OMT 440_ARIZONA STATE UNIVERSITY_ASSIGNMENT 2024_WEEK 2_INTERNATIONAL BUSINESS ENVIRONMENT

INTERNATIONAL BUSINESS ENVIRONMENT

ARIZONA STATE UNIVERSITY

OMT 440 - INTERNATIONAL BUSINESS

WEEK 2

Learning Outcomes.

After studying this chapter, you should be able to:

1. Describe the external and internal environment in international business.

2. Describe the economic environment in international business.

3. Describe the technological environment in international business.

4. Explain environment political-legal in international business.

5. Explain environment socio-cultural in international business.

6. Describe the global environment in international business.

7. Describe the physical environment in international business.

8. Explain corporate social responsibility.

9. Describe international business environment analysis tools.

Introduction:

The international business environment can be defined as the environment in different

countries with factors that generally exist in the home environment of the company that affect

business decision making through the use of resources and capabilities (Hill, 2022; Haslam,

& Shenoy, 2018). The international business environment is defined as a set of activities

related to industry and trade at the international level. The international business environment

is different from thedomestic. Therefore, extra caution is required towards these

environmental differences. The international business environment includes social, political,

economic, regulatory, tax, cultural, legal, and technological environments (Anderson, 2023;

Wardhana, et al, 2023; Suprapto, Jhohari.., Deni, 2023; Hill, 2022; Czinkota, Ronkainen, et

al, 2021; Cavusgil, Tamer, Knight, et al, 2019; Geringer, & Mcnett, 2019; Chandler, 2018;

Pertiwi, & Priyono, 2018; Daniels, Radebaugh, et al, 2017; Schaffer, Agusti, et al, 2017).

Political factors in a country influence the legislation and government rules under

which foreign companies operate. The economic environment relates to all the factors that

contribute to the attractiveness of a country for foreign businesses to enter. Every country in

the world follows its own legal system. Foreign companies operating in a particular country

must abide by its legal system while operating in that country (Pertiwi, & Priyono, 2018;

Schaffer, Agusti, et al, 2017). The technological environment includes factors related to raw

materials and machinery used in the production of goods and services (Chahal, Gupta, Bhan,

& Cheng, 2020). The company's receptivity to new technology and the adoption of new

technology by consumers will affect the decisions made in a company. Since companies have

no control over the external environment, their success depends on how well they adapt to the

external environment (Anderson, 2023; Wardhana, et al, 2023; Czinkota, Ronkainen, et al,

2021; Cavusgil, Tamer., Knight, et al, 2019; Geringer, & Mcnett, 2019; Chandler, 2018).

A company's ability to design and adjust its internal variables to capitalize on the

opportunities offered by the external environment, as well as its ability to control the threats

posed by the same environment will determine its success. Companies operating in

international markets are in a highly competitive environment and require strategies that

differentiate their products and increase perceived value by reducing production costs

(Anderson, 2023; Wardhana, et al, 2023; Chahal, Gupta, Bhan, & Cheng, 2020; Czinkota,

Ronkainen, et al, 2021; Cavusgil, Tamer., Knight, et al, 2019; Geringer, & Mcnett, 2019;

Chandler, 2018).

Companies operating internationally face conflicting pressures. Companies need to

offer their products at competitive prices and customize them to meet local needs. To lower

prices, companies may be forced to standardize products for the global market instead of just

one country. Product customization to meet local market preferences allows for

standardization or location of manufacturing units in one region only (Geringer, & Mcnett,

2019; Dang, & Yeo, 2017). Customization increases the operational costs of the company. To

meet the specific and specialized needs of local customers, firms may have to set up similar

facilities in several countries and change their product features. Pressure from local

competition on customization and price competition from international competitors with low-

cost production bases are challenges for international firms (Wardhana, et al, 2023; Fleisher,

& Bensoussan, 2007). These firms have to choose between standardizing products, producing

in low-cost locations and passing on cost advantages to customers, and setting up factories in

different countries to customize products, despite the high costs that may be involved

(Wardhana, et al, 2023; Czinkota, Ronkainen, et al, 2021; Chahal, Gupta, Bhan, & Cheng,

2020; Cavusgil, Tamer, Knight, et al, 2019; Dang, & Yeo, 2017; D'Aveni, Dagnino, & Smith,

2010). Such companies must formulate strategies that strike a balance between these

conflicting demands. For example, when choosing a location, they have to consider various

aspects such as labor cost, tax rate, infrastructure, distribution system, business contract law

(Pertiwi, & Priyono, 2018; Schaffer, Agusti, et al, 2017), suppliers (Lee, Lee, Heo, 2015),

and government support. They should also identify the extent to which customers are willing

to pay for customization (Anderson, 2023; Wardhana, et al, 2023; Czinkota, Ronkainen, et al,

2021; Cavusgil, Tamer, Knight, et al, 2019; Geringer, & Mcnett, 2019; Chandler, 2018;

Dang, & Yeo, 2017; D'Aveni, Dagnino, & Smith, 2010). For example, Coca Cola named its

product Diet Coke when it was sold in North America, demonstrating product customization

for specific markets. Toyota has been successful in selling cars in Europe, Asia, and the

Americas with a degree of standardization or customization according to conditions in those

countries.

External and Internal Environment:

Business prospects depend not only on resources, but also on the international

environment. As part of the international environment, companies are subject to the influence

of various international environmental variables. Therefore, international environmental

analysis is necessary to formulate international business policies and strategies. International

environmental analysis involves internal and external analysis. International environmental

analysis is the process by which a company understands the various factors of the

international environment and determines the opportunities and threats presented by these

factors. Every international business venture consists of a number of internal factors and is

faced with a number of external factors. International internal factors are generally

considered controllable, while international external factors are largely beyond the control of

the firm. Since external environmental factors are beyond the control of a firm, its success

depends largely on its adaptability to the environment i.e. its ability to design and adjust

controllable internal variables to capitalize on opportunities and counter threats in the

international environment. Thus, The international business environment consists of micro

and macro international environments (Wardhana, et al, 2023; Hill, 2022; Czinkota,

Ronkainen, et al, 2021; Cavusgil, Tamer, Knight, et al, 2019; Geringer, & Mcnett, 2019;

Chandler, 2018; D'Aveni, Dagnino, & Smith, 2010).

The internal environment or international microenvironment refers more to the industry

in which the company operates internationally, which consists of factors in the international

environment that directly affect company performance, such as suppliers (Lee, Lee, Heo,

2015), competitors, marketing intermediaries, customers, and so on (Wardhana, et al, 2023;

Czinkota, Ronkainen, et al, 2021; Cavusgil, Tamer, Knight, et al, 2019; Geringer, & Mcnett,

2019; Chandler, 2018; D'Aveni, Dagnino, & Smith, 2010). For example, Starbucks, as a

multinational company, highlights the importance of its coffee supply system that involves

more than 20 countries. Starbucks relies on millions of retail customers around the world who

contribute significant revenue from retail customers through the sale of coffee, food, and

other products from 37,222 stores spread across 85 countries including Indonesia with 523

stores, the 8th largest in the world by 2022. In the context of global competition, Starbucks

competes to maintain and improve its position in the highly competitive global coffee market

with its largest competitors, namely McDonald's (United States), Dunkin' Donuts (United

States), Tim Hortons (Canada), Peet's Coffee (North America), Lavazza (Italy), Costa Coffee

(Europe), Folgers (United States), and so on.

The external environment or international macro-environment consists of the larger

societal forces that influence a company's micro-environment, such as demographic,

economic, natural, legal, technical, political, and cultural. So, for strategic management

purposes, a strategist should analyze these macro environmental dimensions first, and then a

detailed industry analysis needs to be conducted (Rothaermel, 2017). For example, Starbucks

adjusts its menu Starbucks experiences increased sales as consumers are better able to afford

its products, climate change or changes in agricultural patterns can affect Starbucks' coffee

supply and production costs, Starbucks interacts with customers through online ordering

applications or innovations in payment methods, and Starbucks often tailors store design and

menus to local cultural preferences to create a more localized and immersive experience

(Wardhana, et al, 2023; Czinkota, Ronkainen, et al, 2021; Geringer, & Mcnett, 2019).

As outlined above, the external environment includes social, technological, economic,

environmental and political trends and developments. This analysis will have an impact on

the changes and development of the company. The dimensions of the environment can be

generally classified by a number of key factors (Wardhana, et al, 2023) which describe

economic, technological, legal (Schaffer, Agusti, et al, 2017), political, socio-cultural, and

global environments. The environment in turn, can be overlaid by various constituents of the

company, including shareholders, customers, competitors, suppliers (Lee, Lee, Heo, 2015),

employees, and the general public. Managers must identify the relevant environment in order

for them to analyze the various elements to associate their company with the environment in

question. Since the orientation towards relevant environmental factors differs from company

to company, there may be disagreements about the factors. For example, the economic factors

of a country are likely to be affected by the political and legal aspects of the country

(Schaffer, Agusti, et al, 2017). Similarly, economic aspects may determine and technological

factors but be influenced by the latter.

