The External Business Enviroment

Question 1

The effect of globalisation on businesses

Answer 1

1. Cost savings through purchasing, production and marketing economies of scale;
2. Choice of cheaper locations as businesses no longer stick to the one country;
3. Higher consumer expectations as customers can now browse the internet and compare products very easily
4. Challenge of multi-cultural societies as businesses move into new areas of Asia and the Americas
5. Access to cheaper raw materials as the cost of buying materials in developing countries is often less
6. Transfer pricing can reduce tax bills and therefore increase profits
7. Legislation may have limited growth in the home country
8. Low cost transportation allows organisations to transport goods all over globe
9. Opportunity to take advantage of lower wages and less restrictive (expensive) working conditions in host countries, therefore increasing profitability;
10. Organisations may find it difficult to react to changes in the local market if they have no local knowledge

Question 2

Reasons for the growth of multinationals

Answer 2

1. Increased market share and dominance - Existing on a larger scale allows for market dominance as you quickly become associated with a particular product or service and become the go to business for that product
2. Can avoid import tariffs - any product that is imported into or exported out of the UK is subject to import taxes being applied. One way around this additional charge is to manufacture the product within the country of sale
3. Falling cost of transportation of people and goods - The cost of freight and passenger travel continues to come down, as competition increases and the cost of oil drops. This means that it is more economical for producers to export across the globe. This will result in transportation being less of a reason against setting up in a foreign country
4. Low cost communications enabled by ICT - Video conferencing, audio conferencing, VLEs and cloud computing have all resulted in the increase in global growth. It is now just as easy for employees from different countries to meet as it is for employees in the same office
5. To gain economies of scale - the more you produce of something, the cheaper it becomes to produce one item. This is because businesses become more efficient the more thy make, waste is reduced with practice and discounts become available when large quantities of raw materials are ordered. Many MNCs will manufacture their raw materials in house (backward vertical integration) which reduces costs further.
6. To avoid monopoly legislation in its home country - Monopoly legislation exists to ensure that consumers are protected against price rises. If no competition exists, a business would be free to increase their prices, knowing that customers cannot go elsewhere for that product or service. In the UK, the Competition Commission exists to ensure this does not happen. This may result in certain organisations being unable to grow within their home country, prompting them to set up in an additional country.
7. Markets are saturated in the home country and new markets need to be found elsewhere - There comes a point when an organisation outgrows its market, due to prolonged dominance or a platitude of competitors entering the market

Question 3

Advantages of foreign direct investment (FDI)

Answer 3

1. The ability to access new overseas markets or better serve existing markets
2. To take advantage of lower manufacturing and wage costs
3. To access new technology and skills - particularly in R&D
4. To locate a business function near clusters of similar or related companies

Question 4

What is foreign direct investmet (FDI)

Answer 4

Occurs when overseas companies set-up or purchase operations in another country e.g new projects, expansions of existing projects, or mergers and acquisitions activity.

Question 5

Disadvantages of foreign direct investment (FDI)

Answer 5

1. If the firms bought were previously struggling to maintain custom and reputation
2. It may take a long time to build up confidence again, especially if the business is seen operating as the same organisation but under a different name
3. It is costly to rebrand and update signage and equipment
4. Investing directly in a country to set up a new operation will take a lot of time
5. New staff need to be hired and trained and new sites need to be sourced and premises built

Question 6

What is a joint venture

Answer 6

A joint venture is formed when two or more businesses undertake a project together. They each agree to contribute capital for the project and then share in revenues, expenses and control of the enterprise.

