Global Markets and Business Expansion Flashcards
Trade between businesses in different countries, or a business in one country and consumers in another, tends to prompted by one or more of a number of common factors. What are the two categories can these factors be grouped into?
- Push factors: Adverse situations forcing firms away from its domestic market.
- Pull factors: These are opportunities to attract a business to a new foreign market.
What are the reasons why a firm may wish to leave its domestic market or at least remove a sole reliance on it?
(Push factors)
- Saturated markets.
- Competition.
- Shareholder pressure.
- Extending product life cycle.
What two ways can growth come about in a saturated market?
- Widen the range of products being sold.
- Sell to new markets.
What are the five pull factors?
RECAP
- Risk spreading.
- Economies of scale.
- Cost savings.
- Acquiring brands + intellectual property.
- Possibility of offshoring and outsourcing.
What is offshoring?
Moving one or more business functions to foreign country, usually to take advantage of lower labour costs.
What is outsourcing?
Contracting another business to perform a business function on your behalf. Frequently that function will be production, often performed by a business located in a lower cost country.
Why is risk spreading a pull factor?
Selling in only one country is a little like putting all your eggs in basket. Entering international markets is an effective way of spreading risk. If sales fail in one country, there are other markets where sales may remain stable. Although the process of entering a new market may cary an element of risk, as Ansoff pointed out, if that entry is successful, the overall risk faced by the business is reduced.
How can a business achieve economies of scale through international trade?
The opportunity to boost unit sales through successfully entering new international markets brings with it the opportunity to benefit from economies of scale. These will be accentuated if production is concentrated in a few locations globally. Not only will purchasing economies of scale be likely but also managerial, and technical economies of scale may arise. With economies of scale comes a reduction in unit costs, boosting profit margins.
What are common factors determining market attractiveness?
- Levels of disposable income.
- Quality of infrastructure.
- Growth of disposable income.
- Political stability.
- Ease of doing business.
- Exchange rates.
What is disposable income?
Money a household has available to spend from income after income tax has been deducted.
How does growing levels of disposable income represent an opportunity for business?
As people earn more, they spend more. In addition, they spend differently. As disposable incomes rise, new niche markets emerge, satisfying consumer wants rather than needs. Getting into these niches early can be a major step to success in a new country.
What affects firms looking to expand abroad with growing levels of disposable income?
Timing. Enter too early and there may not be a large enough market to break even. Enter too late and rivals may have already established brand loyalties.
How is ‘ the ease of doing business” measured?
- Days to start a business.
- Days to wait for a construction permit.
- Days to get electricity.
- Total tax as a % of profit.
- Days to import an item.
- Days to enforce a contract.
Infrastructure describes the services needed to make modern life function. What do these include?
- Road.
- Railways.
- Running water.
- Reliable electricity.
- Wifi and broadband connection.
What issues does political stability cover?
- Policy instability.
- Tax regulations.
- Labour regulations.
- Government bureaucracy.
- Corruption.
What is labour intensive?
A business process that relies more on people than machinery.
What is capital intensive?
A business process that relies more on machinery than people.
What is the assumed reason for lower costs in many countries since this factor can be overstated. What is the key thing to consider?
Lower wage costs. This can be overstated so the key thing to consider is how labour intensive the production process is. For many products, even in a lower cost country, production will be capital intensive.
What do you need to consider for the skills and availability of a workforce?
- Skills required to operate machinery may not be available in less economically developed locations.
- Literacy is an important skill, without a strong education system to provide literate staff with necessary skills, some countries will struggle to be seen as attractive locations of production.
Why might some multinationals take responsibility for improving local infrastructure in a location they choose?
Transport and utilities must be up to scratch for a modern manufacturing facility to be able to reliably service the markets its designed to serve.
How does a business assess a country for a production location?
SPELLINGC
- Skills and availability of workforce.
- Political stability.
- Ease of doing business.
- Location in a trading bloc.
- Likely return on investment.
- Infrastructure.
- Natural resources
- Government incentives.
- Costs of production.
Why are national governments keen to attract foreign companies to set up production facilities in their country?
- Job creation.
- Extra tax revenues.
- Benefits local suppliers.
- Increasing skill levels among local labour force.
- Potential for a positive impact on the balance of payment.
Why is it logical for firms to select locations near a plentiful supply of natural resources?
Companies need large quantities of relatively bulky raw materials at the start of the supply chain which are expensive to transport over large distances.
What is joint venture?
A formal agreement between two separate businesses to work together for a fixed time on a specific project.
What is the merger?
A merger occurs when two firms agree to come together to create a new, single business.
What is a takeover?
The takeover occurs when one business buys a controlling interest in another business.
What are the reasons for global mergers or joint-venture?
Spreading risk.
Entering new markets/trade blocks.
Acquiring national/international brand names/patents.
Securing resources and supplies.
Maintaining/increasing global competitiveness.
What are the challenges faced by a merger or takeover?
Synchronising IT systems.
Agreeing new policies and procedures.
Adjusting organisational structure.
Dealing with staff on certainties over job security.
What is global competitiveness?
Global competitiveness measures the ability of the business to succeed against both domestic rivals and foreign competitors in international markets.
What are the key benefits of the ability to compete effectively on a global scale?
Dominating the domestic market with minimal penetration from imports.
Ease of entry and strong competitiveness in foreign markets due to global brand recognition.
Who can the movement in exchange rates have a major impact on?
Companies which rely on export markets,
Companies whose domestic market is subject to competition from imports,
Companies which need to import significant quantities of raw materials or components.
What are the impacts of a high exchange rate on a UK business if the value of the pound appreciates?
Companies which rely on export markets will find it harder to sell their goods in foreign markets due to increased prices or they must accept lower profit margins.
Companies whose domestic market is subject to competition from imports will find their foreign rivals imported products seem cheaper to UK consumers if the pound increases in value.
Companies which need to import significant quantities of raw materials would benefit as the stronger pound buys more foreign currency, lowering their production costs.
What are the impacts of a low exchange rate on a UK business/consumer if the value of the pound depreciates?
Products seem cheaper in foreign markets, boosting export sales.
Imported products will become more expensive, increasing the competitiveness of domestic producers in their home markets.
Imported materials will now cost more, pushing up production costs unless the same materials can be sourced at home.
What are the three strategies to achieving cost leadership?
Raising productivity
Outsourcing
Offshoring
How can you raise the productivity of tangible non current assets?
Finding a way to ensure that a piece of machinery breaks down less often.
Gaining more output or revenue from the same assets means the unit cost will fall.
What is outsourcing?
Outsourcing means contracting another business to perform a business function on your behalf. Frequently that function will be production, often performed by a business located in a lower cost country.
What are the effects of outsourcing?
It can reduce running costs, it can also free up capital and space to invest in other processes which you can do cheaper than anyone else.
What is offshoring?
Offshoring means moving one or more business functions to a foreign country, usually to take advantage of lower labour costs.
When is offshoring a good idea for a business?
If unit costs are high simply because of prevailing local rates of wages and land, offshoring is a good idea.
How can skill shortages impact international competitiveness?
They may find themselves lacking in staff with appropriate skills to cope with changes in the market.
They may need to poach staff from other businesses which will require paying higher wages to coax staff from their existing employers.
