BUS 470- module 3 discussion
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Regional Economic Integration (1 of 6)
Graphic depicting levels of regional economic integration.
What is Regional Economic Integration?
Regional economic integration refers to agreements between countries — usually in the same geographic region — to reduce and ultimately remove economic barriers to the free flow of goods, services, and production elements. Applying the theory of comparative advantage, member nations can expect substantial gains from regional trade agreements.
The five levels of regional economic integration are:
Free trade areas
Customs unions
Common markets
Economic unions
Political unions
We’ll explore each of these types of trade agreements in greater detail.
Regional Economic Integration (2 of 6)
Free Trade Areas
A free trade area eliminates barriers to the trade of goods and services among member nations. In theory the governments of member nations do not permit discriminatory tariffs, quotas, subsidies, or administrative impediments to distort trade among the member nations. However, each country can determine its own trade policies with reference to nonmembers.
Of the several free trade agreements, the most notable is the North American Free Trade Agreement (NAFTA). This is a regional agreement between the government of Canada, the government of the United Mexican States, and the government of the United States of America to implement a free trade area.
Regional Economic Integration (4 of 6)
Click here to visit the European Union (EU) Web site.
Common Markets
Another example of regional economic integration, common markets serve to:
Eliminate trade barriers between member nations
Adopt common external policies
Enable factors of production to move freely among member nations
Common markets usually do not place any restrictions on immigration, emigration, or cross-border flows of capital. Thus, labor and capital move freely within the common markets, unlike in the customs market model. Currently, the European Union (EU) is a common market although its goal is to become a full economic union.
The Treaty of Maastricht, signed in 1991, advanced the goals of the EU by outlining steps for economic union and partial political union. Additionally, the treaty provided a framework for a common foreign policy, an economic policy, a defense policy, citizenship, and currency.
The common currency eliminates exchange costs and reduces risk, making EU organizations more efficient than they were before the formation of the EU. By adopting the Euro, the EU has created the second largest currency zone in the world — second only to the U.S. dollar.
If the EU is successful in establishing a common market and currency among all its members, member nations can expect positive results from the free flow of trade and investment.
Competition among European organizations may also increase. However, the downside of this integration may be the failure of inefficient organizations due to lack of protection against high tariffs, quotas, or administrative trade barriers.
Regional Economic Integration (5 of 6)
Click here to read an article about the unification of East and West Germany.
Economic Unions
Economic unions eliminate trade barriers among member nations, adopt a common external policy, and permit factors of production to move freely among member nations.
A full economic union mandates:
A common currency
Adoption of the tax rates of member nations
Implementation of a common monetary and fiscal policy
While a true economic union has yet to be formed, certain regional integration agreements — such as the EU — have this aim in mind.
You may argue that the EU is an economic union due to the partial adoption of the Euro. However, until all member nations accept the common currency, formulate a common fiscal and monetary policy, and facilitate differences in tax rates, the EU cannot be classified as a true economic union.
Political Unions
A political union is the coupling of multiple previously separate nations into one country. All components of an economic union apply, in addition to the political elements of the countries involved. Perhaps the best example is the United States, where previously separate states banded together to form one country. Another more recent example is the unification of East and West Germany.
Regional Economic Integration (6 of 6)
Caption which reads: How can states cooperate without abandoning what is the characteristic feature of a state, viz its national sovereignty? The European answer to this question has not been to erect a new federation but to maintain the nation-states in Europe while at the same time delegating enough power to the Union so that it can function as a legal order.
Economic and Political Case for Integration
The rationale for regional integration is both economic and political. Regional economic integration is viewed by some as an attempt to achieve additional gains from the free flow of trade and investment among countries. The realized gains are beyond those allowed by the World Trade Organization (WTO).
From a political perspective, integration comprises two main components:
First, by linking them together, political integration makes countries more dependent on each other, creating an environment that requires regular interaction. This also has a positive effect by reducing conflict in the region.
Second, political integration creates a body of nations that is more influential in the world, thereby establishing a stronger bond and position of authority relative to other nations.
Drawbacks of Regional Integration
Regional integration has several drawbacks. Although a nation may benefit significantly from a regional trade agreement, it may be at a cost to certain groups within that nation. Integration may also impede national sovereignty.
Current trends favor regional free trade agreements. However, some economists express concern that the benefits of regional integration do not outweigh the costs. In order for regional integration to be beneficial to participants, the amount of trade it creates must be greater than the amount of trade it diverts.
If the people of the trading nations believe that regional integration is not in their best interests, integration can become a political liability — regardless of economic benefits.
Integration of the Americas through NAFTA (1 of 5)
The NAFTA controversy continues! For insight into different perspectives, do a keyword search using “NAFTA TEN years later”. There is also, a click to explore Web link:
NAFTA — Years Later
As we’ve learned about the various levels of regional economic integration, let’s discuss the integration of the Americas, as accomplished by NAFTA.
NAFTA may be the most controversial trade agreement ever negotiated! Since its inception, it has drawn a long line of supporters and critics.
Many believe that NAFTA has been beneficial only to the United States by:
Helping to create approximately 20 million U.S. jobs.
Nearly doubling U.S. exports to Canada and Mexico.
Initiating a significant increase in U.S. manufacturing wages.
But on the other hand, critics state that implementing NAFTA has been costly for the United States, resulting in the loss of American jobs, increasing trade deficits with Canada and Mexico, and hindering wage growth.
When the United States, Canada, and Mexico entered into NAFTA on January 1, 1994, it was considered one of the most comprehensive agreements of the century. Not only did the agreement contain provisions relating to the trade of goods, but also included guidelines for the trade of services, protection of intellectual property, and protection of foreign investments.
Many believe that NAFTA has served as a model for follow-up agreements including the recently signed Central America-Dominican Republic Free Trade Agreement (CAFTA-DR).
