The Nature of the Business Environment

1. The Nature of the Business Environment Management Level – Paper E2 Project and Relationship Management Lecture - 009 Vidya Rajawasam ACMA CGMA MBA

2. Business Environment We have discussed the Analysis of industry/competitive environment, Porters five forces analysis and globalization.

3. Business Environment In this lecture we will be discussing National Competitive Advantage/ Porters Diamond , Emerging markets / BRICS and Country / Political risks.

4. Business Environment • National Competitive Advantage The Globalization of markets and internationalization of businesses resulted in National Competitive Advantage. Under certain circumstances this is difficult to imitate.

5. Business Environment • National Competitive Advantage Porter (1992), explained why some nations tend to produce firms with sustainable competitive advantage in some industries more than others. Porter was trying to answer following questions in order understand the concerned issues;

6. Business Environment • National Competitive Advantage • Why does a nation become the home base for successful international business competitors in one industry? Example, Germany is renowned for car manufacturing and Japan is famous for electronics.

7. Business Environment • National Competitive Advantage Porter was trying to answer following questions; • Why are firms based in a particular nation able to create and sustain competitive advantage against the world’s best competitors in particular field?

8. Business Environment • National Competitive Advantage Porter was trying to answer following questions; • Why is one country often the home for many industrial leaders?

9. Business Environment • National Competitive Advantage Porter was trying to answer following questions; • Why are firms based in a particular nation able to create and sustain competitive advantage against the world’s best competitors in particular field?

10. Business Environment • National Competitive Advantage Porter argues that the answer to these questions determine national competitive advantage. He indicated that there are four main factors which determine the national competitive advantage. The factors are expressed in the form of diamond, which is called the Porter’s Diamond.

11. Business Environment • National Competitive Advantage Factor conditions; This is related to availability of raw materials and suitable infrastructure. Demand conditions; There should be demand for goods and services in the home country.

12. Business Environment • National Competitive Advantage Related supporting Industries; These factors allow easy access to components and knowledge sharing. Firm Strategy/Structure/ Rivalry; If the home market is very competitive and the firm is very successful in the home country, similar companies, may likely to become a world class company.

13. Business Environment • Further analysis of Porter’s diamond. Demand conditions The demand conditions in the home market are important because of the following reasons. • If the home demand is substantial, the firm will be able to achieve economies of scale, thus providing base to compete globally.

14. Business Environment • Further analysis of Porter’s diamond. Demand conditions The demand conditions in the home market is important because of the following reasons. • The experience gained through supplying goods/ services to the home country customers will give some information advantage in global markets.

15. Business Environment • Further analysis of Porter’s diamond. Demand conditions Examples, The local strong demand is a starting point of Scotch Whisky produced in Scotland for international competition. The domestic customers have become more sophisticated and demanding, thus driving the quality of the products.

16. Business Environment • Further analysis of Porter’s diamond. Demand conditions Examples, Around 15% of Scotch whisky is sold in Scotland.

17. Business Environment • Further analysis of Porter’s diamond. Factor Conditions; These are the basic factor conditions which gives competitive or comparative advantage. There are two types; • Basic factors – raw materials, semi skilled labour, initial capital availability. These are largely natural and not created as a matter of strategy or policy.

18. Business Environment Factor Conditions; These are the basic factor conditions which gives competitive or comparative advantage. There are two types; • Advanced factors – infrastructure ( digital communications) , levels of training and skills , Research & Development etc..

19. Business Environment Factor Conditions; Advanced factors – infrastructure ( digital communications) , levels of training and skills , Research & Development etc.. Porter argues that only advance factors are the root for sustainable competitive success.

20. Business Environment Factor Conditions; Examples, Natural factor Conditions – Scotland has natural raw materials required for whisky production. There is plenty of natural water and the climate suited to grow crops for the whisky production.

21. Business Environment Factor Conditions; Examples, Advanced factor Conditions – Scotland has a knowledgeable and skilled work force for whisky production, which was developed over many years. Also they have processors and procedures to maintain the higher quality compared to other brands.

22. Business Environment Review MCQs Indentify the Advanced Factor conditions related to a particular country out of below points? • Infrastructure • Raw materials • R&D Experience • Unskilled labour

23. Business Environment Review MCQs Indentify the Advanced Factor conditions related to a particular country out of below points? • Infrastructure • Raw materials • R&D Experience • Unskilled labour

24. Business Environment Review MCQs What factors are considered as a part of Porter’s Diamond ? • Revenue generation factors. • Factor conditions. • Demand conditions. • Access to sea/air ports.

