BUSINESS THEME 4 - TOPIC 4.2 - GLOBAL MARKETS AND BUSINESS EXPANSION

4.2.1 Conditions that prompt trade

Push factors : saturated markets

  • For most businesses the move to business abroad begins when it becomes more difficult to increase sales in a domestic market
  • There will be less new customers to target and this is called market saturation

Competition

  • markets can become saturated through lots of rival firms and businesses need a way to differentiate
  • imported products will allow firms to compete on price as foreign firms may have lower labour costs, giving the business a CA

Pull factors

Access to new markets creates huge potential for increased sales and profit

Risk spreading

Economies of scale

  • trading internationally usually the business will increase in size
  • EoS can lead to CA as lower costs may make lower prices and make mass markets available
  • diversified and wider markets reduce the risk if sales crash in one market, this is an economy of scale

offshoring and outsourcing

  • outsourcing means buying inputs from an independent supplier rather than producing in house
  • offshoring refers to the process of locating production abroad usually to cut labour costs

Extending product life cycles by selling in multiple markets

  • exporting to new international markets can be seen as an extension strategy
  • but market research may be needed to ensure the product will succeed in this market

4.2.5 Global competitiveness

The impact of movements in exchange rates

  • foreign exchange dealers make continuous adjustments to exchange rates, dependant on supply + demand
  • SPICED
  • businesses that export will want a depreciating/weaker £
  • businesses that import will want a stronger £

Competitive Advantage

cost competitiveness

achieved through outsourcing, cost leadership(having lowest costs in market),EoS, productivity and offshoring

product differentiation

achieved through branding + reputation, design + reliability, advertising + packaging

skill shortages and their impact and international competitiveness

  • when supply is limited of skilled workers it raises their wages and therefore production costs which will reduce competitiveness
  • training takes time

4.2.2 Assessment of a country as a market

The two main reasons why a company sets up in other countries is to distribute + sell its products and setting up cheaper or higher quality production facilties. When Choosing a country many factors are considered...

Levels + growth of disposable income can influence demand

Ease of doing business includes time + cost of opening there, permits + regulations, workforce, taxes, imports + exports, etc

Infrastructure includes all transport + communication facilities, on top of basic services such as energy + water supplies

Political stability can include issues such as corruption or civil war

Exchange rates can be a source of uncertainty and create issues surrounding importing or exporting (SPICED)

4.2.3 Assessment of a country as a production location

The costs of production

Skills + Availability of the labour force is crucial and in less developing countries labour markets tend to be less regulated

Infrastructure is vital and weak infrastructure can raise costs or slow production

Location in a trade bloc

Government incentives such as reducing taxes to encourage FDI

Ease of doing business

Political stability

Natural resources influences businesses to go there to utilise these

Likely return on investment

4.2.4 Reasons for global mergers or joint ventures

Organic growth means a business grows from using its own resources. Whereas Inorganic growth occurs when a business gets bigger by joining another firm, this can be achieved via a merger or takeover

  • A merger involves the mutual decision of two companies to combine and become one entity
  • A takeover is usually characterised by the purchase of a smaller company by a larger one
  • A Joint venture is a one off-temporary agreement for a particular project

Spreading risk over different regions expands the portfolio and provides stability

Entering new markets or trading blocs

Acquiring international brand names/patents

Securing resources + supplies

Maintaining + increased global competitiveness e.g EoS

However, most are unsuccessful and less than 50% achieve anticipated benefits due to things such as culture clashes