Theme 4 - Global markets and business expansion Flashcards
Push factors
Something that is forcing the business to look at trading in another country
Motivates a firm to look at opportunities in other countries away from domestic markets
What do push factors include?
- Saturated market
- Competition in market
A domestic market
The home market of the business e.g. if the business is a UK business its home market is in the UK
Saturated market
One in which all consumer demand has been or is being met and has reached its peak, becomes challenging for businesses to grow and expand in the domestic market
* Prompts businesses to explore markets in global markets, which can help sustain their growth and profitability
* May move into emerging markets - unsaturated overseas can help increase sales
Intense competition
- High levels of competiton reduce sales and profitability - forced to internationally trade where there is less competition
- Reduce reliance on a single market and diversify their revenue streams - reducing their exposure to market voitality and competition
- Change in domestic govt policies
- Change in local consumer preferences
Pull factors
Something that is forcing the business to look at trading in another country - makes it attractive for a business to trade abroad
* Likely to be opportunities - in overseas markets- grows faster than domestic markets as demand in other countries increases
What are pull factors?
- Economies of scale
- Ability to spread risk
- New and untapped markets, more profitable markets, education and training, lower production material costs high avaliability of resoucres
Economies of scale
- Businesses might expand to achieve eos which will reduce their unit costs
- Expanding is an excellent way to drive productions to a level that delivers eos
- Strong pull factor for firms that need global eos in order to grow and survive
- Allows business to become more cost competitive
Ability to expand
- Expanding a firm to sell in several overseas markets can reduce the costs and downturns in one market
- More able to spread risks, more able it is to be stable
Other
- New and untapped markets, more profitable markets, education and training one market given residents specific skills and knowledge
- Lower production, material costs, higher avalibility of resoucres, ability to ontain overseas trade
Product lifecycle extension
Represents the value of sales frome time it is introduced until it is no longer sold anymore
The stages include introduction, growth, maturity and decline
Product may be at different stage of product lifecycle in different markets
An extension stratergy
A stratergy used by a business to lengthen the life cycle of a product e.g. selling in multiple markets
Offshoring
When a company moves part of the production process, or all of it, to another country
In countries with emerging economies and offer cheaper labor, costs
Reasons for offshoring
- Lower labour costs
- Access to raw materials
- Access to skilled labour
Advantages and Disadvantages of offshoring
Ads:
* Lower labour costs - help keep business costs down and increase profitability
* Access to specialised suppliers in countries abroad who provide better quality service
* EOS as businesses sell to larger international markets
* Increase jobs and qol in a country locating in, investments
Dis:
* Public relations and employer/employee relations may suffer due to relocation as domestic workers lose jobs - loss of investment in home country, exploited workers in host countrys
* Increased cost in short term e.g. relocation costs
* Possible poor customer service due to language barrier
Reshoring
When a business moves its departments back to its country of origin
Changing consumer behaviours/attitudes as customers are becoming more away of firms overseas attitudes - bad repuation if treat staff badly overseas
Outsourcing
When a business contracts out some activities to other businesses
Reasons for outsourcing
- Allows businesses to focus on core competencies
- Reduced demand
- Easier to comply with rules and regulations in countries
- Skills they dont specalise in
Advantages and Disadvantages of outsourcing
Ads:
* Businesses take advantage of specalist skills
* Cost effectiveness - no permanent staff costs
* Benefit from higher labour productivity in other countries
* Accept other contracts
Dis:
* Damage to brand image - values of one business may not align with other
* Poor communication between businesses can cause issues
* No control over the quality of outsourced work - negative effect on reputation
Assessing a new market abroad?