Integration of the Americas through NAFTA (2 of 5)
Impact of NAFTA on Mexico
Perhaps the greatest benefit to the United States has been the economic stabilization of its southern neighbor — Mexico. NAFTA has helped spur trade and investment in Mexico as well as productivity gains, which is the driver for higher living standards.
Mexico reports significant and positive outcomes due to NAFTA membership. According to the United States Embassy in Mexico, Mexico has exported $139 billion to its NAFTA partners in 2001 — 225% more than in 1993, prior to the NAFTA implementation.
According to a June 2009 report by the U.S. Embassy in Mexico, “Mexico’s agriculture exports to the U.S. have expanded nearly 9% per year, growing twice as fast as they did before NAFTA.”
According to data collected by the United States International Trade Commission (2008):
In 2008, the U.S. trade deficit with Mexico decreased by 7 percent as the growth of U.S. exports outpaced the growth of U.S. imports. The reduction of the U.S. trade deficit with Mexico was the second since 1994 when NAFTA was implemented and the first since 1997. A large share of U.S. bilateral trade with Mexico is accounted for by intrafirm transfers and other foreign direct investment and foreign-based manufacturing activity.
In 2008, Mexico was the second-largest U.S. export market. U.S. exports to Mexico rose by $12.1 billion (10 percent) to $131.5 billion, driven in part by a Mexican economy that expanded by 1 percent. The largest export increases were in energy-related products, agricultural products, and minerals and metals. The increase in value of these exports is attributable, in large part, to an increase in commodity prices.
In 2008, the largest U.S. import increases from Mexico were in energy-related products, minerals and metals, agricultural products, and chemicals and related products. U.S. imports from Mexico increased by approximately 3 percent, due principally to global price increases for crude petroleum.
Total trade between Mexico and the United States, as reported by the Census Bureau, is shown below:
United States International Trade Commission (2008). USITC - Mexico: Exports, imports, and trade balance. Retrieved from http://www.usitc.gov/research_and_analysis/tradeshifts/2008/mexico.htm
Integration of the Americas through NAFTA (3 of 5)
Similarly, according to a joint report by the Canadian Minister of Trade, the Mexican Secretary of Economy, and the United States Trade Representative (2009):
“Mexican exports to the United States reached $138 billion. Exports to Canada also grew substantially from $2.7 to $8.7 billion, an increase of almost 227%.”
Mexican exports included a wide range of products, such as machinery and vehicles, miscellaneous manufacturing articles, fuels, and food and livestock.
Integration of the Americas through NAFTA (4 of 5)
Click here to read
The Government of Canada’s Department of Foreign Affairs and International Trade – Canada and the United States: A Strong Partnership
Impact of NAFTA on Canada
The impact of NAFTA on Canada was not as dramatic, in part because Canada and the United States actively traded before the agreement. However it is important to note that Canada is the largest export market for 37 of the 50 states of the United States, and the United States trades more with Canada than with all the members of the European Union. According to the Office of U.S. Trade Representative, Canada and Mexico were the top two purchasers of U.S. exports in 2008 – Canada $216.2 billion and Mexico $151.2 billion.
Trade in goods and services, combined with investment income, resulted in cross-border payments of about $1.7 billion per day (USTR, 2009).
Canada’s exports to NAFTA member nations increased by 104% in value. Exports to the United States increased by 250% since 1989 (USTR, 2010) according to a joint report of the Canadian Minister of Trade, the Mexican Secretary of Economy, and the United States Trade Representative. Similarly U.S. exports to Canada and Mexico grew from $134.3 billion to $250.6 billion (USTR, 2009).
Integration of the Americas through NAFTA (5 of 5)
Click here to read the USTR’s NAFTA fact sheets, including “NAFTA at 10: Myth - NAFTA Was a Failure for the United States”.
Impact of NAFTA on USA
Not only has there been a change in the value of imports and exports within NAFTA member nations, but also in quantity, prices, and the range of goods traded.
Russell Hillberry and Christine McDaniel published "A Decomposition of North American Trade Growth since NAFTA" for the U.S. International Trade Commission in 2002. Their research indicated that U.S. export prices have not kept up with inflation but have in fact, declined. The authors suggest that Mexican export prices for products exported to the United States have risen, possibly signaling rising Mexican production costs, including exchange rates.
Many are concerned that U.S. trade deficits have accelerated rapidly since NAFTA took effect in 1994, resulting in the loss of jobs for U.S. workers. According to the Economic Policy Institute (EPI):
Since the North American Free Trade Agreement (NAFTA) was signed in 1993, the rise in the U.S. trade deficit with Canada and Mexico through 2002 has caused the displacement of production that supported 879,280 U.S. jobs. Most of those lost jobs were high-wage positions in manufacturing industries. The loss of these jobs is just the most visible tip of NAFTA's impact on the U.S. economy. In fact, NAFTA has also contributed to rising income inequality, suppressed real wages for production workers, weakened workers' collective bargaining powers and ability to organize unions, and reduced fringe benefits
Scott, R. E. (2003, November 17). The high price of 'free' trade: NAFTA's failure has cost the United Sates jobs across the nation. Economic Policy Institute: Briefing Paper, 147.
Since its inception, NAFTA has faced controversy. What does the future hold?
The Foreign Exchange Market (1 of 4)
Click here to read A Primer on the Forex Market.
As a global business player, you’ll want to understand the dynamics of the foreign exchange market!
From your textbook reading assignment this module, you learned about the various factors that determine exchange rates — all related to a trading relationship between two nations.
Your text discusses numerous reasons for the determinants of exchange rate movements, including:
Inflation
Differentials in interest
Current account deficits
Public debt
Terms of trade
Political stability and economic performance
The last determinant, political stability and economic performance, relates to foreign investors who search for stable countries with strong economic performance in which to invest their capital. A country with positive performance attributes is an obvious candidate for investment and is favored by investors over countries with economic investment risks.