25. Business Environment Review MCQs What factors are considered as a part of Porter’s Diamond ? • Revenue generation factors. • Factor conditions. • Demand conditions. • Access to sea/air ports.

26. Business Environment Review MCQs Not part of globalization process? • Higher production costs. • Technological advances • Emergence of growth markets • Industrial relocations.

27. Business Environment Review MCQs Not part of globalization process? • Higher production costs. • Technological advances • Emergence of growth markets • Industrial relocations.

28. Business Environment • The Emerging Markets – BRICS One of the recent trends in global markets is that the rise of BRICS economies. BRICS, consist of Brazil, Russia , India , China and South Africa. The key factors related to growth of these economies are; globalization and internal developments.

29. Business Environment • The Emerging Markets – BRICS The Internal developments include; • Large and rapid growth rates in economies. • low wage rates • A move towards free market economy. • Availability of natural resources. • Improvement in Education

30. Business Environment • The Emerging Markets – BRICS By 2020, the combined strength of BRICS economies are expected to outstrip the G6 economies ( Germany, France, Italy , Japan, UK and USA). As early as 2027, China is predicted to become the world’s largest economy.

31. Business Environment • The Emerging Markets – BRICS In 2012, Brazil replaced Briton as the 6th largest economy. These economies are able to invest in major western businesses and becoming owners of the same, instead of being recipients of foreign direct investments.

32. Business Environment • The Future of BRICS The Global Financial Meltdown in 2008 has resulted in a slowdown in their rate of growth. However, these countries have number of strengths which helped them to continue with growth.

33. Business Environment • The Future of BRICS The strengths Strong consumer demand – High levels of consumer expenditure in BRICS countries should help drive growth. Foreign exchange reserves – having high levels of reserves will allow the governments to boost the public spending. These will lead to further economic growth

34. Business Environment • Threats for the BRICS economies. There are number of threats to BRICS economies; Slow down in FDI – foreign direct investments from the developed countries have slowed down. Fall in consumer demand – fall in demand for consumer in developed countries. Two thirds of China’s exports are to the developed world.

35. Business Environment • Threats for the BRICS economies. There are number of threats to BRICS economies; Fall in demand for outsourcing – major part of Indian economy is based on outsourcing services provided to developed countries. Economic slow down in many developed countries have affected this industry.

36. Business Environment • Country and Political risks Globalization has provided huge opportunities for company’s to engage in business with many countries around the world. Foreign investments areassociatedwith risks. Some of the risks are; Political Risks , Country Risks.

37. Business Environment • Political risks A political risk can be resulted as a result of an unexpected politically motivated event in a country that can affect the outcome of a business investment. The characteristics are; • Political risks are greater in developing countries.

38. Business Environment • Political risks The characteristics are; • Changes in governments could also result in dramatic changes in the business environments affecting investments. • Political risks can have an indirect impact on businesses. Example, changes in interest rates , changes in exchange rates.

39. Business Environment • Political risks The characteristics are; • Political risks can have an direct impact on businesses. Example, nationalization of foreign owned assets, decision to raise taxes , payments to foreign shareholders, changes in employment laws, cancelation of contracts etc…

40. Business Environment • Country risks These risks arise when a business is operating or investing in a particular country. The related characteristics are; • Political stability • Social and economic infrastructure. • Attitude to foreign business activities • Cultural issues.

41. Business Environment Review MCQs What are the future strengths related to growth of BRICS economies? • Having high levels of foreign reserves. • Non availability of skilled labour • Trade barriers • Strong consumer demand within the country.

42. Business Environment Review MCQs What are the future strengths related to growth of BRICS economies? • Having high levels of foreign reserves. • Non availability of skilled labour • Trade barriers • Strong consumer demand within the country.

43. Business Environment Review MCQs The future threats faced by BRICS economies are? • Slow down in FDI from developed countries. • Reduction in consumer demand • Increase in trade • Higher GDP growth in developed countries.

44. Business Environment Review MCQs The future threats faced by BRICS economies are? • Slow down in FDI from developed countries. • Reduction in consumer demand • Increase in trade • Higher GDP growth in developed countries.

45. Competitive Advantage Lecture Summary We have discussed the • National Competitive advantage • Porters diamond • Emerging markets BRICS • Country and Political risks

46. The Nature of the Business Environment Management Level – Paper E2 Project and Relationship Management Lecture - 009 Vidya Rajawasam ACMA CGMA MBA