A Complete note for Unit3 | Tesmon Mathew
EDEXCEL
A LEVEL
BUSINESS
STUDIES
UNIT 3 – INTERNATIONAL BUSINESS
A LEVEL BUSINES...
2 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
INTERNATIONAL BUSINESS(UNIT-3)
Unit-. 1: Wh...
3 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
oAs products move through their life cycle,...
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o Outsourcing/off shoring
o Increased trade...
5 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
dramatic miracle of the 20th century. All t...
6 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
Trading blocs
o A trading bloc is a type of...
7 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
The major steps towards achieving economic ...
8 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
1. Member countries.
a. A reduction in tran...
9 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
Advantages of Outsourcing
1. Huge Cost Savi...
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7. Get access to new and growing markets:
...
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Unit-2.Key players in the world economy
o ...
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 What will be the likely impact of growin...
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o Much of what China has produced has been...
14 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
has had two consequences. Low wages have c...
15 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
OPPORTUNITIES AND THREATS TO A UK BUSINESS...
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products. Finally increased globalisation ...
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Unit-3 How does a company decide which cou...
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 Logistics:
 Practical difficulties & co...
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exporters, however, has welcomed the weake...
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 The size of any multiplier and accelerat...
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THEORIES OF INTERNATIONAL TRADE
Comparativ...
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2. If each country specializes in those go...
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The division of labour also runs the risk ...
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relates to organizations taking on their s...
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-Greater productivity
Disadvantages
1. Use...
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accepted by the consumers. In contrast, it...
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-To comply with possible restrictions from...
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Non-Tariff Barrier:
All other measures emp...
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- The alternative of external growth, whic...
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× Differences in brand and product develop...
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Disadvantages
-Incompatibility with cultur...
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Standardization Vs. localization
One of th...
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of which the price of product may be highe...
34 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
THE PROBLEMS OF GLOBAL MARKETS
A. A MISUND...
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Unit8.Are multinationals a force for good ...
36 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
- In other countries, where individuals ar...
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the target's board has no prior knowledge ...
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 Market-extension merger - Two companies ...
39 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
 Diversification: This is designed to smo...
40 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
Here is a useful summary:
Stakeholder Main...
41 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
The reality is that stakeholders do not ha...
42 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
Where Stakeholder Interests are
Aligned
Wh...
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  1. 1. A Complete note for Unit3 | Tesmon Mathew EDEXCEL A LEVEL BUSINESS STUDIES UNIT 3 – INTERNATIONAL BUSINESS A LEVEL BUSINESS STUDIES NOTES
  2. 2. 2 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew INTERNATIONAL BUSINESS(UNIT-3) Unit-. 1: Why does a business seek international market?  labour leads to far greater output and consumption than self-sufficient individuals and families could achieve  Individual providers of service activities such as hairdressing are likely to trade within a small area  New markets  Multiple markets  Global sourcing Global sourcing is a procurement strategy by which a company moves its manufacturing unit to a cost efficient location even if it is a foreign country. . Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs. Some advantages of global sourcing, beyond low cost, include: learning how to do business in a potential market, tapping into skills or resources unavailable domestically, developing alternate supplier/vendor sources to stimulate competition, reduce risk , short term commitment and increasing supply capacity. Some key disadvantages of global sourcing can include: hidden costs associated with difference in cultures, exposure to financial and political risks in emerging economies, loss of intellectual property, and monitoring costs. For manufactured goods, include long lead times, the risk of port shutdowns interrupting supply, poor quality /reliability, loss of control, violation of social norms (child labour) and the difficulty of monitoring product quality.  Limited growth in the Domestic markets  Foreign competition  Improved infrastructure  Trade liberalisation-Absence of Trade barriers  Trading blocs  Reasons to trade internationally: oSelling more can bring more revenue and profit oWhere there are high costs of research and development, selling to multiple markets speeds progress towards breakeven point oIf a home market is saturated or competition is fierce, exporting can be an attractive way to increase sales
  3. 3. 3 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew oAs products move through their life cycle, sales will in many cases eventually diminish oA new, overseas market could offset the impact of a declining domestic market oJust as businesses increasingly sell overseas, they are also able to source materials, components and services from beyond their own national boundaries oOutsourcing is buying in products and services rather than undertaking work within the company. This means that a business can focus on what it does best and use other people for the rest of the work oGlobal reputation – A company or its brand that is popular in many countries will take better hold than others who focus on one country. People are looking for familiar brands than unfamiliar one and the popularity spread faster across the globe oEconomies of scale – selling in large volume will give cost advantage by high production efficiency and marketing efficiency ( CDs in Asia) oAvoid uncertainty – It is risky to concentrate on any single country , because instability in political or economical position or disasters should shatter the whole business oShare production and marketing knowledge in other countries. Toyota managers were trained in Ford .General motors’ shared its production facilities with competitor Toyota. to utilise its under capacity and also learn from their style oTransfer of resources – ( 5 M- men, money , materials , machines, market information) between various branches , subsidiaries and plants oTo reduce cost – companies can go for low cost destinations in specific areas. This will involve physical movement or by electronic exchange. IT business, call centres, education, health ( India ) , manufacturing ( China ) , What market conditions encourage international trade: o Improvements in infrastructure o Improved communications o National differences disappearing o Home markets may be saturated o Declining home market o Sell in multiple markets o Government schemes in place o Source materials o More variety of suppliers
  4. 4. 4 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew o Outsourcing/off shoring o Increased trade liberalisation  Selling in multiple markets spreads risks: o Difficulties in a market become less threatening when it is one of several markets as the supplier is no longer dependent on a single market o Sometimes a home market sees increasing competition from overseas suppliers, motivating home producers to look for new markets where they can compete o The risk in exporting can be reduced by government schemes designed to encourage export activity.  Trade liberalisation: o Trade liberalisation is the process by which international trade is made easier through a relaxation of the rules which govern it o Rulers & government have long taken an interest in imports to their countries. They seek to restrict the availability of items seen as harmful or dangerous o They might wish to stop imports which will compete with state monopolies or industries with political influence. o Placing an import tax (tariff) on products reaching the country was a significant source of income when governments were inefficient at taxing their own people o For most governments, tariffs are now a relatively insignificant source of income o Embargoes (total bans) or quotas (fixed maximum quantities of imports) are also used, either for economic or political reasons o Embargoes is the partial or complete prohibition of commerce and trade within a particular country, in order to isolate it World Trade Organization It was set up in 1995 after marathon discussions and has over 150 members including late entrants like India and China .The members sign to agree for international trade and business co-operation. WTO plays a major role in removing barriers and improving trade which can lead to prosperity. Without WTO, the world could divide into several overlapping trade blocs which would remain as trade blockages. Companies can operate in domestic and overseas markets equally. Uruguay round in 1995 decided to phase out multi fibre agreement that protected textile manufacturers and Doha round in 2005 discussed anti- dumping issues ( Dumping is the export of commodity for a price below its cost for earning foreign currency, remove excess production or destroy foreign industries ). USA is the largest economy in the world followed by Japan which is the