Question 7

Advantages of joint ventures

Answer 7

1. Able to learn from one another
2. The cost of the short term venture can also be shared, meaning a greater return on the investment for the two businesses involved in the venture
3. Once venture is complete, the businesses can take what they have learned and continue to apply this knowledge to their existing business
4. During the time of the venture the businesses can benefit from : economies of scale; stronger, more competitive operations; access to more customers and increased profits

Question 8

Disadvantages of joint ventures

Answer 8

1. Specialist knowledge is lost to a future competitor as joint ventures do not last
2. The venture may not succeed as both parties need to be willing to compromise
3. This may not be possible if the separate businesses want to push the venture in different directions
4. Risks are shared, but so are profits meaning each business will not receive the maximum return

Question 9

Two methods of foreign direct investment (FDI)

Answer 9

1. Creating new facilities in the host country - this method takes time, effort and finance, e.g. building, hiring, training. An advantage is that it can effectively replicate corporate culture.
2. Building over an existing company in the host country - this is a quick way to expand into new markets. The advantages are that an overseas company can gain knowledge and experience of local markets and can often buy loss making companies and turn them around

Question 10

What is a takeover

Answer 10

A takeover is the term used to describe when one company literally “takes over” another company. This usually results in the company being taken over being rebranded

Question 11

What is a voluntary takeover

Answer 11

Is when a company puts itself up for sale

Question 12

What is a hostile takeover

Answer 12

Is when a large company buys enough shares in another company to force through a takeover

Question 13

What is a merger

Answer 13

A merger is where two companies integrate on equal terms - a “friendly” combining of companies, where elements of both brands/names will be retained

Question 14

What is organic growth

Answer 14

Organic growth is where a company grows naturally, without becoming involved in merging with or taking over another company. This can be achieved through increasing sales and opening new branches, or launching a new product range

Question 15

What is horizontal intergration

Answer 15

It occurs when two companies which operate at the same stage of production merge to become one entity. The reasons for doing this include market domination, avoidance of future takeovers and increased efficiency

Question 16

What is vertical intergration

Answer 16

It occurs when two companies which operate at different stages of production in the same industry decide to join. Advantages here include increased efficiency and less need to contract out work to other companies as more expertise at all stages of production is now available

Question 17

What is forward vertical integration

Answer 17

It occurs when an organisation takes over a customer

Question 18

What is backward vertical integration

Answer 18

It occurs when an organisation takes over a supplier giving a guaranteed source of stock

Question 19

What is diversification

Answer 19

It is the result of the takeover or merger of different firms operating in different markets

Question 20

What are the reasons for diversification

Answer 20

1. Growth and development;
2. Spread of risk in case one area of the business fails;
3. Acquisition of assets;
4. Collection of new knowledge and experience

Question 21

Whats is deintegration/demerger

Answer 21

Is where an organisation splits into two separate businesses. This allows each business to focus on their core activity and therefore improve efficiency and performance.

Question 22

What is divestment

Answer 22

It’s where a business chooses to sell off less profitable or loss making elements of operations or some assets. This raises finance which can be invested into improving remaining areas of the business.

Question 23

What is a franchise

Answer 23

Its a contractual agreement in which the owner of a business idea or name (franchisor) gives another person or company (franchisee) the right to sell a good or service or use a company name under the specifications of the franchisor

Question 24

Advantages of a franchise for a franchisor

Answer 24

1. It enables them to increase their market share with little investment
2. It gives them a steady stream of income
3. Receives a percentage or turnover or set royalty payments

Question 25

Disadvantages of a franchise for a franchisor

Answer 25

1. Only receives a small share of profits

2. Reputation can be tarnished by franchisee

Question 26

Advantages of a franchise for a franchisee

Answer 26

1. The risk of failure is reduced as they are selling a branded product or service
2. Additional brands can be added to existing portfolio very cheaply
3. Recognised brand therefore minimal advertising needs
4. Training and support offered by franchisor

Question 27

Disadvantages of a franchise for a franchisee

Answer 27

1. Can be costly to buy a successful franchise
2. Franchise contract may not be renewed
3. Has less control over products, selling prices and store layout
4. Royalty payments of a percentage of profits are paid to franchisor

Question 28

What is transfer pricing

Answer 28

It is used when a multinational declares profit in order to reduce tax liability

Question 29

Benefit of transfer pricing on a MNC

Answer 29

1. The abiliy to reduce the amount of tax paid - reductions in outgoings/costs will boost profits
2. The MNC may have a legal agreement with the host country to pay less tax as a condition of setting up in the host country which reduces the possibility of having to a large tax bill

