Major Factors Affecting International Business

International Business and factors that impact it

Factors that affects International Business


International business:

International business refers to all commercial activities such as trade of goods, services, technology, knowledge and capital across national borders. The cross border transactions take place between individuals, business firms and government agencies (International Business, 2019). Thus, international business refers to cross border transactions of goods and services taking place between two or more countries. Also, International business occurs in different forms:

  • Cross border transactions of goods and services from one country to another
  • Contractual agreements to use products, services and processes of other nations
  • Operating sales, manufacturing, research and development activities in foreign markets.

Article Summary

This article talks about the concept of international business and operational definition of multinationals in the same sphere. Further the factors affecting the international business are discussed with the example of an MNC called Woolworths International. The external factors affecting the international business of the respective company are explained using various analysis like PESTEL and SWOT. These studies are supported by a detailed description of the company along which helps to understand the external factors responsible for making variations in the productivity of international business.

Multinational corporation (MNC):

MNC is a corporate organization that has its operations and facilities in more than one country. MNC is a large corporation which produces and sells its goods and services in number of countries. Generally, MNC firm has a centralized head office and number of offices in other countries. Thus, MNC’s are large size firms that have their operations in number of countries and all the operations are centrally controlled by parent company ("Multinational Corporations (MNCs)", 2019). For instance, Woolworths is a large MNC that has its operations in New Zealand, Africa, Asia, Europe and Australia with its headquarter in Australia (Woolworths International, 2019). Further, Woolworths has 59 stores in 11 countries (Khumalo, 2016).

How international business is impacted and what factors impact it: external influences on a business

Various companies are involved in transacting their goods, services and capital across the national borders and are affected by number of factors. various restrictions are also imposed on companies that are transacting their business at international level. various internal and external factors directly impact the working of these business firms. Various external environment factors directly affecting the working of large MNCs include social conditions of economy, political and legal factors, etc. However, internal factors can be controlled by the management team of companies by taking various strategic initiatives.

Following is the detail discussion on various external factors that are affecting the working of international corporations:

  • Political factors:

    Various political factors affect the international factors. Political factors such as changes in tax rates, policies and actions of government, political stability of country, foreign trade regulations etc. affects the working of an international business firm. Lack of political stability in the country directly impacts the operations of business firm. Also, various tax policies and government initiatives sometimes hinders the expansion of business in other countries. Thus, effective political environment of business influences the growth of business firm (Shaw, 2018).

  • Economic factors:

    Economic factors relates to the economic system of the country where the firm has its operations. Various econocmi factors such as inflation rate, interest rate, income distribution, employment level, allocation of government budget, etc., directly impacts the operations of business firm (NDUNGU, 2012). Various economic factors such as purchasing power of customers also determines the demand of various products and services.

  • Legal factors:

    Legal factors relate to the legal environment of the country in which firm operates. Different laws prevail in different countries and international business firms have to abide by the laws of each country. Laws relating to age and disability discrimination, wage rates, employment and environment laws affects the working of business firms. Along with this, various international lending agencies affects the legal culture and working policies of business firm

  • Social factors:

    Social factors such as education, awareness and trends and status of people in the society affects the consumer behavior to purchase various goods and services. Also, Social environment and culture such as customs, lifestyles and values differs from country to country which further directly impacts the international business.

  • Environmental factors:

    Environment factors such as weather, climate change, temperature etc. affects the business firm and the demand pattern of various goods and services. increasing environment awareness has made this external environment factor a significant issue to be considered by business firms. Move towards environment friendly products and services also has affected the demand pattern of various goods and services.

  • Technical factors:

    Technological changes in the industry has both positive and negative impacts on the working of business firms. Technological changes and development of automated work processes helps in increasing the efficiency of business processes. However, technological changes also threaten the demand of various products and services in the industry.