  5. 5. 5 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew dramatic miracle of the 20th century. All types of companies can flourish under WTO initiative from leading MNCs like Exxon-Mobile, Toyota, and Microsoft to SMEs (Small and Medium size Enterprises with employee strength below 250). Exists to reduce barriers to trade and to ensure that countries keep to the agreements they have made The organisation also deals with complaints between members, organizing negotiations and, if necessary, making judgements against a country WTO agreements can mean that customs unions and single markets must sometimes reduce their external barriers to trade It encourages trade liberalisation by operating a system of trade rules and by providing a forum for the negotiation of trade disputes Promotes peace Trade rises incomes System encourages good government oTrade liberalisation and WTO have made it easier for b/s to export and to compete in foreign markets oAdvantages:  Economic growth can increase  Encourages specialisation & improved efficiency through comparative advantage  Customers may benefit from improved choice and lower prices  Improved international trade oDisadvantages: ×Countries can become over dependent on foreign trade ×Changes in demand can lead to unemployment ×Less equal distribution of income ×Destruction of environment ×Loss of sovereignty – lose ability to make decisions which affects them ×Loss of national identity as it lowers living standards by destroying good habits and native culture
  6. 6. 6 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Trading blocs o A trading bloc is a type of intergovernmental agreement to reduce regional trade barriers. Trading blocs are countries belonging to mutual trade agreement giving each other reduced trade tariff while imposing trade barriers and restrictions to non member countries. o Example NAFTA-North American Free Trade Agreement. ASEAN-Association of Southe East Asian Nations EU-European Eunion SARC-South Asian Agreement for Regional Cooperation. oDepending on how closely the members wish to integrate their economies they may form different types of trading blocs such as free trade areas, customs unions, common markets and full economic & monetary union oAdvantages:  Lessens international isolation which increases gains  Better trade within trading bloc (no tariff) oDisadvantages: ×Distracts governments from large gains ×Distribute the gains from trade unequally ×Low economic benefits ×Lessens national sovereignty A.European Union EU is the community of countries that form a single market as a result of laws on free movement of goods and services between its member countries. It was created for common market for monitory gain and opens new markets and manufacturing hubs. Now there are 27 member countries like Ausrtia ,Belgium,Denmark,Poland,France etc. European Union generates 30% of worlds economic activities. Features of EU 1. Single Market EU has become a common market.The single market was designed to create the free movement of goods,service,capital,and people. To do this a large number of trade barriers were removed. 2. Euro.(Single Currency)
  7. 7. 7 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew The major steps towards achieving economic and monitory union was the introduction of European monitory union(EMU).The main features of EMU are the establishment of a single currency and the control of European interest rate through the European central bank. Advantages to UK firms trading in EU 1. Uk firms can enlarge its marketsas they sell their products in onother EU country without import taxes or customes duties.Th home market of UK is only with 6million people but the EU with over 500 million people is larger than US(300million people) and Japan (125million people). 2. The large Eu market gives competitive advantage to uk firms as they are able to increase their sale. 3. The Uk firms may get opportunity to gain grants and contracts from the various EU financed programmes. 4. The firms will get free access to markets 5. The firms may gain economies of scale in production and marketing. 6. It prevents wage inflations there are many people available with cheap skilled labour. 7. Firms are protected from leading economies in Asia and America. 8. Easy for merger and acquisition activities due to common currency. 9. Reduction transaction cost due to single currency. 10. Availability of cheap resources. 11. Controlled competition will increase productivity and efficiency. Disadvantages to Uk firms due to trading in Eu. 1. Intensive competition may reduce market share. 2. Price may go down and it lower profit margins. 3. Protectionism by EU will lead to inefficiency of local firms. 4. Common currency makes transaction difficult with non member countries. 5. Large companies may dominate the market. 6. Domestic players in UK were so far protected and will now face threat from other nations 7. Protectionism by EU will lead to inefficiency of local firms 8. Company has to customise the product o suit local needs of each country Effect of Euro or the use of a single currency on Member and Non Member countries.
  8. 8. 8 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew 1. Member countries. a. A reduction in transaction costs as there is only a single currency that does not need conversion. b. No exchange rate fluctuation c. Merger and acquisition activities become easier. 2. Non member countries. a.Business has to change transactions into Euro b.It is required to open euro account. c.Higher costs due to conversion of domestic currency into euro B.Asian region(ASEAN) ASEAN (Association of South East Asian Nations) : this bloc was formed in 1967 with 10 members of south east Asia ( Indonesia, Malaysia ,Philippines , Singapore , Thailand , Brunei, Myanmar, Cambodia, Laos, Vietnam ).In 2006 with 7 countries of SAARC nations viz Bangladesh, Bhutan, India ,Maldives, Nepal, Pakistan and Sri Lanka her the trade estimate is $ 14 billion formed a bloc.Asian tigers – Japan, S. Korea, Hong Kong, Taiwan and Singapore have abundant natural and labour resources. Japan is the second largest economy. Singapore, Korea, Malaysia, Mexico and Brazil are called NIC (newly industrialised countries). Examples -Korean firms like Hyundai, LG, Samsung, and Proton cars from Malaysia. China’s GDP growth rate was 10.7 % in 2006 which was the highest in the world characterised by biggest consumer market and massive population of low wage workers .49, 000 US companies are operating in China .China struck midway between market economy and government controlled economy .China is termed as world’s factory and export power house, while India is called world’s service provider. Outsourcing Outsourcing is the subcontracting of works to third party.Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant
  9. 9. 9 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Advantages of Outsourcing 1. Huge Cost Savings:Numerous surveys and studies conducted have shown that the prime outsourcing benefit lies in 40-60% savings in cost due to complete elimination or minimization of overheads like travel allowance, leave bonus, rent allowance etc. Besides these outsourcing benefits cost savings on account of offshoring also occur due to large savings on employee salary bills. 2. Access to Specialized Skills at fraction of the cost: Outsourcing to countries like India has many benefits like availability of trained, hardworking and experienced manpower in large numbers and that too at just a fraction of what it would cost in the parent country. Indian IT professionals are skilled in all the current and emerging technologies and are known for their competence and excellent communication skills. In most of the companies the biggest cost consideration are the employee salaries and with this vital expenditure minimized bottom lines are bound to rise. 3. Focus on the core activities. Outsourcing non-core or peripheral services for instance house keeping, lets you concentrate on your core business activities letting the specialists handle non-core services for you. This saves you enormous costs on wage bills, employee benefits, legal hassles and more. 4. Quicker Project Completion: Outsourcing enables projects to be completed faster as the service providers are bound by pre-decided schedules. Quicker completion enables faster delivery of services to your clients whether in the parent country or in other countries. This way you can take up and outsource more projects thus setting in chain a continuous growth cycle. 5. Outsourcing increases customer satisfaction: As non-core but essential services like customer support are outsourced to domain specialists who are skilled in the task, customer satisfaction is bound to increase as queries and problems are resolved quickly, deliveries are faster and company interaction is more satisfying for the customers. 6. Continuous Development becomes possible: Another important outsourcing benefit is the possibility of continuous development. What this means simply is while your in-house development team sleeps after working in the day, the outsourced team in India or other country that enjoys a similar time zone advantage takes over from where the first team left. This not only saves costs but boosts productivity as well.