Question 30

Cost of transfer pricing on a MNC

Answer 30

MNC reputation ay be negatively affected by home/host consumers protest against it - boycotting company reduces sale - MNC can be taken to court by a host court if felt they may have used a transfer price

Question 31

Benefits of transfer pricing on a host country

Answer 31

A country that has low tax rate will encourage multinationals to operate in that country to use transfer pricing to pay lower tax - this will create employment and improve wealth as a country

Question 32

Cost of transfer pricing of a host country

Answer 32

Not able to make much tax return

Question 33

How does transfer pricing minimise overall tax liability

Answer 33

A company’s profit is declared in the country with low taxes, thus shifting the profits to reduce the overall taxes paid by the multinational group. The multinational will set a high transfer price when transferring goods to subsidiaries based in high tax countries and a low transfer price when transferring goods to subsidiaries in low tax countries. - This has the effect of lowering profit margins in the high tax country so less tax is paid in that country but it increases profit margins in the low tax country. However, as the amount of tax paid in the low tax country is relatively small compared to the high tax country, the overall tax payable has been minimised.

Question 34

Advanatages to a host country

Answer 34

1. Gross National Product (GNP) will increase. This is the measure of the amount of goods that were produced and sold within a country. A higher GNP shows strong economic activity which results in further investment in that country and a good independent rating
2. More direct employment opportunities are created by the multinational and many indirect jobs are created as a consequence. Often employees learn new skills which can be transferred to other employment opportunities
3. Tax raised from multinationals profits is a source of revenue for the government
4. Local companies can benefit from technology transfer improving their skills and making them more efficient as MNCs will bring the technology knowledge from the home country to the host country
5. Competition within the host country can be stimulated leading to improved efficiency and increased productivity - both directly improving GNP further
6. Greater choice of goods and services are now available within the host country, leading to higher sales and increased taxation collected by government

Question 35

Disadvantages to a host a country

Answer 35

1. Multinational profits are repatriated to the home country - this means some of the profits can be returned to the home country and not reinvested in the home country
2. Multinationals usually employ staff from the home country in managerial positions and use the local labour for the lower skilled jobs
3. Multinationals may be socially irresponsible by exploiting local resources for a number of years and then relocating back to the home country
4. Multinationals have no loyalty to the host country and can easily switch production to another location to suit their needs resulting in job losses and lowering economic growth
5. Multinationals can manipulate transfer pricing between subsidiaries to reduce their tax liability. MNCs can move stock from one country to another at an inflated or deflated price to impact the amount of profit made - they may wish to record a stronger profit in a country with lower tax rates and a lower profit in a country with a higher tax rate
6. Local companies may be forced to close because they cannot compete with larger companies
7. Local governments can feel pressure from large MNCs to offer incentives to keep them operating within the country

Question 36

Advantages of home country

Answer 36

1. Creation of additional high quality technical and managerial jobs at the MNC’s HQ - enhance spending power in the UK as the nationals employed to these new positions are financially rewarded according to the amount of responsibility they are given
2. People seeking further and higher education due to less demand for unskilled labour - as unskilled work moves abroad UK citizens will retrain, benefitting themselves as well as the taxation received by government
3. Company profits are returned to home country which boosts balance of payments - a UK business may own a business overseas and send back some of the operating profits to the UK
4. Demand for home country exports can increase if foreign subsidiary creates a demand for them
5. Other firms in the home country may gain opportunities from any expertise gained which will in turn create wealth for the country in the form of increased taxation collected

Question 37

Disadvantages of host country

Answer 37

1. Employment opportunities may be reduced as MNCs wind down operations leading to less tax revenue for government and increased spending on unemployment benefits
2. Increased burden on government to provide college and university places
3. Balance of payments suffer in the short run from the outflow of money to the foreign country as profits are reinvested in the host country to provide additional capital investment on buildings, machinery, etc.
4. Increased burden on government to provide training and skills development to help workers find suitable jobs
5. Competition from foreign-based subsidiaries may lead to greater need for home-based companies to become more efficient or result in losing customers and profit.

