japan, businesspeople have mastered the tactic of silence in negotiations.
(g) Religious Beliefs:
A person’s religious beliefs can affect shopping patterns and products purchased in addition to his/her values. In the United States and other Christian nations, Christmas time is a major sales period. But for other religions, religious holidays do not serve as popular times for purchasing products. Women do not participate in household buying decisions in countries in which religion serves as opposition to women’s rights movements.
Every culture has a social structure, but some seem less widely defined than others. That is, it is more difficult to move upward in a social structure that is rigid. For example, in the US, the two-wage earner family has led to the development of a more affluent set of consumers. But in other cultures, it is considered unacceptable for women to work outside the home.
The political environment abroad is quite different from that of India. Most nations desire to become self-reliant and to raise their status in the eyes of the rest of the world. This is the essence of nationalism. The nationalistic spirit that exists in many nations has led them to engage in practices that have been very damaging to other countries’ marketing organisations.
For example, foreign governments can intervene in marketing programmes in the following ways:
(1) Contracts for the supply and delivery of goods and services
(2) The registration and enforcement of trademarks, brand names, and labeling
(3) Patents
(4) Marketing communications
(5) Pricing
(6) Product safety, acceptability, and environmental issues
(a) Political Stability:
Business activity tends to grow and thrive when a nation is politically stable. When a nation is politically unstable, multinational firms can still conduct business profitably. Their strategies will be affected however. Most firms probably prefer to engage in the export business rather than invest considerable sums of money in investments in foreign subsidiaries. Inventories will be low and currency will be converted rapidly. The result is that consumers in the foreign nation pay high prices, get less satisfactory products, and have fewer jobs.
(b) Monetary Circumstances:
The exchange rate of a particular nation’s currency represents the value of that currency in relation to that of another country. Governments set some exchange rates independently of the forces of supply and demand. The forces of supply and demand set others. If a country’s exchange rate is low compared to other countries, that country’s consumers must pay higher prices on imported goods. While the concept of exchange rates appears relatively simple, these rates fluctuate widely and often, thus creating high risks for exporters and importers.
(c) Trading Blocs and Agreements:
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organisation, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states. Regional trading blocs represent a group of nations that join together and formally agree to reduce trade barriers among themselves.
Trace blocs can be stand-alone agreements between several states such as the North American Free Trade Agreement (NAFTA) or part of a regional organisation such as the European Union (EU). Depending on the level of economic integration, trade blocs can fall into different categories, such as, preferential trading areas, free trade areas, customs unions, common markets and economic and monetary unions.
Trade agreements regulate international trade between two or more nations. An agreement may cover all imports and exports, certain categories of goods, or a single category. The most important general trade agreement is called, simply enough, the General Agreement on Tariffs and Trade (GATT).
India views Regional Trading Arrangements (RTA’s) as ‘building blocks’ towards the overall objective of trade liberalisation. Hence, it is participating in a number of RTAs which include Free Trade Agreements (FTAs); Preferential Trade Agreements (PTAs); Comprehensive Economic Cooperation Agreements (CECAs); etc. These agreements are entered into either bilaterally or in a regional grouping. The United States is currently engaged in some 320 trade agreements with various nations; However, several general trade agreements have shaped trade policy on broad levels.
(d) Tariff and Non-Tariff Barriers:
Most nations encourage free trade by inviting firms to invest and to conduct business there, while encouraging domestic firms to engage in overseas business. These nations do not usually try to strictly regulate imports or discriminate against foreign-based firms. There are, however, some governments that openly oppose free trade. For example, many Communist nations desire self-sufficiency. Therefore, they restrict trade with non-Communist nations. But these restrictions vary with East-West relations.
The most common form of restriction of trade is the tariff, a tax placed on imported goods. Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. The other form of restriction is non-tariff. Countries impose non-tariff barriers to restrict the import of goods indirectly from certain countries. Non-tariff barriers include quota system, restriction on foreign exchange, state trading, etc.
(e) Expropriation:
All multinational firms face the risk of expropriation. That is, the foreign government takes ownership of plants, sometimes without compensating the owners. However, in many expropriations there has been payment, and it is often equitable. Many of these facilities end up as private rather than government organisations. Because of the risk of expropriation, multinational firms are at the mercy of foreign governments, which are sometimes unstable, and which can change the laws they enforce at any point in time to meet their needs.
iii. Legal Environment:
Businesses are affected by legal environments of countries in many ways. Legal environments are not just based on different laws and regulations concerning businesses, these are also defined by the factors like rule of law, access to legal systems by foreigners, litigations systems etc. Variations in legal environments, rule of law, laws, and legal systems affect foreign business firms in a number or areas.
Key areas of business that are affected by legal environments are listed below:
(a) Laws concerning employment and labour affect managing of workforce in international markets.
(b) Different laws in foreign countries regulate financing of operations by foreigners. In some countries foreign firms are restricted access to local deposits/funds.
(c) Various countries around the world have different laws concerning marketing of products, especially food products, pharmaceuticals, hazardous materials and strategic products to a nation.
(d) Countries also control and regulate developing and utilising of technologies through various laws and regulations.
(e) Many countries also have different laws and regulations that affect ownership of businesses by foreigners.
(f) Countries also regulate /restrict remittances to foreign countries and repatriation of profits.
(g) Some countries regulate closing of operations and in some countries businesses are not allowed to close shop especially when they have sold products that have guarantees and warranties from the foreign firms.
(h) Various countries around the world have implemented different trade and investment regulations.
(i) Countries also have their own taxation requirements, systems and laws.
(j) Countries also differ on the accounting reporting requirements from various categories of firms.
(k) Countries around the world have also actively implemented environmental regulations that affect businesses.
iv. Technological Environment:
Technological know-how impacts all spheres of an international marketer’s operations including production, information system, marketing etc. The international marketers must understand technological development and its impact on its total operations. The marketing intelligence system may help the international firm to know technological orientations of other enterprises and to update its own technologies to remain competitive. Research and Development (R&D) has a vital role to play in increasing technological ability of a firm.
New technologies create new markets and opportunities. However, every new technology replaces an old technology. Xerography hurt carbon-paper industry, computer hurt typewriter industry, and examples are so on. Any international marketer, when ignored or forgot new technologies, their business has declined. Thus, the marketer should watch the technological environment closely. Companies that do not keep up with technological changes, soon find their products outdated.
The United States leads the world in research and development spending. Scientists today are researching a wide range of promising new products and services ranging from solar energy, electric car, and cancer cures. All these researches give a marketer an opportunity to set his products as per the current desired standard. The challenge in each case is not only technical but also commercial that means manufacture a product that can be afforded by mass crowd.
The level of technological development of a nation affects the attractiveness of doing business there, as well as the type of operations that are possible. Marketers in developed nations cannot take many technological advances for granted. They may not be available in lesser developed nations.
Consider some of the following technologically related problems that firms may encounter in doing business overseas:
(a) Foreign workers must be trained to operate unfamiliar equipment.
(b) Poor transportation systems increase production and physical distribution costs.
(c) Maintenance standards vary from one nation to the next.
(d) Poor communication facilities hinder advertising through the mass media.
(e) Lack of data processing facilities makes the tasks of planning, implementing, and controlling marketing strategy more difficult.
The international marketer tries to understand economic environmental variables of the global markets for identifying the right marketing opportunities for the enterprise.