We’ll now discuss factors that affect investor actions.
The Foreign Exchange Market (2 of 4)
Graphic with caption that reads: The bandwagon effect is the observation that people often do (or believe) things because many other people do (or believe) the same. The effect is often pejoratively referred to as herd instinct, particularly as applied to adolescents. Without examining the merits of the particular thing, people tend to "follow the crowd".
Investor Psychology
Your text discusses economic theories that have been devised to explain
short-term movements in exchange rates:
Purchasing power parity (PPP)
International Fisher effect (IFF)
However, empirical evidence suggests these explanations are not telling the whole story. Investors are not always rational when making decisions! They may imitate the actions of other people or groups who are influential, contrary to logic.
Investors also make trades based on hunches or speculation, which are psychological in nature. When investors follow the lead of others who may positively or negatively affect the value of a currency, we call this the bandwagon effect.
As the bandwagon effect builds up momentum, investor expectations become a self-fulfilling prophecy and the market moves in the way the investors expected — not necessarily where it should have moved based on rational economic factors. This psychological aspect of investing and the bandwagon effect can profoundly affect exchange rate movements.
The Foreign Exchange Market (3 of 4)
Behavioral Finance
How can we explain what drives investor behavior? The psychology of investment has its roots in the study of behavioral finance. This discipline applies the insights of psychologists in order to understand the behavior of investors, financial markets, and corporate financial managers.
Of course, from a global perspective, behavioral finance has significant implications for international markets and exchange rates. Three central theories attempt to explain investor psychology and provide insights on how investors approach decision-making:
Prospect theory
Regret theory
Anchoring theory
Prospect Theory
Prospect theory suggests that people respond differently to the same situation depending on whether the situation is presented in the context of a loss or a gain. Investors may be more concerned about the prospect of losses than be happy about equivalent gains.
What is the implication of this for investors? Even when faced with sure investment gains, they are averse to risks. However, when confronted with the certainty of loss, they become risk-takers.
The Foreign Exchange Market (4 of 4)
Click here to explore Investopedia’s financial dictionary.
Regret Theory
This theory says that people anticipate regret if they make a wrong choice, and take this anticipation into consideration when making decisions. For example, investors may avoid selling a stock that has declined in value to later avoid regretting making a bad investment and/or the embarrassment of admitting the mistake of not selling it in time.
The bandwagon effect may also arise because investors may find it easier to follow the crowd when considering investment opportunities or when rationalizing financial loss — misery loves company! Consider the implications of this for global investments.
Anchoring Theory
Anchoring refers to a phenomenon that causes investors to assume current investment conditions in the absence of better information. In other words, while making assessments, decision makers anchor on an initial value and then adjust this up or down accordingly.
The traditional process of budgeting in businesses is an example of anchoring, where available figures are used to anchor the budget for future years of operation.
Graphic depicting the effect of investor behavior on exchange rates.
Global Monetary System (1 of 3)
Click to explore Foreign Policy Association (FPA) Web site and review issues and news about the IMF/World Bank.
As we discussed in Module 1, the 1944 Bretton Woods conference resulted in the birth of a new international monetary system. The goal of the conference was to create an economic order to facilitate economic growth and cooperation.
The conference achieved three things:
Establishment of the International Monetary Fund (IMF)
Establishment of the World Bank
Decision to establish a set of fixed currency exchange rates monitored by the IMF
Today the IMF and the World Bank remain major players in the international monetary system. The system of fixed exchange rates established at Bretton Woods worked satisfactorily until the late 1960s — it began to show signs of strain thereafter. In 1973, the system was replaced with a managed float system that continues today.
Global Monetary System (2 of 3)
Graphic with facts about the Barbados dollar. “The Barbadian dollar, which was fixed at Bds.$2.00 = US$1.00 on July 05, 1975 retains the same value today.”
Exchange Rate System
Under a fixed rate system, the value of a currency is usually fixed in terms of the U.S. dollar and can change only under specific circumstances.
A fixed rate system offers four benefits:
It introduces monetary discipline
It discourages currency speculation
It reduces uncertainty with regard to future currency movements
It has little or no effect on trade balance adjustments
Alternatively, a floating rate system allows currency prices to float freely. In practice, the majority of floating rate systems are either managed in some way by government intervention, or pegged to another currency. The benefits of a floating rate system include providing autonomy to countries on their monetary policies and giving them a way to correct trade deficits through exchange rate depreciation. Depreciation of exchange rates helps correct trade imbalances by making a country's exports cheaper and imports more expensive.
Experts continue to debate on the issue of which system is better — and there doesn’t appear to be sufficient data to choose one system over another. From the Bretton Woods system experience, we could conclude that a fixed rate system doesn’t work. But many scholars argue that speculation is a major disadvantage of floating rates. They support the value of a modified fixed rate system, with hopes that it will produce the type of economic stability required for growth in international trade and investments.
Global Monetary System (3 of 3)
Currency Management
The mix of government intervention and speculation can be volatile drivers of exchange rate values. The buying and selling of currencies can create an environment of instability within certain countries and across the world.
In your textbook, you learned about tools used by the foreign exchange market to mitigate foreign exchanges risks. The textbook also discusses theories that do not always hold true — although we base our predictions on them.
As a global business manager, you need to recognize that the foreign exchange market is unpredictable. Should you be engaged in foreign exchange activities, you’ll be required to apply consistent and skillful management techniques. In fact, many companies dealing in the foreign exchange market regularly employ staff members who are dedicated to foreign currency management.