  10. 10. 10 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew 7. Get access to new and growing markets: Outsourcing doesn't just benefit through cost savings but also has another important advantage in the form of exploring previously unexplored markets, especially in developing countries like India, where the economy is on a overdrive. Once you outsource your work to India or some other country you learn about the economy of that country, the customer preferences, the incentives offered, the competition, the work culture and so on. All this will be highly beneficial to your business once you decide to set up shop in the country. Drawbacks of outsourcing 1. Quality Risks -Quality risk in outsourcing is driven by a list of operational factors at the supplier side – lack of motivation, high switching costs , poor communication, lack of resources, low capacity, or absence of legal contract. 2. Local unemployment -Outsourcing affects both jobs and individuals and may lead to job disruption and employment insecurity; however 3. Language and cultural skills- We may find the linguistic features such as accents, pronunciation which may make difficult to understand. The lack of visual clues also may lead to misunderstanding 4. Social responsibility-Some argue that the outsourcing of jobs exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work. It is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower, but paying the higher-rate for local people is wasteful. 5. Staff turnover-The staff turnover of employee transferred to the outsourcer increases and key skills may be lost outside of the control of the company. It is quite normal for such companies to replace its entire workforce each year in a call center. This inhibits the build-up of knowledge 6. Productivity-Saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies outsource.
  11. 11. 11 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Unit-2.Key players in the world economy o Both China and India have grown rapidly in recent times with huge increases in GDP. Businesses based in these countries are now competing with other multinationals to be world leaders in many sectors. o Both countries have seen rapid industrialisation yet both retain traditional rural areas. One consequence of this is that the benefits of growth are not shared equally,income distribution had become increasingly uneven. Starting from relatively low income levels has had two consequences. Low wages have corresponded to low labour costs for business. At the same time, low incomes have held back domestic consumption, so exporting has played a significant role in development. o China o Population – 1,330 million (Comparative advantage) o Population growth rate – 0.65% Still growing (half a billion) o Legislation – 1 child per family. Trying to reduce population rate o China used to be a command economy. o Foreign capital investment is allowed. o They are now wanting to make profit and therefore becoming more efficient o India oPopulation – 1,156 million (Comparative advantage) oPopulation growth rate – 1.4% oAbundance of cheap labour – cheap wage rate oOver populated – empower women oEnvironmental damage – large population oWidespread corruption oRegulation on FDI oImport substitution policy – Not importing goods but making them instead. oReduces imports and corrects balance of payments oCreated their own brands oIndia’s economic growth is faster than most LEDC’s oIndian economy is still very diverse – large primary, secondary and tertiary sectors
  12. 12. 12 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew  What will be the likely impact of growing economic power of China & India on individuals, national & multinational firms in the 21st century?  Both China & India have more than a billion inhabitants, roughly a fifth of the world´s population each, and both increased their rates of economic growth significantly  Both countries have seen rapid industrialisation -> consequence: the benefits of growth are not shared equally; income distribution has become more uneven.  Both countries still have significantly poverty problems for large sectors of their populations  China: o Chinese government is still exerting effective control over much of the economy o From around 1990, the state-owned enterprises rapidly developed infrastructure o Foreign direct investment, to build factories which would be staffed by cheap labour, also extended rapidly o Advantage of involving the private sector: individual businesses could experiment, then successes could be followed and any mistakes could be avoided  India: o It has a long combined private enterprise with regulation, but without the extent of public control seen in China o One estimate suggests that the size of India´s GDP will overtake that of the USA in 2040 – 50 o Liberalisation of the economy led to increasing integration of the country in the global economy, though foreign ownership of business is still regulated  The overseas impact of Chinese & Indian growth: o China´s rapid industrialisation has led to the emergence of a formidable competitor both as a seller in product markets and as a buyer in the markets for many raw materials o Efficiency and low costs in product markets have been exaggerated by the low valuation of the Chinese currency which the government has manipulated - > it makes harder for producers in other countries to compete with Chinese goods
  13. 13. 13 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew o Much of what China has produced has been relatively labour-intensive and low-technology o Indian growth has served internal demand more than exports o Many multinational businesses have chosen to collaborate in partnerships rather than to compete head-on with Chinese firms o Businesses have found China a cheap and reliable provider of outsourced parts and components, once precise specifications and quality standards have been agreed o Rapid income growth in China, combined with the uneven income distribution, has created some affluent consumers with a growing taste for luxuries o While there affluent Indians, the size of the Indian market for luxuries has remained relatively small. o Advantages of India and China o Low wage rates – can provide cheap goods o Young people are now training to go into business and moving more out of the primary sector o Disadvantages of India and China o Bad infrastructure o Adult literacy is only at 60% o Polarisation – Rich is getting richer and poor getting poorer. o (For China) o Even though Mandarin is the most spoken language in the world it is only spoken in China and English is the Business language OPPORTUNITIES AND THREATS TO A UK BUSINESS TO CHINA’S CONTINUED GROWTH o China has grown rapidly in recent times with huge increases in GDP, a growth rate of 10.4%. This compared to the UK’s 1.4% shows the enormous difference between the two countries and the size of their growth. Businesses based in this country are now competing with other multinationals to be world leaders in many sectors. A multinational company is an enterprise operating in several countries but still only managed from one country. o China has seen rapid industrialisation yet retains traditional rural areas. One consequence of this is that the benefits of growth are not shared equally andincome distribution has become increasingly uneven. Starting from relatively low income levels
  14. 14. 14 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew has had two consequences. Low wages have corresponded to low labour costs for business. At the same time, low incomes have held back domestic consumption, so exporting has played a significant role in development. o Not only does China have a huge GDP growth rate but they also have a large population growth rate. With their current population at1,330 million it continues to grow at a rate of 0.65% per year. This gives them a comparative advantage over the UK as it means that they have a large, cheap abundance of labour which gives the Chinese businesses a large choice of employees and means that they can charge low wages meaning that they reduce their costs leading to profits increasing. Due to these low wage rates it enables the businesses to have an edge over their competition in the UK for example and to produce cheaper goods then their competition leading to demand increasing. It will therefore affect the UK’s balance of payment in a negative way as domestic consumers will consume more imports and this will be bad for the domestic producers. o However it may also lead to many business opportunities. Firstly due to disposable income in China increasing it will lead to UK businesses selling more products into the new market leading to demand increasing and the curve shifting to the left as there are new consumers to buy their products. Another opportunity it will have led to is that UK firms (MNC’s) can now move into these emerging markets. Those that are not yet fully developed but have a group of middle class consumers that is large enough to provide a market for developed country products. Finally increased globalisation will now take place which is beneficial for both parties. However there are also draw backs to operating in China. For example it could be made more difficult due to the fact that even though Mandarin is the most spoken language in the world it is only spoken in China and English is the Business language. This could mean that there are additional translation costs and other cultural barriers. o If UK companies ‘Adidas’ for example move into China it would be important that they do not exploit the local work forces with bad working conditions and very low wages. This would be against the ethical way to work and could lead to them having a bad reputation which could mean that demand for their products decreases.
