CIMA E1 Official Learning System - Enterprise Operations Aug 2009

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STUDY MATERIAL E1

THE GLOBAL BUSINESS ENVIRONMENT

Though one explanation may be that US politicians are easily swayed by donors, a

deeper and ultimately more compelling explanation is that ﬁ rms have other mechanisms

for presenting their policy preferences. It also reﬂ ects the fact that in a complex society like

the United States, legislators seeking re-election are only part of the government apparatus.

Regulatory agencies, whose members are not usually directly elected, are key players in

many developed states. Lobbying regulators cannot be easily done through the electoral

process, so other means and other instruments must be employed.

1.12.3 Developing markets

The ubiquitous nature of political participation by business ﬁ rms, not only in the US,

but also in the European Union, Japan, South Korea, Russia, Jordan and Kuwait has been

noted by researchers. It is indisputable that business ﬁ rms spend considerable money and

are among the most prominent political players not only in Washington, DC but in capi-

tals across the globe.

In many developing markets, CPA is far more overt in its nature than in the US or

Europe. Politicians, or even whole governments, can be persuaded to introduce, modify or

remove legislation fairly cheaply. Policy-making bodies can be threatened or bribed, and

political opponents removed.

1.13 Country and political risk

1.13.1 Country and political risk

As we have already discussed, an analysis using Porter’s diamond will ignore the environmental

factors in the target country. It is important, therefore, that as well as conducting a PESTLE

analysis for the home country of a company a similar analysis is conducted for any coun-

try within which a ﬁ rm is currently operating or considering operating (see Table 4.1 later).

Particular emphasis should be placed on determining any political and cultural differences.

1.13.2 Political risk analysis

Political risk can be considered to arise at the macro or micro level. Macro-political risks will

affect all foreign ﬁ rms in the same general way. Expropriation, the seizure of private busi-

nesses with little or no compensation to the owners would be an example as would indi-

genisation laws which require that national citizens hold a majority share in all enterprises.

In recent years with the liberalisation of trade in Eastern Europe, the entry of China to the

WTO and the negotiation of a trade agreement between Vietnam and the US macro-political

risk has diminished somewhat but still needs to be monitored by multinationals.

Micro-political risk tends to affect selected sectors of the economy or speciﬁ c foreign com-

panies and is often driven by the dominance of those ﬁ rms. These risks often take the form

of industry regulation, taxes on speciﬁ c types of business activity and local content laws.

Rugman and Hodgetts have produced a useful summary:

Sources of risk:

●

political philosophies that are changing or are in competition with each other,

●

changing economic conditions,

●

social unrest,

ENTERPRISE OPERATIONS

THE GLOBAL BUSINESS ENVIRONMENT

●

armed conﬂ ict or terrorism,

●

rising nationalism,

●

impending or recent political independence,

●

vested interests of local business people,

●

competing religious groups,

●

newly created international alliances.

Groups that can generate political risk:

●

current government and its various departments and agencies;

●

opposition groups in the government that are not in power but have political inﬂ uence;

●

organised interest groups such as teachers, students, workers, retired persons, etc;

●

terrorist or anarchist groups operating in the country;

●

international organisations such as the World Bank or United Nations;

●

foreign governments that have entered into international alliances with the country or

that are supporting the opposition within the country.

Effects of political risk:

●

expropriation of assets (with or without compensation);

●

indigenisation laws;

●

restriction of operating freedom concerning, for example, hiring policies and product

manufacturing;

●

cancellation or revision of contracts;

●

damage to property and/or personnel from terrorism, riots, etc.;

●

loss of ﬁ nancial freedom such as the ability to repatriate proﬁ ts;

●

increased taxes and other ﬁ nancial penalties.

When forecasting political risk whether the company does this on a formal or ad hoc basis,

it is usual to focus on two areas:

1. the political system in which the company is doing business;

2. the goods/services to be produced and the operations to be carried out.

As regards the political system the major concerns would be the prospect of political

upheaval in the country, the likelihood of the government giving preference to local ﬁ rms

or the prospect of a government acting on a totalitarian fashion. They would also consider

the strength of lobby groups within the target country. For instance, within the US, lobby

groups have considerable strength in the areas of steel, textiles, softwood timber and semi-

conductors and have been able to bring considerable pressure to bear on their government

to bring about favourable decisions.

Products and operations also face an element of political risk. For instance where a gov-

ernment requires a joint venture to exist with a local partner there is both a limit to control

and the risk of theft of product knowledge or technology. Where local laws do not offer

patent protection this can be a signiﬁ cant risk. Similarly a requirement to source a ﬁ xed

percentage of components locally can be a source of risk as can the government’s approach

to monopolies, cartels and price ﬁ xing.

