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.