Taking an example of Woolworths:
PESTEL ANALYSIS DETAIL
POLITICAL FACTORS

The head office of Woolworths is located in Australia and there are close economic relations exist between Australia and New Zealand which provides various profitable work opportunities to Woolworths. Political stability exists in the countries where Woolworths has its operations. Also, lowering rate of corruption in Australia will further increase the profitability of Woolworths. following figure shows the corruption index in Australia:

POLITICAL FACTORS
ECONOMIC FACTORS

Woolworths operates in economically sound and stable work environment which helps in stabilizing the sales and profit of the business firm. Also, there is rising disposable income of consumers in Australia which further will be a positive growth indicator for Woolworths. However, various economic factors such as recession has impacted the financial position of Woolworths by causing the factors that led to the closure of retail stores in UK. This further affected the overall sales growth of Woolworths.

SOCIAL FACTORS

Rising trend of healthy and sustainable options has influence the working of Woolworths. Woolworths has successfully met the needs of large customer base by providing and delivering fresh fruits and vegetables to its customers. Woolworths also had developed its online portal to provide for online and convenient shopping experience to customers. Along with this, Woolworths has started its sustainable strategies to meet the needs of green customers. Corporate social responsibility initiatives of the company also targeted to fulfill the social needs of consumers in reagard to the sustainable demands.  

TECHNICAL FACTORS

Woolworths also had adopted number of technological innovations as a result of various technological trends in retail sector to improve the quality of its products and services. woolworths in current times has introduced Visa Paywave to improve the convenience of customers in shopping and to reduce the waiting time of customers in long queue. Along with this, Woolworths has installed self-check out machines to reduce the chance of thefts being taking place (Ahillon, 2019).

ENVIRONMENT FACTORS

Rising awareness among customers about environment sustainability has influenced various operations of retail firms. Various environmental laws have also been established to reduce negative impacts on environment. Woolworths has adopted number of environment friendly business practices with the aim to reduce negative impacts on environment. Various recycling and ethical sourcing practices have also been adopted by Woolworths to comply with various environmental regulations.

LEGAL FACTORS

Various taxation policies and food licensing requirements also affects the working of food and grocery stores. Also, Woolworths has to comply with various employee related regulations and fair work act policies to keep its employee satisfied with various work policies ("Employment & labour law in Australia | Lexology", 2019). Woolworths also has developed number of policies to comply with changes in various laws relating to employment, competition, product safety, environment protection etc.

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SWOT ANALYSIS:

SWOT analysis is one of the most important business analysis tool that helps in understanding the internal and external business environment of a firm. SWOT analysis refers to the framework that involves analysis of the competitive position of the business firm which further is useful in conducting strategic planning for business firm. Thus, SWOT analysis is a strategic planning tool that helps in identifying the internal and external environment factors of business firm. Internal environment analysis of business firm involves analysis of the strengths and weaknesses of a business organization that are also within the control of business firm. External analysis includes analysis of opportunities and threats of business organization which are external to business firm. Thus, it has been identified that business firms by applying SWOT analysis can identify various competencies and characteristics of business organization. Following is the detailed analysis of various elements of SWOT analysis:

  • Strengths:

    Strengths are internal attributes of the company that helps in achieving strategic business position through distinct competencies. Various strengths of business firm include strong employee attitude, excellent customer service, established brand image etc.

  • Weaknesses:

    Weaknesses are the internal constraints of business firm that stops an organization to achieve the competitive position in industry. Thus, weaknesses are the areas which needs improvement by the business firm. For instance, weak brand image and lack of capital of business firm restricts the business to achieve competitive advantage (Parsons, 2019).

  • Opportunities:

    Opportunities are the favorable external factors that can help business firm to achieve competitive advantage. For instance, expanding business in untapped markets and gaining large number of customers is a good opportunity for business firm.

  • Threats:

    Threats refers to negative external environment forces that can harm a business organization. Business firms lack control over external environment threats which may cause number of problems and difficulties for business firm. For instance, change in behavior of consumers or entry of new firms in industry (SWOT, 2019).