  15. 15. 15 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew OPPORTUNITIES AND THREATS TO A UK BUSINESS TO INDIA’S CONTINUED GROWTH o India has grown rapidly in recent times with huge increases in GDP, a growth rate of 8.8%. This compared to the UK’s 1.4% shows the enormous difference between the two countries and the size of their growth. Businesses based in this country are now competing with other multinationals to be world leaders in many sectors. A multinational company is an enterprise operating in several countries but still only managed from one country. o India has seen rapid industrialisation yet retains traditional rural areas. One consequence of this is that the benefits of growth are not shared equally and income distribution has become increasingly uneven. Starting from relatively low income levels has had two consequences. Low wages have corresponded to low labour costs for business. At the same time, low incomes have held back domestic consumption, so exporting has played a significant role in development. o Not only does India have a huge GDP growth rate but they also have a large population growth rate. With their current population at 1,156 million it continues to grow at a rate of 1.4% per year. This gives them a comparative advantage over the UK as it means that they have a large, cheap abundance of labour which gives the Indian businesses a large choice of employees and means that they can charge low wages meaning that they reduce their costs leading to profits increasing. Due to these low wage rates it enables the businesses to have an edge over their competition in the UK for example and to produce cheaper goods then their competition leading to demand increasing. It will therefore affect the UK’s balance of payment in a negative way as domestic consumers will consume more imports and this will be bad for the domestic producers. Due to India having an Import substitution policy this means that they are not importing goods but making them instead. This reduces imports and corrects their balance of payments. This would be a negative thing for the UK as it would mean that their exports will decrease and if India is producing more than the imports to increase. o However it may also lead to many business opportunities. Firstly due to disposable income in India increasing it will lead to UK businesses selling more products into the new market leading to demand increasing and the curve shifting to the left as there are new consumers to buy their products. o Another opportunity it will have led to is that UK firms (MNC’s) can now move into these emerging markets. Those that are not yet fully developed but have a group of middle class consumers that is large enough to provide a market for developed country 21
  16. 16. 16 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew products. Finally increased globalisation will now take place which is beneficial for both parties. However there are also draw backs to operating in India. For example there could be translation costs and other cultural barriers. o If UK companies ‘Adidas’ for example move into India it would be important that they do not exploit the local work forces with bad working conditions and very low wages. This would be against the ethical way to work and could lead to them having a bad reputation which could mean that demand for their products decreases. Problems faced by firms in Foreign market entry  Cultural differences which may mean products and services need to be adapted or will not sell at all, e.g. dairy products in Asian countries.  Lack of experience in the local market - no core competence  Language difficulties, e.g. Vauxhall Nova translated as 'no go' in Spain  Little brand awareness.  Currency fluctuations and instability  Political instability  Local opposition or pressure group activities, e.g. over low rates of pay or use of child labour e.g. Nike and BAT in Burma/Myanmar  Possible legal restrictions on access - e.g. must find a local partner to operate.  Limited control over supply and distribution chains  Greater set-up costs Advantages of FDI to Host country. 1. Foreign direct investment leads to infrastructure development and fixed capital formation 2. Revenue to Government: Profits generated by FDI contribute tocorporate tax revenues in the host country. 3. Benefits to Consumers: Consumers in developing countries stand togain from FDI through new products, and improved quality of goods at competitive prices. 3. Upgradation of Technology: Foreign investment brings with ittechnological knowledge while transferring machinery and equipment todeveloping countries. Production units in developing countries use out-dated equipment and techniques that can reduce the productivity of workers and lead to the production of goods of a lower standard. 4. Improvements in export competitiveness of the host country 5. Employment creation
  17. 17. 17 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Unit-3 How does a company decide which countries to target? Assessment of a country markets:  Decisions about expanding into the markets of additional countries are not always the result of careful strategic planning  Chance factors such as personal knowledge or contacts often have a role to play, particularly for small businesses  Careful assessment of the attractiveness of a country´s market entails consideration of many different factors Factors to be considered.  Spending potential:  The size of population & level of income determine the number of consumers who are potential customers  For most products, a high and rising GNP per capita will be attractive, showing that people can afford to consume and will be able to consume more in the future  Inferior goods will not benefit from rising incomes as people might lose interest in them if their incomes rise  Cheap form of transport  The structure of population is also relevant  Ageing populations in some northern hemisphere countries suggest higher potential spending on products which appeal to senior citizens  Culture:  Businesses which assume that consumers and distribution systems in other countries will be the same as in the home market often face unpleasant surprises  Tradition, religion, the pattern of family life and other variables all influence what people buy and how they buy it  Life in urban communities is different from life in the countryside
  18. 18. 18 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew  Logistics:  Practical difficulties & costs can create an obstacle to reaching particular markets  If a business decides to manufacture in a new country, the ability to source materials, the availability of power and suitable labour, and even the stability of the country become important  Selling in a new country requires the existence of a suitable distribution and retailing systems  Exchange Rate  The exchange rate is the price of one currency expressed in terms of another and is crucial to businesses selling goods and services abroad as well as those firms who import products from other countries. When the exchange rate rises in value (i.e. an appreciation), this makes exporters' goods, priced in sterling, more expensive in foreign currency. So demand for these dearer exports can be expected to fall, depending on the price elasticity of demand for UK exports and also whether there have been changes in other factors influencing demand.  A decline in exports reduces overall aggregate demand and should lower inflationary pressure - so a higher exchange rate could lead to the Monetary Policy Committee deciding to reduce official base interest rates.  A higher exchange rate also makes imports cheaper when sold in the UK. This is good news for the real purchasing power of British consumers, and also for UK firms who need to import raw materials, components and finished products. But higher prices feed into the consumer price index and can have a direct effect on our rate of inflation.  So a strong pound is good news for keeping inflation under control, but can have negative effects on exports which account for around thirty per cent of aggregate demand. A weaker pound can provide a boost to aggregate demand, a useful tool in lifting the economy out of a recession. What does a weak pound tell us?  As the pound has dropped in value against other major currencies like the dollar and euro, travelling abroad has become much more expensive. Imported goods have also pushed up basic prices for British firms and consumers. UK
  19. 19. 19 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew exporters, however, has welcomed the weaker pound as it makes their goods cheaper to foreign markets. Economists have welcomed the weakening of sterling as heralding a much-needed correction to the UK's chronic trade imbalances. However, as the pound can be seen as a barometer of the UK economy, some perceive its recent weakening as a matter of concern.  Source: News Reports, Feb 2011  The UK operates with a floating exchange rate system where the forces of market demand and supply determine the daily value of one currency against another  The value of the pound depends in how strong is demand for the currency relative to supply  If overseas investors want to buy into sterling to take advantage of higher interest rates on offer in UK bank accounts, they will swap their own currencies for pounds. This causes an increase in the demand for sterling in the foreign exchange markets, and in the absence of other offsetting factors, this will cause an appreciation.  Currencies tend to go up in value either when a country is running a large trade surplus – which brings in extra demand for a currency from sales of exports – or when overseas investors regard the currency as a good one to buy. This might be because attractive interest rates are on offer by putting money into savings accounts in that currency. Or because there are high expected returns from other types of investment notably property, stocks and shares and so on. How does a change in the exchange rate influence the economy?  Changes in the exchange rate can have powerful effects on the macro- economy affecting variables such as the demand for exports and imports; real GDP growth, inflation, business profits and jobs  As with most variables in economics, there are time lags involved. The impact of movements in currencies on the economy depends in part on:  The scale of any change in the exchange rate i.e. a 5%, 10% or even larger movement  Whether the change in the currency is short-term or long-term – i.e. is the change in the exchange rate temporary or likely to persist for some time? How businesses and consumers respond to exchange rate fluctuations – price elasticity of demand is important here i.e. will there be a large change in demand for exports and imports?
