POLITICAL FACTORS
Learning Objectives
1.
2.
3.
4.
Understand the impact that political-legal factors have on companies/industries
Describe how business influences government
Explain how government influences business – link these roles to Porter’s Five Forces.
Compare and contrast traditional forms of business ownership and understand when/why
a firm might pursue/prefer each one. Discuss the forces of globalization.
5. Discuss the forces of globalization.
6. Identify and apply the decision process for going international
7. Identify the decision criteria for choosing an international market
8. Explain some of the ways in which social, economic, and political factors act as barriers to
international trade
9. Understand various strategies for entering a foreign market and identify the conditions
under which each is an appropriate choice.
10. Understand how the key success factors and Porter’s apply to international expansion
decisions.
PEST – Political/Legal Environment Factors
Elements:
Questions to Ask:
o What regulations must be addressed
o Laws, regulations
before the product can be introduced?
o Taxes
o What legal or political restrictions might
o Trade agreements or conditionsimpede sales?
o Are there any legal/political barriers that
create barriers to entry?
Significance:
o Protection of consumers; ethical business; financial and physical
safety
o Support/ protection and regulation of domestic businesses; fair
competition; entrepreneurship
o Opportunity creation in foreign markets
Ebert Ch 2, LO-4, ch 5, LO-4, LO-5
How Business Influences Government
Ref: Ebert Ch 1, LO-3
Government Roles And Their Impact On Business In The
Environment
Role
Approach
Service provider
Business support
Subsidies, trade
agreements
Laws, Regulations
Competition Act,
consumer & pollution
laws, IP rights
Taxation
Income
(business & personal)
Sales, Property
Restrictive
Impact
Competition, social
goals
Opportunity,
protection
Competition,
consumer
protection,
innovation, social
goals, barriers
Customer spending;
incentives; barriers
Link to Porter’s Five Forces
• Select
. a role that
government plays
and explain how it
can affect one of the
forces in an industry
POTENTIAL
ENTRANTS
Customer
Competitor
Regulator
(Laws)
Provider of
Essential
Services
Taxation Agent
Provider of
Incentives &
Assistance
INDUSTRY
COMPETITORS
SUPPLIERS
BUYERS
Rivalry Among
Existing Firms
SUBSTITUTES
Forms of Ownership
Traditional Forms of Ownership:
o Sole Proprietorship
o Partnership
o Corporation
o Public vs. Private Corporations
o Social Enterprise
o Forms of ownership will likely change over the life of a business.
Sole Proprietorship & Partnership
Business & Owner = One Legal Entity; no distinction between personal and
business assets & liabilities
Characteristic
Sole Proprietorship (1)
Partnership (2 + owners)
Ease of
formation
Simple; inexpensive
Simple; inexpensive; optional
partner agreement
Regulations
Few
Control over
profits and
decisions
Complete
Shared
Resources &
capabilities
Whatever owner brings
Slightly more; more partners = more
resources
Taxation*
Taxed as personal income
(advantage if business has
losses)
Same but shared amounts
Liability
Unlimited
Unlimited except if limited partner*
$60,000
$30,000
$(15,000)
$45,000
Types of Partnerships
General Partnership:
o
o
o
All partners have joint and several liability
Joint Liability – together, they share the liability
Several Liability – 1 may be liable for all
Limited Partnership:
o
o
o
Limited Partners Liability = investment in the firm
Limited Partners cannot be active in management
Must be at least one general partner
Types of Partnerships
General Partnership:
o
o
o
All partners have joint and several liability
Joint Liability – together, they share the liability
Several Liability – 1 may be liable for all
Example: If a bank loans $100K to two general partners who have joint and
several liabilities and they default on their loan, the bank may choose to go
after both partners equally (joint) or go after one partner to pay the total
amount (several)
Corporation
Separate entity from owners (shareholders)
Types:
o Public – starts with IPO
o Private
o Crown
Interests Represented By The Board Of Directors:
o Inside Directors
o Outside Directors
Private Corporation
Business & Owners = Separate Entities In A Corporation
Characteristic
Sole Proprietorship (1)
Private corporation (1-49)
Ease of
formation
Simple; inexpensive
Slightly more; still straightforward
Regulations
Few
Slightly more but still simple
Control over