Question 38

What is the single market?

Answer 38

It extends the EU’s basic principle of free trade to cover free movement of factors of production within the EU

Question 39

Benefits of the single market

Answer 39

1. Reduced production costs because of free movement of goods and common standards
2. Opens up new markets to businesses leading to new opportunities
3. Efficient companies producing for a larger market can benefit from economies of scale
4. Consumers can benefit from increased choice and cheaper products
5. Innovation in the creation of new products improves as businesses compete for customers
6. Innovation in processes and procedures improves as businesses strive to cut costs whilst simultaneously maintaining quality

Question 40

Costs of the single market

Answer 40

1. Can have a short term negative impact on some sectors of the economy due to increased international competition
2. Business that previously had market protection and national subsidies may find it difficult to compete in such an open market leading to failure and unemployment in the country
3. Differences in cultures and tastes may prove to be a barrier in entering some markets

Question 41

What is the social chapter

Answer 41

The Maastricht Treaty of 1992 sought to bring members of the EU closer together by creating the Social Chapter. Its aim was to create a “level playing field” for all EU members as regards conditions at work

Question 42

What are the initives of the social chapter

Answer 42

1. Join a trade union;
2. Take industrial action;
3. Have a minimum wage;
4. Take parental leave (either gender)
5. Have a maximum 48 hour working week
6. Have at least four weeks paid annual leave;
7. Participate in decision making

Question 43

Social chapter efects on a business

Answer 43

1. Workers become more motivated as working conditions are improved
2. As a consequence productivity usually increases;
   better industrial relations and worker participation due to improved consultation
3. Raises labour costs to business (eg minimum wage)
4. More difficult to compete on price basis with non EU firms e.g. China and India
5. Increased regulations make labour market less flexible

Question 44

Positive effect of China on UK businesses

Answer 44

1. Inward investment - the investment China provides to UK businesses is expected to pass £105 billion ($170 billion) in the emerging energy, property and transport sectors by 2025
2. Cheaper materials - raw materials from China may be cheaper due to lower wage rates/lower production costs in these countries. China does not have a national minimum wage, but sets a minimum per region. The average minimum wage across China is £0.79, compared to £6.50 in the UK
3. Newer technologies - owing to its vast size, population and GDP per capita, China have access to newer technologies, allowing for better quality products to be manufactured and used in UK production processes. This allows them to be at the cutting edge of product innovation
4. Production processes - UK businesses can learn from the production processes of Chinese businesses. China manufactures 90% of the world’s computers, 80% of all air conditioners and 70% of all mobile phones. This means they also have the largest knowledge of how best to manufacture these products. Chinese companies investing in the UK will bring the lessons they have learned with them, resulting in a technology transfer to UK businesses
5. Large market - China has a population of 1.4 billion people, meaning UK businesses have a larger market in which to export their luxury goods

Question 45

Negative effect of China on UK businesses

Answer 45

1. Price wars - the wage and manufacturing costs of products coming out of Asia are much below that of the UK. As a result, UK businesses may have to lower their prices to compete with Chinese businesses
2. Buying power - the buying power of Chinese businesses may leave UK businesses vulnerable to a takeover.
3. Corporate culture - cultural differences could make trading with China problematic as UK businesses may be unfamiliar with local customs and cultures. The Chinese are very respectful people, and do not appreciate tardy appearances or time keeping. Language and currency differences may also reduce the success of international trade
4. Transport costs - with a distance of almost 5000 miles between China and the UK, transportation costs will be high. Importers must also take account of the time taken to transport. As environmental awareness increases, less consumers want UK businesses to trade with Asia, given the increased carbon footprint of doing so

Question 46

What are business ethics

Answer 46

They are moral principles underpinning decision making.