Duncan (2022) has categorized the environmental components relevant to a firm into

five categories: consumer components, supplier components (Lee, Lee, Heo, 2015),

competitors, socio-political components, and technological components. On the other hand,

Glueck (1984) has categorized environmental factors into six broad categories: economic,

government legal (Schaffer, Agusti, et al, 2017), competitive market, suppliers (Lee, Lee,

Heo, 2015), technological, and geographic and social. Singh (2020), while analyzing the

environmental issues facing multinational companies, has emphasized the following factors:

economic situation, political situation, and financial situation. He further categorized the

political situation into industrial development policy, foreign investment policy, corporate

taxation policy, import-export policy (Hodijah, & Angelina, 2021; Siregar, Pratiwi,

Nurhasanah, & Sinaga, 2019; Sulaiman, Maupa, Kadir, & Muis, 2017), industrial licensing,

foreign exchange control, and capital supply control (Duncan, 2022).

The classification shows that environmental factors can be classified in various ways.

However, the classification of these factors should be done in such a way thus providing a

framework for viewing the total situation faced by managers. The classification of factors

gives managers a sharp focus on relevant environmental factors. They make decisions based

on the various forces of the environment as they face it which requires a classification of the

forces of the environment that distinguishes each element from the others, so that managers

can determine the impact of each of these environmental factors on their company. However,

it needs to be emphasized that environmental factors are interrelated and influence and are

influenced by each other.

Economic Environment:

The economic environment is the most important environmental factor considered by

business enterprises because business enterprises are economic operating units. The

measurement of company performance is mostly in financial terms where managers often

focus more on economic factors. The economic environment is also important for non-

business enterprises as such enterprises depend on the environment for their resource

procurement which is largely determined by economic factors. Therefore, understanding the

economic environment has crucial importance in strategic management (Rothaermel, 2017).

The economic environment includes all factors that give shape and form to the

development of economic activities and may include factors such as the nature of the

economic system, general economic conditions, various economic policies, and various

factors of production. From an analytical point of view, the various economic factors can be

divided into two broad categories: general economic conditions and factors of production. A

discussion of these factors will illustrate the nature of the overall economic environment,

namely:

1. General Economic Conditions determine the extent to which various economic forces affect

a company. These forces include: the economic system, monetary policy, fiscal policy, and

industrial policy of the country. These economic conditions affect national income, income

distribution, employment levels, factor markets, and product markets. Together, all these

factors affect the performance of business enterprises. An in-depth analysis of these forces

will give an idea of the conditions under which the company should operate.

Economic System. Economic system refers to a set of social institutions that govern the

production, distribution, and consumption of goods and services in a given society (Chahal,

Gupta, Bhan, & Cheng, 2020). The economic system essentially consists of people and

institutions, including their relationships with productive resources. The economic system of

a country determines the extent to which companies have to face various constraints and

controls by economic factors. In the three alternative economic systems, namely capitalist,

mixed and socialist, firms have to face different types of control ranging from total freedom

to total control. Economic systems not only impose certain restrictions on the functioning of

firms but also provide certain protections to firms depending on their nature (Gallardo-

Vázquez, & Sánchez-Hernández, 2014). For example, public sector firms are protected from

private firms, local firms from foreign firms, small firms from large firms, and so on.

Indonesia has adopted a mixed economy system. For example, Pertamina, a state-owned

company in the oil and gas sector, and Perusahaan Listrik Negara (PLN) are state-owned

companies that produce electricity. A natural monopoly that is difficult to overcome by a

competitive market because it receives State protection in managing Indonesia's natural

resources to meet the needs of Indonesian citizens.

National Income and its Distribution. National income is defined as the money value of

final goods and services produced in a country during a specific period which is usually one

year (Chahal, Gupta, Bhan, & Cheng, 2020). National income determines people's purchasing

power and therefore generates demand for products (Adner, & Zemsky, 2006). The

distribution of national income determines the types of products that different segments of

society may demand. Per capita income determines purchasing power. For example,

Singapore has the highest per capita income in Southeast Asia. Singapore has very strong

purchasing power. Singaporeans enjoy a high standard of living supported by a thriving

financial and business sector. Indonesia, although its per capita income ranking is still below

Singapore, Brunei, Malaysia and Thailand, the large population size makes it a significant

market with growing purchasing power.

Monetary Policy. Monetary policy controlled by a country's Central Bank regulates

economic growth through expansion or contraction of the money supply in circulation. The

basic objectives of monetary policy are:

Provide necessary finance to industry, especially the private sector.

Control inflationary pressures in the economy (Silaban, & Rejeki, 2020).

Generating and maintaining high levels of unemployment (Indayani, & Hartono, 2020).

For example, Bank Indonesia in conjunction with the National Economic Recovery

Policy (PEN) took measures such as stabilizing the Rupiah exchange rate and lowering

interest rates to support national economic recovery and attract foreign investment.

Fiscal Policy. Fiscal policy deals with the structure of taxes and government spending.

Generally, fiscal policy is adopted to:

1) Gathering the maximum possible resources.

2) Optimal resource allocation to achieve rapid economic growth (Dang, & Yeo, 2017).

3) Achieve greater equity in income distribution.

4) Maintaining price stability is quite possible.

For example, the government provides support to Micro, Small and Medium

Enterprises (MSMEs) in dealing with the impact of the COVID-19 pandemic. Fiscal

incentive assistance is provided through programs to encourage MSMEs to move into the

digital and global realm (Maulana, & Nubatonis, 2020).

There are two aspects of fiscal policy that are relevant to strategic management

(Rothaermel, 2017):

The impact of tax structure on the fortunes of individual firms and industries.

The impact of government spending on various economic activities.

2. Factors of Production. Companies use various inputs in the framework of the production

process such as land, labor, capital, managerial personnel, and so on (Chahal, Gupta, Bhan, &

Cheng, 2020). Management must assess the availability of these tier inputs so that suitable

strategies can be adopted for procurement and utilization. In addition to adequate availability,

the cost and amount of resources are also important. When analyzing the market aspects of

tiers in an economic environment, the following considerations should be taken into account.

Natural Resources. The availability of natural resources such as land, minerals, fuel, and so

on becomes a level of strategic planning for companies that need these resources in the

production process (Bolland, 2020; Chahal, Gupta, Bhan, & Cheng, 2020). Typically,

location patterns are decided based on the availability of these levels of factors (Dang, &

Yeo, 2017). In the country of Indonesia, there are many natural resources such as land, water,

and various types of minerals. However, without proper exploitation and utilization, these

resources cannot provide adequate benefits. In addition, there is a shortage of certain critical

tiers, for example, fuel and electrical energy, which impacts the efficiency level of the

company.

Infrastructure Facilities. Infrastructure provides the supporting basis for the efficient

functioning of the company in a level It may include transportation, communication, banking

services, financial services, insurance, and so on. In Indonesia, while these facilities are

available in abundance and at a satisfactory level in some places, there is still a total absence

or deficiency in others. For example, in urban areas, these facilities are available at a

satisfactory level, but these are lacking in rural areas where the potential for opening more

business operations is high. The government emphasizes the development of underdeveloped

areas by providing various incentives to companies and through the creation of provisions for

infrastructure.

Raw Materials and Supplies. A company needs a continuous flow of raw materials and other

items to maintain its operations. The price of materials, frequency and regularity of supply,

and other terms and conditions, are important considerations in this regard. All these levels,

in turn, depend on the availability of natural resources, infrastructure facilities, and the

general economic development of the country.

Plant and Equipment. A company invests money in plant and equipment because it expects a

positive rate of return on its investment in the future. Revenues from the use of plant and

equipment should be sufficient to cover the money invested, operating costs, and generate

enough profit to satisfy the company. Greater uncertainty in this regard will make plant and

equipment costs a more important strategic level. The availability of plant and equipment

depends on the technical development of the country and the government's approach to

foreign technical cooperation.

Financial Facilities. Financial facilities are required to start and operate a company. External

sources of finance involve share capital, banking and other financial tiers, as well as

unorganized capital markets. Recent changes in the Indonesian capital market indicate better

availability of finance from the financial tier as well as from the general tier. In fact, the

company and the working of the Indonesian capital market can be compared favorably with

many developed tier countries. The availability of tier finance with various incentives

attached, is a facilitating tier. However, such facilities are only utilized by several large and

medium-sized companies.

Manpower and Productivity. While the availability of production tiers affects the

development of countries and individual firms, productivity tiers affect the efficiency and

profitability of firms. The productivity of human and physical levels depends on many levels,

such as the type of technology used, the production process implemented, the company's

operation process, the use of managerial levels, and so on (Chahal, Gupta, Bhan, & Cheng,

2020).