The unpredictability of foreign exchange rates creates risks for organizations in every country on returns on investment. Today, a sudden change in the money markets of Paris can disrupt the economic well-being of retail shop owners throughout the United States — whether or not they have ever ventured out of town!
Global Business Strategy (1 of 3)
Global Strategy and the Organization
The demands you face as a global business manager have increased significantly over the past few decades. Strategic initiatives made during the 1970s and 1980s have transformed international business into the agile, innovative, and adaptive operations you see in today’s world marketplace.
The current situation resulted from:
Rapid advancements in technology
Increased competition
Volatility of markets
Organizational restructuring during the 1960s, 1970s, and 1980s
Companies continued the restructuring process through the 1990s, to ensure readiness for the 21st century — and experienced great financial success for their efforts. But the challenge of adapting to continuous change doesn’t stop. Powerful macroeconomic forces affect the international arena, and may become even stronger over time. As a result organizations will be pushed to reduce costs, improve the quality of products and services, locate new opportunities for growth, and increase productivity.
Your role as a global manager will be to help align your organization strategically to achieve competitive advantage and market agility. This means quickly adjusting and adapting to environmental changes in order to achieve market position and share. Maintaining this competitive advantage requires strategy, the process of making appropriate business decisions.
Quote by Cynthia D. Churchwell: Today's scarce resource is the information, knowledge, and expertise that are embedded in people's heads and human relationships. But we've built companies to allocate and control financial capital, and now we've got to completely change them so they can develop and diffuse intellectual capital and manage human capital.
Global Business Strategy (2 of 3)
Strategic Thinking and Strategic Planning
To achieve and maintain competitive advantage, your company needs a vision for the future, and a strategic plan to get there.
Strategic planning first requires strategic thinking — applying critical thought to what needs to get done, how it should get done, deciding how it will get done, and then doing it!
Strategic planning is the activity that strategic thinking delivers. Many methods have been devised, and several books have been published on the topic. Generally speaking, the following are major considerations in strategic planning:
Graphic depicting the major considerations in strategic planning: What needs to be done and why? How should it be done and why? How will it then be done and why? When will it be done? Who will do it? How will the success of it be measured? Execute the plan to get it done.
So, what is the importance of strategy? What will happen to your organization if it does not have an effective strategy for entering international markets?
Simply put, the chances for success are not great. Failure to follow a systematic approach is a serious oversight for many small- and intermediate-sized companies. Let’s examine a general model for systematic strategic planning that is applicable to companies that plan to enter international markets.
Global Business Strategy (3 of 3)
Click to Explore link to an example of a SWOT analysis.
The SWOT Analysis
Many believe there’s no greater changing environment than that of global business! And as a global manager, an important part of the strategic planning process is the scanning of the internal and external environment factors that affect your business.
Internal environment factors are the strengths and weaknesses within your organization — those factors you have some control over in the quest for competitive advantage. External environment factors are the threats and opportunities generally beyond your organization’s control. However, they can provide an impetus for positive change and organizational growth. We refer to this analysis of the strategic environment as a SWOT analysis.
Opportunities can quickly transform into threats. When market conditions are not accurately monitored, an organization may experience unexpected events such as hostile takeovers, unanticipated mergers, and loss of market positioning. As threats, these environmental factors can have second- and third-order effects on internal operations, such as:
Loss of human capital
Degradation of organizational culture
Communication gaps with internal stakeholders
Uncompetitive compensation and benefits package
In a worst case scenario, your organization may go out of business. On the other hand, when external opportunities are united with internal strengths, your organization can experience unmatched success.
We’ll examine external and internal business environments in greater detail next.
Monitoring the External Business Environment (1 of 6)
Introduction
The external business environment comprises three subsystems that interact with each other:
Trends
Market Influences
Resource Influences
When you monitor and analyze these factors accurately, they can provide you with the information needed to make timely and accurate management decisions.
Trends
The first external subsystem is perhaps the least controllable by organizational leadership. Therefore, many organizations perform a PEST analysis to gain an understanding of their position in the market. This business tool measures the following factors:
Political
Economic
Sociological
Technical
Analysis of these factors is essential to remain competitive and profitable. The PEST analytical approach is often used with Porter’s (1980) Five Forces model to reduce the risks associated with external factors.
Macro-environment is another term used to describe these external factors that can influence an organization, but are out of its direct control. We’ll take a closer look at each of these external factors next.
Monitoring the External Business Environment (1 of 6)
Introduction
The external business environment comprises three subsystems that interact with each other:
Trends
Market Influences
Resource Influences
When you monitor and analyze these factors accurately, they can provide you with the information needed to make timely and accurate management decisions.
Trends
The first external subsystem is perhaps the least controllable by organizational leadership. Therefore, many organizations perform a PEST analysis to gain an understanding of their position in the market. This business tool measures the following factors:
Political
Economic
Sociological
Technical
Analysis of these factors is essential to remain competitive and profitable. The PEST analytical approach is often used with Porter’s (1980) Five Forces model to reduce the risks associated with external factors.
Macro-environment is another term used to describe these external factors that can influence an organization, but are out of its direct control. We’ll take a closer look at each of these external factors next.
Monitoring the External Business Environment (2 of 6)
Political Factors
The political environment can affect your organization in several ways and should be monitored closely. Legislative initiatives and lobbying efforts may offer new opportunities or create prohibitive environments, which limit the possibility of profitable transactions.
For example, legislation that permits offshore drilling or logging may be beneficial for an oil, gas, or timber company, but may pose risks to the fishing and wildlife industries. Maintaining relations with political and professional organizations will help you to stay informed about current industry-specific political initiatives.
Economic Factors
Slow economic growth, floating foreign exchange rates, fewer tariffs as a result of GATT, and emerging world markets are external economic factors that should be considered in your organization’s strategic decision-making processes.