Question 47

Why might a business introduce an ethical code of practice

Answer 47

1. To help define what is acceptable behaviour;
2. To promote the highest standards of behaviour;
3. To have a benchmark against which employees/owners can compare themselves to
4. It provide a means of establishing an individual identity

Question 48

What is meant by ethics

Answer 48

Ethics are moral principles, not guided by law but by the conscience of consumer and corporate behaviour. The art of doing good for others

Question 49

What is social responsibility

Answer 49

It takes into account the needs of external stakeholders, ensuring the business contributes to society

Question 50

What is corporate social responsibility

Answer 50

It refers to a more holistic approach that an organisation takes to meet or exceed both internal and external stakeholders’ expectations beyond those of simply making profits and meeting legal obligations

Question 51

What are things corporate social responsibility cover

Answer 51

1. Community involvement - CSR requires organisations to treat their local community with respect and to engage in some kind of community investment. This can be through: by offering your staffs’ time and skills in developing and maintaining local projects
2. CSR employers treat their staff fairly, equally and value diversity. This is done through: being fair in the recruitment and promotion processes
3. CSR means doing more than complying with the law in treating the environment with respect by:
   reducing energy consumption and minimising waste
4. CSR means you have an obligation to best serve the interests of stakeholders, e.g. customers, shareholders, government, wider society, by:
   meeting conflicting stakeholder demands, e.g. maximising ROI for investors while providing high quality and low cost for customers

Question 52

Costs of pursuing a policy of CSR

Answer 52

1. Increased business costs lead to a reduction in dividends for shareholders
2. Turning down a lucrative contract because you disagree with the prospective client’s business philosophy
3. Raw ingredients in food production are more expensive, e.g. when using organic ingredients

Question 53

Benefits of pursuing a policy of CSR

Answer 53

1. It will improve the business’s public image and strengthen the brand
2. It can attract good quality staff and improve employee retention and productivity
3. Due to the increase of ethical investors the business can access new sources of capital for expansion
4. You may be less likely to face litigation and fines

Question 54

Explain the difference between social responsibility and corporate social responsibility

Answer 54

Social responsibility refers to an organisation’s obligations to all its external stakeholders in the widest sense whereas corporate social responsibility goes further to include obligations to both internal and external stakeholders

Question 55

What are the main policies that the government uses in its approach to managing the economy

Answer 55

1. Fiscal policy - involves changes in taxation and spending within the economy. This impacts businesses because if business taxation increases it means less profit for the business and may curtail its growth plans. Main taxes affecting business are income tax, corporation tax, VAT and capital gains tax
2. Monetary policy - is designed to control the amount of spending in an economy by altering interest rates, the money supply and exchange rates. When interest rates go up the cost of borrowing increases for both businesses and consumers. This impacts businesses as it can have an adverse affect on its cash flows, increases business costs as the cost of borrowing increases and it will likely reduce turnover as consumers now have less disposable income than before
3. Regional policy - aims to redress the balance in terms of employment, income and wealth between areas of the UK. A variety of incentives, such as grants, rent-free and rate-free premises, providing training programmes for employees, are given to companies who locate in less affluent areas in order to create employment and wealth in these areas
4. Fluctuations in the Exchange rate alter the value of UK sterling against other currencies. Governments often try to manipulate exchange rates in an effort to maintain business competitiveness. It can influence the exchange rate by using its gold and foreign currency reserves held by its central bank to buy and sell its currency or it can use interest rates through its monetary policy

Question 56

What are ways in which the government influences business activity

Answer 56

1. Through taxation and spending, as governments can finance new initiatives and give grants to promote businesses as well encourage multinationals to set up
2. Through laws, directives and regulations such as the change to shared parental leave and other flexible working practices
3. By encouraging business activity through subsidies;
   by providing advice and support through government agencies such as Skills Development Scotland and Princes Trust
4. By working closely with new business start-ups to provide them with advice, partners and trade opportunities
5. By providing grants and emergency loans when a business is in crisis or facing liquidation

Question 57

Describe some external influences on business

Answer 57

1. Social - this relates to changes in society and social structures. e.g. changes in demographics, changes in patterns of demand
2. Political - this relates to ways in which changes in government and government policies affect businesses, e.g. competition policy.
3. Technological - this provides opportunities for businesses to adopt new innovations and invention to cut costs and develop new products/services.
4. Legal - this relates to changes to laws and regulations and how they impact on the ways in which businesses operate.
5. Ethics - some ethical decisions may involve turning down lucrative contracts but can bring rewards of increased sales if a business is perceived as an ethical one by consumers.
6. Economic - this relates to changes in the wider economy. A growing economy provides businesses with greater opportunities for growth while one in recession does the opposite. Therefore changes in interest rates, exchange rates, inflation, unemployment may impact on a firms strategic plans.
7. Environmental - this relates to what businesses are doing to protect the environment and is often part of their CSR policy.
8. European Union - this relates to issues such as enlargement and EU directives and regulations.