  20. 20. 20 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew  The size of any multiplier and accelerator effects  When the currency movement takes place – i.e. at which point of an economic cycle  How can changes in the exchange rate affect the rate of inflation?  The exchange rate affects the rate of inflation in a number of direct and indirect ways:  Changes in the prices of imports – this has a direct effect on the consumer price index. For example, an appreciation of the exchange rate usually reduces the sterling price of imported consumer goods and durables, raw materials and capital goods.  Commodity prices and the CAP: Many commodities are priced in US dollars – so a change in the sterling-dollar exchange rate has a direct impact on the UK price of commodities such as foodstuffs. A stronger dollar makes it more expensive for Britain to import these items.  Changes in the growth of UK exports: A higher exchange rate makes it harder to sell overseas because of a rise in relative UK prices. If exports slowdown (price elasticity of demand is important in determining the scale of any change in demand), then exporters may choose to cut their prices, reduce output and cut-back employment levels.  Competition:  A business will want to know how competitive an industry is in a potential large market  Where a market is already intensely competitive, profit margins are likely to be squeezed - > this will make the market less attractive unless the business is confident that it has a competitive advantage to put ahead of rivals
  21. 21. 21 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew THEORIES OF INTERNATIONAL TRADE Comparative advantage and specialisation:  Absolute advantage: - Refers to the ability to produce more of a good or service than competitors, using the same amount of resources - A simple and clear ability to produce at lower costs - Example: to produce tropical fruits in a cool climate would be costly, requiring artificial heating and possibly artificial lighting as well. Production is simply cheaper in tropical countries because they have an absolute advantage  Comparative advantage: - Is a slightly more complicated concept. The economist´s technique of focusing on a simplified model to identify the key concepts works well in this case - The trade between a rich and efficient country and a poorer, less productive country can benefit both of them - Refers to the ability to produce a particular good or service at a lower opportunity cost than another party ⌂ Specialisation - Comparative advantage exists when a country has a ‘margin of superiority’ in the production of a good or service i.e. where the marginal cost of production is lower. One feature of nearly every aspect of economic life is that individuals, businesses and countries engage in specialisation. Specialisation is when we concentrate on a particular product or task. Surplus products can then be exchanged and traded with the potential for gains in welfare for all parties.Trade allows each country to specialise in the production of those products that it can produce most efficiently (i.e. those where it has a comparative advantage). Advantages of Specialisation. 1. Countries will usually specialise in and then export products, which use intensively the factors inputs, which they are most abundantly endowed.
  22. 22. 22 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew 2. If each country specializes in those goods and services where they have an advantage, then total output can be increased leading to an improvement in allocative efficiency and economic welfare. 3. Higher output: Total output of goods and services is raised and quality can be improved. A higher output at lower costs means more wants and needs might be satisfied with a given amount of scarce resources. 4. Variety; Consumers have improved access to a greater variety of higher quality products i.e. they have more and better choice both from their own economy and from the production of other countries 5. A bigger market: specialisation and international trade increase the size of the market offering opportunities for economies of scale (a fall in long run costs per unit of output) 6. Competition and lower prices: Increased competition for domestic producers acts as an incentive to minimise costs and innovate to remain competitive. Competition helps to keep prices down and maintains low inflation. 7 Prices have been rising and so has demand. 8. Growth in revenue and this may lead to development of the secondary sector and a more sustainable future. 9. . Division of Labour: The division of labour is a particular type of specialisation where the production of a good is broken up into many separate tasks each performed by one person or by a small group of people. The division of labour raises output per person, thereby reducing costs per unit because lower skilled workers are easily trained and quickly become proficient through constant repetition of a task – ‘practice makes perfect’ – or “learning by doing”. Low unit costs allow firms to remain competitive in the markets in which they operate. Traditionally the division of labour and high level of specialisation in manufacturing industries is associated with the concept of scientific management or Taylorism. Limitations of division of labour There are limits and downsides to the breaking down of production into many small tasks. Perhaps the greatest downside is that the division of labour may eventually reduce efficiency and increase unit costs because unrewarding, repetitive work lowers worker motivation and productivity. Workers begin to take less pride in their work and quality suffers, the result may be a problem of diseconomies of scale.
  23. 23. 23 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew The division of labour also runs the risk that if one machine breaks down then the entire factory stops. Some workers receive a narrow training and may not be able to find alternative jobs if they find themselves out of work (they may suffer structural unemployment). Another disadvantage is that mass-produced standardized goods tend to lack variety. Problems of Specialisation 1. Over-reliance can be a problem, if demand falls because no major alternative to fall back on, 2. specialisation in commodities does not add as much value as manufacturing, 3. Not ideal long-term because it uses unsustainable resources jeopardising future generations, 4. Price fluctuations leading to uncertainty. Unit4.Other considerations before trading internationally.  Responsibility to stakeholders: A Business has to consider - Ethical decisions as to what and where to manufacture - Balance between capital and labour - Where to sell - Pay and working conditions - Environmental factors such as waste disposal - Potential conflicts of socially responsible and ethical behaviour with profit based and other objectives. Corporate social responsibility: Definition of CSR  Corporate Social Responsibility is the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large." There are number of ways to define Corporate Social Responsibility. It is the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life. It can also be defined as a concept that
  24. 24. 24 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew relates to organizations taking on their social and environmental responsibilities and includes factors such as provisions for employees, participation in local community, green working practices, ethical trading and good corporate governance. On the other hand, Corporate Social Responsibility (CSR) is a concept that organizations, especially (but not only) corporations, have an obligation to consider the interests of customers, employees, shareholders, communities, and ecological considerations in all aspects of their operations. CSR for an organization means achieving long term growth and profitability while reducing their environmental footprint and meeting the needs of employees and the communities in which the organization operate. It characterizes the need for organisations to consider the good of the wider communities, local and global, within which they exist in terms of the economic, legal, ethical and philanthropic impact of their way of conducting business and the activities they undertake. - A simple rush for short-run profits is often both damaging in the long run and ethically wrong. This last point has increased significance in an age of CSR. - Is a way of recognising that a company has a variety of stakeholders, each of whom have different goals. - CSR obliges businesses to consider more than just profit, to take account of the interests of workers, suppliers, customers and the wider community as well as stakeholders - They are generally expected to respect the environment, to treat people fairly and to “give something back” to the local community - Some businesses treat CSR as a public relations exercise, giving more priority to looking good than to doing well. ADVANTAGES of CSR 1. Builds a good company reputation and makes the business more competitive 2. Ensures suppliers and customers know what the business is doing. 3. Builds good public relations 4.Helps to differentiate the business 5. Provides a competitive advantage 6. Good reputation makes it easier to recruit employees 7. Employees may stay longer -Less labour turnover
  25. 25. 25 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew -Greater productivity Disadvantages 1. Use of money not directly linked to the business 2. Extra staff needed to fulfil CSR policies 3. Not productive Unit5.Social/cultural differences in doing business. Buyer’s behaviour and consumer needs are partly circumscribed by cultural norms. Managers who run a company in foreign country need to interact with people from different cultural environments. International business means dealing with consumers, strategic partners, distributors and competitors who have different cultural minds sets .Culture often provides the cement for members of the same society. It is important to gain a deeper understanding about cultural differences to grasp the intricacies of foreign market. Importance of culture in marketing mix  Cultural forces shape the marketing mix and they are very sensitive in marketing and they often create problems to marketers due to violations.  They also create a lot of marketing opportunities which if properly used can give wider scope . Factors Needed to be considered in international marketing. 1. Cross-cultural marketing Cross-cultural marketing is defined as the strategic process of marketing among consumers whose culture differs from that of the marketer's own culture at least in one of the aspects, such as language, religion, social norms / values, education, and the living style. Cross-cultural marketing demands marketers to be aware of and sensitive to the cultural differences; to respect culture of the consumers as their right in various marketplaces. If the marketers want to be the winners in the cross-cultural marketing, they must create the marketing mix that meets the consumer's values on a right to their culture. Therefore, in order to match the marketing mix with consumer preferences, purchasing behavior, and product-use patterns in a potential market, marketers must have a thorough understanding of the cultural environment, i.e., marketing cross-culturally. However, this is does not suggest that all marketers should focus on cultural differences to adjust marketing programs to make them