- Ease of doing business
- Infrastructure
- Political stability
- Exchange rates
- Levels and growth of disposable incomes
EODB
- Rules and regulations involved in establishing a business in a particular market may be relativley simple or extraordinarly hard
- Issues to consider include; accessing credit, registering properties and enforcing contratcs
- If businesses face signifcant challenges setting up a business - leads to delays in operations and the business generating sales
- Businesses will trade easily with countries with similar culture, langauges etc
- Businesses enterting international markets need to take into account the laws, trade barriers etc of the country they are entering into
Infrastructure
- The physical systems and services a country has that allow society and businesses to work effectivley such as roads, transportation and communication
- Good infrastructure improves the production process and delivery of goods and services to the customer which reduces costs and increases sales - a country w poor infrastructure would be difficult market for a business to operate in
- Avaliability of technology affects size of the market
- If needs to buy/sell w poor infrastructure - pay to improve - costs rise
Levels of growth and disposable incomes
- Selling in countries with higher disposable incomes - more sales
- Selling in countries with lower disposable incomes - slower growth of sale
- Businesses should look into trends of incomes overtime - any potential rise in sales
- Expand into emerging economies - rising incomes
Exchange rates
- Attractiveness of a country depeneds on where it imports/exports and increase or decrease in exchange rates
- Exchange rates can be subject to extreme fluccuations due to external factors - should look at historical trends
- Businesses moving into strong currencies can i,port raw material and components for production at a lower price - exports more expensive
Political stability
- Businesses may be at risk of not gaining a roi in a country with political instability
- At risk of unpredictable policyt changes - affects employment
- Subject to corruption, lack of law enforcement and higher levels of crime
- More likley to have a disruption to trading
- A stable economy and govt is less risky investment for the business
Assessment of production locations abroad?
- Costs of production
- Skills and avaliability of labour force
- Infrastructure
- Location in trading bloc
- Ease of doing business
- Government incentives
- Political stability
- Natural resources
- Return on investment
Costs of production
- Businesses want to keep costs of production low as this can help them increase their profit margin or allow them to sell at a lower price to gain a comeptitive advantage
- Costs of land and office space often cheaper overseas aswell as utilities like water and electricity
Skills and avaliability of labour force
- Quality of workforce important as it will directly impact the quality of good and services produced in an economy
- Businesses will need to consider factors such as literacy rates and whether the workforce has the right skills needed for the business
- Businesses may look at the size of the labour force and also locate production where labour costs are lower
Location in trading bloc
- A business within a trading bloc will be able to access many advantages such as reduced protectionist measures
- May relocate to be within a trading bloc to benefit from this
EODB (PRODUCTION)
- A business will want to relocate in an area where there is limited bureucracy so that the process of establishing a business production facilities is not delayed or has high costs
- A business will consider a countrys regulations such as enviromental protection laws that say how much pollution firms can release, reaction of people living there, proximity to markets they want to sell in
Government incentives
- Businesses may be offered incentives by the governmemt such as specalist advice, lower corp tax rates and tax relief, offering loans with low interest rates, grants for training staff
- Govt do so to attract fdi - bring money into country through increased employment and tax revenue
Political stability
- A country with political instability - corruption, lack of law enforcement, higher levels of crime
- A country with political stability and stable economy is seen as less of a risk
Natural resources
- Businesses may locate where they have easy access to the raw materials as they need - reduces delays and cost of transporting materials
Return on investment
- Reduce the risk of initial investment not being paid back
- Firms may use investment apprasial to compare the roi of different potential locations for production
Infrastructure
- Businesses need to consider the infrastructure needed such as roads as this will affect the production process
- Businesses may also consider the avaliability of services, banks, it
- May look at the utilities avaliable - waste disposal, energy supplies
- The standard and effectiveness of security avaliable
A global merger
A permanent agreement betweeb two businesses from two different countries join together
A joint venture
Where two businesses join together to share their knowledge, resources and skills ro form a seperate business entitity for a limited period of time
They share equity and profits of the business
Reasons for joint ventures/mergers?
- Spreading risk
- Access to different markets
- Securing resources and supplies
- Acquiring national/international brand names/patents
- Maintaining/increasing global competitiveness
Spreading risk
- Businesses operating in different markets spreads the risks associated with fluctuating economic conditions
- If there is an economic downturn in one country/market they will still gain sales in another market that is less affected
- A foreign firm in a joint venture/merger should bring good knowledge of the local market customs and legal requirements - reduces these risks
- Any risk shared between partners in a joint venture
Access to different markets
- Entering a market using a merger/ joint venture is quicker than using organic growth
- If one of the firms is within a trading bloc - the other firm will also have access to the bloc w/o paying tariffs
- May enter to avoid govt restrictions on businesses
- A business with MEDC with a slow growing market might invest in a business in a LDE with an emerging economy - more growth
- In EME many govts insist that foreign businesses can only operate as joint ventures as it can benefit domestic businesses
- Firms in LDES enter into mergers with MDEC access to more established markets
- Form joint venture with local economy - gain knowledge of local markets
Securing resources and supplies
- Businesses can strategically merge or create a joint venture with another business that has access to resouces - quickly gain access to these resources - helps speed up the production process - one firm might have good access to the resouce
- Businesses might enter into a merger.joint venture with its supplier of raw metrials which will give the firm greater control over the quantity, and reliablity of price
Acquiring national/international brand names/patents
- A patent is a legal right given by the government to an individual or business to make, use or sell and invention to exldude others form doing so
- Using a merger/aquisition is a method businesses can use to get access to intellectual proteporty or a business with strong reputation
- MNCS have better resources than smaller businesses such as marketing expertise and distribution channels - make better use of patents
- Firms also entet to obtain a well known national ot international brand na,e likley to gain customers from already exisiting brand and increase brand recogniton
Maintaining/increasing global competitivness
- Increase their global dominace - expanding - benefit from eos - which will reduce unit costs - reduce prices - more competitive
- May enter to remove competitor from the market
- Give access to new technologies, expertise, skilled workers, new products - more innovation, more competitive
- Enter with several firms that make similar products to maintain competitvness through diversification with different products each servce diff market any loss of sales of one could offset the sales of another business
Global competitiviness
The ability of a business to perform better than ts rivals across markets in different countries
What factors affect global competitivness?