The economic environment is comprised of the following economic variables:
(a) National Income
(b) Gross Domestic Product (GDP)
(c) Industrial Structure
(d) Currency floating (Open/fixed) issue
(e) Demand patterns
(f) Balance of Payment (BOP) status
(g) Economy base (Import/Export)
(h) Rate of Economic Growth
(i) Occupational Pattern
(j) State of Inflation
(k) Consumer Mobility.
The economic situation varies from country to country. There are variations in the levels of income and living standards, interpersonal distribution of income, economic organisation, and occupational structure and so on. These factors affect market conditions. The level of development in a country and the nature of its economy will indicate the type of products that may be marketed in it and the marketing strategy that may be employed in it.
In high income countries there is a good market for a large variety of consumer goods. But in low-income countries where a large segment does not have sufficient income even for their basic necessities, the situation is quite different. A nation’s economic situation represents its current and potential capacity to produce goods and services. The key to understanding market opportunities lies in the evaluation of the stage of a nation’s economic growth.
A way of classifying the economic growth of countries is to divide them into three groups:
(a) Industrialised,
(b) Developing, and
(c) Less-developed nations.
The industrialised nations are generally considered to be the United States, Japan, Canada, Russia, Australia, and most of Western Europe. The economies of these nations are characterised by private enterprise and a consumer orientation. They have high literacy, modern technology, and higher per capita incomes. Developing nations are those that are making the transition from economies based on agricultural and raw materials production to industrial economies.
Many Latin American nations fit into this category and they exhibit rising levels of education, technology, and per capita incomes. Finally, there are many less developed nations in today’s world. These nations have low standards of living, literacy rates are low, and technology is very limited.
Usually, the most significant marketing opportunities exist among the industrialised nations, as they have high levels of income, one of the necessary ingredients for the formation of markets. However, most industrialised nations also have stable population bases, and market saturation for many products already existing. The developing nations, on the other hand, have growing population bases, and although they currently import limited goods and services, the long-run potential for growth in these nations exists.
Dependent societies seek products that satisfy basic needs-food, clothing, housing, medical care, and education. Marketers in such nations must be educators, emphasising information in their market programmes. As the degree of economic development increases, so does the sophistication of the marketing effort focused on the countries.
To plan effectively international marketing strategies, the international marketer should be well-informed about the competitive situation in the international markets.
By competitive environment we mean the following variables:
(a) Nature of competition
(b) Players in the competition
(c) Strategical weapons used by the participants
(d) Competition regulations
Entering an international market is similar to doing so in a domestic market, in that a firm seeks to gain a differential advantage by investing resources in that market. Often local firms will adopt imitation strategies, sometimes successfully. When they are successful, their own nation’s economy receives a good boost. When they are not successful, the multinational firm often buys them out.
Japanese marketers have developed an approach to managing product costs that has given them a competitive advantage over US competitors. A typical American company will design a new product, and then calculate the cost. If the estimated cost is too high, the product will be taken back to the drawing board.
In Japan, a company typically starts with a target cost based on the price that it estimates the market is most willing to accept. Product designers and engineers are then directed to meet the cost target. This approach also encourages managers to worry less about product costs and more about the role it should play in gaining market share. Briefly, at Japanese companies like NEC, Nissan, Sharp, and Toyota, a team charged with bringing a product idea to market estimates the price at which the product is most likely to appeal to the market.
From this first important judgment all else follow. After deducting the required profit margin from the selling price, planners develop estimates of each element that make up the product’s cost- engineering, manufacturing sales, and marketing. US firms tend to build products, figure how much it costs to build the product, and then ask whether the product can be sold at a profitable price. US companies tend not to assess what the market will be willing to pay.
Following are the ways an international marketer can handle competition:
(i) Proper knowledge about the competitors
(ii) Knowledge of competitors’ objectives
(iii) Knowledge of competitors’ strategies
(iv) Knowledge of competitors’ reaction patterns
(v) Knowledge of competitors’ strengths and weakness.
International Marketing Environment – Importance
The various components of the international marketing environment are the major determinants of marketing opportunities. As such, it is the responsibility of an international firm to have clear grasp of international marketing environment to formulate effective marketing decisions regarding Marketing Mix variables.
The following points highlight the importance of understanding international marketing environment:
1. International Marketing environment opportunities vary among the nations. Some economies have enormous potentials of growth while other has not. The knowledge of economic environment helps an international marketer to understand which market to select for reaping lasting benefits.
2. Culture is a basic determinant of human behaviour. The cultural norms and values may vary among the countries. That’s why knowledge of cultural environment is utmost important to the international marketer.
3. Political environment has a major influence on creating sound investment climate. The law and order situations influence business operations. International marketing operations can be smoothly conducted in a country having political stability and healthy political situation.
4. International marketing is affected by legal environment of a foreign country in which a firm intends to operate. International marketing transactions need compliance with legal provisions. So international marketer should be familiar with the legal environment of foreign countries where marketing efforts will be made.
5. The state of competition prevailing in an international market has great importance upon the strategic plan of the international marketer.
6. Technological changes have also great importance because of its direct impact on product obsolescence issue. Up-to-date knowledge about the state of technological environment is essential for the firms associated with international marketing.
International Marketing Environment – 5 Major Factors Affecting International Marketing Environment
The successful companies in the global perspectives are constantly scanning the marketing environment and presenting new opportunities and threats. The successful x business firms are continuously updating their products with the latest technology and requirements in the changing marketing environment globally.
It is difficult to survive for those companies, which fails to see changes as an opportunity in the international business. It is for the marketing managers in an organization to make such efforts regularly for scanning the international marketing environment forces. In the economic area and in the global perspectives the companies and consumers are increasingly affected by the international market and other forces.
Therefore the firm must monitor the following major forces, within the changing global scenario. It includes geographical factors, demographical factors, economic forces, socio-cultural forces, political forces and legal forces in the international marketing. A marketer must pay his attention to all these forces as the analyses of all these factors present new opportunities and there after methods to cope with threats in the international business.
A detailed discussion of all the factor is as under:
Factor # 1. Geographical Environment:
Geographical environment is determined on the basis of the analysis of various geographical units such as, neighbourhoods, cities regions, states and nations etc. The business firm operates its business in one or a few geographical areas or in all but pay its specific attention on the potential areas.
A firm divides the market into different targeted units on the basis of geographical characteristics. The environment prevailing in the particular location helps a marketer to decide the marketing mix in the international business. For example the purchasing power of the consumers of two nations may be different. It influences the buying behavior of the individuals, which ultimately influences the marketing decision making process as well as market mix.
If a company has planned to enter the U.S. market, the firm should understand the geography of that country before deciding about the marketing strategy to be adopted there. It must understand the characteristics of the buyers at different locations and to decide the product and other features accordingly. The geographical characteristics should be examined very carefully in the international marketing decisions.
The geographical environment can be determined by the following:
i. Geographical characteristics of the people.
ii. Consumer’s taste for the product.
iii. Geographical characteristics of the market.
iv. Attitude of the host country.
v. Potential for growth.
The manufacturers should distinguish carefully among the regions, in which they are planning to operate and to select those markets where they have favourable environment to operate and also have a comparative advantages of business in the international marketing.