profits and
decisions
Complete
Shared with other shareholders
Resources &
capabilities
Whatever owner brings
Whatever owners bring
Taxation
Taxed as personal income
(advantage if business has
losses)
Taxed separately from shareholders;
lower than personal income tax rates
Liability
Unlimited
Limited to investment except personal
assets brought into business
DOUBLE TAXATION
•
Private
corporation may
pay/distribute
dividends to
owners
•
If so, corporate
profits are taxed
once on corporate
tax return and the
portion of profits
paid out as
dividends are
taxed personally
as well
Public Corporation
Business & Owners = Separate Entities In A Corporation
Characteristic
Private corporation (1-49)
Public corporation (unlimited)
Ease of
formation
Straightforward; relatively
inexpensive
Expensive; complicated
Regulations
Relatively few; simple
Many
Control over
profits and
decisions
Shared with other
shareholders
Board of Directors; less control
Resources &
capabilities
Whatever owners bring
Can afford to buy them
Taxation
Private corporate rates
Taxed separately from shareholders;
Slightly higher than private
Liability
Limited to investment except
personal assets brought into
business
Limited to investment
Social Entrepreneurs
"Social entrepreneurs are not content just to give a fish or teach how to fish. They will not
rest until they have revolutionized the fishing industry."
— Bill Drayton, CEO, Chair and Founder of Ashoka
“Social Enterprises generate social value while operating with the financial
discipline, determination & innovation of private sector businesses.”
- Alter, 2006
Social Enterprise
Key Facets of Social Enterprises
Help overcome market inequities/failures.
Why?
o Inefficient allocation of resources: markets don’t address all societal
needs
How?
o Seek innovative solutions to the world’s ‘wicked’ problems
o Often in areas of education, health, environment, food insecurity,
and poverty
Key Facets of Social Enterprises
Social Value is the primary objective, but financial sustainability is
imperative.
Why?
o Donor and government funding are not reliable.
How?
o Create social value with a sustainable business model (economic
value is the means to the end goal, not the actual end goal).
o Dual stakeholders (those served & those supporting); one or both
pay.
Examples of Social Entrepreneurs
Prof. Muhammad Yunus: Founder of the Grameen Bank and Nobel Prize
winner (2006)
Grameen Bank – providing (micro-credit) loans to women in impoverished
areas of rural Bangladesh.
o Wicked Problem: poverty, no access to reasonable small loans
o Social Value: women start businesses, can invest in children’s
education, build their own homes, etc.
o Self-sustaining; loans are repaid,
capital given to other members
o Form; not-for-profit
o Constraint: no collateral
o
Examples of Social Entrepreneurs
Grameen-Danone Partnership – selling low-cost, nutritionally
fortified yogurt in impoverished areas of rural Bangladesh
o
o
o
o
o
Wicked Problem; poverty, malnourishment
Social Value: improved health, work opportunities
Self-sustaining: Danone is repaid initial capital only; profits stay
within the partnership and fund operations.
Form; not-for-profit and for-profit partnership
Constraint: low-income customers
Examples of Local Social Enterprise
Students Offering Support (SOS) (p. 39 text)
o Wicked Problem; poor access to education in Latin American countries
o Social Value; funds educational development projects in Latin America
o Self-sustaining; volunteers run review sessions and student fee funds
projects in Latin America
o Bootstrapping; using university resources & volunteers
o Dual stakeholders; students receiving support; developing country
students
o Unique value to paying customers; assists with exam preparation
Similarities & Differences Summary
Traditional
Entrepreneurship
Value Definition
and Financial
Priority
Social Benefit
Focus
Who they
serve/stakeholders
Organizational
Form
Social Entrepreneurship
International Business
Application example: Couche-Tard case – Pearson Chapter
5 – describes motivation & expansion approach as well as
PES factors and Diamond-E features that constraint or
enable
Globalization
World becoming a single interdependent system.
Driving Forces:
Deciding to Go International
Considerations:
Should We
Do It?
Barriers We
Might
Encounter
Strategies to
Overcome
Barriers
Deciding to Go International
Can we?
Should we?
Where?
How?
Do we have the
basics to even
consider it?
Is there demand
for our product?
Is it worth going?