Taking example of Woolworths:
STRENGTHS WEAKNESSES
Well known retail brand with larger market share in industry. Lack of presence in other economies
Offers Diverse range of products and services under one roof Lack of brand awareness among local people
Strong brand image and reputation Low pricing of products
Strong brand image and reputation  
Leading position in retail market  
Economics of scale due to operations at large scale  
Lower bargaining power of suppliers  
Convenient shopping experience to consumers  
OPPORTUNITIES THREATS
Expanding business in developing economies Reduction in purchasing power of customers through global recession
Decreasing cost of distribution and increasing profit margins Increase in cost of various raw materials
Expanding product base by offering gluten free and organic products Huge competition from other dominating retail firms
Expanding customer base Increase in prices of organic produce
Promoting goods over social media and other online channels New regulations by government authorities

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Micro factors affecting business- Internal influences on a business

Micro environment of business includes various internal environment factors of business firm that affects the performance and decision making of an organization. various micro environment factors of international business include customers, competitors, distribution channels, suppliers, public, etc. Thus, micro environment factors are factors that exist in the immediate operation environment of business and directly impacts the operations of business organization. Micro factors of business also involve various factors relating to resource availability and usage of resources (Pratap, 2019). Following is the detail discussion of various micro environment factors of business:

  • Impact of customers on business:

    Customers are important micro environment factor of business that impacts the operations of business organization. Customers have gained lot of importance in 21st century. Business firms in current times cannot successfully run a business without fulfillment of needs and wants of customers. Also, customer preferences changes at regular pace which influences the working of business firms (Seidel, 2019). Thus, customer focus and engagement have become key factor for business firm to be considered while determining the type of products and services to be offered to customers. Customer engagement also influences the competitive position of business firm. For instance, Woolworths has taken various initiatives to provide convenient services to customer. Woolworths also has developed online portal to provide convenient shopping facility to customers. Various store innovation has also been done by Woolworths to ensure that customer do not face any difficulty in shopping. Woolworths also ensures that customers get fresh fruits and vegetables. Along with this, Woolworths is known for providing superior services to customers at reasonable prices. All these initiatives have helped Woolworths to achieve competitive position in industry. In addition to this, Woolworths also has adopted number of rapid prototyping techniques to try new ideas with customers and to gain their feedback from customers regarding various products and services (Woolworths Innovation Lab, 2019).

  • Suppliers factors affecting business:

    Suppliers provides various raw materials, technology, human resources and other components to the company. international business firms operate on large scale and procure resources and other supplies from number of suppliers. It is must for international business firm to have well managed supply chain. Business firms should remain in touch with various suppliers to reduce their operational cost and to ensure that various raw materials required in business are readily available (HQ, 2015). However, growing concern for quality products and need for sustainable and ethical products has increased the bargaining power of number of suppliers. Location, price charged by suppliers, quality of products provided by suppliers etc. affects the selection of suppliers by the business firm. Also, price charged by various suppliers directly impacts the cost structure of various goods produced by the business organization. For instance, Woolworths has developed effective supply chain management system by developing effective relations with number of suppliers and procuring timely supplies from suppliers. Various products of suppliers such as fresh fruits and vegetables are directly stored in the retail stores of the company. Thus, Woolworths ensures that fresh and quality produce is procured from suppliers.

  • Competitors factors affecting business:

    Various competitive factors also affect the working of company. Large number of competitors exist in the industry and initiatives undertaken by competitors directly influences the working of company. Market share of the competitors also affects the profitability of business firm. However, larger competition in the market signified huge demand for the product in the market. Products and services provided by competitors also creates new demand trends in the industry by creating demand for new products and services which further reduces the demand of firm products and services in the industry. Rapid change in the needs of customers is also the result of actions taken by competitors. This further influences the business organization to bring some innovation and develop products according to the needs of customers ("Competitive Forces Affecting Business Environment", 2019). Thus, it is must for business firms to provide differentiated products to customers to gain larger market share. For instance, Woolworths has reduced its prices as a result of reduced prices of ALDI and coles stores. Also, Woolworths also has taken number of initiatives to move toward more uniform pricing policies ("Australia's food & nutrition", 2012).