When analyzing the economic environment, companies intending to enter a particular

international business sector may consider the following aspects (Hill, 2022; Xie, Xie, &

Zhao, 2018):

System economic system to enter sector international business.

Economic growth stage and growth rate in the destination country.

National and per capita income levels in the destination country.

Direct and indirect taxation policies in the destination country.

Available infrastructure facilities and constraints in the destination country.

Availability of raw materials and components and their costs in the destination country.

Financial resources and costs in the destination country.

Availability of managerial, technical, and labor laborers and their salary and wage

structure in the destination country.

Technological Environment:

Technological environment is the total knowledge that provides ways to do things. This

can include inventions and levels, which affect the way things are done, such as product

design, production, and distribution (Chahal, Gupta, Bhan, & Cheng, 2020). The

technological environment is critical to a business because it affects the type of conversion

process it might adopt. A particular technology affects the company in the way it is organized

and faces competition (Fleisher, & Bensoussan, 2007). From a strategic management point of

view, technology has the following implications (Rothaermel, 2017):

1. Technology is a major source of increased productivity. Although humans are primarily

responsible for the management of technology, their efficiency is determined by the type

of technology used.

2. The various jobs within a company performed by individuals are determined by the

technology used. If there is a change in technology, the nature of work also changes as

technology determines the level of skills required.

3. Technology affects the tier situation. Group size, group membership, patterns of

interpersonal interaction, opportunities to control activities, and so on are affected by

technology in various ways.

4. Companies become secure by developing efficiency through the adoption of the latest

and efficient technologies. As technology has become more complex, it is difficult for

new companies to enter the field.

5. Technology affects production costs and product or service quality (Chahal, Gupta,

Bhan, & Cheng, 2020).

6. There is a time gap in using new technology both within a firm and between firms in an

industry. The time gap within firms means that the adjustment to technological

innovation will spread over several years (Burns, Stalker, 1961). Within tiers, if a firm

adopts a new technology, others in the same tier will follow, but due to the time gap, the

first firm will have a tier advantage over the others (Lin, Hsu, Hsu, & Chung, 2020;

Barney, & Hesterly, 2018; Strandskov, 2006).

The key strategic implications of the technology environment are as follows:

1. The technological environment can change the competitive cost position of tiers within a

company.

2. The technological environment can create new markets with new business segments.

3. The technological environment can join certain business tiers by reducing or eliminating

their segment cost barriers. Technology environment A country can change due to

technology imports and domestic research and development. The Indonesian government

is quite liberal when it comes to importing appropriate technology from foreign countries

to improve efficiency and make the country internationally competitive. The government

also encourages internal technology development by providing various incentives to

concerned business enterprises as well as through other technical institutions.

Therefore, in analyzing the technological environment, companies can consider the

following aspects:

1. The overall level of technological development in a particular country and business

sector.

2. Speed of technological change and technological extinction.

3. Technology resources.

4. Restrictions and facilities for technology transfer and the time required for technology

absorption.

Political-Legal Environment:

The Political-Legal Environment comprises the legal and regulatory framework and the

political order in which a business unit operates. A stable political and legal framework in the

economy affects the firm. Robock (1971) has developed a conceptual framework for

identifying and assessing the main sources of political risk that can affect the business level,

namely competing ideologies, entrenched interests in business groups, the majority of voters

of the ruling party, dissent within the ruling party, insurgencies in border areas, international

power alignments and alliances, government foreign economic policies, national and regional

interests, and so on. Political-legal environmental factors are particularly important in a

mixed economy such as Indonesia, and have a significant effect on the running of business

enterprises (Pertiwi, & Priyono, 2018; Schaffer, Agusti, et al., 2018). The legislature,

judiciary and executive are the three main organs in the political and legal environment. The

political-legal environment includes the following elements:

1. The political system is the political process, political enterprises-political parties, political

stability, the level of bureaucratic delay, and so on.

2. The rule of business law covers business formulation, implementation, efficiency and

effectiveness.

3. Defense and foreign policies include defense spending, maintenance of external relations

with other countries, and so on.

The political-legal environment can be divided into the following two parts:

1. Promoting Environment. The promoting environment includes stimulating business interest

through the provision of various incentives and facilities, thereby protecting local products

and markets from the influence of foreign competitors, as well as taking a direct role in

promoting business insurance. In Indonesia, the government provides all these facilities in the

form of solid infrastructure such as transportation, electricity, banking, post and

telecommunications, promoting overseas business, promoting business in the public and

shared sectors; concessions and benefits for different types of industries located in certain

areas (Dang, & Yeo, 2017).

2. Regulatory Environment. The regulatory environment imposes certain restrictions on a

company's business operations. These restrictions are not arbitrary but are based on the nature

of the social system and are an effective means or instrument to achieve the desired level of

social welfare in the country. In Indonesia, the regulatory environment consists of factors

related to the regulation of business operations by detailing their freedom to operate in

several business areas and the practices to be followed in conducting their business. The

regulatory environment has been established through legislative actions in the form of various

laws and policy formulations. For example, important regulations enacted in Indonesia that

affect the functioning of business enterprises involve the following:

Industrial policy and licensing.

Competition law.

Foreign investment.

Import and export regulations (Hodijah, & Angelina, 2021; Siregar, Pratiwi, Nurhasanah,

& Sinaga, 2019; Sulaiman, Maupa, Kadir, & Muis, 2017).

Foreign operations, cooperation, and partnerships.

Protection of consumer interests (Gallardo-Vázquez, & Sánchez-Hernández, 2014).

Prevention of environmental pollution.

Company Law and other economic regulations.

Every country is different when it comes to international trade and the relocation of

foreign factories in their country. Some countries openly approach foreign companies and

encourage them to invest in their country by offering tax reductions or other investment

incentives. Other countries impose strict regulations that may cause large companies to

relocate and open factories in countries that provide more favorable operating conditions

(Dang, & Yeo, 2017). When a company deciding to do business in another country, it is also

necessary to consider the political stability of the destination country's government. Unstable

leadership can create significant problems in regaining profits if the destination country's

government falls or changes its policies regarding trade and foreign investment. Political

instability is often caused by severe economic conditions that result in social instability (Xie,

Xie, & Zhao, 2018).

Another key aspect of international trade is payment for products in foreign currencies

(Bailey, 2023). This practice can create potential problems for companies, as each currency is

subject to currency value fluctuations and price fluctuations. A company can lose money if

the value of the foreign currency decreases before it can be exchanged into the desired

currency. Another currency-related issue is that some countries do not have enough cash.

Instead, they engage in barter trade, which involves the direct or indirect exchange of goods

for goods rather than cash. The principle of this barter trade is the same as bartering, a

practice that dates back to prehistoric times. For example, an automotive company may trade

new cars to a foreign government in exchange for high-quality steel that is more expensive if

purchased on the open market. The company can then use the steel to produce new cars that

are sold (Chahal, Gupta, Bhan, & Cheng, 2020). In more extreme cases, some countries do

not want to engage in free trade with other countries, known as self-sufficiency. There are

many reasons for this choice, but the most important one is the existence of strong political

beliefs. For example, the Soviet Union and its communist allies only traded with each other

because the Soviet Union feared that Western countries would try to control their liberal

governments through trade. Self-sufficiency allowed the Soviet Union and its allies to avoid

this possibility. However, These self-imposed trade restrictions created shortages of products

that could not be produced within the group which resulted in the overall quality of life

within the Soviet bloc being much lower than in the West as consumer demand could not be

met. When the Berlin Wall came down, trade with the West resumed and the resultant

product shortages were reduced or even eliminated.

In analyzing the political-legal environment, a company can broadly consider the

following aspects (Xie, Xie, & Zhao, 2018):

1. The influence of the political system on business in the destination country.

2. The government of the destination country's approach to business is either restrictive or

facilitative.

3. Facilities and incentives offered by the government in the destination country.

4. Legal restrictions in the destination country such as license requirements, reservations for

specific sectors such as public, private, or small-scale sectors.

5. Restrictions on importing technical know-how, capital goods, and raw materials in the

destination country.

6. Restrictions on exporting products and services in destination countries (Hodijah, &

Angelina, 2021; Siregar, Pratiwi, Nurhasanah, & Sinaga, 2019; Sulaiman, Maupa, Kadir,

& Muis, 2017).