The world market can be subdivided on the basis of following market characteristics:
i. High market potential zones.
ii. Less market potential zones.
iii. Average market potential zones.
iv. High risk countries.
v. Low risk countries.
vi. Developed economies.
vii. Developing economies or third world countries.
viii. Market potential in the home country.
ix. Other demographical factors.
The marketing strategy is determined on the basis of above mentioned characteristics of the world market in the international business. It varies from market to market and product to product. In one market setup one product can be a luxurious, whereas it may be necessities in the other market.
The marketing environment of a particular nation is also depends upon the market characteristics. In high risk nations the marketing environment is always different in comparison to low risk countries. It also more or less depends upon the political structure of that country and how frequently the government of that country is accepting the different changes in the market.
The marketing environment of developed nations and developing nations is also different in many ways. The people of the developed nations do have good purchasing power. They are very quality conscious. Their approach to every aspect is always advanced and refined. On the other hand the purchasing power of the people is low in the developing nations.
They are having compromising nature. The market environment in both the cases is always different. But it is pertinent to mention here that some of the developing nations like India are adopting the changes and marketing requirements from time to time, by keeping their national objectives and interest on the top priorities.
Therefore they have attracted the attention of the developed nations to make investment in their country. The developed nations are also looking these markets as a big potential market for their product. It is only the reason that U.S. based firms have shown very keen interest in the Indian market and in other similar kind of markets.
The demographical variables also play an important role to analyze all the above mentioned variables in depth. The age groups of a particular zone, educational qualification, household system, sex, marital status and background etc. are the basis for examining the geographical environment in the international business.
Therefore it is for the marketers to analyze, examine and scan all other variables while taking any decision and making any strategy about the marketing mix in the international business.
The geographical environment helps the marketers to concentrate their marketing efforts to the potential countries so that all other marketing efforts could be utilized fruitfully. It is evident that geographical mobility always changes the habits of the consumers. Therefore the scanning of geographical environment should be carried out scientifically in the international business.
Factor # 2. Demographic Environment:
Demographic environment of a country explain the pattern of population and other changes in the societies, cities, regions and nations. It is explained on the basis of age classification, sex classification, educational level, marital status, household patterns, religion based classification and nationality etc.
The analysis of demographical environment is useful for market segmentation, taking marketing decisions and formulating marketing strategies.
Demography provides an analysis of quantitative as well as qualitative aspects of the population.
i. Worldwide Population Growth:
The world population is showing an explosive growth rate. It was 6.1 billion 2000 and will exceed 7. 9 billion by 2025.
The following picture presents an alarming scene of world population:
“If the world were a village of 1000 people, it would consist of 520 women and 480 men, 330 children and 60 people over age 65, 10 college graduates and 335 illiterate adults. The village would contain 52 North Americans, 55 Russians, 84 Latin Americans, 95 Europeans, 134 Africans and 584 Asians. Communication would be difficult because 165 people would speak Mandarin, 86 English, 83 Hindi, 64 Spanish, 58 Russian, 37 Arabic and rest would speak one of over 200 other languages. There would be 329 Christians, 178 Muslims, 132 Hindus, 62 Buddhists, 3 Jews, 167 non-religious, 45 atheists and 84 others.”
The world population is growing at an alarming rate. The majority of the world population is still residing in the less developed nations. According to one report, it is about 76 percent of world population who are residing in the less developed regions of the world.
The growth rate of population is nearly 2 percent in these regions, whereas the growth rate of population is about 0.6 percent in the developed nations. The death rate is falling in every part of the world but the birth rate is still stable in the developing nations.
ii. Population Age Mix:
The population of different countries varies in their age mix. The age factor is an important factor in deciding marketing strategy in the international business. The Mexico is a country with very young population in the world. On the other hand Japan is a country with one of the oldest population in the world.
The age mix can be further subdivided, for example for marketers, the most populous age groups decide the international marketing environment. The marketing strategy is decided according to the most populous factor. It depends which group in the age mix is dominating.
One question is very important here that whether marketers are to develop separate plan to promote their product in every age group and what strategy is to be adopted. Recently, Tommy Hilfiger has planned to launch a different range of their product for different age groups in Indian market. It has different product line to cater the different demographic segments.
It is including men’s and women’s sportswear, junior, Hline and Kids. It has also planned to target the middle upper segment of different income levels. Tommy Hilfiger has big brand logos on his clothes for teenagers and a little polo logos on the product of baby boomers. The brand name of Tommy Hilfiger is more inclusive than the exclusive strategy.
The Impact of Higher Growth Rate of Population on Marketing Strategy:
The higher growth rate of population do have a big impact on the international business scenario. If the population of a country is growing very rapidity, it does not mean that the market is also growing. It must be supported by sufficient purchasing power. Therefore the company must analyze the market opportunities of their product before deciding about the marketing mix.
For example, the Chinese government is very alert with the explosive growth of their population in order to strict its population growth the Chinese government has passed a regulation of limiting their families to one child only.
As a result the Chinese children’s are being showered with each and everything right from little chocolate to big computers. This trend and carefulness about the child has encouraged other business firms to pay their attention towards Chinese market. It has provided a big opportunity to the business houses to do business there.
Thus it can be said that while deciding marketing strategy for the business it is not only that the growth pattern is considered, but the study of potentiality of a particular segment is also equally important. Unless or until the growth rate of population or the entire population structure is not backed with the purchasing power, it will be meaningless from marketing point of view.
Therefore a firm must analyse their market opportunities by keeping in mind all these factors. It will certainly be helpful for the companies to find out more market opportunities.
iii. Educational Groups:
The population of any country can be divided on the basis of following subgroups of educational qualifications- (i) Illiterates groups (ii) High school dropouts (iii) High school certificates (iv) College degrees and (v) Other professional degrees. The impact of our educational qualification can be observed from our day to day behaviour.
An educated to the higher level will be demanding for the quality products of each kind. The consumer behaviour also tends to influenced by the educational level. Therefore the marketing strategy for a product or market is to be decided by keeping in mind the educational level of that particular society, culture and nation etc.
iv. Household Pattern:
The household pattern of a family do have its big impact on the buying patterns. It may consist of a husband and wife, couples with children, single parent families, children married couples, traditional families, non-traditional families. The buying behaviour of the customers is influenced by all these factors.
A marketer must consider all these factors while taking any kind decisions of such kinds in the international business. It is evident that the factors like age, sex, educational level, life style and household pattern etc. influences the marketing environment to a great extent in the international business.
Each group do have their own preferences and choices. The demographic patterns are considered highly reliable in the short run as well as medium period of time. The various multinational companies are designing their marketing product, strategy and market programmes for the specific markets instead of man’s market.
v. Gender Groups:
Men and women tend to have different attitude and behaviour. It is based partly upon genetic characteristics and partly upon sociological features.
“Women tend to take in more of the data in their immediate environment whereas men tend to focus on the part of the environment that helps them in achieving a goal.” The gender based environmental factors are helpful in deciding marketing mix in the international business. The product can be designed specifically for each group.
The scanning of demographic environment pertaining to the gender groups should be considered while deciding marketing strategy for the product and a particular market.
Factor # 3. Economic Environment:
The economic environment can be studied in two ways- (i) From macro point of view and (ii) Micro point of view. The macro views of studying economic environment deals with needs and requirements of the consumer and the economic policy of a country. The economic policy of a nation also establishes the scope of market and the economic outlook of a business firm.
