4.2.1 - Conditions That Prompt Trade Flashcards
What are Push Factors?
-There are some PUSH factors which may force a business to consider selling abroad;
• High levels of domestic competition
• Saturated markets with only low growth opportunities
Push Factor - Saturated Market
• A saturated domestic market means that a business or group of businesses has sold a product to just about everyone who will buy one
• While R&D is taking place the business needs to continue to trade and to grow and so will look for new markets for the products abroad
• E.g. Chinese smartphone manufacturers; Apple, Samsung, Huawei and LG all now sell to overseas markets
Push factor- high competition in home market
• High levels of competition in the home markets mean that a business will look abroad to where there may be less competition and lucrative market opportunities to trade
• An example is the food and drink market in the UK is very competitive but there is a very buoyant market for unusual food imports to other countries
Pull Factors Defined
• There are some PULL factors which may force a business to consider selling abroad;
1. Significant opportunities to sell to overseas markets
2. Ability to spread risk across more markets
3. Ability to gain economies of scale
Opportunities in overseas market
• Exporting is one way for a business to increase sales and this can contribute to increased profits
• An export opportunity may arise when demand increases for your product in other countries
• A business selling in overseas markets will be able to grow faster than those limited to domestic markets
Ability to Spread Risk
• A key benefit of exporting to other nations is that it allows the business to spread the risk
• By selling in other countries the business is less vulnerable to changes in the domestic economy
• Different countries may have different growth rates at any time, selling in multiple countries can give a balanced portfolio of growth
Ability to Gain Economies of Scale
• Exporting is an excellent way to drive production to a level that delivers economies of scale, particularly if the product or service is standard across export markets with little or no need for adaptation.
• Achieving greater economies of scale will allow the business to become more cost-competitive
Offshoring
• Offshoring is when a business relocates some of its production process to another country
• This may be to cut costs in terms of labour pay rates
• This may also be to take advantage of trade blocs or trade deals
Outsourcing
• This is where a business function, such as payroll, is contracted out to a third party business.
• This third party business may or may not be located abroad
• May be marketing research, legal work, accountancy or even human resources functions can be carried out by outsourced companies
• The most common example is a call centre in India
Outsourcing - Production
• This means sending some of the production to other companies to complete
• Some motor manufacturers now outsource not only parts but complete assemblies – steering, transmissions, engines, interior assemblies.
• 1/5 of Europe’s cars are sub- assembled in Eastern Europe
Outsourcing - Payroll
• Payroll is the most common task that companies outsource to other businesses who specialise in this task
• Services include weekly/monthly/quarterly payroll and will involve the completion of the complex HMRC paperwork
• Payroll includes the payment of taxes and NI contributions which can be beyond the skills of many self employed business owners
Purchasing
• Purchasing and maintaining information systems
• Hiring and evaluating IT staff and training users can be very costly and time consuming for SMEs
• By outsourcing the IT function the business can obtain the latest technology and suitably skilled personnel
Outsourcing - delivery
• Larger businesses might prefer to contract a major delivery firm rather than maintain their own fleet.
• Either way, the business can hire the expertise to keep delivery problems and decisions off their desk
• You can probably name at least 3 delivery companies
Extending the Product Life Cycle
By selling in multiple different markets you can extend the life cycle of the product
