4.2 - Global Markets & Business Expansion Flashcards
What are Push Factors?
- Factors that push a business to expand outside of their domestic country
- Saturated Markets
- Competition
How are saturated markets a push factor?
- Saturated markets occur when the demand for goods and services has reached a peak and it becomes challenging for businesses to grow and expand within the local market
*This often prompts businesses to explore opportunities in other global markets, which can help sustain their growth and profitability
How is competition a push factor?
- In a competitive market, businesses need to find ways to differentiate themselves and gain a competitive advantage
*One way to achieve this is by exploring new markets and expanding their customer base - By exporting goods and services to new markets, businesses can reduce their reliance on a single market and diversify their revenue streams, thereby reducing their exposure to market volatility and competition
What are Pull Factors?
- Factors that encourage businesses to operate within markets abroad which present significant growth opportunities
- economies of scale
- risk spreading
How are economies of scale a pull factor?
- Economies of scale usually occur when a business expands its production in new markets abroad
*Businesses may also be able to purchase raw materials and labour at lower prices than within their domestic markets
How is spreading risk a pull factor?
- By accessing many markets, businesses can diversify their customer base and reduce their exposure to risks associated with operating in a single market
- This can include economic, political, and other types of risks that could impact their operations and profitability
What is offshoring?
- Offshoring is when a company moves part of the production process, or all of it, to another country
- Reasons for offshoring include,
- lower labour costs
- access raw materials
- access skilled labour
What are the advantages of offshoring?
- Lower labour costs may be available in other countries, which help businesses keep costs down and increase profitability
- Access to specialised suppliers in countries abroad who provide better quality service, raw materials, or components
- Economies of scale as businesses sell to a larger international market
What are the disadvantages of offshoring?
- Public relations and employer/employee relations may suffer due to relocation as domestic workers lose jobs
- Increased costs in short term, such as relocation costs, acquiring new premises and training new staff
- Possibly poor customer service due to language and cultural differences between the domestic consumers and foreign workers
What is outsourcing?
- Outsourcing occurs when a business hires an external organisation to complete certain tasks or business functions
- Key reasons may be,
- reduced costs
- allows for business to focus on core competencies
- easier to comply with rules and regulations in other countries as they are often less demanding
What are the advantages of outsourcing?
- Businesses can take advantage of specialist skills that another business has or that can complete a particular task more efficiently
- Cost effectiveness as businesses avoid having to spend money investing in new facilities abroad
- Businesses can benefit from higher labour productivity in other countries
What are the disadvantages of outsourcing?
- Damage to brand image as the values of the business may not be in alignment
- Poor communication between the business can cause issues, which can lead to increased costs and disruption for the business choosing to outsource
How can a business expand its product life cycle?
A business could sell the product in new international markets
- a product could reach maturity in one market but could then be introduced into another market
- this allows the business to generate more revenue
What factors should be considered when assessing countries as a market?
- Ease of doing business
- Levels and growth of disposable income
*Exchange rates - Political stability
*Infrastructure
Why should infrastructure be considered when assessing countries as a market?
*Infrastructure considers factors such as roads, transportation, and communication
- good infrastructure improves the production process and delivery of goods and services to the customer, which reduces costs and increases sales
Why should ease of doing business be considered when assessing countries as a market?
- Rules and regulations involved in establishing a business in a particular market may be relatively simple or extraordinarily hard
- issues to consider include credit access, property registration, and enforcing contracts
- if businesses face significant challenges setting up a business, this may lead to delays in operations and the business generating sales
Why should levels of growth and disposable income be considered when assessing countries as a market?
- Disposable income is the income individuals have left after paying direct taxes and other deductions
- selling products in a country with higher disposable income is likely to lead to more sales
- selling in a country with lower disposable income is likely to lead to slower sales growth
*Businesses should look at trends in income levels over time to see if there is potential growth in sales in the future
Why should exchange rates be considered when assessing countries as a market?
- An exchange rate is the price of one currency in terms of another
*Exchange rates can be subject to extreme fluctuations due to external factors - businesses should look at the historical trends of the currency of the country
*Businesses moving to countries with stronger currencies can import raw materials and components for production at a lower price - exports from this country will be more expensive to customers abroad
Why should political stability be considered when assessing countries as a market?
*Businesses may be at risk of not gaining a return on their investment in a country with political instability
- subject to corruption, lack of law enforcement, and higher levels of crime
- it is more likely to have disruption to trading
*An economy with a stable economy and government is seen as a less risky investment for business
What factors should be considered when assessing a country as a production location?
*Costs of production
* Skills and availability of labour force
* Infrastructure
* Location in trade bloc
*Government incentives
*Ease of doing business
* Political stability
*Natural resources
* Likely return on investment
Why should costs of production be considered when assessing a country as a production location?
Businesses want to keep production costs low as this can help them increase their profit margin or allow them to sell at a lower price to gain a competitive advantage
Why should skills and availability of labour force be considered when assessing a country as a production location?