On the other hand micro environment focuses to study firm’s ability to compete in a market. The economic environment of a country defines the marketing opportunities in the foreign business. The economic environment of the home country influences international marketing, to the great extent.
The economic environment can be studied in the international prospectus as under:
(i) Macro Economic Environment:
The macro environment of a country can be studied by taking a vast perspective. It includes the study of population, national income, economic advancement of a country and the study of consumption patterns etc. It is pertinent to mention here that a clear cut idea of the economic environment of a particular host country is always useful to form an appropriate marketing strategy in the international business.
The macro environment of a country can be studied as under:
a. Per Capita Income/GNP and Population:
The study of per capita income and per capita gross national product is an important variable in the study of macro-economic environment. The nature of the population is considered to be a basic requirement of the study. The per capita GNP in combination with population provides an estimated consuming capacity of the population.
The consuming capacity depends upon the total population of a country and per capita income of the people. It is evident that the developing countries are establishing themselves as a potential markets. The U.S. market has increased their attention towards developing countries because of the said reason only.
b. Economic Advancement of a Country:
The economic advancement of a country can be characterized as under:
i. High gross national product and income.
ii. High per capita consumption.
iii. Lower population growth rate.
iv. Lower cost per unit.
v. Substantial amount of capital investment.
vi. Advanced transportation and communication facilities.
The developing nations are emerging as an important market in the international business. The factors discussed above can provide an estimate of the market if in depth and detailed analysis is not possible.
c. The Structure of Consumption Pattern:
The consumption pattern of a country also determines its economic environment. Thus it is necessary to measure the consumption pattern of different societies, cultures and nations. It determines the structure of consumption pattern in a country. The necessities of one country or economy may be luxurious in other economy.
Therefore the consumption pattern of different economies also differs accordingly. The consumer of developed economies may emphasize more on the consumption of capital goods whereas in poor countries or less developed nations, emphasize of consumption may be on the consumer goods.
“When a less developed economy decides to become technically and economically more advanced, an extraordinary percentage of national income must be diverted to producer goods, especially if that economy is unable to attract substantial amount of foreign currency in the form of direct investment, loan or other add.”
d. The Economic System of a Country:
The economic system of a country is another indicator to determine the macro-economic environment of a country. The economic system of a country is based upon one of the following system- (i) Capitalistic approach (ii) Socialistic system or state owned system and (iii) Mixed economy. The Capitalistic system is prevailing in the United States.
The Socialistic pattern or state owned system is prevailing mostly in the communist countries. All the activities relating to production and distribution are centrally control by the government of that country. In some countries like India, mixed economy approach is prevailing.
It is pertinent to mention here that the economic environment of a nation depends largely upon the economic system of that country, Therefore the study of economic system is considered very important in the international business.
The following indicators also determine the macro-economic environment of a country:
i. Prices of the goods – The prices of the goods is considered an important indicator while examining the macro-economic environment of a country. It includes the prices of gold, wheat, cotton, industrial raw material and finished steel etc.
ii. Production Indicators – It includes the production of different articles such as automobiles, coal production, paper production and electricity production etc.
iii. Others – Among other indicators which determine the macro environment of a country includes money supply inflation, deflation, industrial production index and inventories etc.
A marketer should examine those economic indicators very carefully, which are relevant to their business decisions.
(ii) Micro Economic Environment:
A micro environmental view of economic environment emphasizes on a firm’s ability to compete within a market. It refers to that environment within which a firm takes decision regarding to its product and market. It further indicates that whether a firm can enter in a particular market successfully or not?
It considered the competition factor as an important variable in this regard.
Competitiveness and Demand Analysis:
The competition can be analyzed by defining characteristics of the products.
There may be the following categories of a product, which are considered in the analysis of competition:
a. Unique innovation at entry level – It is mainly technical in nature. The company enters in the market by introducing its new innovations.
b. Competitive range – It is that range of the product, which is available in the market as to compete with other similar brands in the market.
c. High quality product – It is generally unique and much superior in quality to other existing brands.
The demand for the product of all three categories varies in every situation. Therefore the nature of the competition will also be different in all these categories. With the help of analysis of the competition, a company can ascertain that which product is to be pursued and in which segments it is to be marketed. An analysis of demand is also considered in this view point.
The demand factor can be explained briefly as under:
a. Existing Demand – It refers to the demand of those products, which are purchased to satisfy a particular need and requirement.
b. Latent Demand – When a particular need or requirement is not being satisfied and no product have been offered in this regard.
c. Incipient Demand – It refers to that kind of needs, which are likely to be emerged in future. It emerges in that situation when the customers become aware of it. Therefore a company/firm must examine all three situations before taking any decision relating to international marketing.
Advantages of Competitiveness:
The following questions should be examined while analyzing advantages of competitiveness:
a. Who the competitors are?
b. Competitor’s strategies and their targeted objectives.
c. Competitor’s strengths.
d. Competitor’s weaknesses.
e. Opportunities available in the market.
f. Various implications and threats of competitors.
It is very difficult to make an analysis of a firm in the international business. Because it is difficult to know that from which part of the world a firm will enter the market. The demographic profile of the industry is the best base to examine the competition in the international business.
An attempt should be made to know the financial strengths of the competitors and other strengths along with weaknesses of the competitors. The company must decide its course of action after analyzing the market opportunities and thereafter the threats and problems in the international business.
It is therefore essential for the firms to consider the critical aspects first as to take any decisions regarding the product and market effectively in the international business. The multinational companies mostly do have all the required features to dominate over the single industry business or small national competitors.
Therefore the multinational companies do have an advantage of competitiveness over the other firm, which is considered to be always useful for the business firm.
Analysis of Economic Environment:
It is important for the firm to make opportunity analysis to determine whether it is worthwhile to take entry into foreign market or not.
The analysis of the opportunities concentrates on two sets of criteria, i.e.:
(1) Cost-Benefit Analysis:
The cost-benefit analysis emphasize on the analysis of market, competition and financial strengths of a company. While analyzing the market certain set of questions may be examined. The products, the needs and requirements of the market. Price of the product and thereafter the margin.
The second aspect for which the cost-benefit analysis is carried out is competition. The kind of competition, the legal complications all these factors are examined carefully. Finally the financial strengths of the firms are examined. The resources they do have. The return expected etc.
There are also other criteria’s, which can also be examined from cost-benefit point of view. The analysis of the workforce can be carried out in this respect. In addition, transportation analysis, communication system etc. are also considered in the cost-benefit analysis.
(2) Risk-Reward Analysis:
The risk-reward analysis emphasize on the impact of various environmental factors on the marketing mix. It examine that how socio-cultural, political and economic factors affect the product and market in the international business. The national economic business. The business firms must analyze that what impact may be there of various national policies over the product and the market in foreign business.
The firm should analyze carefully the monetary policy of the country, what is the position of inflation and whether the currency of that country is strong or not etc. All these economic factors should be considered in the risk-reward analysis while analyzing the economic environment of a country. It can be explained with the help of following case of a U.S. based company.
Impact of Economic Environment on Marketing Strategies:
The overall economic environment of the host country revolves around product and the market. It has a significant impact on the marketing strategies of a firm. The impact of economic environment varies in different situations and phases of the economies as well as the business.
