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Exploring the Global Business Environment: A Detailed Examination
Business Essentials · Chapter 1: The Business Environment and Ethical FoundationsSection 1.5 · lesson 5 of 10513 min · free with a free account
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In this lesson
How forces beyond the border reach a business that never leaves home.
- Explain how global forces reach a domestic business
- Identify six components of the global environment
- Work through a currency movement's opposite effects
- Map global dependencies and choose mitigations
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The Business Environment and Ethical Foundations
Exploring the Global Business Environment: A Detailed Examination
Picture a business that has never sold abroad, never imported, and never left its home town. It is tempting to think the global economy passes it by. It does not. This section shows how forces from beyond the border reach even a purely domestic business. We name six components of the global environment, and how each one arrives. We work through a currency movement, which helps one firm while it hurts another. We look at political risk, and at the debate over trade, without taking sides. And we finish by mapping one small firm's hidden dependencies, and deciding how much protection to buy.
Already Global
Five Channels Across the Border
The global business environment is the set of markets, competitors, suppliers, capital, and rules beyond a country's borders. Those things still act on businesses inside the country. A common assumption says a business is affected only if it exports, imports, or operates abroad. That assumption is mistaken. Almost every business is affected, because the effects arrive through five channels. The inputs it buys. The competition it faces. The customers it can reach. The capital available to it. And the regulations that govern it. Think of a bakery that sells only to its neighbors. It may buy flour milled from grain traded on world markets, and bake in ovens made abroad. And it may compete with a supermarket whose bread depends on international supply chains. Trade and entry strategies belong to chapter three. Here, the global environment is simply a force acting on a domestic business.
Six Components
What the Global Environment Contains
Six components can be distinguished. Global markets are the customers beyond national borders. They are an opportunity for a business that can reach them. For a business that cannot, they are a source of competition. Global competition is the arrival of competitors whose costs, scale, or offerings differ from those of domestic firms. Global supply chains are the networks of suppliers and transport, carrying inputs from where they are made, to where they are used. Currency movement is the change in the price of one country's money, in terms of another's. Global capital markets are where funds are raised and invested across borders. They influence how available, and how costly, credit is at home. International regulation and standards are rules and technical specifications, agreed or adopted across countries, and applied to firms within them. Each one reaches a business by a different route.
Table 1.5.1
How Each Component Arrives
Here is how each component reaches a purely domestic business, and what it can do about it. Through global markets, customers abroad become reachable. Or a domestic customer buys from an overseas seller. The mitigation is selective use of online sales, and differentiating on service and proximity. Global competition arrives as an imported product with a different cost base. Compete on features, speed, or customization, not price alone. Supply chains carry a distant disruption or price change into the inputs the business buys. The mitigations are a second source, buffer inventory, contract terms, or redesigning around alternative inputs. Currency movement changes the prices of imported inputs, and of competing imports. The tools here are price flexibility, purchase contracts in the domestic currency, and the timing of large purchases. Credit conditions abroad influence the cost and availability of funds locally. So diversify lenders, keep cash reserves, and avoid relying on one credit line. And standards set elsewhere may have to be met to satisfy customers or suppliers. Monitor them, and adopt required ones early. The key lesson is that each mitigation is different in kind. A business protected against one component, say by a second supplier, may still be exposed to another. So map exposure component by component.
Supply Chains
Concentration and Fragility
A supply chain is the sequence of organizations and activities, carrying materials from their origin to the finished product, and the customer. Over recent decades, much manufacturing has concentrated in particular regions, where costs, skills, or scale are favorable. Concentration lowers cost. But it also creates fragility, meaning a vulnerability to disruption. A problem at one place can interrupt many businesses that depend on it. And the disruption reaches a small business through intermediaries it may never have heard of. A shortage at a factory abroad delays a distributor. The distributor then raises prices, or lengthens delivery, for the local shop. The trade-off is between resilience and cost. Resilience is the capacity to keep operating through a disruption. Second suppliers and spare inventory improve it. But they add cost every day, whether or not a disruption ever comes. How much to pay for resilience is an operations question, taken up in chapter fourteen.
Currency Movement
One Movement, Opposite Effects
An exchange rate is the price of one currency in terms of another. When it changes, importers and exporters feel it in opposite ways. The figures here are illustrative. A domestic importer buys goods priced at ten thousand units of a foreign currency. If one unit costs fifty cents, the goods cost the importer five thousand dollars. Now the foreign currency strengthens, and one unit costs fifty-five cents. The same goods now cost five thousand five hundred dollars. The importer must accept a smaller margin, or raise its price. Now take a domestic exporter selling goods for five thousand dollars to a foreign buyer. Before the change, the buyer pays ten thousand units. Afterward, about nine thousand and ninety-one. The goods got cheaper for the buyer, with no change in what the exporter charges. So the exporter is better placed to win sales. The movement that hurts the importer helps the exporter. A reverse movement reverses both effects. And a business that neither imports nor exports is not immune. It may compete with importers whose prices move with the rate. Or it may buy from domestic suppliers whose costs contain imported materials. Currency arrives as a price change, and its source is often invisible to the person who feels it.