  • Industry rivalry affecting business:

    Rivalry among the existing competitors also affects the operations of business firms. Behavior of competitors affects the operations of business organization. Competitive rivalry also pressurizes business firms to offer quality produce to customers at reasonable prices. Also, competitive rivalry influences business firms to increase their spending on product and service innovation. For instance, huge competition exists in the retail industry and various dominating firms such as Coles supermarkets, Wes farmers, ALDI, etc. are competing against one another to achieve higher market share in the retail industry ("Woolworths's Competitors, Revenue, Number of Employees, Funding and Acquisitions", 2019).

  • Porter 5 forces analysis

    porter 5 force analysis is one of the important framework that helps in evaluating the competitive position of business firm. Various factors influence the profitability of business firm. Rivalry among existing competitors, chance of entry of new firms, availability of substitute products, availability of customers and suppliers etc. directly affects the profitability of business organization (CHAPPELOW, 2019). Porter 5 forces are the competitive forces that helps in determining the strengths and weaknesses of business firm. Also, these five forces helps in developing corporate strategies for business organization. following is the detail description of porter five forces:

    Porter 5 forces analysis
  • Competition in industry:

    Competition in the industry refers to the number and ability of competitors existing in the industry. Huge competition in the industry and number of equivalent products and services lowers the power of business firm. However, lower rivalry among existing firms helps business firm to charge higher price for various products and services from customers.

  • Threat of new entrant:

    This relates to the potential of other firms to enter the industry. lower time and money required in setting up the business increases the threat of new entrants being faced by the company. Lower potential of other firms to enter the industry increases the power of existing firms to charge competitive price from customers.

  • Bargaining power of suppliers:

    It refers to the ability of company suppliers to charge higher price for inputs served to the business organization. Number of suppliers, quality and uniqueness of supplier products and switching cost of company to other suppliers impacts the bargaining power of suppliers in industry. Fewer suppliers in industry increases the bargaining power of existing suppliers.

  • Bargaining power of customers:

    Bargaining power of buyers refers to the ability of buyers to lower the price of products and services being offered to them. Number of business firms, number of buyers, amount of purchase, switching cost to other organizations etc. determines the bargaining power enjoyed by the buyers.

  • Threat of substitute products:

    Substitute products refers to goods that can be substituted in place of other products and services. Availability of substitute produces increase threat of substitute being faced by business firm. Availability of substitute goods also determine the price of goods charged by the company.

Following table shows the porter five force analysis model for Woolworths:
PORTER FIVE FORCES DETAIL
Competition in the industry Huge competition exists among dominating firms in retail sector in New Zealand and Australia. Coles, ALDI, Wes farmer and Woolworths are some of the dominating firms in retail industry. These firms compete against each other to capture larger share in market and to increases their profitability.
Threat of new entrants Threat of new entrants is relatively low for the Woolworths due to development of leading positon in the industry. Also, huge investment is required in setting up chain of grocery stores which further lowers down the threat of new entry being faced by Woolworths.
Bargaining power of suppliers Woolworths and Coles holds around 80 % of market share in Australian retail industry. The larger part of supply produce in Australia is purchased by these firms which provides that Woolworths and Coles are major purchaser of supplier produce in Australia. Also, Woolworths has maintained effective relation with various suppliers. This provides that bargaining power of Woolworths suppliers is moderate.
Bargaining power of buyers Presence of large number of retail firms operating in Australia and other countries increases the bargaining power of customers. Customers make purchase decision for various grocery items by comparing the price charged by various retail organizations. Woolworths has charged reasonable prices for its quality and fresh produce which reduces the bargaining power of buyers. Also, online portal offers fixed pricing system to customers. Thus, bargaining power of Woolworths customers is moderately low.
Threat of substitute products Threat of substitute products is relatively moderate for Woolworths as retail and dairy products are available at various retail stores. However, Woolworths offers fresh produce to customers which induces customer to purchase products of Woolworths.

Internal Factors affecting business:

Internal factors are factors within the control of company and are referred to both tangible and intangible factors of organization which influences the strengths and weaknesses of an organization. Various internal factors that affects an organization are discussed as follows:

  • Human resources:

    Human resources are one of the biggest treasure of an organization as whole operations to the company depends on its human resources. Effective and hardworking staff members helps in achieving competitive position in the industry whereas lack of skilled staff members reduces the profitability of business organization and may lead to closure of business (Internal & External Environmental Factors, 2019). Thus, working of an organization depends on efficiency, effectiveness, performance and skill base of staff members. Further, Woolworths has hired more than 11500 employees in its operational departments to ensure that best quality of services are provided to customers.