It can be discussed in detail as under:
i. Impact of Macro Economic Environment on Marketing Strategies:
The macro environment enforces its activities in different sectors of the economy. It is evident that whenever there is boom in the economy the optimistic approach is always followed in all the sectors of the economy. On the other hand if recession is there in the economy, the adverse impact is observed in all sectors of the economy.
The economic conditions always affect the health of the economy. It also affects the consumer confidence, which can be observed in his buying pattern. A favourable economic condition always generates various opportunities in different sectors. If the economic climate is unfavourable, the reverse will be the position in all the sectors of the economy.
Despite these facts a company may enter in the foreign market by keeping in mind long term economic prospects. In the short run the circumstances may be unfavourable but in the long run if the perspective are there, the firm should take the opportunity of future favourable environment.
ii. Impact of Micro Economic Environment on Marketing Strategy:
The micro economic view point of a firm focuses on the firm’s ability to compete in a particular product and market in the international business. If the firm did not orient its marketing strategies in accordance with the product and market requirements, it will not be possible for the company to compete in the international business.
Factor # 4. Socio-Cultural Environment:
The socio-cultural environment can be defined as a set of traditional benefits and values that are passed and shared among different societies. This is a way of thinking process and a system of life culture, which is transmitted from generation to generation. It can be considered as a concept which encompasses different values, different customs and different norms.
The following are the main characteristics of Cultural Environment:
i. Prescriptive:
It describes that kind of human behaviour which is acceptable in the society. It also denotes certain kind of beliefs regarding the product characteristics, which are acceptable to the particular society. The consumption of alcohol and smoking was societies considered socially acceptable in certain societies. But now in most it is not desirable both socially as well as clinically.
ii. Shared Socially:
The culture is a pattern of different values, customs, norms and beliefs, which is shared socially. The impact of all these factors goes to the decision making process of an individual in a particular society. Therefore the marketer must study all these factors before taking any decision regarding international marketing mix.
iii. Subjective:
The socio-culture environment is always subjective. The people of different societies perceive differently for the same object. The interpretation regarding the same object may be different in different cultures. Something may be acceptable to one society but may not be acceptable to the other culture. The interpretation of dowry is different in different societies in India. In some cultures it is encouraged while in some cultures it is discouraged. The same perception should be kept in mind by the marketers in the international marketing.
iv. Dynamic:
The socio-cultural environment tends to change consistently. It passed through generation to generation. It changes in accordance with the situation to situation, time to time and place to place. It generates new ideas and also absolute some products from the market. The marketers also keep Lim updated with the latest changes and requirements by producing new products and innovating new technologies continuously.
v. Facilitates the Communication Process:
The advertisements play an important role in communicating the product features and benefits to the target audience. The marketing efforts always interact with a particular culture and determine the response regarding that particular product or service. It is helpful to determine the success or failure of a product. Thus it can be said that socio-cultural environment facilitate the communication processes.
Components of Socio Cultural Environment:
The human behaviour is based upon the cultural forces. The culture can be said to be a total pattern of human behaviour embodied in a country, state and its small subdivisions. It is considered to be most important force in international market which enables a marketer to decide whether the products or services are compatible with a particular market.
The following are some of the important components which are studied and cared in the international marketing:
(1) Language – The Media of Communication:
The boundaries of different countries are set along linguistic perimeters in majority cases. These perimeters are set on the basis of physical forms. It may be a mountain range, a river, an ocean etc. It also separates the language of one nation from others. It is very important for a marketer to be acquainted with the language of that particular country in which he is interested in doing business. The language can be seen as the essence of the culture without which no other aspect of culture can be truly understood.
The physical aspects of communication play an important role in international marketing. The physical aspects includes smile, eye to eye contact etc. It plays a vital role in a culture use of language. The products or services advertised with smiling faces may produce positive or negative reaction in the target market.
It depends, how a particular culture perceive regarding the particular appeal. Marketers must change style as per the requirements of the market. It should be changed from place to place and time to time. The marketers must know that before a market accept your product. The cultural forces also play major role in this regard.
(2) Customs:
A successful marketer always looks into the close connection between custom and customers. It is presumed that a marketer should make his product a part of customary action of an individual. The environment of the industry revolved around the custom and on the other hand custom should also be revolved around the product.
This is because, sometime the purchase decisions regarding the product or services is dictated by the traditional culture, gender roles, buying patterns of certain society, age demographics and family structure etc. The first-hand information regarding all aspects of the particular custom should be with the marketers. It will be certainly helpful for him to take decisions regarding product or services.
(3) Education:
For the marketing of certain goods and services it requires that the ultimate user has attained a specific level of education. This is a very difficult task in international marketing because different nations have their different legal and other setup. It may put certain restrictions that how much people can be educated in that particular country.
There may be different methodology of imparting education. The diffusion of new innovations into different culture depends upon literacy rate. It leads to better communication, new ideas, improved technology etc.
(4) Social Organization:
The social organizations are also an important component of a socio cultural environment. The people in a society organize different activities, consistent with other expectation and cultural values. The role of culture, family relationship, friendship, social reference groups and gender role is very important in the decision making process of an individual in a society.
(5) Religion:
Religion is a most important component of culture. It provides people a sense of knowledge that why they exist, what is their role and responsibilities. Their attitude, values, beliefs and behaviour is some sort of reflection of their culture and it is mostly dictated by the religion. It also plays an important role in decision making process. The study of all relevant aspects in this regard is necessary in the international business.
(6) Legal System:
The legal system in the world fall into one of the following. It includes common legal environment, civil legal system, Islamic legal system, communist legal environment, democratic legal system or other indigenous legal system which is based on the religious pattern. The legal system of a particular country is dictated by the one of above or more patterns. It reflects the attitude of a culture which may be written or unwritten.
The basic purpose of studying all these factors was to illustrate that how the marketer approaches another socio cultural environment by adopting the view point of that particular culture in the international business. It should be clear in the mind of a businessman that socio cultural forces play a vital role in deciding the international marketing mix.
Impact of Socio Cultural Environment on Different Aspects:
The socio cultural forces play a vital role in the international decision making process of marketing. The marketers are to take in to consideration, all components of cultural environment in international business.
The impact of socio cultural environment on different aspects can be studied as under:
(i) Impact of Socio Cultural Environment on the Consumption Pattern:
It is evident that consumption pattern varies from one culture to another and one society to another. The cultural forces dictate the consumption patterns, the living styles and the priorities of needs of an individual and a society as well. We can take an example of consumption pattern of beef.
The consumption of beef is more in United States and Argentina whereas it is less in China and banned in India. The eating habits of one society or culture are changing in comparison to another society or culture. The socio cultural environment not only influenced the consumption pattern but also the buying behaviour of an individual or society.
The purchasing pattern of Muslims is different while buying mutton. They prefer to purchase only the halalled mutton, otherwise they will not be purchasing. These kinds of restrictions are prevailing in the Islamic culture.
There is a big challenge in front of the marketing. The business house is to decide the marketing mix in such a way which suits and fits to the needs of a particular culture. The success or the failure in the international business depends upon the decision making abilities of a marketer, which is also based upon the cultural forces.
(ii) Impact of Socio Cultural Environment on Thinking Process:
The thinking process of an individual and society is influenced by the socio cultural environment. While going for international business, a marketer makes his own assumptions about socio-cultural dimensions of that particular country. It is important for a marketer to recognize how the perceptions about foreign cultures can be distorted by the effects of self-reference criterion.