Question 58

What are technological developments used by businesses

Answer 58

1. More advanced and sophisticated computers;
2. Many business transactions are now carried out using the internet
3. Computer-aided design (CAD) and computer-aided manufacture (CAM), enables non-technical clients to experience and comment upon the project during the design stage
4. Video conferencing - many more sophisticated PC’s are being bundled with video conferencing software; this means that businesses can easily communicate with clients and suppliers across the globe without the need for expensive software. Potential job applicants can use video conferencing software to complete an interview rather than travelling to another county.
5. Internet banking - all major banks now offer this service although there is still some concern over its security.
6. Websites such as Office 365 and Dropbox mean that businesses can securely store all content in the cloud. This means that files can be accessed from anywhere with internet access whilst still remaining secure

Question 59

Explain ways in which ICT can enable a firm to be more competitive in world markets

Answer 59

1. It can improve communications between companies and their customers through continuous access
2. It can provide links so that customers can buy and pay online and have access on the status of their orders whilst providing customer advice and support
3. Having access to customers’ personal details allows the company to email information to them about new products and services that may be of benefit to them
4. Online surveys and market research can be carried out to ensure current products and services meet customer expectations.
5. Companies can set up their own internal intranet to manage email and video conferencing which enables swift communication between all parts of the organisation This helps maintain an efficient communication system within the company and can coordinate projects or developments that are taking place in different locations within the company

Question 60

Costs to businesses of technological change

Answer 60

1. Staff training and investment in, and renewal of, ICT equipment
2. E-security breaches from fraud, hackers, viruses
3. Loss of face to face customer contact minimising the personal touch
4. Complying with the General Data Protection Regulation (GDPR) and Computer Misuse Act (1990)

Question 61

Benefits to businesses of technological change

Answer 61

1. New products can be developed relatively cheaply
2. Average cost per unit can be reduced
3. Faster communications between suppliers and customers
4. Employees can access data readily to enable them to work from home

Question 62

What is eccommerce

Answer 62

It refers to business transacted using electronic media, primarily the internet

Question 63

What are the various forms of eccomerce

Answer 63

1. B2C - Business to Consumer - consumers order direct from the business and the goods are delivered to their homes
2. B2B - Business to Business - companies order direct from their suppliers, receive invoices and make payments.
3. B2G - Business to Government - government orders direct from the business

Question 64

Why is the volume of B2B transactions much higher than the volume of B2C transactions

Answer 64

This is because businesses have adopted electronic commerce technologies in a greater percentage than households. In a typical supply chain there will be many B2B transactions but only one B2C transaction, as the product is retailed to the consumer. Retailers are more involved in B2C transactions while manufacturers are more involved in B2B transactions

Question 65

Advantages of e-commerce

Answer 65

1. Can find out if products are in or out of stock
2. Can increase global market share
3. Customer data can be used for marketing
4. Improved relationship with suppliers
5. Often reduces lead time
6. Saves costs and improves efficiency

Question 66

Disadvantages of e-commerce

Answer 66

1. Concerns about security when purchasing/banking online
2. Delivery problems
3. Fear that retail shops will be replaced by storage warehouses
4. Shopping is more impersonal and less of a social affair

Question 67

Why is internet shopping booming

Answer 67

1. Online shopping is convenient, saves times and costs and gives consumers more choice, customisation and control;
2. Consumers are becoming increasingly confident in shopping online
3. As broadband internet use is spreading, faster browser speeds enable consumers to compare more sites