Exercise 1.4

Assess the political risk in three or four different countries, for an organisation that might

be considering doing business there.

STUDY MATERIAL E1

THE GLOBAL BUSINESS ENVIRONMENT

1.14 Summary

If any one thing characterises the last decade, it has been a time when leaders of big multi-

national ﬁ rms thought about the governance of the global economy – the principle being

that there was no such thing as world government, and national governments in the main

were particularly focused on their own jurisdictions when creating the rules of trade and

ﬁ nance or environmental protection of labour. Just a few years ago, it was thought that

ﬁ rms were moving into this vacuum tentatively, but that the world would soon be run

more according to business and market principles. Over the past decade, most global man-

agers have decided this idea is not to their liking; in turn they have created a vacuum into

which governments are moving, for better or worse.

References and further reading

Bartlett, C.A. and Ghoshal, S. (1989) Managing Across Borders. Boston, MA: Harvard

Business School Press.

Bridgewater, S. (2000) ‘Strategic management in emerging markets’, in M. Tayeb (ed.)

International Business. London: Financial Times/Prentice-Hall, pp. 340–53.

Dicken, P. (1998) Global Shift. London: Paul Chapman.

Drucker, P.F. (1992) Managing for the Future. New York: Butterworth-Heinemann.

Foster, D. (1998) Managing Across Cultures. Lincoln: University of Lincolnshire and

Humberside.

Hecksher, E. and Bertil, O. (1991) H. Flam and M. J. Flanders (eds), Hecksher – Ohlin

Trade Theory. Cambridge: MIT Press

Hofstede, G. (1980) Culture’s Consequences: International Differences in Work Related Values.

London: Sage Publications.

Hofstede, G. (1991) Cultures and Organizations: Software for the Mind. New York:

McGraw-Hill.

Huijser, M. (2006) The Cultural Advantage: A New Model for Succeeding with Global Teams.

Boston, MA: Intercultural Press.

Levitt, T. (1983) The globalization of markets. Harvard Business Review, May–June:

92–102.

Mintzberg, H. (1994) The Rise and Fall of Strategic Planning. Hemel Hempstead: Prentice-

Hall International.

OECD (2006) Science and Engineering Indicators 2006. Arlington, VA: National Science

Foundation.

Ohmae, K. (1990) The Borderless World. New York: Harper Business.

Porter, M. E. (1990) The Competitive Advantage of Nations. New York: Free Press.

Quinn, J.B. and Hilmer, F.G. (1994) Strategic outsourcing. Sloan Management Review 35:

43–55

Ricardo, D. (1817) On the Principles of Political Economy and Taxation.

Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations.

World Bank (2005) Overview: World Development Report 2005. A Better Investment Climate

for Everyone. Washington, DC: World Bank.

World Trade Organization (2004) World Trade Report 2004: Exploring the Linkage between

the Domestic Policy Environment and International Trade. Geneva: WTO.

World Trade Organization (2005) World Trade Report 2005: Exploring the Links between

Trade, Standards and the WTO. Geneva: WTO.

Revision Questions

Question 1

Each of the sub-questions below requires a brief written response and is worth 5 marks.

This response can be in note form and should not exceed 50 words.

1.1 Explain the differences between free trade and protectionism. (5 marks)

1.2 Explain how ‘demand conditions’ in a company’s home country might lead to a

competitive advantage. (5 marks)

1.3 Explain why organisations choose to outsource services. (5 marks)

1.4 Explain what Hofstede meant by a ‘masculine’ culture. (5 marks)

1.5 Explain what general principles of corporate governance apply to the Board of

Directors. (5 marks)

Question 2

2.1 Porter’s ‘diamond’ is a model that explains

(A) how an organisation gains competitive advantage

(B) how a country gains competitive advantage

(D) how an organisation can assess risk in a country (2 marks)

2.2 Offshoring is…

(A) gaining a competitive advantage by virtue of being based in a particular

country.

(B) a form of outsourcing.

(D) a way of avoiding tax. (2 marks)

2.3 A country that is moving from being a recipient of Foreign Direct Investment, to

being a provider of it, is said to have

(A) a developed economy.

(B) a transition economy.

(D) a command economy. (2 marks)

THE GLOBAL BUSINESS ENVIRONMENT

2.4 If interest rates are high…

(A) there will be an incentive to borrow.

(B) exports will increase.

(D) the country’s currency will strengthen. (2 marks)

2.5 Gross Domestic Product is…

(A) a measure of the volume of goods produced.