  26. 26. 26 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew accepted by the consumers. In contrast, it is suggested that successful marketers should also seek out cultural similarities, in order to identify opportunities to implement a modified standardized marketing mix. 2. The importance of local knowledge: The desire to avoid problems due to unforeseen cultural and language differences helps to explain why many businesses seek local partners or use agents 3. Promotional messages: A business which overcomes any obstacles to importing or manufacturing products still faces potential issues involved in distribution and in persuading customers to buy Both the words used in promotion and the subtler subconscious messages conveyed should be treated with care 4. International branding: Coca Cola, Nike, MTV -> strong global brands Achieved EOS in marketing and seem to draw cultures to them instead of 5. A5. 5. Adapting Pricing strategies: Price needs to remain fairly consistent throughout the world Example: medicine in developing countries -> need is great, no income to buy, fear of resale 6. Joint ventures: Is where two or more companies share the cost, responsibility and profits of a business venture.The complexities arising from social and cultural differences persuade many businesses that it is better to work via local agents or in joint ventures with local companies, in order to gain inside information on how to operate in a country.Some countries block foreign business so joint ventures is only option Advantage: -To have the use of an existing supply chain, -To enter a very different market and access local knowledge, shared costs ,cultural differences etc. -To avoid making mistakes in an unknown market and incur losses, -To get advice from within local market to maximise sales,
  27. 27. 27 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew -To comply with possible restrictions from the govt. and therefore gain access to the market etc. Disadvantage: share profit, build relationships over large distance Unit6 The purpose of tariffs, laws, import quotas Protectionism: The intervention by governments in the free trade between nations. The methods available usually attempt to reduce imports (to protect domestic production) and are therefore often referred to as trade barriers, although other methods may seek to encourage exports. Tariffs: o A tax on imported goods. This adds to the price of imports, shifting the supply curve upwards o Tariffs are a tax on imports. The higher the taxes the more expensive imports become. High tariffs restrict the volume of trade o The higher price will often discourage customers, particularly if there is a locally made substitute available o A tariff is a tax placed on an import to increase its price and decrease its demand o Home produced goods do not incur the tariff and so are likely to be cheaper o It is the PED, shown by the slope of the demand curve, which slows how much a tariff will reduce demand for imports o A tariff increases prices for consumers, so they do not benefit directly o The people who do benefit are the home producers and their employees o Tariff protection allows them to sell more because they gain a price advantage compared to imports o Home producers gain price advantage o Better job security o High import price won´t put many off o Protect new businesses o Unfair competition – dumping
  28. 28. 28 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Non-Tariff Barrier: All other measures employed to protect domestic production other than tariffs. o Stringent health and safety regulations and other standards o Subsidising domestic production o Non-competitive purchasing by governments o Delaying imports at borders through excessive administration o Advertising campaigns to buy domestic goods o Environmental standards  Import quotas: o An alternative to tariffs as a form of protection is the use of quotas o Is a limit on the physical number of goods that can be imported over a period of time o WTO and trade bloc agreements make it increasingly difficult for countries to use tariffs or other forms of protection  Why might countries erect protectionist barriers? : o Maintains a positive trade balance o Domestic producers may be offered additional protection o Existing jobs can be protected from competition from low cost manufacturers o New industries are protected o It allows a small industry to develop and to innovate until it can compete in the international market without barriers Unit7 Globalisation  Global industries:  Globalisation is broadly defined as the growing integration and interdependence of nations  The increased freedom & capacity of individuals & firms to undertake economic transactions with residents of other countries and operate on a global scale  One measure of the impact of globalisation is the reduction of poverty  Global strategy needs to be considered by any business which sells products to overseas customers  Mergers & takeovers: - Some businesses have grown relatively slowly, preferring to expand by internal growth
  29. 29. 29 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew - The alternative of external growth, which entails mergers & takeovers, allows faster growth & is attractive where the global capacity of an industry is already adequate to meet global demand - It also has the advantage of removing a rival and strengthening the competitive position of the business making the takeover - The disadvantages of takeovers are that large amounts must be raised to finance deals, that high prices are often involved and that it is subsequently necessary to integrate the cultures of acquired businesses Global marketing  Global Marketing Strategy: Where a business doesn’t differentiate its products or marketing between countries.  The issue of global marketing & global brands evokes an emotive response from many people  When a company becomes a global marketer, it views the world as one market and creates products that will only require weeks to fit into any regional marketplace  Multinationals use their size, power and brands to limit the choices available in their efforts to dominate their field  Microsoft has one of the strongest brands because its operating systems are used around the world. Marketing is broadly consistent in different locations, although price differentiation is used, with higher prices where consumers are considered to be willing and able to pay more  Variations in marketing preferences and language sometimes make changes in brand names worthwhile  Advantages: EOS in production and distribution Lower marketing costs Power in the market as your brand is known Consistency in brand image Ability to leverage good ideas quickly and efficiently Uniformity of marketing practices  Disadvantages: × Differences in consumer needs, wants and usage patterns for products × Differences in consumer response to marketing mix elements
  30. 30. 30 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew × Differences in brand and product development and the competitive environment Differences in the legal environment, some of which may conflict with those of the market Global Marketing Strategies 1. Standardization Many proponents of global marketing argue that it does not necessarily do standardisation of the marketing mix. Rather it is reflected in a company’s willingness to find commonality in their marketing approach across countries and to take a global perspective, rather than region wise perspective. For example, Black & Decker, a US tool manufacturer, standardised and streamlined components such as motors and rotors while maintaining a wide range of product lines, and created a universal image for its products. In this case, the global marketing approach was not standardisation of products, but standardising components and product design for in manufacturing and services to achieve cost leadership. The chosen strategy will depend on the nature of the company’s offerings and on the economic, cultural, political and legal environments of various country markets in which the company operates. For example, a firm (say Coca-Cola) may have a market plan with standardised products worldwide (a global marketing approach), but use region wise advertising. Alternatively, firms like Subway or Mc Donald’s may use standardised outlets in appearance, yet adapt the local food menu to suit local tastes. McDonald’s, like many other global firms, treats the world as one large market by standardising much of its marketing strategy, yet still customizes or ‘adapts’ elements of the marketing mix to countries or regions where necessary. In many European countries, it serves beer. In Asian countries, burger is adapted as mutton or vegetables (India), pork (Thailand), beetroot (Australia), beetroot sauce (New Zealand), or served in a spicy burger (Philippines). Advantages of standardization: -Economies of scale in manufacturing and marketing -Standardized products and common minimum marketing programs -Can develop a global organizational structure -Easy to manage global operations -Target the mass market that share average common value systems -Faster rate of expansion and generate large sales volume -Create customer loyalty world wide
  31. 31. 31 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Disadvantages -Incompatibility with culture will lead to tragic failure -Shall co-ordinate divergent culture -Ignores and disrespects cultural differences 2. Localization It is also argued that when companies operating across the global will have to modify their products in order to be successful in their new world markets. International markets are flooded with different products and there have been many evidences where businesses that tried to shift their existing products and business models into overseas markets had failed even with their best of the marketing strategies. Some common causes of failure are; -Language / interpretation problems -Misunderstanding the culture -Mistiming – economic or political mistiming These can be minimized by careful research to ensure a good understanding of the market before a company enters to do business in such new markets. Advantages of localisation : -Firm can compete with local firms -Firm can get acceptability in foreign soil due to their adaptation create local customer loyalty -Close match with local customer’s preferences and high satisfaction -Efficient marketing efforts due to integrated adaptation of marketing mix (product design, promotion programs, pricing and distribution channels) -Build relationship with customers -Competitive advantage over local and global players Disadvantages: -Lack of economies of scale in manufacturing and marketing leading to rise in cost and selling price -Difficult to manage product and promotion globally due to differences in design .
