THE EXTERNAL ENVIRONMENT: Drawing on Other Disciplines
THE EXTERNAL ENVIRONMENT
Drawing on Other Disciplines
The external environment is the aggregate of conditions outside the company that influence the success of its practices. Inasmuch as international business operates within the broad context of the world environment, its managers must have a working knowledge of the basic social sciences, including geography, history, political science, law, economics, and anthropology.
A knowledge of geography is important because it helps managers to determine the location, quantity, and quality of the world's resources and their availability for exploitation. The uneven distribution of resources gives rise to the production of different products and services in different parts of the world. In our Star Wars example, these differences led to the filming of some scenes in Tunisia and others in Norway. Geographical barriers such as high mountains, vast deserts, and inhospitable jungles affect communication and distribution channels for companies in much of the world's economy. Human population distribution around the world and the impact of human activity on the environment exert a strong influence on international business relationships.
An understanding of history provides managers with a systematic recording of the evaluation of ideas and institutions. Looking at the past gives international businesspeople a clearer understanding of the functioning of international business activities in the present. History is, after all, the accumulation of human experience that determines how we live today. Technical and institutional developments have expanded the scope of business. For example, the creation of the three Star Wars films could not have occurred in the same way at an earlier period. Likewise, transactions that are not now feasible may be possible in the future, and others may be carried out in different ways.
Politics has played and will continue to play an important role in shaping
business worldwide. Political science describes the relationships between busi-
ness and national political organizations and, in turn, helps to explain behav-
ior patterns of governments and business firms in areas of potentially
conflicting interests. The political leadership in each country controls whether
and how international business will occur. The prohibition of Star Wars dis-
tribution in Cuba is an example of a political decision that adversely affected
international business. The 1990 agreement for PepsiCo's Pizza Hut to start
operations in the former Soviet Union is an example of a more open political
policy, glasnost, that positively affected international business.
Domestic and international law largely determines what the manager of an international company can or cannot do. This includes domestic laws in both the home and host countries that regulate such matters as taxation, employment, and foreign exchange transactions. For example, when The Empire
Strikes Back was shown in Japan, Japanese law determined how Japanese revenues would be taxed and how revenues could be exchanged from yen to U.S. dollars. U.S. law, in turn, determined how and when the earnings from Japan would be taxed in the United States. International legal agreements between the two countries temper how the earnings are taxed by both nations. Only by understanding the treaties among nations and the laws for each country where operations may take place can companies such as Lucas-film determine where they might operate profitably abroad.
An appreciation of economics gives a manager the analytical tools to determine (1) the impact of an international company on the economy of the host and home countries and (2) the effect of a country's economic policies on the international company. Economic theory also explains why nations exchange goods and services with each other, why capital and people travel from one country to another in the course of business, and why one country's
currency has a certain price relative to another's. For example, the decision by Lucasfilm to use British studios was economic. Economics provides a framework for understanding why, where, and when one country can produce goods or services less expensively than another. The decision not to distribute the Star Wars films in such places as Haiti was economic, based on a belief that there was insufficient economic wealth to provide a large enough market. The decision to distribute in France was also economic, based not only on the fact that France's economy was more prosperous, but also on an expectation that the French francs earned from moviegoers would buy enough U.S. dollars to make the showings profitable.
Through the study of anthropology, managers may better understand the values, attitudes, and beliefs people have concerning themselves and their environment, thus improving their ability to function in different societies. Recall that Lucasfilm had to cut scenes from Return of the Jedi to get permission for children's viewing in Sweden.
Functional Adjustments to the Environment The previous discussion is intended as an introduction. National differences in geography, history, political science, law, economics, and anthropology affect how a company conducts its operations. Yet the amount of adjustment required is related to the degree of dissimilarity between the home and foreign countries and is also a function of the number of different foreign environments in which the company is operating. We shall examine these external environmental influences in greater detail in subsequent chapters.
A company's specific functional adjustments (for example, how it markets, produces, staffs its operations, and maintains its accounts) depend largely on the environment. Recall our Star Wars case: Lucasfilm had to use different promotion methods for different countries. It undoubtedly had to deal with different labor and accounting regulations for its production in the United Kingdom as well. We shall also examine specific functional adjustments in greater detail in subsequent chapters.
