Chapter 1 The Business Enterprise in the International Environment To highlight the ways in which the international dimension in business activities is distinctive from national and local enterprises. To appreciate the role of the entrepreneur and entrepreneurship in the international environment. To gain an overview of the ways in which enterprises organize and adapt when they expand internationally. To gain an understanding of the key players in the international environment with which businesses interact

To identify key characteristics of international business To appreciate the role of entrepreneurship To gain an understanding of the nature of the company, along with roles within the company To identify the main business functions of the organization in the international context To highlight the role of co-operative arrangements in international business To give an overview of key players in the international business environment

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

Size Custo- mers Prod- ucts Seeking Customers Small local firm Countrywide organization with local and regional units Organization based in a home country with foreign and regional links Local customers Diverse custo- mers within the national environment Domestic and foreign customers Sourced through local suppliers More complex products and distribution Sourcing of products across national borders Personal relations for operations and for reaching the customers Use of national media to reach the customers Global media to manage international activities and reach customers Local business National business International business Comparison of the local, national and international business

International environment Economic National economies and financial regulation Regional economic conditions International economic trends Legal National legal systems Regional law and regulations International law and regulations Cultural National cultures Different languages National social groupings Changing cultural preferences due to international influences Political National political systems Regional political ties International relations Dimensions of the international environment

Chapter Summary...2 There is no single model or optimal size of the international firm. The MNE covers a range of possible organization and ownership structures. While it is generally the case that the MNE is a public company with international shareholders, many MNEs remain home-country dominated, with prominent share- holders, including governments. The company’s shareholder profile and the size of dominant stakes affect its strategy and culture. The company’s corporate governance system is linked to its ownership and is the chief determinant of how major decisions are taken. These systems vary in their openness to outsiders and in the transparency of their processes, but, in general,

Inside Look - PepsiCo Positions For Growth Interview and discussion with PepsiCo CEO and Chairman, Indra Nooyi. She gives her insights behind her company's success. (Bloomberg News) Sound investor backing Stage 1 Innovative ideas Research on the viability of business model Willingness to Undertake moderate risk Confidence in ability to meet customer needs Stage 2 Adaptation to national markets Financial strategies Innovative capacity New product s pressures for greater transparency intensify as companies become more internationalized. Similarly, companies now take greater account of stakeholder interests, extending their perspective to social and environmental issues, both globally and in national environments.

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

Dynamics of the company Forming a company offers advantages of separate legal identity to the owners. Companies are registered in particular countries, in accordance with their national laws. Private companies are often family owned. In contrast, public companies … Have numerous shareholders and tradable shares Have a chief executive officer (CEO) and directors who are accountable to the shareholders Are increasingly international in their ownership profiles

Roles within the public company Corporate goals Lenders Creditors of the company Interest in company’s ability to repay Shareholders Owners of the company Overall oversight Chief executive officer Overall responsibility for carrying out the strategy Directors Strategic decision- making Duty to shareholders Managers Responsibility for day-to-day running of the business

Entrepreneurship Successful entrepreneurship involves identifying opportu- nities, pursuing new ideas and securing financial support. It includes start-up businesses, as well as the re-focusing of existing enterprises. Levels of entrepreneurial activity differ from country to country, and are influenced by culture. Governments can encourage (or discourage) entrepreneurs. The born-global company takes an international approach from the outset. Mumbai Dabbawala More off-beat example of a SME is hard to find

Changing ownership of UK equities Rest of the world Other UK Financial institutions UK Insurance companies UK Pension funds UK Individuals 0%10%20%30% Overall, company ownerships in the developed world are shifting, from insurance companies and pension funds to the rest of the world, individuals and other financial institutions.

Small-to-medium size enterprise (SME) An SME is usually defined as an organization employing fewer than 249 employees. SMEs provide the bulk of jobs in most countries. The franchise provides a means for an SME to benefit from the brand and support of an established MNE. Franchising is often used by MNEs as a means of international expansion.

Strategic Crossroads 1.1: McDonald’s (page 11) What reasons lie behind the comparative success of McDonald’s franchise outlets over the company-owned ones? How does the development license fit in with McDonald’s overall revitalization program? In the franchise outlets, the franchisee invests more of his or her own resources and has a more entrepreneurial approach to the business. Managers of the company-owned outlets, by contrast, have less sense of ownership and a lower level of entrepreneurial drive. This question can be broadened into a discussion of an entrepreneurial approach generally, which can bring in country differences in entrepreneurial environments. The nature of the new developmental licenses should be highlighted at the start. They provide that the underperforming outlets should be sold to local entrepreneurs, who would invest their own capital to a greater extent than under McDonald’s usual arrangements. The new owners would be imbued with a greater entrepreneurial approach, but would still benefit from the strong brand and supply chain arrangements. Whether these new owners deliver improved financial performance depends on their competitiveness in their local markets. McDonald’s executives are stressing the importance of the revitalization program to win new customers. They look to the new owners to deliver these improvements, reflecting the success of the revitalization program in the US.

NASDAQ DOW S&P-500 McDonald’s common shares Jan % +50% -50% Jan 07Jan 08Jan 09Jan 10 Postscript The continuing depressed state of the world economy has had an interesting effect on McDonald's market-performance. Note how the McDonald's shares have almost doubled in these past 5 years, at a time when the market has barely recouped its losses!

The multinational enterprise (MNE) Pursues opportunities and co- ordinates businesses across national borders. As it grows in size, it evolves a more complex organizational structure, often based on parent company and subsidiaries. MNEs differ in the degree of centralized control or local autonomy in various locations.

Divisions in this multi-tiered ownership structure of a MNE may themselves be parent companies that own a number of subsidiaries. Aa Ab Ba Bb Ca Cb Parent company Division ADivision BDivision C

International business functions International operations Accounting and finance for international business International marketing International HRM Research and development (R&D) These functions may be centralized or decentralized, depending on the organization’s overall culture and strategy.

Finance, HRM and marketing are the functions that are often centralized, but Head Office usually coor- dinates with the functional departments in subsidiaries for the day-to-day activities. Operations and R&D are the functions that are increasingly being handled by the local subsidiaries. Business functions in the international context

Corporate governance concerns the company’s decision-making structures and processes. ‘Shareholder’ model predominates in the US and UK: It has a single-tier board that focuses on maximizing the shareholder value ‘Stakeholder’ model is prevalent in the 2-tier boards in Europe and Japan: It takes a wider perspective, encompassing the em- ployees in particular. Wider stakeholder interests are now recognized in most companies, as corporate social responsibility (CSR) impacts on governance. Dominant shareholders Suppliers Creditors Customers Corporate partners Employees National regulators International organizations Consumers Nearby residents Host communities Trade unions Executive management Primary stakeholders Secondary stakeholders

Joint ventures offer international opportunities through the formation of a new enterprise, benefiting from the strengths of both founding partners. Alliances, networks and joint ventures are the co-operative arrangements that contribute to a firm’s international strategy. Company B Company C Company A Alliance Network Company D, joint venture, owned 50/50 by the com- panies A & C. Alliances (often called strategic alliances) offer opportunities for pooling resources and skills in differing environments. Networks may be intra-firm or inter- firm; both organizations and individual staff can benefit. They can be important for SMEs in their strategic expansion.

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

Businesses change in their organization and strategy as they become more international. As more countries become integrated into global business, MNEs face challenges in adapting to diverse cultural environments. Firms’ interactions with business partners, governments, international organizations and groups in society grow as their operations develop in different locations. Managing stakeholder interests, including shareholders, customers and communities, is a key challenge for today’s international managers. Clearly, …