7. Restrictions on pricing and distribution of goods in destination countries.

8. Procedural formalities required in setting up a business in the destination country.

9. Reforms in the economic and financial sectors of the destination country.

Socio-Culture Environment

The Socio-Cultural Environment is an important aspect of environmental scanning in

strategic management (Rothaermel, 2017; Aguilar, 1967). Basically, the socio-cultural

environment refers to a collection of values, ideals, attitudes, beliefs, desires, and

expectations that distinguish one group from another. Companies need to be aware of how

social and cultural factors in the destination country can directly affect the way they manage

their business operations especially related to human resources and marketing. Executives in

the company should be aware of the values and sensitive ideas of people coming from

different backgrounds and education in the destination country. Changes in aspirations,

habits, customs, and values generate new opportunities and threats for the Company's

business in the destination country. Elements of the social and cultural environment influence

the functioning of the company primarily through the setting of company objectives,

company processes, and the products to be offered by the company. These aspects affect the

total functioning of the company. Social and cultural factors influence the basic purpose of

the company by determining its norms. The company's business processes are also designed

by considering various social and cultural factors in the destination country. Since the firm

serves as a mediator to convert inputs into outputs, and these outputs are provided to society,

it can only produce things that are accepted by society in the destination country (Chahal,

Gupta, Bhan, & Cheng, 2020; Xie, Xie, & Zhao, 2018). Therefore, social and cultural factors

influence the goods and services that firms can offer.

The socio-cultural environment includes the following (Xie, Xie, & Zhao, 2018):

1. The expectations of the people in the destination country for the business.

2. The attitude of the people in the destination country towards the business and its

management.

3. Outlook on employment achievements in the destination country.

4. A view of the Company's authority structure, responsibilities and position in the

destination country.

5. Views on customs, traditions, and conventions, etc. in the destination country.

6. Labor mobility and education levels in destination countries.

Sometimes, managers in formulating or implementing strategy do not adequately

consider the social and cultural factors in the destination country. The result is strategy failure

and losses for the company in terms of lost opportunities and additional costs. In a dynamic

and competitive global environment, social and cultural factors are also subject to change.

These changes are gradual and steady in nature that can be predicted relatively easily once

managers gain insight into these factors. Before a company begins exporting products to

other countries, it should examine the norms, customs, and values of those countries. This

information can be critical to the successful introduction of a product into a particular country

and will affect the way the product is sold and/or marketed. This kind of information can

prevent cultural mistakes, such as those made by General Motors when trying to sell its

Chevy Nova in Spanish-speaking countries. Nova, in Spanish, means not running and few

people would buy a car named not running. This marketing mistake caused only by ignorance

of the Spanish language cost General Motors millions in initial sales and also suffered

considerable embarrassment in the destination country.

Business professionals also need to be aware of foreign customs with respect to

standard business practices. For example, people from some countries like to sit or stand very

close when conducting business. In contrast, people from other countries like to keep a spatial

distance between them and the person with whom they are doing business. Therefore, before

businesspeople travel abroad, they should be given training on how to conduct business in

foreign countries on how to do business in the country they will be visiting.

Business professionals also face other practices that occur in some countries such as

bribery. The practice of bribery is common in some countries and is considered a normal

business practice. If a bribe is not paid to a businessperson from the destination country

where the bribe is expected, the business transaction may not take place (Chow, &

Schoenbaum, 2022). Laws in some countries prohibit businesses from paying or accepting

bribes. Therefore, navigating the laws and culture of the destination country should be done

with great care to fully comply with the applicable laws of the destination country. In

analyzing social and cultural factors, companies need to pay attention to the following aspects

(Xie, Xie, & Zhao, 2018):

1. People's approach to business in general and in specific areas.

2. The influence of social, cultural and religious factors on product acceptance.

3. People's lifestyles and products that benefit them.

4. Level of acceptance or resistance to change.

5. The values associated with a product such as ownership value or functional value in the

product.

6. Special product requests for specific events.

7. Propensity for consumption and savings.

Global Environment.

Companies in every industry are facing an increasing wave of globalization. The world

is becoming smaller as a result of revolutions in means of transportation and communication,

as well as the spread of information technology. Therefore, companies today need to consider

specifying and producing goods for customers globally (Wild, & Wild, 2021; Chahal, Gupta,

Bhan, & Cheng, 2020; Hitt, & Hoskisson, 2017). Globalization essentially provides existing

opportunities and challenges for many Companies (Dunung, & Carpenter, 2023; Wild, &

Wild, 2021; Hitt, & Hoskisson, 2017). In this era of globalization, many multinational

companies earn more than half of their revenue from overseas operations (Wild, & Wild,

2021; Hitt, & Hoskisson, 2017; Dabic, Gonzalez-Loureiro, Furrer, 2014). Many Indonesian

companies, particularly in the information technology sector such as Infosys Technologies,

Tata Consultancy Services, Wipro, Satyam Computers, Hughes Software, and so on derive

more than 70% of their revenue from overseas operations. Globalization thus changes the

rules of the game in business. On the one hand, globalization creates new opportunities for

Indonesian industries. On the other hand, Indonesian companies face increasing competition.

Therefore, a global environmental scan is required (Hitt, & Hoskisson, 2017; Fleisher, &

Bensoussan, 2007; Aguilar, 1967). From a strategic management point of view, analysis is

required to open operations abroad and understand the implications of the entry of

multinational companies in the country as well as the freedom to import products and

services from abroad (Rothaermel, 2017). These factors have become more important and

relevant in the Indonesian economy as it has opened its markets to multinational companies

in almost every sector and that too in an unlimited form. Therefore, Indonesian companies

must be very careful (Dabic, Gonzalez-Loureiro, Furrer, 2014).

In the context of analyzing the global environment for threats through imports and

multinationals' operations in the destination country, the following factors need to be

considered (Xie, Xie, & Zhao, 2018; Dabic, Gonzalez-Loureiro, Furrer, 2014):

1. Comparative cost advantage through technological advances and large-scale production

(Chahal, Gupta, Bhan, & Cheng, 2020).

2. Tariff structure in the destination country.

3. The attitudes of destination countries and exporting companies and various other ways to

take advantage of local companies in destination countries (Hodijah, & Angelina, 2021;

Siregar, Pratiwi, Nurhasanah, & Sinaga, 2019; Sulaiman, Maupa, Kadir, & Muis, 2017).

4. The level of subsidies and incentives, both financial and non-financial, available to

exporting companies (Hodijah, & Angelina, 2021; Siregar, Pratiwi, Nurhasanah, &

Sinaga, 2019; Sulaiman, Maupa, Kadir, & Muis, 2017).

5. The attitude of overseas customers.

Physical Environment

Other factors that affect international trade activities are related to the physical

environment. Natural physical features, such as mountains and rivers, as well as man-made

structures, such as bridges and roads, can impact international trade activities. For example, a

large number of potential customers in the destination country experience natural physical

obstacles such as mountains and rivers that make it difficult to bring the company's products

to market in the destination country.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a concept in which companies consider the

impact of their decisions and activities on society, the environment, and the economy. In

practice, CSR encompasses a variety of programs and activities designed by companies to

have a positive impact on the surrounding community, ranging from environmental

sustainability programs, community empowerment, to contributions to education and health.

CSR can provide many benefits for companies, such as improving the company's reputation,

building strong relationships with stakeholders, and improving environmental conditions. In

addition, the implementation of CSR can also help companies to meet higher ethical

standards and contribute to a better future on sustainable development. The importance of

CSR aspects in the business world makes it not only a responsibility, but also an opportunity

for companies to grow and have a significant positive impact (Winarso, 2022; Tunjungsari,

2021; Harventy, 2020; Saifi, 2020; Razak et al., 2019; Rahmah & Iramani, 2015; Peloza &

Shang, 2010; Yuliana et al., 2008; Adams & Zutshi, 2004).

According to Rahmah & Muchtazar et al., (2021), Wangi et al., (2021), Saifi (2020),

Hardiana (2020), Fahrial et al., (2020), Asman

(2019), Iramani (2015), Peloza & Shang (2010), and the implementation of CSR can be done

through various programs and activities that are tailored to the needs of the company and the

surrounding community. Some examples of CSR implementation include:

1. Environmental Sustainability Programs. Companies can conduct reforestation,

wastewater management, and carbon emission reduction programs to maintain

environmental sustainability. For example, BCA (CSR Bakti BCA) planted 24.6

thousand trees, resulting in a reduction of carbon emissions by 39.7 tCo2. Unilever

Indonesia implements a water management program around the company.

100 production sites to address water shortages and contribute to climate change.

2. Community Empowerment. Through skills training programs, providing business

capital, or establishing cooperatives, companies can empower the surrounding

community to improve their welfare. For example, Bank Mandiri implements the

provision of business capital according to Law No. 20/2008 on MSMEs, as an effort to

support the development of micro businesses. Baznas Sumedang provides productive

business capital assistance to MSMEs to increase productivity and income, as a form of

community economic empowerment.

3. Contribution to Education. Companies can provide scholarships, establish schools, or

provide learning facilities for the surrounding community to improve access to

education. For example, Telkom University (Tel-U) provides various types of

scholarships as an effort to increase access to education for the community. Djarum is a

national company that routinely provides education scholarships.

4. Contribution to Health. Through public health programs, construction of health

facilities, or health education, companies can play a role in improving the health of the

surrounding community. For example, Kimia Farma has a TJSL (Environmental Social

Responsibility) Program that seeks a balance point between improving company

performance and community development, including health programs. Petrokimia Gresik

presents a program to improve the health of the community around the company as a

joint effort to increase community productivity.