Sociological Factors
Your organization must pay attention to changes in the sociological environment as well. Demographic shifts and changing consumer needs can have a profound impact on the bottom line.
Technological Factors
The most dramatic of these external factors is technological change. The advent of low-cost personal computers, high-speed signal carriers, the Internet, and satellite communications have revolutionized business operations. As a global business manager, you need to recognize the commercial impact of emerging new technologies.
As just one example, the emergence of Web-based technologies has transformed corporate functions such as HR management. The open access to personalized information and online transaction capabilities has revolutionized the traditional employer-employee relationship.
Considered individually, each factor can have a significant impact on your company. When viewed together as a subsystem, the impact is even greater. This underscores the importance of monitoring and evaluating these factors for inclusion in your organization’s decision-making.
Monitoring External Business Environment (3 of 6)
Image depicting the relationship of collaborators and competitors to the market influence upon your business.
We now come to the second subsystem of external business environment
factors: market influences.
This subsystem is linked with the other two—trends and resource influences—through such resources as collaborators and external stakeholders. Collaborators would include distributors, suppliers, alliances, and informal partnerships and alliances.
The main component of this subsystem is the competitor — both current and emerging. And it’s vital to know what your competitors are doing! Why can’t you just ignore the competition?
There are several key benefits to conducting competitor analysis:
Help your organization understand its competitive advantages/disadvantages relative to its competitors.
Develop an understanding of competitor’s past and present strategies, with the hopes of predicting future strategies.
Gain insight for developing strategies for achieving competitive advantage in the future.
Help forecast potential returns made from future investments (knowing how competitors have responded to marketing strategies).
Predict probable reactions to industry changes of each competitor.
Obviously, it makes sense to study your competitors! But this means looking not only at current competitors, but also potential or emerging ones. The evaluation of competitors should include a complete assessment of capabilities such as:
Products
Operations
Research and development
Cost positioning
Financial strengths
Monitoring and evaluation of competitors will also provide the requisite change management and strategic information for decision-making within your organization.
Monitoring External Business Environment (4 of 6)
Resource Influences
The third external environmental subsystem also requires monitoring, as their activities can have a profound effect on your organization’s resources. Resource influences include:
Regulators
Customers
Board of directors and other governance bodies
External stakeholders
Regulators
One example of regulators would be new political appointees whose views represent a shift in government philosophy. It is important to monitor these regulators not only for who they are, but also for their political agendas.
Regulations relating to scientific developments such as cloning and use of food additives and safety equipment are influenced by public opinion and those holding political office.
Regulations have the potential of making a huge impact on the resources of a company. We see a dramatic instance of this principle where the Food and Drug Administration has been given authority over the regulation of nicotine. Here, governmental regulation would be catastrophic to the tobacco industry.
Customers
Having knowledge of the current regulatory climate can help you provide solutions to clients — ones that will comply with current and future statutes. And by scanning trends and market influence factors, you’ll be able to improve customer relationship management. Customers are your company’s most valuable resource. To attract and retain good customers, you’ll need to keep an eye on changes in their attitudes, preferences, and buying power.
Consumer behavior is explained in part by economic theory and in part by social and psychological factors. However, regardless of market stimuli or buyer characteristics, it is essential to include monitoring of customer-related factors in your organization’s external environmental evaluation and assessment processes.
Monitoring External Business Environment (5 of 6)
Quote: Corporate Governance looks at the institutional and policy framework for corporations The integrity of corporations, financial institutions and markets is particularly central to the health of our economies and their stability.
Board of Directors and Other Governance Bodies
Another group of resource influencers you need to monitor is the board of directors and other governance bodies. These groups should be scanned to so that you understand their perspectives and orientation.
As an organizational leader, you can be well equipped to position your company for any change that results from the preferences and biases of board members. How do you accomplish this? Do your research and find out:
Who makes up the board?
How do these members manage their own organizations?
What interests do they represent (i.e. bankers, lawyers)?
External Stakeholders
In his book Strategic Management. A Stakeholders Approach (1984), R. Edward Freeman defined the term stakeholder as "any group or individual who can affect or is affected by the achievements of the organization's objectives." To further explain the stakeholder approach to strategic planning, he introduced many of the current themes of stakeholder-related research, stakeholder relationships, stakeholder management, stakeholder behavior, and stakeholder analysis.
As a global manager, you may find it useful to include external stakeholders when addressing core strategic issues within your organization. They are often better at assessing external threats and opportunities than employees. In strategy formulation, be sure to discuss and evaluate strategies in relation to key stakeholders. Strategies deemed unacceptable by this group are likely to fail.
Monitoring External Business Environment (6 of 6)
Summary
External monitoring is crucial to help your organization adapt to changing environments. The degree of change and turbulence in the external environment will determine the extent to which this monitoring is needed.
Gary A. Yukl, author of Leadership in Organizations (2009), suggests five guidelines while monitoring external environmental conditions:
Identify relevant information to gather.
Use multiple sources of relevant information.
Learn what clients and customers need and want.
Learn about the products and activities of competitors.
Relate environmental information to strategic plans.
This process of monitoring and evaluating external conditions forms a critical part of managing change within an organization — essential to its ability to adapt to a changing environment.
Image depicting the external environmental elements to monitor and evaluate to help your organization succeed.
Yukl, G. A. (2009). Leadership in organizations (7th ed.). Upper Saddle River, NJ: Prentice Hall.
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Monitoring the Internal Business Environment (1 of 8)
Downsizing the workforce may be a prudent and necessary step, however, it can adversely affect staff morale and add to employee stress.
Introduction
The external environmental conditions we’ve just examined can lead to turbulence within the organization. Often, what is often perceived as an astute managerial decision based on external environmental conditions results in creating havoc for employees.