- Fluccuations in exchange rates
- Competitive advantage; cost leadership and differentiation
- Skills shortages
Currency appreciation
The value of one currency increases against another currency
Advantages and disadvantages of currency appreciation
Advantages:
* If a business imports raw materials and components from abroad they will now be cheaper
* This will help a business to increase costs and increase their profit margin
Disadvantages:
* If a business exports goods/services to foreign consumers the goods will be more expensive for international customers
* This may lead to a fall in sales as consumers now shift demand to domestic businesses
Currency depreciation
The value of a currency decreases against another currency
Advantages and disadvantages of currency depreciation
Advantages:
* If a business exports goods/services abroad they become more competitive because their products are cheaper to purchase
* In the domestic market there may be less competiton from foreign firms as imports are now more expensive for domestic consumers to purchase
Disadvantages:
* If a business imports raw materials or components from abroad they are now more expensive
* This leads to an increase in the costs of a business which could then be passed onto consumers in the form of higher prices
Competitive advantage
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices
Businesses can gain a competitive advantages through cost leadership and differentiation
Cost leadership
When a business becomes the lowest cost producer in their industry
Lower prices increase competitivness - attract customers and increase market share
This can be achieved through increasing their productivity of workforce, using machinery and technology effcientley, outsourcing and offshoring
Businesses with low quality aim for cost leadership
Differentiation
- When the business makes the characteristics of their products/services different to those of their competitiors
- Methods of differentiation; developing a strong brand, strong usp, better design and quality and customer services
- Firms can use differentiation to charge higher prices - products with lower ped is good for
- Differentiation can only be used in the long term if firm possess a barrier to entry - w/o barrier to entry another firm could copy the usp - No longer differentiated
- Differentiation can be used to attract customers that place high value on product characteristics such as brand or design - outsource to ensure high quality production
The impact of skills shortages
- If ability to obtain skilled labour is difficult - affect their ability to gain a competitive advantages
- Due to increased production costs as a result of having to rise wages, could use less skilled staff but that would mean a reduction in quality and unskilled workers - can train but leads to increased costs and thus less comeptitivness
- Whole countries can have skills shortages - lack of training - migration - offer incentives to reduce the skills shortage
Evaluation of CL and D
- Businesses that rely on product differentiation - require highly skilled workers - therefore are more affected by the skills shortage
- Costleadership difficult to achieve if workers lack skills - may not be as productive - can lead to increase costs such as waste
- In order to overcome these issues a business can use offshoring and outsourcing to access the skills needed for their business
Advantages and Disadvantages of global mergers and aquisitions
Advantages:
* Economies of scale gained from costs being spread over larger output which can lead to increased profit margins
* Diversifying risk due to having products in several markets so there is a fall in sales of a certain product the business can still generate profit from other products
* Opportunity to enter new markets which might otherwise be closed to the business
* Access to knowledge and resources
Disadvantages:
* No guarntee a business will gain a return on investment if it is not a successful merger
* Diseconomies of scale can occur due to communication issues and a lack of control as the business expands
* A culture clash between the two businessess can affect the quality of business - poor sales
* When two businesses merge redundancies can occur because same roles taken - this affects the motivation levels of the remaining employees
Intellectual
property
A produce that is a creation of the mind, such as invention, that the law protects from unauthorised use by others. It includes patents, copyrights and trademarks
Global competitiveness
The extent to which a business or a geographical area such as a country, can compete successfully against rival