Where is the
best
opportunity?
How to do it –
tactical strategies
Can we make
needed
changes? Do we
have minimum
resources &
capabilities
needed?
How much do
foreign
consumers
spend on this
type of product?
Is there room for
us? What’s the
ROI?
Compare
countries:
Demand,
Competition,
Trade barriers,
Familiarity,
Distance
Entry strategy:
Sales, marketing,
production,
distribution
Diamond-E
internal
Diamond-E
external
PEST, Porter’s
Execution
Analytical thinking:
Pearson text: Chapter 5 PBL #1: Walmart’s Global Failure – can you link the failure to the items above?
Deciding to Go International
Can we?
Should we?
Do we have the
basics
Can
ourtohreven
take
consider
it?
on
the extra
work?
Do we know
Analytical thinking:
anything about
selling abroad?
Can we make
Do we have
needed
money to pay for
changes? Do we
expertise, advice
have minimum
and services?
resources &
capabilities
needed?
How much do
Is there
demand
consumers
for
our product?
spend
on this
Is
it worthAre
going?
globally?
we
better off trying
to grow at
home?
What
How lifestyles,
much do
income,
habits
foreign
does
this align
consumers
with?
How
spend
on much
this
we
typemust
of product?
change?
What’s
What changes
the ROI
the
must
weon
make?
strategy?
What’s
the ROI?
Diamond-E
internal
Diamond-E
external
Where?
How?
Where is the
best
opportunity?
How to do it –
tactical strategies
Compare
countries:
Demand,
Competition,
Trade barriers,
Familiarity,
Distance
Sales, marketing,
production,
distribution
PEST, Porter’s
Strategy
Ref: Consulting book 4.1, 4.2; Pearson Ch. 5 LO-4, LO-5
Where? Country Comparison
Factor
Features
Significance
Population
Large; Large market segment
More = better
Average
spending (E)
Average income/high spending on
this type of product
Have money & spend it on our
product
Customer
reachability
No lock-in, dominant habit or
brand; physical reachability
Can be persuaded; able to switch;
can easily get the product
Competition
Little; no one addressing your
Uncontested market easy to win;
niche fragmented; no dominant
competitors won’t or can’t shut you
player; opportunity to differentiate out
Liability of
foreignness (S)
Cultural distance of customers and
doing business; existing networks
& capabilities
Distance
How far do I have to ship or move? Further = more costs
Administrative
barriers (P)
Importing bureaucracy; trade
barriers; lots of regulations
Bigger differences = greater risk;
must learn to design product, reach
& win customer, build distribution
network;
More time, more hassle, more
change, more barriers
How? Entry Strategies
High
Foreign
subsidiary
Investment
Local sales
office
Sales agent or
distributor
Licensing/
franchising
Alliance/ joint
venture
Indirect export
Low
Low
High
Control
Ref: Consulting 4.1; Ebert Ch. 5 LO-4
Indirect Export
What it is: Sell to a third-party export merchant in own country. Export company
identifies where to sell and takes care of shipping and obtaining payment
Why use it:
• No additional cost
• No market knowledge,
export experience or
new infrastructure
needed
• No risk from foreign
market political
volaatility
Risks/costs: No customer contact; No control over
destination; no control over pricing, promotion or
foreign distribution strategy
Capabilities and resources needed: None
Sales Agent or Distributor
What it is: Hire an agent or distributor to sell your product using their local network
and you manufacture domestically and ship abroad
Why use it:
• You aren’t familiar or
have the network
resources to easily tap
into the foreign market
• Limited understanding
of foreign market
Risks/costs: Share attention with other organizations;
Limited marketing control; Subject to trade barriers
Capabilities and resources needed: Manufacture in
sufficient quantity to satisfy agent/distributor; adjust
product; some understanding of foreign market and
exporting
Licensing and Franchising
What it is: Giving local organization the right to use your intellectual property
(brand, patent, copyright) in exchange for royalties; Another company produces
goods or services using your intellectual property in exchange for royalties
Why use it:
• Faster and larger
expansion with fewer
financial resources No
need to understand
market, export, produce,
distribute etc
• No need to overcome
trade barriers or acquire
additional resources
Risks/costs: Damage to intellectual property
Capabilities and resources needed: Intellectual
property of value that other company can’t easily
acquire
Joint Venture
What it is: Partner with a local firm for mutual benefit; partnership can take many
forms – mutual distribution, sharing of knowledge, investment
Why use it:
• Political or trade
barriers;
• overcome market
barriers with lower
investment or risk;