One scenario would be a company’s decision to downsize in reaction to adverse external conditions. Such a managerial decision affects the organization’s employees in many ways:
Lower morale
Higher stress
Reduced organizational trust
Fewer promotions
Minimized compensation packages
Another example would be the decision to outsource services. Food service workers, security guards, clerical workers, cleaners, maintenance workers, telephone operators, receptionists, and others at the bottom of the organizational ladder are affected. These workers face salary cuts of 20-40%, depending on the job market. Under new agreements, they typically lose all or most of their nonwage benefits.
These examples illustrate how internal business environment conditions are shaped by the decisions made from monitoring and evaluating external environments. They underscore the importance of reacting with sound strategic decisions.
Essentially, three internal environmental subsystems are likely to be affected by external environments:
Strategic leadership and management
Internal resources and human capital
Measuring organizational performance
As with external environmental factors, these subsystems interact with each other. Let’s take a closer look!
Monitoring the Internal Business Environment (2 of 8)
Strategic Leadership and Management
Analysis of external environment factors often means an organization must implement a new strategic direction. As an organizational leader, you’ll need to evaluate what internal changes will be needed, and to what degree they should be implemented.
Generally speaking, when making these decisions, focus on your company’s culture, structure, and human resource practices. You’ll also need to consider your organization’s vision, mission, and business objectives.
Turbulent conditions may require that you conduct an analysis in order to redirect the company. In the event of transformation, you’ll need to build consensus and confidence if the company is to be successful.
The leaders and managers of an organization undergoing change must provide guidance that instills confidence in employees. The CEO who is successful in this type of organizational change is called a transformational leader. According to Bass (1990), this type of leader is one who:
Displays conviction and trust
Takes a stand on difficult issues
Demonstrates values
Emphasizes the importance of purposefulness and ethical consequences of decisions
Brings about pride, loyalty, confidence, and alignment around a shared purpose
Jack Welch, former CEO of G.E., is one leader who demonstrated a keen awareness of the importance of internal environmental factors. Welch’s change process, known as the Workout, required all managers to involve employees in the identification of barriers and development of change plan solutions.
Monitoring the Internal Business Environment (3 of 8)
Internal Resources and Human Capital
This internal subsystem encompasses all aspects of the human resources domain, as well as organizational behavioral factors.
Employees often experience stress and insecurity when a company undergoes change due to external factors, which can lead to increased illness and absenteeism. Other effects they may face on the job include:
Elevated expectations
Redefinition of careers
Requirements for continuous learning
Individual responsibility for maintaining competencies
These internal human resource-related factors will become apparent in the organization’s culture and climate. However, they can be directly addressed through your organization’s human resources (HR) policies and practices. Successful implementation of organizational strategies is directly related to the organization’s ability to change its culture.
Organizational culture has a significant and positive impact on organizational effectiveness and long-term performance. Monitoring organizational culture and HR practices can provide a more holistic assessment for your change management decisions.
HR practices are linked to organizational performance through the selection and development of employees who achieve organizational goals. Rewards and training motivate employees to improve processes and organizational citizenship behavior (OCB). This refers to individual helping behaviors and gestures that are organizationally beneficial, but are not formally required (Organ, 1990). Such practices can help improve workforce quality and create human capital assets that contribute to competitive advantage.
Quote: “Organizational culture" can be defined as an organization's values, beliefs, principles, practices, and behaviors. "Organizational climate," is found in the private language of the organization, such as the conversations about work among staff during coffee breaks. Source: “Effecting Extension Organizational Change Toward Cultural Diversity: A Conceptual Framework” by Ann C. Schauber
Monitoring the Internal Business Environment (4 of 8)
As a global business leader, you’ll need to examine specific HR practices as part of the monitoring and evaluating process. Your analysis should focus on the main categories of HR practices that are affected by change:
Staffing
Employee development
Appraisal
Rewards
Organizational design
Communication
Change initiatives
Keep in mind that your organization’s culture may have a positive or negative influence on each of these practices. (The reverse is also true: these practices may affect your organizational culture!)
Staffing becomes an area of concern during turbulent times for several reasons. The organization’s inability to recruit and retain the best talent can adversely affect the success of the change initiative and decrease employee morale and confidence. Similarly, instability may reduce or eliminate the benefits of in-house training and other employee development programs. If not monitored appropriately, this can result in employee attrition.
Performance appraisal systems can also be affected by change — appraisals may fall behind schedule because senior employees have left the organization. If these systems are not monitored and evaluated properly, employees may be denied feedback or opportunities for promotions.
As a leader, you can help reduce feelings of fear and insecurity throughout the change process. Ensure that news of proactive steps taken by the organization reach your employees through strong internal communications, such as:
Newsletters
The Internet
Intranet sites
Line management
All-hands meetings
Monitoring the Internal Business Environment (5 of 8)
Finally, the third internal environmental subsystem likely to be affected by external environments is the measurement of an organization’s performance.Measuring Organizational Performance
Often during organizational transformation, measurement of change is given low priority. But measurement processes should be monitored to ensure they include appropriate techniques and performance areas. Your organizational measurement systems may need to be re-engineered to incorporate performance measurements of revised policies, practices, and procedures.
Numerous corporate measurement data may be included in formal measurement systems, such as profitability, customer service, returns on equity, assets and sales, and cash flow and liquidity projections. The inclusion of additional factors in the organizational measurement system such as HR, internal processes, innovation, and improvement activities should be linked to organizational strategy and change management processes.
Four measurement systems often used by organizations today are:
Economic Value Added (EVA)
Activity-Based Costing/Management (ABC/ABM)
Process Value Analysis (PVA)
Balanced Scorecard (BSC)
We’ll take a closer look at these systems next.