Drawing on Other Disciplines
The external environment is the aggregate of conditions outside the company that influence the success of its practices. Inasmuch as international business operates within the broad context of the world environment, its managers must have a working knowledge of the basic social sciences, including geography, history, political science, law, economics, and anthropology.
A knowledge of geography is important because it helps managers to determine the location, quantity, and quality of the world's resources and their availability for exploitation. The uneven distribution of resources gives rise to the production of different products and services in different parts of the world. In our Star Wars example, these differences led to the filming of some scenes in Tunisia and others in Norway. Geographical barriers such as high mountains, vast deserts, and inhospitable jungles affect communication and distribution channels for companies in much of the world's economy. Human population distribution around the world and the impact of human activity on the environment exert a strong influence on international business relationships.
An understanding of history provides managers with a systematic recording of the evaluation of ideas and institutions. Looking at the past gives international businesspeople a clearer understanding of the functioning of international business activities in the present. History is, after all, the accumulation of human experience that determines how we live today. Technical and institutional developments have expanded the scope of business. For example, the creation of the three Star Wars films could not have occurred in the same way at an earlier period. Likewise, transactions that are not now feasible may be possible in the future, and others may be carried out in different ways.
Politics has played and will continue to play an important role in shaping
business worldwide. Political science describes the relationships between busi-
ness and national political organizations and, in turn, helps to explain behav-
ior patterns of governments and business firms in areas of potentially
conflicting interests. The political leadership in each country controls whether
and how international business will occur. The prohibition of Star Wars dis-
tribution in Cuba is an example of a political decision that adversely affected
international business. The 1990 agreement for PepsiCo's Pizza Hut to start
operations in the former Soviet Union is an example of a more open political
policy, glasnost, that positively affected international business.
Domestic and international law largely determines what the manager of an international company can or cannot do. This includes domestic laws in both the home and host countries that regulate such matters as taxation, employment, and foreign exchange transactions. For example, when The Empire
Strikes Back was shown in Japan, Japanese law determined how Japanese revenues would be taxed and how revenues could be exchanged from yen to U.S. dollars. U.S. law, in turn, determined how and when the earnings from Japan would be taxed in the United States. International legal agreements between the two countries temper how the earnings are taxed by both nations. Only by understanding the treaties among nations and the laws for each country where operations may take place can companies such as Lucas-film determine where they might operate profitably abroad.
An appreciation of economics gives a manager the analytical tools to determine (1) the impact of an international company on the economy of the host and home countries and (2) the effect of a country's economic policies on the international company. Economic theory also explains why nations exchange goods and services with each other, why capital and people travel from one country to another in the course of business, and why one country's
currency has a certain price relative to another's. For example, the decision by Lucasfilm to use British studios was economic. Economics provides a framework for understanding why, where, and when one country can produce goods or services less expensively than another. The decision not to distribute the Star Wars films in such places as Haiti was economic, based on a belief that there was insufficient economic wealth to provide a large enough market. The decision to distribute in France was also economic, based not only on the fact that France's economy was more prosperous, but also on an expectation that the French francs earned from moviegoers would buy enough U.S. dollars to make the showings profitable.
Through the study of anthropology, managers may better understand the values, attitudes, and beliefs people have concerning themselves and their environment, thus improving their ability to function in different societies. Recall that Lucasfilm had to cut scenes from Return of the Jedi to get permission for children's viewing in Sweden.
Functional Adjustments to the Environment The previous discussion is intended as an introduction. National differences in geography, history, political science, law, economics, and anthropology affect how a company conducts its operations. Yet the amount of adjustment required is related to the degree of dissimilarity between the home and foreign countries and is also a function of the number of different foreign environments in which the company is operating. We shall examine these external environmental influences in greater detail in subsequent chapters.
A company's specific functional adjustments (for example, how it markets, produces, staffs its operations, and maintains its accounts) depend largely on the environment. Recall our Star Wars case: Lucasfilm had to use different promotion methods for different countries. It undoubtedly had to deal with different labor and accounting regulations for its production in the United Kingdom as well. We shall also examine specific functional adjustments in greater detail in subsequent chapters.
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