International Entrepreneurship and Management Journal

ISSN: 1555-1938 SJR : 0.746 SNIP : 1.448

International business environment

Akmaral.Miraliyeva  (Senior Lecturer at Al-Farabi Kazakh National University Department of International Relations)

Introduction

Nowadays, technology is growing dramatically and plays an important in the human life. Mobile phone is also apart of this development. In the last decade, mobile phone industry has grown significantly from using phone to contact to using phone as an entertainment device. Therefore, the mobile network providers have catch up the trend to satisfy customer expectations. They have improved it facilities and infrastructures to increase the quality of their service. Besides, there are many telecommunication companies have operated not only one country but also expand to several countries. However, these company need to consider about the effect of the international political, legal, economic and financial environment as well as the impact of current risk. In this situation, one of the largest mobile network providers in the UK as Vodafone could be a good example because it is operating in many countries with different political system, economic and financial.

Review in general terms its growth and performance over the past decade;

Vodafone Group PLC is known as Vodafone, is a British multinational telecommunications company providing several services including voice, massage, mobile data and broadband, (EBSCO, 2015), It currently has headquarter in London but the first head office located in Newbury, Berkshire, (Barrow, 2010). Currently, this mobile network provider is the world’s second largest mobile telecommunications company measured by both 435.9 million mobile connections and £42.5 billion revenue for the period to Q2, 2014, (Evans et al., 2014).

Until 2014, Vodafone has owned and operated its networks in 27 countries and became partner with mobile networks in 48 other countries, (EBSCO, 2015). It also provides fixed broadband services in 17 markets, (Vodafone, 2014). In addition, this multinational organisation also has Vodafone Global Enterprise division, which provides services related telecommunications and IT to enterprise customers. For example, Vodafone has a five-year contract with Deutsche Post DHL to provide an international wide area network (WAN) through three continents including Europe, Middle East and Africa with over 65 countries, (EBSCO, 2010). 

In stock market, Vodafone has recently a primary listing on the London Stock Exchange where it has a huge market capitalisation with £ 60,836 million. Beside, It is also apart of the FTSE 100 Index and has a secondary listing on National Association of Securities Dealers Automated Quotation System (NASDAQ).

Identify and provide an assessment of how, the key factors within the international business environment have impacted on the company’s recent performance and development. How are these factors likely to impact on the company in the near future?

When an organisation enters international market, understanding the international business environment will help the organisation to analyse the impact of it on company’s performance and development recently as well as in the future. As mentioned in the beginning, Vodafone Group PLC is a multinational organisation, thus it should consider about several aspects of the international business environment including international political, legal, economic and financial. In the following paragraph, it will define and analyse critically the impact of these factors on the company’s recent performance and development.

The international Political and Legal environment

An organisation expands its market internationally. The political environment should be considered firstly because this factor relates to the political system that will effect on investment, foreign trade, tariffs, price controls, globalisation, liberalisation, privatisation and so forth.  In addition, the political ideology of government also impact on political stability of a country, (Jain et al., 2010).

Political systems

According to Hill (2011) political system is defined that the system of government uses in action. There are two types of political system including democracy and totalitarianism. Currently, Vodafone has operated its services in 27 countries and had partner with mobile networks in 48 countries, (EBSCO, 2015). Therefore, this organisation will face many types of political systems. In the next topic, it will explain further these political systems.

                        Democracy

Vodafone Group PLC is a British company, thus it is operating in a country where the political ideology of government is Democracy. It is defined as a system of government, which political power belongs to the people, (Schmidt et al., 2010). In this system, the people can choose their representative through election and the elected representative will create laws to lead the country (Kenney, 2014). Moreover, democratic system gives each individual in society the right to rule and vote any matter. In the business, the government attempt to keep a stability environment through ‘laws protecting property right’, (Aswathappa, 2004). Therefore, an organisation will have freedom to decide, invest, earn and spent its money in this political system. Currently, Spain and UK can be seen the main markets of Vodafone within annual revenue in 2014 of £3.2 billion and £6.4 billion respectively, (Vodafone, 2014). These countries all have democratic system, (Hill, 2011), thus Vodafone can use this money to expand and develop its service in these markets without being influenced by government. However, Vodafone will spent more money to maintain its position in the market because there are many competitors, which also have the right to do the same.

                        Totalitarianism

Totalitarianism is a form of a government that on person or a political party has total authority to control the society as well as deny opposing political parties, (Hill, 2013). In this political system, the individual’s right will be limited while freedom of expression and organisation will be rejected, (Hill, 2011). There are four main forms in this political system including communism, theocratic totalitarianism, tribal totalitarianism and right-wing totalitarianism.