Monitoring the Internal Business Environment (6 of 8)
Measuring Organizational Performance (Continued)
Economic Value Added (EVA)
EVA was devised by Stern Stewart & Co., a global consulting firm, to help clients measure their true economic profits. EVA measures a company’s financial performance by calculating the net operating profit, minus an appropriate charge for the cost of all capital invested in the business.
As Bennett Stewart puts it, “By taking all capital costs into account, including the cost of equity, EVA shows the dollar amount of wealth a business has created or destroyed in each reporting period. In other words, EVA is profit the way shareholders define it.”
This is how you would calculate EVA:
EVA = Net Operating Profit After Taxes (NOPAT) – (Capital x Cost of Capital)
Activity-Based Costing/Management (ABC/ABM)
ABC/ABM is an activity-based costing tool used to improve the operations of an organization, by enhancing profits through cost control and tracking practices. As a manager, you would look for deficiencies in the system, then attempt to correct them in order to improve efficiency. These are the steps you would follow:
Analyze activities.
Gather costs.
Trace costs to activities.
Establish output measures.
Analyze costs.
Monitoring the Internal Business Environment (7 of 8)
Measuring Organizational Performance (Continued)
Process Value Analysis (PVA)
From your reading this module, you learned that a company's value chain identifies the primary activities that create value for customers and the related support activities.
PVA is used to estimate the value added by each activity to the value chain. Some consider PVA to be the foundation for ABC/ABM. These are the steps you’d follow in process value analysis:
Study the flow of activities needed to design, create, and deliver a service.
Determine the associated cost and its cause for each activity and step within the activity.
Determine how the step adds value, and if it doesn’t add value, consider ways you might eliminate it and its associated cost.
Determine the time needed to complete each activity and whether the activity is performed efficiently.
Look for ways to improve efficiency and reduce associated costs due to delays, excesses, etc.
Monitoring the Internal Business Environment (8 of 8)
Measuring Organizational Performance (Continued)
Balanced Scorecard (BSC)
BSC is an approach to strategic management that was developed in the early 1990s by Drs. Robert Kaplan (Harvard Business School) and David Norton.
Kaplan and Norton describe the innovation of the balanced scorecard:
The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation. (What is the Balance Scorecared?, 2010)
As a manager, you would use the BSC model to evaluate your organization’s performance by balancing measures of:
Financial performance
Internal operations
Innovation and learning
Customer satisfaction
We’ve looked briefly at how these management control systems are used to measure performance in an organization.
These systems have proven to be solid methods for assessing overall business performance. While there has been extensive debate about which system is best, it really depends on the type of organization you manage, along with its structure and vision. Many companies choose to implement a combination of measurement tools and techniques.
Balanced Scorecard Institute (2010). What is the balanced scorecard? Retrieved from http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx
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The International Business Environment (1 of 3)
The Internationalization Process
We’ve looked at the importance of environmental monitoring and evaluation from external and internal perspectives. The models we’ve studied represent factors you should pay close attention to during turbulent business environments. In fact, these factors require your attention regardless of the current business climate.
Now that we’ve examined the basic components of the systematic approach to organizational strategy, we’ll apply a systems-oriented strategy to the international business environment.
The internationalization process refers to companies that are increasing their involvement in international operations. In the study, “The Role of the Internationalization Process in the Performance of Newly Internationalizing Firms” (Yip, Biscarri, and Monti, 2000), Dr. George Yip focused on the extent to which 68 small- and midsized U.S.–based companies used a systematic approach to globalization.
Yip found that newly internationalized companies experience significant issues during the process. Most either fail, or achieve only limited success. This is particularly true at the stage of commitment — making an international investment. Such investments may be in the form of sales offices, equity investments, acquisitions, alliances, and so on.
Unlike existing multinational companies, small- to intermediate-sized companies undergoing the internationalization process are constrained by two issues: inexperience and lack of sufficient resources to handle the new international venture. Yip found that the use of a more systematic approach — a strategic approach — resulted in improved organizational performance.
This study introduced the Way Station Model, a six-step process to internationalization. Yip concluded that a combination of thorough strategic planning and motivation to enter foreign markets would help companies, regardless of their size, to be successful in internationalizing. A key aspect of success lies in identifying and leveraging organizational core competencies — our next topic!
Yip, G. S., Biscarri, J. G., & Monti, J. A. (2000). The role of the internationalization process in the performance of newly internationalizing firms. Journal of International Marketing, 8(3), 10–35.
Organizational Core Competencies
Narrowing of markets and focusing on organizational expertise have long been proposed as the solution to depleting profits. In the 1990s, C.K. Prahalad and Gary Hamel coined the term “core competencies” in their article, “The Core Competence of the Corporation.” Core competence refers to organizational skills that are unique and cannot be easily imitated.
Prahalad and Hamel (1990) claim that three assessments can be applied in order to identify an organization’s core competencies. Each core competency should:
Provide potential and future access to varied markets.
Make a key contribution to customer benefits through the product or service.
Be difficult for competitors to duplicate.
Core competence is not easy to develop, and harder to maintain. Few companies are likely to build world leadership in more than five or six fundamental competencies.
Quinn and Hilmer (1994) identified several characteristics of core competence. They claim that core competence refers to corporate skills or knowledge — not the company’s products or functions. In other words, it is the process of creating the product rather than the product itself.
An important characteristic of core competence is flexibility and long-term approach that enables you to adapt to the needs of your customers. Another is focusing your resources on activities where your organization is a market leader.
Core competence lies with activities that are reflected in your organization’s values, structures, and management systems — and ones that don’t rely on a few talented individuals to maintain. Core competencies become extremely important when considering entry into foreign markets.
Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79–91.
Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43–55.
The International Business Environment (3 of 3)
Core Competencies and Foreign Entry Modes
Once you’ve decided to enter a foreign market, how do you choose the best mode of entry? Here, we’ll discuss the advantages and disadvantages of various foreign entry modes. Knowing your organization’s core competencies can help you select the best approach.
