Business Structures Flashcards
Joint Ventures
This is where 2 or more businesses agree to work together on a particular project and to create a separate business
Examples of Joint Ventures
Sony and Ericsson with SonyEricsson cell phones, News Corp (which owns Fox), Disney (which owns ABC) and Comcast (which owns NBC) with video streaming site Hulu
Why do Joint Ventures?
Shared costs and risks
Benefit from others expertise
Able to exploit each other’s strengths
Risks of Joint Venture
Management and culture clash
Different external forces
Holding companies
This is where a business that owns and controls a number of separate business, but doesn’t unite them into one company (they are all legally separate)
Examples of Holding Companies
Airline Industry
Advantages of Holding Companies
- Can operate in different markets to allow a high degree of diversification
- Easier to manage separate companies compared to one big one
Disadvantages of Holding Companies
- Cannot fully benefit from economies of scale if they are run indepenedently
- Diseconomies of scale; hard to make management and cultural changes if not united
Privatization
- The selling of state-owned and controlled businesses to the private sector
- Opposite to nationalization where a private business/sector becomes run by the state (e.g. some banks in Europe)
Examples of Privatization
State schools becoming private schools
1980’s in the UK: any business starting with the name British was a government run business; now they are all privatised.
Advantages of Privatization
- Increased competition (no more monopolies)
- More efficiency
- Faster Decision Making
- Lower Prices for customers
- More choices for customers
- Increased income for governments (opportunity costs)
- More income generated in economy (may lead to economic growth)
Disadvantages of Privatization
- Some industries can’t be privatised as they cannot be ran for profit.
Eg:
Lighthouse, army, search and rescue, refuse collection, police, fire
- Increased competition may not in reality lead to a better service.
Local businesses
- operate in a small and well-defined part of the country.
• They do not have expansion as an objective and make no attempt to expand to obtain customers across the whole country.
National businesses
- have branches or operations across most of country.
• They make no attempt to establish operations in other countries.
International business
- operate in more than one country.
• These are often called multinational businesses.
Multinational business
a business which has its HQ in one country but operates in many other countries/worldwide markets in:
• products,
• capital
• labour,
• These are unrestricted by barriers to entry
Globalization
• This is the increasing freedom of movement of goods, capital and people around the world.
Globalization Benefits
Global food production has led to malnutrition rates falling.
Better healthcare (AIDS medicine e.g.)
Less poverty
Opportunities for local employment
Business strategies to adopt to benefit from globalization:
- New location/outsourcing jobs
- Mergers and takeovers
- Increased sales, revenues and profits (huge markets)
- Cheaper resources (cost minimisation)
- Economies of scale
- Developing different products for different markets (Ansoff Matrix)
Problems of Globalization
Transport and translation costs
Different local markets trends and consumer tastes
Cultural backlashes
In India consumers wrecked McDonald’s restaurants for violating Hindu Dietary Laws
Canadian communities are fighting to keep Walmart out which will destroy their local shopping centres
Can lead to companies having to develop slightly different strategies, cultures and products to suit diverse communities around the world. This is referred to as ‘global localisation’
Emerging Markets
BRICS
Brazil, Russia, India, China, South Africa
MIST
Mexico, Indonesia, South Korea, Turkey
International Trade
- All of us are affected by international/global trade in goods and services.
- Trade is huge and, over the last decade, international transactions have been growing far quicker than expansion of the internal economies of countries around the world.
- This trade has major impacts on our economic performance.
- Free trade= When trade between nations is allowed to occur without any form of import restriction.
- The World Trade Organisation helps to promote free trade by persuading countries to abolish import tariffs and other barriers to open markets.
Benefits of free trade
- Specialisation- Free trade forces domestic firms to produce quality goods and services as they face much foreign competition
- Trade allows firms to exploit economies of scale by operating in larger markets.
- Economies of scale lead to lower average costs – a gain in efficiency that might be passed onto consumers through lower prices.
- Free trade encourages firms to export and import. This should encourage a greater choice for consumers and a higher standard of living
- Due to increased competition globally, free trade also stimulates product and process innovation
The limitations of free trade
Domestic firms will face fierce competition
Smaller domestic firms may struggle to compete against larger foreign firms
Could lead to these firms closing down
Less domestic firms producing goods = higher national unemployment
Could result in ‘undesirable’ lower quality goods entering the market
Protectionism
- Protectionism represents any attempt by a government to impose restrictions on trade in goods and services between countries
- Countries can implement barriers to the free movement of goods and services
2 main methods of protectionism
Tariffs and Quotas
Tariff
tax on imports and is used to restrict the demand for imports and at the same time raise revenue for the government.
Quotas
- An import quota directly reduces the supply of a product that is imported and reduces the amount of money that the export producers receive.
- These restrictions reduce the supply of imports to a market
- This leads to a rise in the price higher than the free market
- These benefit domestic producers who then face less competition in their markets.
- With less competition, this can lead to a rise in the price of the product
- So more £ for domestic firm
Other types of/methods of protectionism
- Voluntary export limits
- Embargoes
- Import licensing
- Regulations
- Bureaucracy
- Export subsidies
Voluntary export limits
an exporting country agrees to limit the quantity of goods sold abroad
Embargoes
total ban on imported goods
Import licensing
government grants importers the license to import goods
Regulation
this includes laws and safety guidelines – e.g. quality standards
Bureaucracy
lots of ‘red tape’ to make it confusing to sell imported goods
Export subsidies
payment to encourage domestic production by lowering their costs
Example = used by the EU is the Common Agricultural Policy (CAP) for European Farmers
The limitations of Protectionism
1) Protectionism keeps domestic firms away from genuine competition. They may become lazy and inefficient
• Firms that are protected from competition have little incentive to reduce production costs.
2) Protectionism – Hurting Consumers
• If the UK puts up trade barriers then other countries are likely to retaliate.
• Tariffs, non-tariff barriers and other forms of protection serve as a tax on domestic consumers.
3) Higher prices for consumers:
• Trade barriers in the form of tariffs push up the prices for imports
National vs. International business Strategies
- Decision of whether a firm chooses National or International business strategy depends on:
- Corporate objective (i.e. growth, new markets etc.),
- type of business,
- size,
- industry
- competitors reactions
Benefits from international business
- Growth
- Profitability
- Spreading risks
- Understanding of markets improved
Common problems with International business Strategies:
- Misunderstanding the culture
- Legislation
- Political factors
- Language/interpretation problems
- All of these can be minimised by….. careful research of the new markets