Competition, Labor, Standards
Rivals With a Different Cost Base
Global competition often arrives as a rival with a different cost base. A cost base is a structure of wages, materials, land, and overhead. A different one permits prices a domestic firm cannot match. The domestic business cannot change a foreign rival's cost base. It has three choices instead. Compete on a different dimension, move to a different segment, or match the price at the expense of margin. Skills and labor are also globally mobile, to an extent. Some work can be done remotely for a firm anywhere, and employers compete for particular skills across borders. That affects the availability and cost of talent. But the effects vary greatly by occupation, and say nothing about any group's ability. International standards are technical or management specifications, developed by standard-setting bodies. The International Organization for Standardization, for example, publishes voluntary standards on matters such as quality management. A domestic supplier may adopt one because a customer requires it. That is how practice developed elsewhere becomes domestic practice. The cultural side of global business belongs to chapter three.
Political Risk
When Politics Reaches the Shop Floor
Political risk is the possibility that political decisions, or instability, will damage a business. Three categories affect planning, even for purely domestic firms. Trade policy covers government measures on cross-border commerce. Tariffs are taxes on imported goods. Quotas limit quantities. Sanctions are government restrictions on dealings with named countries, organizations, or individuals. In the United States, many are administered by the Treasury Department's Office of Foreign Assets Control. Export controls restrict the transfer of certain goods and technologies abroad. All three can change quickly. And all three can alter the cost or availability of inputs, and the size of a market. A tariff on imported steel, for instance, raises the cost of a local fabricator's materials.
A Contested Question
More Open, or More Restricted?
Should trade be more open, or more restricted? The question is contested, so state each side at its strongest. Those favoring openness say trade lowers prices, widens choice, and lets businesses specialize where they are strongest. They add that restrictions raise costs for consumers, and for firms that use imported inputs. Those favoring restriction say trade can expose particular industries and communities to concentrated losses. They argue that dependence on foreign suppliers creates vulnerability in critical goods. And that governments may reasonably protect domestic capacity, for security or other reasons. The disagreement has an empirical part. How large are the gains and losses, who bears them, and over what time? It also has a normative part. How should gains and losses be weighed, and what does a society owe those who lose? This section takes no position on either. For a business, the practical point is narrower. Policy can change. A business that plans on the assumption of no change is exposed.
Mapping Dependencies
Four Questions for Every Link
A dependency map is a structured account of where a business's inputs come from. It also shows where competitors are, and which links would interrupt operations if they failed. Build it by asking four questions of each input, and each market. Where does it come from? Is there a substitute? How long would substitution take? And what would it cost? The answers separate single points of failure from links that are merely inconvenient. Then comes the question that gives the map its purpose. If this link failed today, what would the business do on the first day, in the first month, and in the first quarter? A small business cannot remove every exposure. Trying would be prohibitively expensive. It can rank exposures by the harm they could cause, and the time available to respond. Then it can line up alternatives for the most serious, hold stocks of hard-to-replace inputs, build flexibility into supplier agreements, and keep a reserve.
Dependency Map
Three Inputs, One Region
Here is a composite case. Ilse is operations manager of Ferncliff Candle Company, a fictional business. It makes candles in one domestic workshop, and sells to domestic customers. While preparing a dependency map, she finds something nobody had mentioned. The glass jars, the wicks, and a key wax additive all come from the same overseas region. They arrive through three different distributors, so on paper the supply looks diversified. In fact, all three routes run back to one place. A disruption there would stop production within weeks. This is the hidden concentration that a list of suppliers never shows. Only tracing each input back to its origin reveals it.
Buying Resilience
Ferncliff's Decision
Ilse considers three options. The cost figures are illustrative. A second source for each input would remove most of the exposure. But it would raise the cost of those inputs by around a tenth. A larger buffer stock of jars and wicks would ride out a short disruption. But it ties up cash and storage space. Doing nothing costs nothing, until a disruption occurs. Then it could cost the business its season. Ilse mixes the options. She qualifies a second source for the jars, which are the hardest to replace. She keeps a modest buffer of wicks. And she accepts the exposure on the additive, because substitutes are easy to find. The reasoning has two parts. Buy resilience where replacement is slowest. And carry some exposure, when the cost of removing it exceeds the harm it could do. How much protection to pay for is a judgment. The map makes sure it is an informed one.
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Business Essentials (Business 100) is a self-paced online course of 105 video lessons in 24 chapters, from the business environment, economics and global markets to ownership, management, leadership, operations, people, marketing, accounting, finance and banking. It carries a NCCRS credit recommendation for 3 semester credits.
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