Companies often expand so that they can transfer their core competencies to foreign markets where these skills are not present. The author Charles W. L. Hill, in his book, Global Business Today, refers to these competencies as know-how that is technological and management know-how (2010). He offers this advice:
If your organization’s core competence is proprietary technological
know-how, licensing and joint venture arrangements should be avoided.
If your organization perceives its technological advantage as temporary, licensing may be appropriate.
Management know-how is a unique and hard-to-imitate skill set. The organization benefits by receiving more visibility through the brand name, which is usually protected by international law. Management style as a competence is less likely to be copied by others in foreign markets. If your company possesses this as a core competency, you may decide that a joint venture, subsidiary — or a combination of the two — may be the best mode of entry to a foreign market.
Entering a foreign market requires an in-depth analysis of the differentiators between your organization’s unique competencies, and those existing in the foreign market. Without this information, many companies fail in their internationalization efforts.
Hill, C. W. L. (2010). Global business today (7th ed.). New York, NY: McGraw-Hill/Irwin.
The International Business Environment (3 of 3)
Core Competencies and Foreign Entry Modes
Once you’ve decided to enter a foreign market, how do you choose the best mode of entry? Here, we’ll discuss the advantages and disadvantages of various foreign entry modes. Knowing your organization’s core competencies can help you select the best approach.
Companies often expand so that they can transfer their core competencies to foreign markets where these skills are not present. The author Charles W. L. Hill, in his book, Global Business Today, refers to these competencies as know-how that is technological and management know-how (2010). He offers this advice:
If your organization’s core competence is proprietary technological
know-how, licensing and joint venture arrangements should be avoided.
If your organization perceives its technological advantage as temporary, licensing may be appropriate.
Management know-how is a unique and hard-to-imitate skill set. The organization benefits by receiving more visibility through the brand name, which is usually protected by international law. Management style as a competence is less likely to be copied by others in foreign markets. If your company possesses this as a core competency, you may decide that a joint venture, subsidiary — or a combination of the two — may be the best mode of entry to a foreign market.
Entering a foreign market requires an in-depth analysis of the differentiators between your organization’s unique competencies, and those existing in the foreign market. Without this information, many companies fail in their internationalization efforts.
Hill, C. W. L. (2010). Global business today (7th ed.). New York, NY: McGraw-Hill/Irwin.
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Export, Import, and Countertrade (1 of 2)
Graphic with links to sources of information for US companies mentioned in lecture.
Export and Import
Now that we’ve looked at modes for entering foreign markets, we’ll briefly discuss export, import, and countertrade.
New exporters often underestimate the resources required to conduct business outside domestic boundaries. Common pitfalls include:
Weak market analysis
Poor understanding of competitive conditions in the foreign market
Failure to customize the product offering to the needs of foreign customers
Lack of effective distribution programs
Poorly executed promotional campaigns in the foreign market
Problems securing financing
If you’re managing a U.S. organization, you can overcome some of these pitfalls by investigating the various Web sites provided by the U.S. Department of Commerce (DOC). One example is Export.gov, designed to provide “online trade resources and one-on-one assistance for your international business — whether you’re just starting or expanding your global sales.”
The U.S. Commercial Service Web site offers four ways to help you grow the international sales:
Sources for market research
Trade events opportunities
Introductions to qualified buyers and distributors
Guidance through each step of the export process
TradeStats Express will help you find information about the export activities of each state. This information is helpful in determining global patterns in state exports, including geographical regions and products.
We’ve provided several links in the sidebar graphic — so start exploring!
Export, Import, and Countertrade (2 of 2)
Countertrade
Countertrade is another method of structuring international sales when alternative means of payment are difficult or expensive. The primary objective of countertrade is to trade goods and services for other goods and services without using money.
A major advantage of countertrade is that it provides financial opportunities when other means are not available. In some countries it is preferred even when there are other options available.
There are many disadvantages to countertrade agreements. Companies usually prefer to be paid in hard currency. Countertrade contracts sometimes involve the exchange of lower-quality goods, which makes it difficult for the organization to maintain profitability levels. Countertrade also requires the organization to have an in-house trading department, which increases human capital and management overheads.
Countertrade is a logical choice for larger companies that are geographically dispersed with a world-wide network and which can effectively relocate and sell products acquired through countertrade measures.
Export, Import, and Countertrade (2 of 2)
Countertrade
Countertrade is another method of structuring international sales when alternative means of payment are difficult or expensive. The primary objective of countertrade is to trade goods and services for other goods and services without using money.
A major advantage of countertrade is that it provides financial opportunities when other means are not available. In some countries it is preferred even when there are other options available.
There are many disadvantages to countertrade agreements. Companies usually prefer to be paid in hard currency. Countertrade contracts sometimes involve the exchange of lower-quality goods, which makes it difficult for the organization to maintain profitability levels. Countertrade also requires the organization to have an in-house trading department, which increases human capital and management overheads.
Countertrade is a logical choice for larger companies that are geographically dispersed with a world-wide network and which can effectively relocate and sell products acquired through countertrade measures.
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Summary
This module you examined the various levels of regional economic integration and changes in trade patterns between NAFTA member nations. You also examined the foreign exchange market and investor psychology using behavioral finance theories. We also explored the volatile world of the global monetary system.
You learned about global strategy, external and internal environmental conditions that affect strategy formulation, and organizational core competencies required for global strategy formulation. You also learned about foreign entry modes, and issues related to export, import, and countertrade.
In Module 4 we will examine international marketing and product development focusing on cultural differences. We will also explore how to plan and develop global communication strategies and overcome cultural barriers to communication. In addition, we will discuss global operations management with the focus on technological enablers and strategies for successful initiatives.