Toos for Environment Analysis:

Some tools for analyzing the international business environment are discussed below

(Wardhana, et al, 2023; Verbeke, & Le, 2022):

1. PEST Analysis. is an evaluation of political, economic, social, and technological factors in

the external environment of a company, which can affect its activities and performance.

PEST (Political, Economic, Social, and Technological) analysis describes a framework of

macro-environmental factors used in the environmental scanning component of strategic

management (Rothaermel, 2017). PEST is part of the analysis of the external environment

when conducting strategic analysis or market research, providing an overview of the various

macro environmental factors that companies need to consider. PEST is a useful strategic tool

to understand market growth or decline, business position, potential, and operational

direction. The PEST factors are:

Political Factors. Political factors basically cover the extent to which the government

intervenes in the economy. Specifically, political factors include areas such as tax policies,

labor laws, environmental laws, trade restrictions, tariffs, and political stability in the

destination country. Political factors may also include the goods and services that the

government in the destination country wants or does not want to provide and those that the

government in the destination country does not want to provide. In addition, the government

has a great influence on the health, education, and infrastructure of a nation. The political

factors that companies need to consider are summarized in the form of the following

questions:

When is the local, provincial or national business election in the destination country?

How can this change government policy in the destination country or regionally in the

region such as Southeast Asia?

Who are the most likely competitors in the destination country?

What are the host country's views on business policies and on other policies affecting the

company?

Depending on the destination country, how well developed are property/asset rights and

the rule of law and how widespread is corruption and organized crime in the destination

country?

How is the situation in the destination country likely to change, and how is this likely to

affect the company?

Are there any pending tax laws or changes that may affect What are the positive and

negative impacts of the company's business in the destination country?

How will business regulations and planned changes in the destination country affect the

company's business? And is there a trend towards regulation or deregulation in the

destination country?

How do governments in destination countries approach corporate policy, corporate social

responsibility (Chandler, 2019), environmental issues (Duncan, 2022), and consumer

protection legislation (Gallardo-Vázquez, & Sánchez-Hernández, 2014)? What is the

impact, and is it likely to change?

10)

What is the duration of the proposed legislative changes in the destination country?

11)

Are there any other political factors that are likely to change in the destination country?

Economic Factors. Economic factors include economic growth, interest rates, exchange

rates, and inflation rates in the destination country (Silaban, & Rejeki, 2020). These factors

have a huge impact on the way a business operates and makes decisions. For example,

interest rates affect the cost of capital of a company and therefore, the extent to which a

business can grow and expand in the destination country. Exchange rates affect the cost of

exports and the supply and price of imported goods in an economy in the destination country

(Hodijah, & Angelina, 2021; Siregar, Pratiwi, Nurhasanah, & Sinaga, 2019; Sulaiman,

Maupa, Kadir, & Muis, 2017). The economic factors that companies need to consider are

summarized in the form of the following questions:

How stable is the economy in the destination country at the moment? Is it growing,

stagnant, or in decline?

Is the exchange rate the key to economic stability, or does it tend to vary wildly?

significant in the destination country (Ismanto, Kristiani, & Rina, 2019)?

Is the net income level of customers in the destination country rising or falling? How is

this likely to change in the next few years?

What is the unemployment rate in the destination country? Is it easy to build a skilled

workforce? Or is it expensive to recruit skilled workers in the destination country

(Indayani, & Hartono, 2020)?

Do consumers and businesses have easy access to credit in the destination country? If not,

how will this affect the company?

How does globalization impact the economic environment in destination countries (Wild,

& Wild, 2021; Hitt, & Hoskisson, 2017)?

Are there other economic factors that companies need to consider in the destination

country?

Social Factors. Social factors include cultural aspects and involve health awareness,

population growth rates, age distribution, career attitudes, and emphasis on safety in the

destination country. Trends in social factors affect the demand for a company's products and

the way it operates (Adner, & Zemsky, 2006). For example, an aging population may imply a

smaller and less willing labor force, increasing labor costs in the destination country. In

addition, companies may change various management strategies to adapt to these social

trends such as recruiting older workers. The social factors that companies need to consider

are summarized in the form of questions as follows:

What is the growth rate and age profile of the population in the destination country? How

is this likely to change?

Is the destination country's generational shift in attitude likely to affect what the

company does?

What is the level of health, education and social mobility of the people in the destination

country? How will these change, and how will they impact the company?

What employment patterns, labor market trends and attitudes towards work can

companies observe in the destination country? Are these different for different age

groups?

What social attitudes and social restrictions could affect the company's business in the

destination country? Are there any new socio-cultural changes that might affect this?

How do the religious beliefs and lifestyle choices of people in the destination country

affect the population?

Are there any other socio-cultural factors that might drive change for the Company's

business in the destination country?

Technological Factors. Technological factors include technological aspects such as research

and development activities, automation, technological incentives, and the rate of

technological change in the destination country. These factors can determine entry barriers,

minimum efficient production levels (Chahal, Gupta, Bhan, & Cheng, 2020), and influence

outsourcing decisions. In addition, technological shifts can affect costs, quality, and lead to

innovation (Burns, Stalker, 1961). Francis Aguilar is considered the creator of PEST

Analysis. He included a scanning tool called ETPS in his 1967 book titled Scanning the

Business Environment (Aguilar, 1967) The name was later changed slightly to create the

acronym PEST used today. Technological factors that need to be considered by the company

are summarized in the form of questions as follows:

Is there any new technology that the company can use in the destination country?

Are there any new technologies in the future that could drastically affect the jobs or

industries where the company is located in the destination country?

Do the company's competitors in the destination country have access to new technologies

that could redefine their products?

In which areas do the government and educational institutions in the destination country

focus on research? Is there anything the company can do to capitalize on this?

How do changes in the infrastructure in the destination country affect work patterns e.g.

remote working rates?

Are there any existing technology centers in the destination country that the company

can collaborate with or learn from?

Are there other technology factors that companies need to consider?

PEST analysis is useful for four main reasons:

PEST analysis assists companies in identifying business or personal opportunities and

provides early warning of significant threats.

PEST analysis reveals the direction of change in the Company's business environment

that helps the company shape what it does, so that it will work with change, not against

change.

PEST analysis helps companies avoid embarking on projects that are likely to fail, for

reasons beyond the company's control.

PEST analysis can help companies let go of unconscious assumptions when entering a

new country, region or market; as it helps companies develop an objective view of this

new environment.

Gathering information is only an important first step in conducting a PEST analysis.

Once that is done, the information must be evaluated. There are many changing factors in the

external environment, but not all of them affect or may affect a company. Therefore, it is

important to identify which PEST factors represent opportunities or threats for a company

and include only those factors in the PEST analysis so as to allow the company to focus on

the most important changes that may impact the company.

The factors in this model will vary in importance to a company based on the industry

and goods it produces (Chahal, Gupta, Bhan, & Cheng, 2020). For example, consumer and

B2B companies are likely to be more influenced by social factors, whereas global defense

contractors will tend to be more influenced by political factors. In addition, factors that are

more likely to change in the future or are more relevant to a company will have greater

importance. For example, a company that has borrowed heavily will need to focus more on

economic factors especially interest rates. Also, a conglomerate company that produces

multiple products such as Sony, Disney, or British Petroleum (BP) may find it more useful to

analyze one department of the company at a time by focusing on specific factors relevant to

that department in the destination country.

PEST factors, along with external micro-environmental factors and internal drivers, can

be classified as opportunities and threats in a SWOT analysis. PEST analysis is often

associated with SWOT Analysis, however, these two tools have a different focus. PEST

analysis looks at the big picture factors that may affect decisions, markets, or potential new

businesses whereas SWOT analysis explores these factors at the business, product line, or

product level. Both PEST and SWOT complement each other and are often used together.

PEST analysis is also conducted to assess the potential for new markets. The general rule is

that the more negative forces affecting that market, the more difficult it is to do business in it.

The difficulties to be faced significantly reduce the profit potential, and the company may

decide not to engage in any activities in that market.

PEST analysis is the most common version of all the PEST variations created. PEST is

a very dynamic tool as new components can easily be added to it to better focus on one or

more critical forces affecting the company. Although subsequent variations are more detailed

analyses than the simple PEST, the additional components are merely extensions of the same

PEST factors. A PEST analysis may include:

STEP = PEST in a more positive approach.

PESTEL = PEST + Environmental + Legal

PESTELI = PESTEL + Industry analysis

STEEP = PEST + Ethical

SLEPT = PEST + Legal

STEEPLE = PEST + Environmental + Legal + Ethical

STEEPLED = STEEPLE + Demographic

PESTLIED = PEST + Legal + International + Environmental + Demographic

LONGPEST = Local + National + Global factors + PEST

2. PESTEL Analysis involves gathering and presenting information about internal and external

factors that can, or may, impact a business. PESTEL analysis is a simple and effective tool

used in situation analysis to identify key external forces or at a macro-environmental level

that might affect a company. These forces can create opportunities and threats for a company.