It is for the marketing manager to make an attempt to eliminate the effect of self-reference criterion, while investigating a phenomenon in another country. The following steps have been suggested to remove under influence of the self-reference criterion.
“First the problem should be defined in terms of the culture of the home country. Second, the same problem is defined again, except that it is defined in terms of the cultural norms of the host country. Third, a comparison is made of two cultural composites. Any difference noted between the composites indicates an existence of the self-criterion, necessitating another look at the problem with the self-reference criterion.”
Further, the awareness of the impact of self-reference criterion can help a manager to prevent a transfer of socio cultural norms to an overseas market. It can be helpful to become more customer oriented and the marketing strategy will be representing the true market needs and requirements.
(iii) Impact of Socio Cultural Environment on Communication Process:
The socio cultural context of a nation and way in which the information is processed, both in combination develop a summary of communication process in a particular country. A country can be classified in two ways, on the basis of cultural influences on communication process.
(a) High context culture
(b) Low context culture.
It explains how the socio cultural dimensions are understood and how the communication is conveyed, processed and perceived. In the high context culture, in most of the time the communication is indirect and most of the information are not carried in the verbal part. The major part of the information is contained in the nonverbal part of the message. This type of culture is prevailing mostly in France, Spain, Asia, Japan and in middle east Arab nations.
On the other hand low context culture is opposite to the high context culture. In these types of the culture the exact words are used to convey the particular message. The important point of this type of culture is what is said, and it is not important that how it is said, also not the environment within which it is said.
The study of the impact of socio cultural environment on communication process is important while promoting products or services in the international market. What decision is to be taken, where it is to be taken, when it is to be taken, by whom it is to be taken is considered in depth in the international marketing.
Factor # 5. Political Environment:
Political environment is an important ingredient in the international business. The political environment does not remain constant. The changing political environment is uncontrollable in nature. Therefore it is necessary to understand the political risks in the international business.
The multinational companies are to face different political environment and they are also to cope with the politics of different nations. The political environment of different nations may influence product, price, place and promotional factors in the international business.
“The economic interest of multinational companies differs widely from the economic interest of those nations where the MNCs do business. In the absence of mutual interests, political pressures can lead to political decisions, resulting in laws and proclamations that affect business.”
The above decisions lead to the conclusion that political environment of a country affect the international marketing activities. The political environment may have the following types- (1) Foreign (2) Domestic and (3) International political environment. The most of the multinational companies do have little control over the changes in international politics.
It depends upon the positive relationships among the nations that how they are prepared to respond to the changes. The government policies play a vital role in this regard. In India, until 1991 there was closed economy and the foreign investments were discouraged. After 1991 the new Indian government started a reform programmes in this context.
The foreign direct investments were encouraged and it transformed India into one of the most dynamic and highly potential economy in the world. This was possible only because of political will. If the government of such kind comes into power, which again discouraged the foreign participation, the whole of the world’s attention can divert once again to any other nation. It is because of the political risks.
Therefore the MNCs are always keen to study the political prospect of a particular nation, where they are willing to do business. To assess the potential of international marketing environment, the study of political risks is very important. The indicators which are responsible for the political risks should be identified and studied.
The following are some factors which are responsible for the political instability:
(a) Social Unrest:
The social unrest is a major cause for the political unrest. It includes conflicts among different groups in the society, conflicts based upon different groups of different religious such as Hindu- Muslims and conflicts among trade unions and the government etc. A multinational company or domestic company may not be involved directly in such disputes, but the business of the companies is likely to be disputed severely by such types of the incidents.
In practice human nature is of two types. One type of human nature belongs to those who urge to stand alone and other type of human being urge to stand together. Both of these ways provide different ways for the utilizations of countries resources. The way of utilizing resources in a co-operative manner tends to be a closed economy as it was in the Soviet Union.
China still has a closed economy and the pattern of Chinese economy is still based on the cooperative sector. It is evident that China is having a rich economy but they have also started to shift their attention towards open economy. One group is still in the support of co-operative system, while other group is in favour of the open economy.
This type of situation may cause certain interest in the society. The multinational companies are to study both these situations before deciding about their marketing mix.
The social unrest may be caused by the following types of the conflicts:
(i) Domestic disputes – It is confined within the boundaries of the countries and can escalate into violence. The civil war may be a good example of it.
(ii) International disputes – International disputes can draw the attention of the third party into the conflict. The international problem of Sri Lanka and Nepal can be an example of such types of the disputes. Such types of disputes can also cause the social unrest in a country, which are important to be considered in the international business.
The above mentioned conflicts may lead to a direct confrontation between two countries. Iraq and USA were having deep rooted grievances with each other, which was converted into the direct confrontation. Such types of circumstances and social unrest always should be discouraged from international business point of view.
(b) Attitudes of the People:
An assessment of the government of the host country and analysis of the attitude of people of the host country is very important in the study of practical environment. The perception and attitudes of the citizens towards Multinational Corporation should be evaluated in the international marketing.
What they perceive about the foreign companies? Generally it is thought that foreign companies believe in the exploitation of the resources of the host country. Whether it is natural resources or human resources, such type of attitude of the people may cause unrest among different groups in the society, which is harmful for the international business.
(c) Government Policies:
The government policies play an important role in the formation political environment. The government policies tend to change either with passage of time or change in leadership or change in the government itself. The change in the attitude of the government leads to change in the government policies.
It may be either for betterment or for the worse. The government policies tend to change in the short run or in the long run period. The government policies can affect the business environment internally as well as externally. The internal effect of the government policies regulates the activities of a business firm within the home country, whereas when the business activities are regulated across the national business, it is said to be the external effect of the government policies.
It is pertinent to mention here that a company must pay its special attention towards election time. Some of the parties can negotiate with interest of companies for the vote politics. Such situation can create an unwelcome atmosphere for the multinational companies.
Therefore a company must evaluate whether early threats are just and it need not to take any drastic decision at this moment. The company must determine its future policies by evaluating the political environment deeply as the same situation may be instant and may not be real intention and attitude for the future.
How to Minimize Political Risks?
It is impossible to eliminate the total political risks but these can be minimized up to certain extent. The multinational companies should take all these measures as to reduce the political risks in the international business.
The following are some of the measurers to reduce the political risks in the international business:
(1) To Encourage Local Economy:
A company can stimulate local economy in a number of ways. It may encourage local purchase for its raw material and other products used for its production and other operations. It can boost local partners, who can give opportunities by providing valuable political links.
Sometime local sourcing may be compulsory. The local contents boost the economy in two ways- (i) By encouraging demand for the domestic products (ii) By investing in local production facilities by the company can boost the local economy. Finally the international company should make an attempt to artist the host country by being expert oriented.
(2) By Providing Employment Opportunities to the Nationals:
Sometime a big mistake of such kind is done by the multinational companies that the people of less developed nations are poor by their choice. They do not have any vision, they are lazy and are not intelligent. They are mostly illiterate and are not self-motivated towards their job. They generally believe that the local persons can be fit for the lower level jobs only and they would like to appoint their own persons on the higher level jobs.
“Therefore the multinational companies have to change their attitude in this regard and should weigh the impact of automation carefully in a cheap labour and highly unemployment area. The process of automation does not work well in the countries like India, where job creation on the national policy. An inability to automate production completely does not necessarily constitute a negative for multinational companies. Multinational companies may gain more in less developed companies by using international technology instead of the most advanced equipment. International technology accompanied by additional labour is less expensive and it promotes good will by increasing employment.”