In this system, communismcan be known as the most common type of totalitarianism, where the government will control all properties and makes all decisions relate to the production and distribution of goods and services, (Hill, 2011). Thus, any company will need to report and get permission from government to operate in this political system. Currently, there are few countries with communism government such as China, Vietnam, Laos, North Korea and Cuba, (Hill, 2013), however Vodafone just operate mainly in Europe, Middle East and Africa and have no sight to run its services in those communism countries.  Therefore, it is unable to face this type of system.

 In addition, theocratic totalitarianism is another form of totalitarianism where a political party or individual will have power based on religious principles. According to Hill (2013) Islamic principles could be a good example for theocratic totalitarianism because some countries as Iran and Saudi Arabia will base on these principles to create laws that will reduce freedom of political and religious expression. A third form istribal totalitarianism, which a particular tribe controls the government and makes decisions that could the best interests of country, (Hill, 2013). Tanzania, Uganda and Keny, for instance, are good example for this type of totalitarianism. For these two forms, an international company will have less opportunity to expand and develop due to the monopoly power of government and limit freedom of expression and organisation. Besides, there is no fair market could be occurred in this type of government because corruption could be happened in this type of system. For Vodafone, if it operates in these types of government, it will be impacted by local telecommunication company that is owned by government. There are some barriers to limit the growth of foreign companies. The fourth form of totalitarianism is right-wing totalitarianism,which has individual economic freedom, however individual political freedom will be rejected. In this case, the government system is quite similar with communism. There are many right-wing totalitarianism government are controlled by the military, all decisions will be made by military officers. In the past, many countries have this type of government such as South Korea, Taiwan, Singapore, Indonesia and Philippines. However, this form of government has been removed since the early 1980s, (Hill, 2011). With Vodafone, it is unable to face this government currently as well as in the future,

Legal environment

The legal system of a country is very important to international business because it not only follow rules and laws, which are created by its home country. It also understands the laws framework in all countries where it operates. Vodafone operates recently in 27 countries, (Vodafone, 2014) thus, this organisation must well aware the legal system in those countries. The main markets of this telecommunication company as UK, Spain and India are democratic governments, therefore the business laws are created to protect small businesses and consumers. While, communism government will totally control business sectors without freedom. Thus, international company should adapt to general laws such as common law, civil law, contract law and the laws governing property rights help the company make decisions. According Hill (2013) common lawestablished in former Great Britain’s colonies, which is based on country’s legal history, some cases were ruled by court in the past and the laws are used in specific situations. This law will develop overtime when a legal precedent is established based on judge decision. Therefore, an international company as Vodafone will be impacted by common laws in different countries such as UK, Australian and India. This company must follow and change to avoid some problems. In contrast, civil law will be different with common lawbecause law is based on written rules and codes (Hill, 2013). Besides, judges in this system have the authority only to apply the laws to specific situation (Hill, 2013). Hence, Vodafone must be knowledgeable about some countries using civil law system. Currently, Vodafone is providing its service in Germany where the government operates with civil laws. 

A contract is an important document in international transactions currently. Thus, contract lawis created to support the companies, which involved to the contract. If one of companies violates the terms of the contract, contract law will be the body of law that deals with the conflict, (Hill, 2013). As mention before, Vodafone is operating in many countries and has partner with several mobile network. Therefore, contract law is very important to avoid some risks in international transactions. However, if Vodafone have any contract in some countries with common law, the contract must be detailed in all term due to the changing of law bases on judges. If the contract disputes, Vodafone can use on the terms of contract as the evidences in the court. While, the contract in civil is more simple and short because many terms are covered in a civil code, (Hill, 2013). 

Another important law for international business should be considered as property rights, which protect an individual or a business owns property legally including land, building, equipment, intellectual property (patents and copyrights) and so forth, (Hill, 2013). Private action and public action could be threats for international companies. For private action, theft, piracy, blackmail could violate property rights because if a local government have a weak legal system, it will allow a high criminal rate. For example, when communism collapsed in Russia, the local and international business must paid ‘protection money’ for ‘Russian Mafia’. If business owners do not pay that, they can face violent retribution including bombings and assassinations, (Hill, 2013). For public action, local authorities or government bureaucrats will be reason of violation. Corruption in government could be a good example in any country. Therefore, Vodafone should consider all aspects of legal system to ensure that the organisation is unable to face the risk in countries where it provides services.