overcome production
constraints
Risks/costs: Time, personnel, money. Partnership
doesn’t work – partner doesn’t deliver, doesn’t
deliver as expected or promised or is difficult to work
with (incompatibilities); Not easy to break up
Capabilities and resources needed: something of
value for partner, capability to negotiate, supervise
and work in partnership; resources as determined by
partnership
Sales Office
What it is: Establish your own sales office but manufacture in your domestic market
and ship abroad
Why use it:
• Retain marketing
control
• Insufficient volume to
justify facility
• Have excess capacity in
domestic facility
• Don’t have resources
to build foreign facility
• Don’t want to take risk
(yet)
Risks/costs: Trade barriers, market knowledge,
investment to establish foreign sales capabilities
Capabilities and resources needed: Understanding of
foreign market, ability to pay for and supervise
foreign office, investment in foreign office, ability to
modify product
Foreign Subsidiary
What it is: Manufacture and sell in foreign market
Why use it:
Overcome trade barriers
Control of intellectual
property and marketing
Risks/costs: Cost of facility and establishment of
operations; sometimes need permission of foreign
government
Capabilities and resources needed: Sales volume
justifies investment; understanding of foreign market
and access; distribution capabilities
International Trade Barriers & Factors
Internal
• Knowledge/
capabilities
• Production
• Preference
• Finances
5 Forces
• Distribution
• Customers
• Competition
• Suppliers
• Substitutes
EXTERNAL
INTERNAL
Political
• Quotas, tariffs,
subsidies
• Protectionism
• Local content laws
• Business practice
laws
Economic
• Exchange rates
• Foreign GDP
Social & cultural
• Customer needs
• Customer “values”
• Language
• Norms
Technological
• IP laws
• Technology
standards
Choose By Applying Diamond-e
Questions to Think About
Identify the various government roles and connect each role to a force in Porter’s five forces. Explain the impact the government's role
will have on the force and profitability of the industry.
Identify a business that would view each of these as a threat or an opportunity and describe the impact:
o The government imposes a tax on the LCD screens used in computer
o A trade deal is signed with Mexico allowing skilled trade workers, i.e. bricklayers and plumbers, to come to Canada
o The CRTC allows two more mobile service providers into the Canadian market
o The government offers a subsidy to research on the causes of ADHD
o The government has launched a mobile service
Why is the “P” of PEST the factor most susceptible to business influence?
How is the “P” of PEST influenced by other PEST factors? How does it influence other PEST factors?
Compare and contrast the various forms of business ownership. Describe the conditions under which each form of ownership is the
optimal choice.
Compare and contrast a social enterprise to a traditional for-profit. How do they prioritize social versus profit objectives? How are they
similar and different concerning approaches and attitudes toward achieving financial performance?
Identify and describe the similarities and differences concerning key success factors for social and traditional for-profit enterprises. What
are the implications for the actions they must take for each KSF?
Questions to Think About
•
•
•
•
•
•
Combine and apply the Diamond-E and PEST to identify factors that might create barriers or challenges for going
international. Use an example to illustrate the factor and demonstrate the barrier/challenge that it creates.
Describe the four components of the decision to go international. Identify the model you can apply to guide your
thinking on each component. Describe the critical insights/raise essential questions to consider and the role those
insights play in ensuring the successful implementation of an internationalization strategy.
Identify and describe the decision criteria that should be applied when comparing possible international targets. Explain
the significance of each criterion and what an ”ideal” target would look like on this criterion. Use an example to
demonstrate your answer.
Describe each of the foreign entry strategies. Compare and contrast their similarities and differences and their risk and
benefit tradeoffs. For each strategy, explain why the risks and benefits arise.
Explain what a firm would need to execute each strategy and the significance of each capability or resource you identify.
Identify the conditions under which each strategy would be ideal for a firm. Use the Diamond-E to identify the criteria
for choosing among the strategies and describe the Diamond-E conditions that make it the optimal choice.