The PESTEL model includes legal, environmental, ethical, and demographic factors, in

addition to the PEST model.

3. SWOT Analysis is an analysis of the strengths and weaknesses of a company together with

the opportunities and threats that exist in the external environment which involves collecting

and displaying information about internal and external factors that can affect the business.

SWOT is a framework that allows managers to synthesize insights gained from an internal

analysis of the company's strengths and weaknesses with insights from an analysis of external

opportunities and threats. SWOT is an acronym that refers to:

Strengths. Factors that give a company an advantage over its competitors (Lin, Hsu,

Hsu, & Chung, 2020; Barney, & Hesterly, 2018).

Weaknesses. Factors that could be detrimental if used by competitors.

Opportunities. Favorable situations that can provide a competitive advantage (Lin, Hsu,

Hsu, & Chung, 2020; Annarelli, Battistella, & Nonino, 2019; David, et al, 2019; Barney,

& Hesterly, 2018).

Threats. Unfavorable situations that can negatively affect the business.

Strengths and weaknesses are internal and can be managed directly by the company,

while opportunities and threats are external and the company can only anticipate and react to

them.

SWOT is a widely accepted tool due to its simplicity and the value of focusing on key

issues affecting the Company (Duncan, 2022). The purpose of SWOT is to identify relevant

strengths and weaknesses in the face of opportunities and threats in a given situation.

The benefits of SWOT analysis are:

Easy and practical to use.

It is clear to understand.

Focus on key internal and external factors that affect the company.

Help identify future goals.

Initiate further analysis.

Limitations of SWOT analysis are:

A redundant list of strengths, weaknesses, opportunities and threats.

There is no prioritization of factors.

The factors are described too broadly.

Factors are often opinions rather than facts.

There is no recognized method to distinguish between strengths and weaknesses,

opportunities and threats.

The stages in conducting a SWOT analysis can be described as follows:

a. Compile the Company's Key Strengths and Weaknesses

1) Strengths and weaknesses are factors of the company's internal environment.

2) When looking for strengths, ask "What can the company do better or have more value than

the company's competitors?"

3) In terms of weaknesses, ask "What can the company improve on and at least catch up to its

competitors?"

4) Strengths and weaknesses can be identified from the company's resources such as land,

equipment, knowledge, brand equity, intellectual property, and so on.

5) Internal factors can be strengths or weaknesses, depending on the characteristics of the

VRIO (Valuable, Rare and cannot be Imitated) framework.

6) For example, Brand Image can be a weakness if the company has a poor brand image, but

it can also be a strength if the company has the most valuable brand in the market.

7) A profit margin of 17% may be an excellent margin for many companies in most

industries, but it would be considered as a weakness if a competitor's average profit

margin is 20%.

b. Identifying Opportunities and Threats

1) Opportunities and threats are external factors that cannot be controlled.

2) They arise due to changes in the macro environment, industry, or competitor actions.

3) Opportunities reflect external situations that provide a competitive advantage if utilized

(Lin, Hsu, Hsu, & Chung, 2020; Annarelli, Battistella, & Nonino, 2019; David, et al,

2019; Barney, & Hesterly, 2018).

4) Threats are detrimental to the company so they are better avoided or dealt with.

5) Each external factor can be a strength or a weakness. Managers must analyze them

depending on the information and circumstances available. Companies can only guess at

the outcome and rely on analysts' forecasts. For example, exchange rates can increase or

decrease profits from exports, depending on whether the currency exchange rate will rise

(opportunity) or fall (threat) against other currencies (Hodijah, & Angelina, 2021; Siregar,

Pratiwi, Nurhasanah, & Sinaga, 2019; Sulaiman, Maupa, Kadir, & Muis, 2017).

The following guidelines are essential in compiling a successful SWOT analysis by

overcoming most of the limitations of SWOT and improving it significantly (David, et al,

2019):

Factors are identified relative to competitors to determine whether they are strengths or

weaknesses. Avoid making too short or endless a list.

Items should be clearly defined and as specific as possible. For example, the company's

strengths are: brand image (vague); strong brand image (clear); $10 billion brand image

that is the most valuable brand in the market (very clear).

Rely on facts not opinions. Find external information or involve someone who can give

an unbiased opinion.

Factors must be action-oriented. For example, a slow introduction of a new product is an

action-oriented weakness.

4. Porter's Five Forces Model is an analytical tool that uses five forces to determine the

profitability of an industry and shape the Company's competitive strategy (Porter, 1996).

Porter's Five Forces Model is a framework that classifies and categorizes the five forces

analyzes the most important forces that affect the intensity of competition in an industry and

its level of profitability (Fleisher, & Bensoussan, 2007; Spanos, & Lioukas, 2001; Porter,

1985). Porter's Five Forces Model This model was created by Michael Porter in 1979 to

understand how five major competitive forces affect an industry (Ali, & Anwar, 2021; David,

et al, 2019; Porter, 1985; Porter, 1980).

These forces determine the structure of the industry and the level of competition within

it (Fleisher, & Bensoussan, 2007; Porter, 1985). An industry with low entry barriers, having

few buyers and suppliers (Lee, Lee, Heo, 2015), but many substitute products and

competitors, would be considered highly competitive and therefore, less attractive due to its

low profitability.

The task of any strategist is to evaluate the company's competitive position in the

industry and identify strengths or weaknesses that can be leveraged to strengthen that

position. This tool is very useful in formulating a company's strategy as it reveals how strong

each of the five major forces in an industry are (Porter, 1985):

Threat of New Entrants. This force determines how easy or how difficult it is for a Company

to enter a particular industry. If an industry is profitable and has few barriers to entry,

competition is intensive (Fleisher, & Bensoussan, 2007). It is important for existing firms to

create high barriers to deter new entrants. The threat of new entrants is high when:

The amount of capital required to enter the market is low.

Existing companies can't do much in return.

Existing companies do not have patents, trademarks, or an established brand reputation.

There is no government regulation.

Customer switching costs are low so it doesn't take much money for a company to switch

to another industry.

Low customer loyalty.

Products are almost identical.

Economies of scale can be achieved easily.

Bargaining Power of Suppliers. Strong bargaining power allows suppliers to sell raw

materials at high prices or low quality to their buyers. Bargaining Power of Suppliers directly

affects the profit of the buying company because it has to pay more for materials. Suppliers

have strong bargaining power when (Lee, Lee, Heo, 2015):

Few suppliers but many buyers.

Suppliers are large and threatening for forward integration.

Few substitute raw materials.

Suppliers have scarce resources.

The cost of switching raw materials is very high.

c. Bargaining Power of Buyers. Buyers have the power to demand lower prices or higher

product quality from industrial producers when their bargaining power is strong. Lower

prices mean lower revenues for producers, while high-quality products usually increase

production costs (Chahal, Gupta, Bhan, & Cheng, 2020). Both scenarios result in lower

profits for the producer. Buyers exert strong bargaining pressure when:

1) Buying in bulk or controlling multiple access points to end customers.

2) Only a few buyers were present.

3) The cost of switching to another supplier is low.

4) They threatened to integrate backwards.

5) There are many substitutes.

6) Buyers are price-sensitive.

d. Threat of Substitutes. This force is particularly threatening when buyers can easily find

substitute products at attractive prices or better quality and when buyers can switch from one

product or service to another at low cost. For example, switching from coffee to tea costs

nothing, unlike switching from a car to a bicycle.

e. Rivalry Among Existing Competitors. This force is a key determinant of how competitive

and profitable an industry is. In competitive industries, firms must compete aggressively for

market share, which results in low profits. Competition among competitors intensifies when

(Fleisher, & Bensoussan, 2007):

1) Many competitors.

2) High exit barriers.

3) Industry growth is slow or negative.

4) Products are not differentiated and can be easily replaced.

5) Same-sized competitors.

6) Low customer loyalty.

Although Porter originally introduced five forces that influence an industry, researchers

have suggested including a sixth force (Ali, & Anwar, 2021; Spanos, & Lioukas, 2001):

Complementary. Complementary products increase the demand for the main product with

which they are used, thus increasing the profit potential of the company and the industry

(Spanos, & Lioukas, 2001; Adner, & Zemsky, 2006). For example, iTunes was created to

complement iPod and add value to both products. As a result, iTunes and iPod sales

increased, increasing Apple's profits.

Porter's Five Forces framework is used to analyze the competitive forces in an industry

and form a corporate strategy based on the analysis results (Fleisher, & Bensoussan, 2007).

However, how to use this tool? Here are the steps:

Gather information about each of the five forces.

Analyze the results and display them on the diagram.

Formulate a strategy based on the conclusions.

Gather information about each of the five forces in their industry and check them against

factors such as the number of competitors in the industry that affect the force.