The international Economic environment

Globalisation currently has a huge impact on international business because the countries will open their borders to exchange goods and services as well attract more investors from other countries. As a international company, Vodafone can adapt to globalisation to expand its markets.  In this case, international trading and investment could be a good strategy. In addition, there are several economical unions were established to reduce the barriers between nations such as EU, ASEAN, CAN and others. However, the trading and investment activities across national border will face some issues related to the relationship between countries and various international treaties. For example, Vodafone is a British company, it have to consider about policy framework when it operate in European countries. Article 207 of the Treaty of the European Union said that international organisations must achieve European Common Commercial Policy, if it invests or operate in other countries, (Foster, 2014). It will ensure that the EU prosperity is maintained while also enhancing the interest of trade and investments. Moreover, tariffs, subsidies, import quotas and voluntary export restraints are the tools that governments use to influence trade.  For tariffs, the governments want to protect domestic goods through increasing tax of imported goods, (Hill, 2013). It will make international company as Vodafone spend more money to run business in the local market. For subsidies, the government will support domestic companies to compete with international companies including cash grants, low-interest loans, tax breaks and so forth, (Hill, 2013). In 2014, Vodafone has opposed a government plan, which subsidise Telstra’s mobile phone network to improve its service in regional and remote areas, (Hutchinson, 2014). It will be disadvantages for foreign company as Vodafone. For import quotas, the government restricts the total quantity of imported goods that are allowed into the country, (Hill, 2013). As with tariffs, quotas will limit imported goods and increase the price in local market. if Vodafone operates in this type of government, the solution for company could be partner local mobile network companies to reduce the operating cost. Another instrument of trade policy is voluntary export restraint (VER), which are type of import quotas. It is a quota on trade imposed by the exporting country. It will create more opportunities for local companies, while imported goods are limited. 

The international financial environment

As an international company, international monetary systems should be considered by Vodafone Group PLC because it includes some internationally agreed rules, conventions and supporting institutions, which will help an organisation to avoid some problems related to international trade, cross border investment and generally the reallocation of capital between nation states. Besides, there are many competitors currently can be impacted on Vodafone’s financial condition. The government also made some regulations to protect small competitors and concentrate on foreign customers to raise the tax and license fees. Therefore, Vodafone can lose its customers and market share as well as profit, if it is not protected by the government. However, according to Vodafone (2014) the revenue of this company has recovered to £38,3 billion in 2014 after went down to £38 billion in 2013. It can be seen that Vodafone faced some financial condition issues, but it have solve out those problems and begin to grow well in the mobile industry.  Furthermore, the share and revenue from main markets also increased such as India, Germany, Italy and Spain, (Vodafone, 2014).

The impact of currency risk for Vodafone Group PLC and strategies used by the company to mitigate currency risk

Impact of currency risk

Currently, Vodafone Group PLC is operating almost in three continents including Europe, Middle East and Africa, thus there are three major forms of currencies can be faced by Vodafone include Europe, Indian Rupee and South African Rand. According to Vodafone (2013) share price is denominated in sterling, while the main financial results are generated in other forms of currencies. Therefore, currency risk will occur when the price change in those currencies because it will impact on exchange to sterling.  According to Jho(2014) the operating profit will be affected significantly by currency fluctuations, hence the organisation can be under high currency risk. Vodafone (2013) said in its annual report that Greece, Ireland, Italy, Portugal and Spain are countries that impact on the Group’s EBITDA EBITDA for the year ended 31 March 2013 with 14% (Italy), 7% (Spain), 3% (Portugal) and 3% (Ireland and Greece combined). In 2013, the Group’s EBITADA revenue decreased about £0.1 billion due to an average 3% decline in the sterling when exchange from other currencies. 

Strategies to mitigate currency risk

According to Vodafone (2013) this company keep concentrating on reduce risk through the protection and availability of cash deposits and investments. To achieve that objevtive, this telecommunication company generated some policies related to cash sweep arrangements to ensure that  operating company would not spend more than €5 million on deposit on any one day.  In addition, Vodafone stated in its annual report (2013) the company wil try to reduce foreign exchange risks on transactions denominated in other form of currencies. Vodafone would create the policies that cover an economic barrier in terms of reduced fluctuation in the sterling equivalent value of the Group. 