  32. 32. 32 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Standardization Vs. localization One of the key issues in the field of international marketing is the appropriate balance between a localised approach and a global or standardised approach to marketing. Supporters propose a standardised strategic approach in international markets because of the emerging ‘global consumer’. They conclude that the consequence of an increasing commonality in lifestyles of consumers, educational background and developments in transportation and telecommunications technology has meant that we are staring to develop homogenized needs As such, there is a convergence in tastes and preferences across a spectrum of goods and services. But it is not just their consumption patterns that may distinguish them. 3. Glocalisation  It is the name given to the concept and "Think Global - Act Local" is the mantra most closely associated with the concept.. The idea behind this phrase is pretty straightforward. Businesses should set their sights high and aim to reach a potential customer base around the world. But, to be successful with those potential customers, businesses need to take account of local needs and wants. Global businesses should tread carefully, being sensitive to the specific requirements (customs, tastes, traditions) of the different markets in which they want to succeed.  So, if glocalisation is partly about adapting existing products to meet the needs of new markets, where would a strategy built around glocalisation fit into the popular and important model of product and market strategy  Global market niches:  The existence of FC in most productive activities encourages businesses to make and sell large quantities so that their FC can be spread across more units, AC will fall & prices can be attractive to consumers  Exists when the home market for a good may be too small to be attractive, but where targeting this niche globally creates a more larger market  Niche marketing involves a business tailoring a product to a particular, often tiny, segment of the market. E.g. BMW, Tie Rack, Knickerbox and SockShop  Niche market a is a very small segment of a much larger market ie; a specialized sub-market. Here the products tend to sell in relatively low volumes, because
  33. 33. 33 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew of which the price of product may be higher when compared to the mass- marketed products.  In a new firm’s perspective, it makes sense to target a niche which is relatively neglected. To identify and establish a product in a niche market the business needs to concentrate on:  Discovering a market with sufficient demand to be profitable  Finding markets with good growth potential  Seeing markets that have been ignored by major players  Acquiring the skills needed to operate in the market  Building up customer goodwill and keeping it Niche Marketing  A business aiming a product at a particular, often tiny, segment of the market. E.g. BMW cars  May fit the limited resources e.g. production capability.  Avoids head on clash with major firms.(Less competition)  Returns may be relatively high.  Can focus on the needs of consumers.  Less competition – the firm is a “big fish in a small pond” • Clear focus - target particular customers (often easier to find and reach too) • Builds up specialist skill and knowledge = market expertise • Can often charge a higher price – customers are prepared to pay for expertise • Profit margins often higher • Customers tend to be more loyal The main disadvantages of marketing to a niche include:  • Lack of “economies of scale” (these are lower unit costs that arise from operating at high production volumes) • Risk of over dependence on a single product or market • Likely to attract competition if successful • Vulnerable to market changes – all “eggs in one basket
  34. 34. 34 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew THE PROBLEMS OF GLOBAL MARKETS A. A MISUNDERSTANDING OF CULTURE 1. Culturally bound products – Some products may be specific to a certain culture. Therefore it may be difficult to market some products then others. 2. Market Research – This is important when going into markets overseas. Businesses have to find out if there is a market for their product and work out the consumer’s wants and needs. 3. Advertising – The wrong colour, a poor choice of words or inappropriate actors can ruin an advertising campaign and then give the brand a bad image. It is important to work out what is suitable in new markets. B. LANGUAGE BARRIERS  Language can cause many problems especially if a firm uses an international brand name and/universal names for their products (there are cost advantages to this). Also when a company tries to translate its brand name into another language it may not find the suitable words. C. LEGISLATION  A firm must also adapt its products and marketing to local laws and customs or there is the risk of prosecution. D. PRICING STRATERGY  With the wrong pricing strategy the firm may lose market share or fail to penetrate a new market. A firm with a global brand may find it difficult or costly to differentiate between markets and may be forced to sell their product at a uniform price throughout the world, even if a lower or higher price would be appropriate in some cases. E. DISTRIBUTION CHANNELS  International marketing can go wrong if it creates a demand, but distribution channels fails because buyers are reluctant to stock foreign products. Domestic manufactures may also bring out duplicated that retailers may prefer to stock.  PACKAGING  Some firms may use the wrong colours, packaging, shape etc. which may insult the consumers unintentionally
  35. 35. 35 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Unit8.Are multinationals a force for good or should they be controlled? :  Benefits that multinationals bring to overseas countries:  Incoming multinationals bring FDI - > they fund capital formation (investment) which creates additional productive capacity  Creates jobs  New investment will increase output of goods & services  Any extra output sold abroad, thus increasing exports, also imports could be reduced  Taxes paid increases government funds enabling them to improve their services  An efficient multinational might make high-quality products available at lower prices than there were previously found, helping consumers  Increased competition  Improved trade flows  Economies of Scale  Potential negative impact of multinationals on overseas countries:  Exploitation of labour in developing countries  Influence on foreign governments to gain concessions  Implementation of working practices which would be unacceptable in their home country  Sale of unsafe products to consumers  Use of unsustainable resources  Degradation of local environment  Local businesses might be unable to compete & forced to close  Some businesses might be driven out of the market due to competition  Local workers might obtain low wage unskilled jobs  Loss of national identity  Can multinational firms be controlled?  Power of multinationals: - Many large multinationals combine high market shares with high net worth & seek to use their power to further their own ends  Legal constraints: - Where legal systems treat companies as separate legal entities and can only take action against the company, control tends to be relatively weak
  36. 36. 36 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew - In other countries, where individuals are held responsible for their part in company decisions, the law is often treated with more respect  Political constraints: - Many multinationals are footloose, able to switch operations between countries relatively easily, the threat of leaving the country gives multinationals a powerful weapon whenever they are in dispute with governments  Pressure groups: -Pressure groups are organised groups of individuals who share one or more common goal and seek to influence governmental decision-making. - Image consciousness makes large businesses reluctant to suffer sustained bouts of adverse publicity. - Negative publicity threatens to harm sales if consumers become uncomfortable about a business, and also reduces the ability of the business to recruit talented people in future  Internet  Why multinational?  To maintain/increase competitive advantage and profitability  To reduce costs  To access new markets  To secure resources  To take advantage of government support in host countries Unit9 Strategic Alliances MERGERS, ACQUISITIONS AND TAKE OVERS  The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. Acquisition  Acquisition is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or
  37. 37. 37 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Another type of acquisition is reverse merger a deal that enables a private company to get publicly listed in a short time period.  A reverse merger occurs when a relatively smaller company that has strong prospects of growth and is eager to raise finance buys a bigger company. Achieving acquisition success has proven to be very difficult, while various studies have showed that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome.  Demerger is the converse of a merger or acquisition. It describes a form of restructure in which shareholders or unit holders in the parent company gain direct ownership in a subsidiary (the ‘demerged entity’). Underlying ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that ceases to own the entity is known as the ‘demerging entity’. If the parent company holds a majority stake in the demerged entity, the resulting company is referred to as the subsidiary.  A spin-off is a new organization or entity formed by a split from a larger one, such as television series based on a pre-existing one, or a new company formed from a university research group or business incubator Merger  In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons. Classifications of mergers and acquisitions  Horizontal merger - Two companies that are in direct competition and share similar product lines and markets. E.g. Adidas buying Reebok.  Vertical merger – Merging with a customer (forward vertical integration – L’Oreal’s purchase of retailer Body Shop) or with a supplier of the company (backward vertical integration - an ice cream maker merges with the dairy farm whom they previously purchased milk from; now, the milk is 'free').