(3) Sharing of Ownership:
It is always advisable that a company should try to share the ownership of the company with others. It may be by converting a Private Ltd. Company into Public Ltd. Company or by converting a foreign company into a local company. The ownership can also be shared by way of joint venture.
Sometime an international business the local firms may not be a partner of the foreign based firms. Instead of this the company from other country start joint venture with that company. It is helpful to reduce the political risks because the host country will not be willing to destroy its relations with more than one nation in a single time. By this way it makes difficult for the host country to take over business venture without offending a number of nations at once.
(4) Not to Involve in the Political and other Disputes:
It is always advisable to the company not to involve in any kind of disputes, whether they are local disputes or disputes within two or more countries. The company must state it clearly that it is none of their business. There only motive is economic in nature. If company’s involvement is there in all these matters, it is always harmful for the company.
(5) Sensitive to Changes in Political Mood:
A business firms should always be sensitive to the changes in political mood. The marketers must make a contingency plan in advance. As the changes take place in the political climate the marketer should also reduce the exposure in the market. A defensive approach is always advisable in case the political mood is serious in a country.
In addition to all these measures companies can also reduce their business risks by employing the strategy of risk shifting. The companies can get insurance coverage from number of sources.
Some of the sources can be explained as under:
(i) Insurance through Private Parties:
The business companies can transfer their political risks to the third parties by purchasing political insurance. The companies will be compensated in case of such losses which are caused due to political risks. The comprehensive policy is advised to be taken which should include coverage for kidnapping, terrorism and creeping expropriation etc.
(ii) Government Insurance:
The multinational corporations should not rely on the private insurance only. They should also search for other alternatives. There are so many non-profit organizations and public agencies which provides the same type of coverage. OPIC is United States based government agency and provide several types of assistances and having political risk insurance as its primary business.
It provides the protection to cover following types of risks (a) Inconvertibility of the currency (b) Expropriation which includes creeping expropriation and (c) Loss or damage caused by war, revolution or insurrection. A typical insurance contract runs up to twenty years at combined annual premium of 1.5 percent for all three coverage considering that private insurance companies issue a 3 year policy. Overseas Private Investment Corporation’s coverage is a positive feature.
(iii) Multinational Investment Guarantee Agency:
It was established in year 1988, with the objective to create an attractive investment climate to its member states. The main objective of the MIGA is to promote private sector investment in the developing nations through insuring investments against political risks.
It offers following types of coverage against political risks:
(a) Transfer of currency
(b) Wars
(c) Other domestic problems
(d) Expropriation
(e) Breach of contract – The annual premium for every coverage depends upon the type of the project coverages and other terms and conditions. Its rates are bit on the higher side in comparison to others.
Political Perspectives of a Nation:
A multinational company should evaluate the political environment of a country before operating its business activities there. The analysis of the political risk is very essential before going for international business. It is evident in the history that nationalistic approach of a nation is always damaging to the international business.
It is mostly prevailing in the third world countries. As for as the US economy is concerned, it cannot ignore the importance of third world countries for its economic, political and national interests. The world’s nation are the major suppliers of raw materials to the U.S. market.
The multinational company must emphasize on the following political perspectives before taking its entry into foreign business:
(1) The Form of Government:
The government of a nation plays a major role in the foreign business. The policies of the government depend upon the form of the government governing that particular nation.
The following are some forms of the governments:
(i) Democratic Governments:
These types of governments are formed through regular elections. The different party systems are prevailing in these nations. In some countries two party system is prevailing, i.e. USA and UK. In some countries it is multiparty system i.e. Italy and France and somewhere in the world multiparty system with one or two party dominance is prevailing. This system is prevailing in India.
The each party do have their own agenda and working system. With the change in government the programmes, agenda, and policies etc. also changes. It is also decided whether the private sector investments or foreign direct investments will be encouraged or discouraged. Whether the import of the goods will be restricted as to promote domestic industries or vice versa. It plays an important role in the international business.
(ii) Communist Government:
This type of system do have complete control over the business activities. They are very rigid towards regulations. Such types of governments are governing in the People Republic of China, North Korea, Vietnam and Yugoslavia etc. The working of these governments is concentrated around their national interests only. Therefore the multinational companies are to evaluate the system very carefully by keeping in mind its interests of doing business in that particular country.
(iii) Dictatorships:
These forms of governments are authoritarian regions. These are run either by the civilian dictator or by military dictators. These types of governments are prevailing in Pakistan and South Korea etc. These types of dictators also hold elections as to adopt a civilian posters.
The government in this type of culture is run by the monarch as its head. The Sandi Arabia and Jordan do have its monarchies. A monarch may be having its inclination to either the leftists or the rightist.
A view of a country’s political system and its impact on foreign business must remain free of stereo typed nations. The political philosophy of a nation changes over a time and with a change in the political system. Therefore it is essential for the multinational companies to analyze, review and understand the current and emerging political perspectives, before taking any decision regarding the international business.
(2) Stability of the Government:
The stability of the government is considered very important in the international business. If the sitting government with whom the agreement was made is different from the government such changes in the government may create certain problems in implementing the agreements. It may be because of policies of the new government.
Therefore a multinational company must assess the stability of the present government and the political structure of the particular country. If the present government has not any scope to come in the power again, the policies of the probable government should be examined carefully.
The following are the reasons which are responsible for the instability of the government:
(a) Public unrests like riots, strikes etc.
(b) Crises in the government like majority and opposition by the rival group.
(c) Armed attack by another country.
(d) Other causalities at top levels etc.
(3) Changes in the Government Policies:
Sometimes the government policies tend to change frequently. In case such type of environment exists, it makes the things uncertain for the foreign business. The multinational companies always dislike such types of frequent changes in the government policies. Therefore it is important for the multinational companies to assess and evaluate carefully the various changes in the government policies and the frequency of these changes. They should take any kind of decision about foreign business only after reaching until certain concrete conclusions.
(4) The Attitude of the Government towards Foreign Direct Investment:
It is important to mention here that the attitude of the government towards foreign direct investment matters very much in the international business. Whether it is the case of developed nations or the case of developing nations. The developing nations may discourage foreign direct investments for its nationalistic approach.
In developed nations it is again difficult for the multinational companies to enter in the joint venture until they don’t win the faith of the concerned government. It is therefore the appropriate to analyze the regulations of the host country and to identify underlying attitudes and motivations.
(5) Administrative Setup of the Country:
Every nation does have its own administrative setup. It depends upon the experience, culture, availability of qualified and experienced administrators and style of functioning of the government. The business firms tend to complain about the bureaucracy of United States for its functioning. They are much efficient in comparison to the bureaucracy of some other countries.
The business firm is to study the administrative setup of a country in depth and then to decide its line of action. How to get work done in the different perspectives is the major challenge. In some countries they may find it easy to get their objectives fulfilled whereas in some countries it may be difficult. The administrative setup of a nation largely depends upon the ruling culture of government and experience to govern the state. Therefore the multinational companies are to cop up accordingly in that system.
(6) Political Model:
A country can be divided on the basis of one of the following political models.