Financial ratio

Return on Capital Employed:

 20142013
     
Return on capital employed(4.6)%(3.4)%

This ratio shows that for every £1 invest in the business Vodafone Group PLC make a loss £0.046 in 2014 and this figure was £0.034 in 2013. By making a comparison between two years, Vodafone Group PLC did not perform well after one year, thus it could improve its ROCE by increasing its operating profit that in turn requires reductions in the cost of running the business.

Net profit margin

 20142013
     
Net profit margin(17.7)%(13.3)%

This ratio indicates the amount of net profit per £1 of sales, which a business has earned. In 2013, Vodafone Group PLC make a loss £0.133 and this figure increase to £0.177 in 2014. By making comparison between two years, Vodafone Group PLC is making a financial loss on their sales because the company failed to increase revenue from its markets. Therefore, the net profit margin can be improved if it considers about pricing of its services as well as cost reductions.

Current Ratio 

 20142013
    
Current Ratio1.1 : 10.7 : 1

The a rule of current ratio of 2:1 is considered to be good because the business will have £2 worth of current assets for every £1 worth of current liabilities. Base on the ratio, Vodafone Group PLC can met its short-term debts 1.1 times in 2014, but the company is unable to meet its short-term debt in 2013 when the current ratio is 0.7:1. The reason of low ratio is Vodafone holding a little cash and trade payable is high. In addition, inventory level is also low. However, this ratio tends to be better after one year, thus, Vodafone have evaluated its currents assets and manage them more efficiently.

Trade payables ratio

 20142013
      
Trade payable ratio219 days209 days

This ratio shows that Vodafone Group PLC has 219 days to pay suppliers after receiving its goods in credit.  The figure has increased since 2013 with 209 days. It is a good sight indeed for Vodafone because this company can keep its money as long as possible; it is willing to pay its bills before pay its debt. However, the long payable time could be risky for Vodafone Group PLC. It can lose its supplier goodwill as well as facing the potential threat of legal action for late payment.

Trade receivables ratio

 20142013
      
Trade receivables ratio116 days124 days

This ratio will measure the time it takes for debtors to pay their bills. In 2013, customers had 124 days to pay their debt. Until 2014, this figure decreased to 116 days. Thus, the company will get ‘real-money’ earlier and it is willing to manage its cash flow.  However, 116 days are still long for the company. Vodafone Group PLC should reduce debtor days to operate efficiently including offering early-payment bonus or by using invoice factoring

b)

Gearing

According to Marsh (2012) gearing ratio describe the difference between debts and shareholders’ funds. This ratio is computed to ascertain the soundness of the long term financial policies of the firm

 VodafoneBT
     
Gearing  

Earnings per share

According to Tracy (2012) EPS calculation shows how profitable a company is on shareholder basis. It is a very good indicator of financial gain. Profitability of a company is determined by the growth in EPS.

EPS =             Net income- Preferred Dividend

                Weighted average common share outstanding

Basic EPS

Narayanaswami (2014) described that Basic EPS works as an uncertain profit of a company that can be assigned to one share of its stock. 

Diluted EPS

Narayanaswami (2014) mentions that Diluted EPS states the number of shares existing after stock options. 

 Vodafone had 223.84p Basic EPS in 2014 and BT has 25.7p while the diluted EPS of Vodafone was 222.07p, which was higher EPS than BT with 24.5p. It means that Vodafone is creating more profit for its shareholders. Therefore, it has risen the efficiency of the organisation as well as the organisation’s shares. 

Impact of National and International tax policies on Vodafone

According to Vodafone (2014) contributed £14.4 billion pounds in 2013-14 as tax amount in countries of operation. Besides, the company also paid more than £300 million direct taxes for European government and about £1 billion for governments in AMAP region.  It can be seen that, Vodafone paid a huge among of tax for the governments, where it operates. In addition,the cost of acquiring radio spectrum in the many countries increased, then it rose operating costs with high capital expenses and so forth. It also reduced the income of Vodafone. According to Jho (2014) if Vodafone Group PLC stilltolerates higher taxes than the payments for the acquisition of rights and services, company turnover is greatly reduced. Significant reduction is, therefore expected to arise on the profitability of the organisation as well as the telecom industry in the UK.

ConclusionVodafone Group PLC is the world’s second largest telecommunication providers and operates in 27 countries. Therefore, it must works with different governments with different political, legal and economical environment. The company will have to clearly understand those factors to ensure that it will avoid several problems. Besides, the financial analyse in this report also shows that the company has recovered after went down in 2013, however it still has high risks in some markets. Furthermore, Vodafone has paid a high among of taxes for the government, thus it must negotiate with the governments to make sure that the company will not tolerate high taxes in the future.

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