  • Financial resources:

    Financial resources refers to the funds available with the company to carry out various operations in the organizations. Funds are the base for growth and competitive position in the industry. Lack of availability of this resource leads to failure and closure of business organization. Woolworths has gained revenue of $39.568 billion in 2019.

  • Innovation capabilities:

    innovation refers to the ability of business organization to introduce new ideas into the business operations. Innovation capability is also one of the important factor that affects the operations of business organization. For instance, Woolworths has made use of its innovation capability in all its operations to increase its reputation in the industry and to provide convenient services to customers.

  • Organizational structure:

    Type of organization structure shapes the employee behavior in organization and also influences the type of communication taking place in organization. Team based structures helps in free flow of information (Johnson, 2019). Woolworths has adopted hierarchy based organization structure to maintain control of managers over all the operational activities and to ensure that all rules and regulations are strictly followed in organization.

  • Value proposition:

    Value proposition is the belief of customers as to how the products and services of organization will meet the expectations of customers. Value proposition also influences customers to purchase goods from the organization. Currently, Woolworths price based marketing campaign has helped in achieving “cheap cheap” slogan for the new value proposition.

VRIO ANALYSIS:

VRIO analysis refers to the analytical technique used to evaluate the resources of an organization which further helps in analyzing the competitive advantage of business in the industry (Frue, 2017). Following table shows the overview of each term:

VRIO ANALYSIS DETAIL
Valuable Valuable resources of an organization helps in exploiting the opportunity and also helps in mitigating various threats that can be faced by organization.
Rare Rare resources are strengths to an organization and can lead to competitive advantage. Thus, these are the resources which are valuable to organization and are unique among number of competitors.
Imitable Imitable are resources that are difficult to be acquired by other firms in industry
Organization Organization that has valuable, rare and imitable resources must manage and organize its resources to achieve competitive advantage and to exploit all the available resources.
VRIO analysis of Woolworths:
Resources Valuable Rare Imitable Organized Competitive implication
Financial resources Yes Yes Yes Yes Permanent competitive advantage
Fresh produce and Differentiated products Yes No No No Temporary competitive advantage
Employees Yes Yes No Yes Temporary competitive advantage
Distribution network Yes yes Yes Yes Permanent competitive advantage
Patents Yes Yes Yes No Competitive parity
Brand name Yes Yes No Yes Sustained competitive advantage
Customer service Yes No No Yes Temporary competitive advantage
Marketing Yes Yes No Yes Temporary competitive advantage
Financial services Yes Yes No No Temporary competitive advantage

The above VRIO analysis of Woolworths provides that financial resources of Woolworths are organized enough to capture value and huge competitive advantage in the industry. The distribution network of the company is also effectively organized which helps in procuring sustainable and ethical resources from number of suppliers. The employees of the organization are rare resource as all the employees are highly trained. Woolworths provides better compensation packages to its employees to retain the existing staff members in the organization. However, it has been identified that Woolworths has failed to effectively organize its number of resources such as patents and financial services which offers only temporary competitive advantage to the industry.

References
Article By:

Paul Smith

Ex- Management faculty of University of Sydney. Along with an extensive interest in management studies, he is a sports enthusiast who loves to spend time in the basketball court. Just like smart playing the opposition in basketball, he smartly instills


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FAQ


What are the four main factors of the international business environment?


Q

There are many factors which actually affect the international business environment. Few of these include the political and legal environment, technological environment, the social and economic environment that directly influence the operations of MNCs.


What is the international environment?


Q

International environment refers to the surrounding where the international managers have to deal with a number of factors which include political, social, cultural, technological, environment and many other factors.


What are the internal and external factors of business environment?


Q

The internal factors of the business environment include employees, managers, money, resources, the culture of the company. Whereas, the external factors consist of customers, suppliers, government policies, economic conditions and competition from other companies.