  38. 38. 38 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew  Market-extension merger - Two companies that sell the same products in different markets (eg: an ice cream maker in the United States merges with another in Canada)  Concentric mergers occur where two firms are in the same industry are merged, but they have no common customer or supplier relationship. Example: merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company  Conglomerate integration occurs when one firm buys another company with no clear connection to its own line of business. Such mergers are likely to be prompted by the desire to diversify or to achieve rapid growth. However, conglomerate mergers are least likely to succeed due to lack of knowledge of the market place of the company that has been bought out by the purchasing company. Example P&G’s merge with Gillette. Advantages or Motives behind M&A  Growth: The fastest way for any company to achieve a significant growth is to merge with, or take over, another company. E.g. P&G buys Gillette in 2005.  Economies of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.  Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. E.g. Indian car producer TATA buys Jaguar and Land Rover in 2008.  Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.  Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Other examples are purchasing economies due to increased order size and associated bulk-buying discounts. E.g. Morrisons taking over Safeway in 2004.  Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability.
  39. 39. 39 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew  Diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. The Glazer family (owners of Tampa Bay American football team) buying Manchester United FC in 2005.  Resource transfer: The resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.  Reduces competition.  Access to foreign market  It helps to overcome trade barriers. Limitations of M&A The disadvantages of mergers and takeovers are: - Diseconomies of scale if business become too large, which leads to higher unit costs. - Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. - May need to make some workers redundant, especially at management levels – this may have an effect on motivation. - May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business. Unit10. Introduction to stakeholders Let’s start with a definition of stakeholders, which are: Groups / individuals that are affected by and/or have an interest in the operations and objectives of the business Most businesses have a variety of stakeholder groups which can be broadly categorised as follows: Stakeholder groups vary both in terms of their interest in the business activities and also their power to influence business decisions.
  40. 40. 40 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Here is a useful summary: Stakeholder Main Interests Power and influence Shareholders Profit growth, Share price growth, dividends Election of directors Banks & other Lenders Interest and principal to be repaid, maintain credit rating Can enforce loan covenants Can withdraw banking facilities Directors and managers Salary ,share options, job satisfaction, status Make decisions, have detailed information Employees Salaries & wages, job security, job satisfaction & motivation Staff turnover, industrial action, service quality Suppliers Long term contracts, prompt payment, growth of purchasing Pricing, quality, product availability Customers Reliable quality, value for money, product availability, customer service Revenue / repeat business Word of mouth recommendation Community Environment, local jobs, local impact Indirect via local planning and opinion leaders Government Operate legally, tax receipts, jobs Regulation, subsidies, taxation, planning Managing the power of stakeholders Stakeholder power is an important factor to consider whenever you are asked to write about the relationship between a business and its stakeholders. In the context of strategy, what is important is the power and influence that a stakeholder has over the business objectives. For stakeholders to have power and influence, their desire to exert influence must be combined with their ability to exert influence on the business. The power a stakeholder can exert will reflect the extent to which:  The stakeholder can disrupt the business’ plans  The stakeholder causes uncertainty in the plans  The business needs and relies on the stakeholder
  41. 41. 41 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew The reality is that stakeholders do not have equality in terms of their power and influence. For example:  Senior managers have more influence than environmental activists  A venture capitalist with 40% of the company’s share capital will have a greater influence that a small shareholder  Banks have a considerable impact on firms facing cash flow problems but can be ignored by a cash rich firm  A customer that provides 50% of a business’ revenues exerts significantly more influence than several smaller customer accounts  Businesses that operate from many locations across the country will be less relevant to the local community than a business which is the dominant employer in a town or village  Governments exercise relatively little influence on many well-established and competitive business-to-business markets. However their power is much stronger over businesses in markets which are regulated (e.g. water, gas & electricity) or where the public sector has a direct stake (e.g. retail banking)  Employees have traditionally sought to increase their power as stakeholders by grouping together in trade unions and exercising that power through industrial action. However, in the last two decades the level of union membership has declined significantly as has the total time lost to industrial action How should a business handle stakeholders? How should a business respond to these variations in stakeholder power and influence? The matrix below provides some guidance on the approaches often taken: High level of interest Low level of interest High level of power Key players Take notice of them Keep them satisfied Low level of power Communicate regularly with them Can usually be ignored In handling its stakeholders, a business also has to accept that it will have to make choices. It is rare that “win-win” solutions can be found for key business decisions. Almost certainly the business cannot meet the needs of every stakeholder group and most decisions will end up being “win-lose”: i.e. supporting one stakeholder means another misses out. There are often areas where stakeholder interests are aligned (in agreement) – where a decision can benefit more than one stakeholder group. In other cases, there is a clear conflict of interest. Here are some common examples:
  42. 42. 42 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew Where Stakeholder Interests are Aligned Where Stakeholder Interests Conflict Shareholders and employees have a common interest in the success and growth of the business High profits lead not only lead to good dividends but also greater investment (retained) in the business Suppliers have an interest in the growth and prosperity of the business Local community, employees and shareholders benefit from business involvement in the community Wage rises might be at the expense of lower profits and dividends Managers have an interest in organisational growth but this might be at the expense of short term profits Expansion of production activity might cause extra noise and disruption in local community Stakeholder conflicts There are two main approaches to handling the often conflicting needs of stakeholders: Shareholder Approach Stakeholder Approach The traditional approach Business (management) acts in best interest of shareholders / owners Principal aim is to maximise shareholder returns Main focus is on growth & profit Increasingly popular Business takes much more account of wider stakeholder interests Approach based on consultation, agreement, cooperation E.g. social and environmental concerns become more important

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