- The quality of the workforce is important as this will directly impact the quality of the goods and services produced in an economy
- e.g. literacy rates and skills
*Businesses may choose to locate production in a market where the labour costs are lower
Why should infrastructure be considered when assessing a country as a production location?
- Businesses need to consider the infrastructure needed such as roads as this will affect the production process
- e.g. transportation of raw materials for the production process
Why should location in a trading bloc be considered when assessing a country as a production location?
*A business located in a market within a trade bloc will be able to access many advantages such as reduced protectionist measures
Why should return on investments be considered when assessing a country as a production location?
- Assessing the ROI in different markets will reduce the risk of the initial investment not being paid for
- Investment appraisal techniques can be used to tell a business what their potential ROI could be
Why should natural resources be considered when assessing a country as a production location?
It is often important that a business has easy access to their raw materials as this can help to reduce transportation costs and help to reduce any potential delays to the production process
Why should political stability be considered when assessing a country as a production location?
- Businesses may be at risk of not gaining a ROI in a country with political instability
- a country with instability will be subject to corruption, lack of law enforcement, and higher levels of crime
- it is more likely to have a disruption to production
- An economy with a stable economy and government is seen as a less risky investment for a business
Why should ease of doing business be considered when assessing a country as a production location?
A business will want to locate in an area where there is limited bureaucracy, so the process of establishing production facilities is not delayed or does not incur high costs
Why should government incentives be considered when assessing a country as a production location?
Businesses may be offered incentives, e.g. grants, business loans, and tax breaks by the government
What is a global merger?
It is a permanent agreement between two businesses from two different countries to join together
What is a joint venture?
When two businesses join together to share their knowledge, resources, and skills to form a separate business entity for a limited period of time
What are the main reasons for global mergers or joint ventures?
*Spreading risk
* Entering new markets/trade blocs
*Acquiring national/international brand names and patents
* Securing resources/supplies
*Maintaining/increasing global competitiveness
What are the advantages of global mergers and joint ventures?
*Economies of scale gained from costs spread over larger output can lead to increased profit margins
*Diversifying risk due to having products in several markets so if there is a fall in sales of certain products, the business can still generate revenue from other products
*Opportunity to enter new markets which otherwise may be closed to the business
What are the disadvantages of global mergers and joint ventures?
- The initial costs of merging can be significantly high
*There is no guarantee a business will gain a ROI if it is not successful
*Diseconomies of scale can occur due to communication issues and a lack of control as the business expands
*A culture clash between the two businesses can affect the quality of the business, leading to poor sales
*When two businesses join together, redundancies can occur - this can affect the motivation of workers
What is global competitiveness?
It is the ability of a business to perform better than its rivals across markets in different countries
- fluctuations in exchange rates can influence the competitiveness of business
What is currency appreciation?
An appreciation of the exchange rate means the value of a currency increases against another currency
What are the advantages of appreciation?
*If businesses import raw materials and components from abroad, they will now be cheaper
- this will help the business to reduce their costs and possibly increase their profit margin
What are the disadvantages of appreciation?
- If businesses export goods/services to foreign consumers, the goods will be more expensive for international customers
- this may lead to a fall in sales as consumers now shift demand to domestic businesses
What is currency depreciation?
A depreciation of the exchange rate means the value of the currency decreases against another currency
What are the advantages of depreciation?
- If businesses export goods/services abroad, they become more competitive because their products are cheaper to purchase
- In the domestic market, there may be less competition from foreign firms as imports are now more expensive for domestic consumers to purchase
What are the disadvantages of depreciation?
- If a business imports raw materials or components from abroad, they are now more expensive
- this leads to an increase in the costs for a business, which could then be passes onto consumers in the form of higher prices
What are the acronyms to help remember the impacts of currency fluctuations on imports and exports?
SPICED
S-tronger
P-ound
I-mports
C-heaper
E-xports
D-earer
(+ the opposite, WPIDEC)
What two factors provide a competitive advantage?
*Cost leadership
*Differentiation
How does cost leadership lead to a competitive advantage?
- Cost leadership is when a business becomes the lowest-cost producer in their industry
*Cost leadership can be achieved using strategies such as: - increasing the productivity of their workforce
- using machinery and technology efficiently
- outsourcing
- offshoring
*Businesses can utilise this position as a cost leader to reduce their prices or keep their prices the same, which results in an increase in profit margins
How does differentiation lead to a competitive advantage?
*Differentiation occurs when the business makes the characteristics of their products/services different to those of their competitors
* Methods of differentiation include developing a strong brand, better design, better quality, and customer service
What is the impact of skills shortages?
- If a business is unable to find the labour with the required skills, it will affect its ability to gain a competitive advantage
- Cost leadership could be difficult to achieve if the workers lack skills, as they may not be as productive
- this could increase unit costs due to factors such as waste
*Product differentiation is less likely to occur where workers lack the skills and expertise to produce highly differentiated products - To overcome these issues, a business can use outsourcing and offshoring to access the skills needed for their business
