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Session 16: Outsourcing & Expanding Overseas - Coggle Diagram
Session 16: Outsourcing & Expanding Overseas
Outsourcing
Reasons to outsource
Reduce costs
Improve Focus
Increase variable cost element
Access to skills
Grow revenue
Improve quality
Conserve capital
Innovate
"The devolution of operations to third parties, while retaining responsibility for it."
Businesses can outsource any element of the value chain.
If there is no strategic advantage in performing the function in-house, why not outsource it and benefit from lower costs?
Businesses change their structures and shape through outsourcing.
Globalisation has meant that the destinations of outsourcing has increased.
Businesses have moved their outsourcing offshore.
Now possible in a global economy with advanced technology.
Risks
Moving jobs offshore can provoke politicians and labour leaders (unfair competition and exploitation of third world countries).
Distance
Transport costs and increased time in supply chain.
Currency
Pricing set in local currency is exposed to changes in exchange rates.
Legal systems
Some governments interfere more than others. More rules and regulations for a business to follow, could mean increased costs.
Political/Economic instability
Risk of disruption to the supply chain.
Reliability of service
Availability, skills and education of the workforce are fundamental when deciding on a suitable location.
Language and culture
Can be a barrier for conducting business.
Damage to brand
'Sweat shops' may save costs but is unacceptable to values espoused by shareholders and customers.
Never choose an offshore location purely on cost.
Can have adverse publicity.
International Trade
Nations are almost better off when they buy and sell from one another.
When a firm buys a good or a service produced more cheaply abroad, standards in both countries increase.
Why do countries trade?
Comparative costs rather than absolute costs.
Comparative advantage - exporting products in which its absolute advantage is greatest and importing products in which its absolute advantage is comparatively less.
Differences in comparative advantage could be down to role of labour and capital as a determinant for advantage.
Countries tend to export goods whose production uses intensively the factor of production that is relatively abundant in the country.
Trade rises the living standards of both countries.
Enables greater selection across different types of goods.
Efficiency benefits
Greater product variety
Efficient investment spending as firms have access to higher variety of capital inputs.
Sustained growth
By better investment options and facilitating innovation
Why is trade reform difficult?
Trade brings dislocation to firms and industries that cannot cut it.
Firms face difficult adjustment because of more efficient foreign producers that lobby against trade.
Benefits from trade can be spread widely and beneficiaries often do not recognise how trade benefits them.
Trade Policies
Exist to protect domestic industries.
Tariffs vary between sectors.
Many countries have barriers to trade in services.
Trade barriers affect some countries more than others.
Less developed countries are hardest hit, their exports concentrated on low-skill labour intensive products that industrial countries protect.
World Trade Organisation
Exists to referee international trade.
Promotes non-discrimination and facilitates liberalisation in areas of commermce.
Imposed rules-based international trading system
Trade policies have become more stable, more transparent and more open.