Analyze the results and display them on a diagram. After collecting all the information, it is

necessary to analyze and determine how each force affects the industry. For example, if many

companies of the same size operate in a slow-growth industry, it indicates that competition

between existing companies is strong (Fleisher, & Bensoussan, 2007). Remember that the

five forces affect industries differently, so do not use the same analysis results even for

similar industries.

Formulate a strategy based on the conclusions. At this stage, managers should formulate the

company's strategy using the results of the analysis. For example, if it is difficult to achieve

economies of scale in the market, the company should pursue a cost leadership strategy. A

product development strategy should be used if the current market growth is slow and the

market is saturated.

While Porter's Five Forces is a great tool for analyzing industry structure and using the

results to formulate corporate strategy, it is also a great tool for analyzing industry structure

have limitations and require further analysis, such as SWOT, PEST, or Value Chain analysis.

5. Global Competitive Index. The World Economic Forum annually releases the Global

Competitive Index which examines and measures many of the factors that underpin national

competitiveness. The aim is to provide insights and stimulate discussion among all

stakeholders on the best strategies and policies to help countries overcome barriers to

improving competitiveness. The Global Competitive Index has grown over the past three

decades to become the most comprehensive national assessment in the world. This report

presents the Global Competitive Index (GCI) rankings, developed by Xavier Sala-i-Martín

and introduced in 2005 (Sala-i- Martín, & Barro, 2003). The GCI is based on 12 pillars of

competitiveness, providing a comprehensive picture of the competitiveness landscape in

countries around the world at different stages of economic development. This Global

Competitive Index contains detailed profiles highlighting competitive strengths and

weaknesses for each of the 144 economies presented, as well as a data table section

displaying relative rankings for over 100 variables.

Since 2005, the World Economic Forum has based its competitiveness analysis on the

Global Competitive Index (GCI), a comprehensive tool that measures the microeconomic and

macroeconomic basis of national competitiveness. Competitiveness has been defined as the

set of institutions, policies and factors that determine a country's level of productivity. The

level of productivity, in turn, determines the level of prosperity that an economy can earn.

The level of productivity also determines the rate of return earned by investments in an

economy, which in turn becomes the main driver of its growth rate. In other words, a more

competitive economy tends to be able to support growth. The concept of competitiveness

involves both static and dynamic components. While a country's productivity determines its

ability to maintain high income levels, it is also one of the main determinants of its return on

investment, which is one of the key factors explaining economic growth potential. Many

determinants drive productivity and competitiveness (Safitri, & Aslami, 2022).

Understanding the factors behind this process has been a concern of economists for hundreds

of years, resulting in theories ranging from Adam Smith's focus on specialization and

division of labor to neoclassical economists' vocalization of investment in physical capital

and infrastructure, and, more recently, interest in other mechanisms such as education and

training, technological progress, macroeconomic stability, good governance, firm complexity,

and market efficiency, among others. This openness is accommodated in the GCI by

including a weighted average of many different components, each measuring a different

aspect of competitiveness. These components are grouped into 12 pillars of competitiveness

namely:

The first pillar is Institutions. The institutional environment is defined by the legal and

administrative framework within which individuals, firms and governments interact to

generate wealth. The importance of a sound and equitable institutional environment became

more apparent during the recent economic and financial crisis and is critical to strengthening

a fragile recovery given the increasingly large role played by the state at the international

level and for many countries' economies. The quality of institutions has a profound effect on

competitiveness and growth, influencing the decisions of investment and production firms

and playing a key role in how society distributes the benefits and bears the costs of

development strategies and policies (Chahal, Gupta, Bhan, & Cheng, 2020). For example,

owners of land, company shares or intellectual property are reluctant to invest in the repair

and maintenance of their property if their rights as owners are not protected. The role of

institutions goes beyond the legal framework. The government's attitude towards the market

and its freedom and efficiency of operation is also crucial: excessive bureaucracy, over-

regulation, corruption, dishonesty in the handling of public contracts, lack of transparency

and trust, inability to provide appropriate services to the business sector, and political

dependence on the judicial system impose significant economic costs on businesses and slow

down the process of economic development. In addition, proper public financial management

is also critical to ensuring confidence in the national business environment. Indicators that

capture the quality of the government's public financial management are therefore included

here to complement the macroeconomic stability measures measured in pillar 3 below.

Although the economic literature focuses more on public institutions, private institutions are

also an important element in the wealth creation process. The recent global financial crisis

along with numerous corporate scandals, have highlighted the relevance of accounting and

reporting standards and transparency to prevent fraud and mismanagement, ensure good

governance, and maintain investor and consumer confidence. An economy is well served by

honestly run businesses, where managers adhere to strong ethical practices in their

relationships with governments, other companies, and the general public. Private sector

transparency is essential for business and can be achieved through the use of auditing and

accounting standards and practices that ensure access to information in a timely manner.

The second pillar is Infrastructure. Extensive and efficient infrastructure is essential to

ensure the effective functioning of the economy, as it is an important factor in determining

the location of economic activity and the types of activities or sectors that can develop in a

given case. Good infrastructure reduces the effects of distance between regions, integrating

market national markets, and connect them at low cost to markets in other countries and

regions. In addition, the quality and extent of infrastructure networks significantly affect

economic growth and reduce income inequality and poverty in various ways. Good

transportation and communication infrastructure networks are a prerequisite for less

developed communities' access to core economic activities and services. Effective modes of

transportation include quality roads, railways, ports and air transport that enable

entrepreneurs to deliver their goods and services to markets safely and on time, and facilitate

the movement of workers to the most suitable jobs. The economy also depends on an

electricity supply that is free from disruptions and shortages so that businesses and factories

can work without hindrance. Finally, a solid and extensive telecommunications network

allows for the fast and free flow of information, improving the overall efficiency of the

economy by helping to ensure that businesses can communicate and decisions are taken by

economic actors by taking into account all available relevant information (Dang, & Yeo,

2017).

The Third Pillar is the Macroeconomic Environment. The stability of the macroeconomic

environment is important for business and, therefore, important for the overall

competitiveness of a country. While it is true that macroeconomic stability alone cannot

improve productivity of a nation, it is also recognized that macroeconomic instability is

detrimental to the economy, as we have seen over the past few years, especially in the

European context. Governments cannot provide services efficiently if they have to make high

interest payments on past debts (Bailey, 2023). Running fiscal deficits limits governments'

ability to respond to the business cycle and to invest in measures that improve

competitiveness. Firms cannot operate efficiently if the inflation rate is uncontrolled (Silaban,

& Rejeki, 2020). In short, the economy cannot grow sustainably unless the macro

environment is stable. Macroeconomic stability has attracted public attention recently when

several European countries needed the support of the IMF and other eurozone economies to

prevent defaulting on agreed payments, as their public debt reached untenable levels (Bailey,

2023). It is important to note that this pillar evaluates the stability of the macroeconomic

environment, so it does not directly take into account the way public finances are managed by

the government. This qualitative dimension is captured in the institutional pillar described

above.

The Fourth Pillar is Health and Basic Education. A healthy workforce is essential for a

country's competitiveness and productivity. Sick workers cannot function optimally and will

be less productive. Poor health leads to significant costs for businesses, as sick workers are

often absent or operate at lower levels of efficiency. Investment in healthcare provision is

critical for obvious economic, as well as moral, considerations. In addition to health, this

pillar takes into account the amount and quality of basic education received by the

population. Primary education improves efficiency every worker. Furthermore, workers who

have little formal education can only perform simple manual tasks and will have more

difficulty adapting to more advanced production processes and techniques, thus contributing

less to discovering or executing innovations (Chahal, Gupta, Bhan, & Cheng, 2020; Burns,

Stalker, 1961). In other words, the lack of basic education can be a constraint to business

development, with firms struggling to add value by producing more sophisticated or high-

value products with existing human resources (Chahal, Gupta, Bhan, & Cheng, 2020). For the

long term, it will be crucial to avoid significant resource reductions in these critical areas,

even if government budgets need to be trimmed to reduce deficits and debt burdens.

The fifth pillar is higher education and training. Higher education and quality training are

essential for economies that want to rise in value beyond simple production processes and

products (Chahal, Gupta, Bhan, & Cheng, 2020). Especially, today's global economy requires

countries to nurture a pool of well-educated workers who are able to perform complex tasks

and adapt quickly to changing environments and evolving economic needs. This pillar

measures the level of secondary and tertiary enrollment and the quality of education

evaluated by the business community. The extent of staff training is also taken into account

due to the importance of vocational and continuous on-the-job training which is overlooked

in many economies to ensure continuous improvement of workers' skills.