A brief summary of each political model is as under:
(a) State Centric Political Model:
It is assumed in the state centric model of international politics that national government seek more power in the content of its international objectives. The national government tends to utilize its internal political resources for the fulfillment of its international objectives. Any action of the national government is assumed to be a desire for the international power.
(b) Bureaucratic Model of Politics:
In such type of model the government functioning is carried out through bureaucratic setup. Thus the government policies tend to change slowly.
(c) Transnational Political Model:
It emphasize that dominant role in the international politics is played by the different organizational groups other than the national governments. Such organizational groups do have greater impact in the international politics. Thus the above model must be studied from critical point of view while taking any decision in the international business. How the business activities may be carried out in such political setup and what different risk factors may be there should be evaluated before taking any decision of such kind.
The government can impose following restrictions from time to time by changing its policies:
(1) Exchange Control:
When the countries do have a problem of balance of trade then it may impose restrictions on the free use of foreign exchange. It may be an effort by the government to change domestic industry. It is mostly used by the governments of the developing nations to regulate their hard currency balances. The governments can restrict the import of luxurious items from outside the countries.
(2) Import Restrictions:
The import restrictions are generally imposed as to protect domestic trade industries. By doing this the local supply of the product is encouraged. The firms can face two types of problems by this (i) The local supply of raw materials or other articles may be inferior in quality. (ii) The local supply may be short. It is the will and attitude of the government, which tends to change from time to time. If government want to encourage domestic industry it always make changes in its policy and impose impart restrictions on the products.
(3) Market Restrictions:
Sometimes the governments of the countries may impose certain restrictions to enter in the market. By this way it prevents the foreign companies to compete in the certain areas. An interesting example of this type of restriction is The Arab. “The Arab boycott of companies doing business with Israel is an interesting example of it. The Arabs were hoping the collapse of the state of Israel. But the U.S. government has adopted strict laws to prevent companies from becoming susceptible to the Arab blackmail.”
(4) Tax Restrictions:
The government may impose excessive taxes on the companies operating in the international business. Such taxes may be imposed for the following reasons (i) To discourage the operations or working of the foreign companies in the country. (ii) To generate more and more revenues and (iii) It may be retaliatory action by the government.
(5) Price Restrictions:
The government may impose price control restriction .as a measure to improve the economies of their countries. Such types of the restrictions are imposed on the finished product of the company. The raw material used to make that product is left on the market forces. This price control weapon is used for the public interest in the different economic items.
(6) Labour Restrictions:
The foreign firms have their own interest in doing business in a particular country. In many nations the labour unions are very Strong. The unions may be able to convince government into passing certain restrictive laws, which are supportive to the labour but putting heavy cost to the business.
These unions are working and forcing the government on the basis of their strength. In these kinds of circumstances foreign firms find it difficult to accommodate with these forced laws. If they don’t comply with it even if there is no labour laws, the company is to face big problems. Sometimes the problems become so difficult that the foreign firms are left with no option except to leave the business.
(7) Legal Incentives:
The legal incentives in terms of investment incentives are enforced to attract foreign investment in the country. This type of strategy is prevailing mostly in the developing countries. The investment incentives are rarely exclusive for the foreign companies. But in some countries the foreign private investment is the only beneficiary in getting such incentives.
It is because of inability of the local enterprises to undertake such types of incentives encouraged by the various incentives. In some countries the incentives are restricted to the local enterprises or with a minor foreign participation. The incentives to encourage foreign investments in the country are given generally the tax holiday of certain years.
Some other incentives can also be obtained generally in the developing countries such as waiving of import duties on raw materials and other industrial equipments necessary for the further production of the goods and other tax concessions can also be granted in that locality where the business enterprises has been located.
(8) Regulations Relating to Trading Restriction:
In some countries regulations relating to trading restrictions are enforced as to restrict import of the goods artificially stimulation of export.
The following are the measures in terms of non-tariff barriers to international trade:
(a) Participation of the government in the international trade – The government can enforce certain measures through subsidies, procurements and state trading.
(b) Duties on import and export procedure – It includes valuations, classification and documentations etc. for the above purpose.
(c) International standards – The government can enforce certain international standards in the foreign business. It includes product standards, packaging and product labeling etc.
(d) Legal Environment – A multinational company must cope up with different legal systems of different countries. They not only have to consider the legal aspects prevailing in their home country, but also must be responsive to the legal environment of the host country. The legal environment of different nations do have complexity and different dimensions.
In some nations legal system provides a broad guideline, whereas the interpretation is left to the courts. In international business an enterprises must ensure that it fully abides by the local laws and other regulations. Any multinational company primarily must consider the legal requirements pertaining to that competition, prices, place factor and product promotion.
Therefore the legal system pertaining to the home country as well as the legal environment prevailing in the host country should be studied, understood and complied with certain international legal requirements and conventions that can affect international decision making process in the global perspectives. The marketer must understand the use of arbitration as an alternative of the legal requirements.
International Marketing Environment – Top 11 Reasons for Increasing Exports
Exports have become an inevitable part of any economy. Day by day there is rise in the export activities of a nation. Excessive competition in domestic market may force a firm to increase its export operations.
There are several other reasons which encourage a firm to do exports in markets of international environment:
1. Surplus Production:
A firm may choose to export for utilising and compensating its surplus production. Moreover a firm earns foreign exchange by exporting its surplus production to a foreign market.
2. Relatively More Profitable:
Exports are relatively more profitable in comparison to the domestic sales. This relative profitability is also due to the concessions and incentives announced by the government. So manufacturers prefer to go for exports.
3. Due to Legal Restrains:
In domestic market some legal restriction on the expansion of the firm may be imposed by government. Government may also put restriction on the production and distribution of certain commodities. But foreign market is free from such kind of restrictions. As a result a firm decides to export.
4. Diversify Business Risk:
Exports help to diversify the risk of the manufacturer. It provides a firm with different alternative markets where it can sell its products. So exports help in reducing the risk as well as increasing the income of the manufacturer.
5. For Making Import Payments:
Every country needs to import something. It may be raw material, technology, know-how or equipments. So it requires indulging in exports for earning foreign exchange and for making payments for imports.
6. Social Responsibility:
Another reason for doing exports may be the social responsibility. Manufacturers out of their social responsibility feel that it is their duty to export and do something for the benefit of the country. In this way they earn goodwill in the society also.
7. Obsolete Products:
A product after passing through various stages of its life cycle comes to an end. Product which has become obsolete in one market may have life in another market. So obsolete products of the developed countries may have demand in the developing or underdeveloped countries. Hence, exports help in increasing the life span of a product.
8. Shortage of Demand:
There may be shortage of demand in the domestic market due to many reasons such as recession, change in taste and preferences, availability of substitutes etc. As a result existing production remains unsold. In such situations the only remedy left for the manufacturer is to export the existing production.
9. Rise in Productivity:
Due to the advancements in technology and research, there is rise in the production level of a firm and hence its productivity. This increased production is exported to earn foreign exchange in order to cover the cost incurred on research and developments.
10. Technological Advancements:
Advancements in technology helps a manufacturer to produce quality products at reasonable prices. This enables him to compete at international level. So improvements in technology is one of the reason for increasing exports.
11. Stiff Competition:
There are fewer restrictions on the entry of the new firms in domestic market. This results in overcrowding of the market leading to severe competition. Survival of the existing firms becomes very difficult. So they look for the new markets and decide to export. This way cut throat competition in domestic market leads to increased exports.