(B) a measure of the wealth of a country.

(D) a source of competitive advantage. (2 marks)

REVISION QUESTIONS E1

Solutions to

Revision Questions

Solution 1

Note: for the purpose of clarity, these answers are not in note form, and therefore exceed the

word limit. In the exam, you should use the form directed by the questions.

1.1

●

Free trade is the movement of goods, services, labour and capital without tariffs, quotas,

subsides, taxation, or other barriers likely to distort the exchange.

●

Protectionism is where one country, or trade bloc, attempts to restrict trade with

another, to protect their producers from competition.

1.2

The demand conditions in the home market are important for three reasons:

1. If the demand is substantial it enables the ﬁ rm to obtain the economies of scale and

experience effects it will need to compete globally.

2. The experience the ﬁ rm gets from supplying domestic consumers will give it an infor-

mation advantage in global markets, provided that:

(a) its customers are varied enough to permit segmentation into groups similar to those

found in the global market as a whole;

(b) its customers are critical and demanding enough to force the ﬁ rm to produce at

world-class levels of quality in its chosen products;

ﬁ rm to develop new and sophisticated products.

3. If the maturity stage of the plc is reached quickly (say, due to rapid adoption), this will

give the ﬁ rm the incentive to enter export markets before others do.

1.3

The main advantages of outsourcing are thought to include the following:

●

That it allows more accurate prediction of costs and, hopefully, improves budgetary control.

●

That, due to the specialist nature of the external provider, the services received will be of

a higher standard.

●

The supplier should be able to provide a cheaper service, due to economies of scale from

specialisation.

●

The organisation will be relieved of the burden of managing specialist staff in an area

that the organisation does not really understand.

●

It supports the concept of the ‘ﬂ exible ﬁ rm’.

THE GLOBAL BUSINESS ENVIRONMENT

1.4

Masculine cultures emphasise ‘assertiveness’ compared to ‘nurturance’ for feminine

cultures.

High masculine societies, whether individualistic like United States or collectivist like

Japan, provide weaker people with, on average, less support whether from within the

organisation or from society at large. People learn to admire the strong and to have a rela-

tively negative view of the weak and dependent.

1.5

Listed companies should be led by an effective board, with a balance of executive and

non-executive directors such that no individuals or small groups can dominate decision-

making. There should be a clear division of responsibilities of the two key tasks of running

the board (Chairman) and running the business (Chief Executive) so that no individual

has unfettered powers. Appointments to the Board should be made in a formal, rigorous

and transparent manner. To enable it to discharge its duties, the board should be supplied

in a timely manner with good quality information. Directors should receive an induction,

on joining the company, and should regularly update and refresh their skills. The Board

should evaluate its own performance, and that of its committees, on an annual basis. The

directors should offer themselves for re-election at regular intervals, and should plan for

the Board to be ‘progressively refreshed’ by bringing in new members.

Solution 2

2.1 (A)

2.2 (C)

2.3 (B)

2.4 (D)

2.5 (B)

SOLUTIONS TO REVISION QUESTIONS E1

Information Systems

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LEARNING OUTCOMES

This part of the syllabus attracts a 20% weighting and covers a variety of areas associ-

ated with information systems. This chapter addresses information systems as a significant

functional area of business, outlines major developments and introduces some important

tools and techniques. By completing this chapter you should be assisted in your stud-

ies and be better able to discuss the wider business context within which information

systems operate. You should also be able to analyse how information systems can be

implemented in support of the organisation’s strategy. Specifically you should be able to:

䉴 identify the value of information and information systems in today’s organisations,

䉴 discuss the reasons for organisations’ increased dependence on information systems,

䉴 discuss the transformation of organisations through technology,

䉴 discuss ways for overcoming problems in IS implementation,

䉴 discuss ways of organising and managing IS activities in the context of the wider

organisation.

Information Systems

2.1 Information and information systems

The hunger for information has never been greater than for today’s organisations, likewise

the value of information systems that deliver this information has never been more keenly

felt. The dependence of modern day organisations on information and information sys-

tems is underlined by Hellriegel and Slocum (1992) as follows:

Today’s organizations store and process vast amounts of data, which managers and other employees must

turn into useful information. In turn, this information enables them to perform their jobs better.

Pesola’s (2004) explains:

businesses increasingly run their databases over ofﬁ ce-wide networks, link employees’ computers via ofﬁ ce-

wide wireless-LAN (local area network) connections, sell goods and run support services over the internet

and rely on receiving customer commissions by email

The increase in more sophisticated information and technological solutions has led to the

emergence of the automated ofﬁ ce, teleworking and the ‘information superhighway’ as