The Sixth Pillar is Goods Market Efficiency. Countries with efficient goods markets are

well-positioned to produce a mix of products and services that match supply-and-demand

conditions. They also ensure that these goods can be traded most effectively within the

economy. Fair market competition, both domestic and foreign, is important in promoting

market efficiency and therefore business productivity by ensuring that the most efficient

firms, which produce the goods demanded by the market, are the ones that thrive (Chahal,

Gupta, Bhan, & Cheng, 2020; Fleisher, & Bensoussan, 2007). The best environment for the

exchange of goods requires a minimum of barriers to business activities through government

intervention. For example, competitiveness is hampered by adverse or burdensome taxes as

well as restrictive and discriminatory rules against foreign direct investment (FDI) by limiting

foreign ownership as well as international trade. The recent economic crisis has highlighted

the degree of economic interdependence around the world and the extent to which growth

depends on open markets. Protectionist measures are unproductive as they reduce aggregate

economic activity. Market efficiency also depends on demand conditions such as customer

orientation and buyer sophistication (Adner, & Zemsky, 2006). For cultural or historical

reasons, customers may be more demanding in some countries compared to others which can

create an important competitive advantage, as it encourages firms to be more innovative and

customer-oriented and thus imposes the necessary discipline for efficiency to be achieved in

the market.

The tenth pillar is market size. Market size affects productivity because large markets allow

firms to take advantage of economies of scale. Traditionally, the markets available to firms

were limited by national boundaries. In the era of globalization, international markets can

replace part of the domestic market, especially for small countries. Much empirical evidence

suggests that trade openness is positively associated with growth. Although some recent

studies doubt the robustness of this relationship, there is a general view that trade has a

positive effect on growth, especially for countries with small domestic markets (Wild, &

Wild, 2021; Hitt, & Hoskisson, 2017). The case of the European Union illustrates the

importance of market size for competitiveness, as important efficiency gains are achieved

through closer integration. Although the reduction of trade barriers and harmonization of

standards within the EU have contributed to increasing exports in the region, many barriers to

a true single market, especially in services, still exist and cause important border effects.

Therefore, we continue to use domestic and foreign market measures in this Index. Thus,

exports can be considered as a substitute for domestic demand in determining the market size

for a country's firms (Hodijah, & Angelina, 2021; Siregar, Pratiwi, Nurhasanah, & Sinaga,

2019; Sulaiman, Maupa, Kadir, & Muis, 2017), Adner, & Zemsky, 2006). By including both

domestic and foreign markets in our market size measurement, we give credit to export-

driven economies and geographical areas such as the European Union that are divided into

many countries but have a common single market.

The Eleventh Pillar is Business Expertise. There is no doubt that sophisticated business

practices support higher efficiency in the production of goods and services (Chahal, Gupta,

Bhan, & Cheng, 2020). Business expertise involves two interrelated elements: the quality of

the overall business network in a country and the quality of individual firms' operations and

strategies. (Neamtu, & Neamtu, 2014). These factors are particularly important for countries

that are at a high stage of development when, for the most part, the basic sources of

productivity gains have been exhausted. The quality of a country's business and industry

support networks, as measured by the number and quality of local suppliers and the extent of

their interactions, is important for a variety of reasons (Neamtu, & Neamtu, 2014). When

firms and suppliers from a particular sector are interconnected in close geographical groups,

referred to as clusters, efficiency is enhanced, opportunities for innovation in processes and

products are created, and entry barriers for new firms are reduced (Burns, Stalker, 1961). The

sophisticated operations and strategies of individual firms such as branding, marketing,

distribution, advanced production processes, and the production of unique and sophisticated

products, permeate the economy and lead to sophisticated and modern business processes in

the country's business sector (Chahal, Gupta, Bhan, & Cheng, 2020).

i. The twelfth pillar is innovation. Innovation can arise from new technological and non-

technological knowledge (Burns, Stalker, 1961). Non-technological innovation is closely

related to the expertise, skills and working conditions embedded in the firm and is therefore

largely covered by the eleventh pillar of the GCI. The last pillar of competitiveness focuses

on technological innovation. Although substantial gains can be made by improving

institutions, building infrastructure, reducing macroeconomic instability, or improving human

capital, all of these factors ultimately appear to experience diminishing returns. The same

applies to the efficiency of labor, financial, and goods markets. Finally, living standards can

be significantly improved through technological innovation. Technological breakthroughs has

been the basis of many of the productivity gains that our economy has experienced

historically that range from the industrial revolution in the 20th century 18 and the invention

of the steam engine and the generation of electricity to the more recent digital revolution. The

latter not only changed the way things work, but also opened up a whole new range of

possibilities in terms of products and services. Innovation is crucial for economies as they

approach the frontiers of knowledge and the possibility to generate more value by simply

integrating and customizing exogenous technologies tends to disappear. While less developed

countries can still increase their productivity by adopting existing technologies or making

incremental improvements in other areas, for those that have reached the innovation stage this

development is no longer sufficient to increase productivity. Firms in these countries must

design and develop cutting-edge products and processes to maintain a competitive advantage

and shift to higher value-added activities (Lin, Hsu, Hsu, & Chung, 2020; Barney, &

Hesterly, 2018; Madhok, & Marques, 2014). This progress requires an enabling environment

for innovative activities and is supported by both the public and private sectors such as

sufficient investment in research and development (R&D), especially by the private sector;

the existence of high-quality scientific research institutions that can generate the basic

knowledge needed to build new technologies; extensive cooperation in research and

technology development between universities and industry; and intellectual property

protection (Gallardo-Vázquez, & Sánchez-Hernández, 2014), coupled with a high level of

competition and access to venture capital and financing analyzed in the other pillars of the

index. Given the recovery In light of the slow growth and increasing fiscal pressures that

advanced economies have faced in recent times, it is important for both the public and private

sectors to resist the pressure to reduce R&D spending which will be critical for sustainable

growth going forward.

K. Summary:

The international internal or micro environment refers more to the industry in which the

company operates internationally and consists of factors in the international environment that

directly affect the company's performance, such as suppliers. The international macro-

environment consists of the larger societal forces that influence the international macro-

environment. Environment micro environment environment, such as demographic, economic,

natural, legal, technical, political, and cultural. The economic environment includes all the

factors that give shape and form to the development of economic activities and may include

factors such as the nature of the economic system economy, general economic conditions,

various economic policies, and various factors of production.

The technological environment refers to the total knowledge that provides ways of

doing things. This can include inventions and levels, which affect the way things are done,

such as product design, production, and distribution.

The political-legal environment comprises the legal and regulatory framework and the

political landscape in which a business unit operates including competing ideologies,

entrenched interests of business groups, the majority of voters of the ruling party, dissent

within the ruling party, insurgencies in border areas, international power alignments and

alliances, the government's foreign economic policy, national and regional interests, and so

on.

The regulatory environment has been established through legislative action in the form

of various laws and policy formulations such as industrial policy and licensing, competition

law, foreign investment, import and export regulations, foreign operations, cooperation, and

partnership, protection of consumer interests, prevention of environmental pollution,

company law and other economic regulations.

The socio-cultural environment refers to the set of values, ideals, attitudes, beliefs,

desires, and expectations that differentiate one group from another in the destination country

which directly affects the way they manage their business operations especially related to

human resources and marketing.

The Global Environment as a result of revolutions in means of transportation and

communication, and the spread of information technology. The global environment includes

comparative cost advantages through technological advancements and large-scale production,

tariff structures in destination countries, attitudes of destination countries and exporting firms

and other means of take advantage of local firms in the destination country, the level of

financial and non-financial subsidies and incentives available to exporting firms, and the

attitudes of overseas customers.

The Physical Environment with natural physical features such as mountains and rivers,

as well as man-made structures, such as bridges and roads, can impact international trade

activities.

Corporate Social Responsibility (CRS) is a concept in which companies consider the

impact of their decisions and activities on society, the environment, and the economy. In

practice, CSR covers a wide range of programs and activities designed by companies to have

a positive impact on the surrounding community, ranging from environmental sustainability

programs, community empowerment, to contributions to education and health. CSR can

provide many benefits for companies, such as improving the company's reputation, building

strong relationships with stakeholders, and improving environmental conditions.

Some tools to analyze the international business environment are PEST (Political,

Economic, Social, Technology) analysis, PESTEL (Political, Economic, Social, Technology,

Environmental, Legal) analysis, SWOT (Strengths, Weaknesses, Opportunities, Threats)

analysis, Porter's Five Forces Model, and the Global Competitive Index (GCI).

L. Practice Questions

1. Explain the meaning of external and internal environment in international business?

2. Explain how environment economic environment can affect international business?

3. Explain how environment technology can affect international business?

4. Explain how environment political-legal environment can affect international business?

5. Explain how environment socio-cultural environment can affect international business?

6. Explain how the physical environment can affect international business?

7. Explain various tools analysis environment of international business?

8. Explain what is meant by corporate social responsibility (CSR)?

OMT 440_ARIZONA STATE UNIVERSITY_ASSIGNMENT 2024_WEEK 2_INTERNATIONAL BUSINESS ENVIRONMENT

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