Complete International Business Unit 3 Revision

Quick Recap Notes On Unit 3A2 Level

Why Search for new Markets?

3.1

Product Life Cycle

• The Product Life Cycle refers to the phases through which a product goes through from introduction into the market to eventual removal from the market.

• Businesses can often sell old products and services to new markets as they have become mature in domestic markets.

• This way, businesses can sell an old idea in a new place, as well as there being no additional R&D costs.

3.1

Product Life Cycle3.1

Domestic Limitations

• Governments want to keep their markets competition and ensure there is constant innovation. This will also mean prices will be kept competitive, leading to consumers gaining more purchasing power.

• This is achieved by ensuring the government prevents large successful businesses having too much influence and power in a market.

3.1

Domestic Limitations

• When a market reaches market saturation it means that the growth of sales of products will be slow, often at the point of maturity.

• One way a firm can still gain constant sales is to reach out to new markets. These markets are often international markets.

3.1

Domestic Limitations

• Foreign competition can be bad for UK businesses as they may provide better quality goods at a lower price.

• This may force businesses to search to new markets to make their products more competitive through better quality or reducing prices.

• Foreign competitors may have acquired significant market share, therefore the only way to expand is to export to newer markets.

3.1

Domestic Limitations

• If businesses offer a product that has a small market and little demand, exporting may be the only method to expand the business.

• Emerging markets are particularly popular due to their growing set of middle class consumers who are demanding higher priced, western products.

3.1

Global Sourcing

• Global sourcing is gaining goods and services from the global market across geopolitical boundaries. This is often used to exploit global efficiencies such as cheap labour, cheap land or a skilled market pool.

• Differences in the cost of living in poorer nations enables skilled as well as unskilled labour being significantly cheaper. These workers work at lower wages than those in developed nations as the cost of living is cheaper.

• Outsourcing is buying necessary inputs from independent suppliers, either domestically or internationally.

• Offshoring is buying necessary inputs from overseas suppliers.

3.1

Business Objectives

• Entrepreneurs may want to expand their business across the boards of their domestic nation. This is because they will have access to more profit. The larger the business gets, the wider the risks become.

• Larger businesses can take larger risks without threatening its future ventures.

3.1

Trade Liberalisation

• Trade Liberalisation is the process of reducing barriers to entry so that economies become closer to free trade.

• The reduction of quotas and tariffs has given businesses incentives to export as well as import goods.

• The World Trade Organisation (WTO) has helped nations to achieve greater cooperation in making markets more accessible.

3.1

Trade Liberalisation

• Foreign Direct Investment (FDI) is when businesses set up production/distribution facilities overseas. BRIC economies are being increasing sought after as the destination for FDI.

• The costs for trading internationally have gone down, meaning that international trade has become far more lucrative.

3.1

Trade Blocs

• Trading Blocs are a group of countries that have no trading restrictions between them, such as tariffs and quotas.

• Free trade areas are when countries have no restriction within themselves but each country determines their own trade policies with the rest of the world. (NAFTA: Canada, USA and Mexico)

3.1

Trade Blocs

• Common Markets have completely free trade internally and a single trade policy covering member countries to the rest.

• There is a free movement of goods and service as well as people and capital. Businesses can feely invest in any other country within the trading bloc. (European Union)

• A Single Market are when barriers to movement of goods, services, people and markets have been reduced by the EU.

• There are no barriers to trade and there is a single policy throughout the country.

3.1

Benefits of Trade Blocs

• The EU is highly competitive with a competition commissioner that ensures all businesses trading have equal opportunities. There is no price fixing and no barriers to trade.

• Businesses do not have so spend extra on specialising products for each country. Standardised products can be sold, leading to economies of scale.

• No boarder controls means that goods arrive faster to the consumer.

3.1

Benefits of Trade Blocs

• Businesses have access to larger markets where they can exploit economies efficiencies better. Trade Creation is an increase in total goods traded because of reduced trading restrictions within a trading bloc.

• EU products become cheaper than non-EU goods. Trade Diversion is when a trading bloc reduces important from non-member countries, enabling businesses to increase sales in their trading bloc.

3.1

Technology

• Shipping containers (containerisation) have made over seas sale of products more cheaper. Once labour intensive, the use of cranes now handle everything.

• Plane fares have dropped due to rising fuel efficiency. Air transport is much cheaper.

• Computerised data handling as led to a fall in administration costs.

• E-commerce has made shopping accessible to people around the world. (eBay/Amazon)

3.1

Key Players In The World Economy

3.2

China

• China is the fourth largest country by landmass and has a population of 1.3 billion people.

• Once a state run economy, major economics reforms changed it to a more capitalist economy.

• Interior provinces of china still remain very poor, with little education.

• Economic growth for china has been constantly high for a very long time, making it a very lucrative business to settle in.

• This economic growth has benefitted the population of china who have seen their incomes rise as well as their quality of life.

3.2

Purchasing Power

• Purchasing Power Parity is when exchange rates have been adjusted to allow accurate comparisons of purchasing power. This is used as the prices of specific products vary between countries.

• The massive increase in total GDP has helped china. Cities with wealthy citizens facilitate the growth in demand for luxury goods.

3.2

Foreign Direct Investment

• FDI poured into china since it adopted capitalist reforms, making business more lucrative and cheap unskilled labour provided was ideal for manufacturing plants.

• FDI has also led to technology transfer, when countries with limited access to technology acquire expertise when MNC’s locate there. This is why joint ventures had to be set up with Chinese companies.

• This resulted in more skilled labour available due to technology in china, leading to great production efficiency.

• This led to more sophisticated products being produced, particularly electronics.

3.2

Barriers to Trading• English speaking Chinese managers are in short supply and likely to

be expensive. • Intellectual copyright laws are not properly enforced• Markets can suddenly fluctuate due to change in government

economic policies • China has no nationwide credit database• Rapid social and economic change• MNCs much compete with local players with lower cost operations

and prices• Highly diverse market• Infrastructure less developed• Language and cultural barriers

3.2

Trading Opportunities

• Fast growing market with a large landmass and population

• There is a lot of foreign education incentives

• Growing economy meaning there is a growing demand for processed foods

• Large increases in income has led to the demand of luxury goods.

3.2

India• India has a large landmass with a population of 1.2 billion. • The economy had been left crippled after the India was colonised.

However, the British did establish an administration system and rail transport lines.

• This gives India an edge over china as it has more English speakers and markets are more accessible.

• Socialist principles aimed to reduce the divide between rich and poor, and believed in the idea of self-sufficiency.

• Domestic markets protected by trade barriers. This lead to little FDI, there little technology transfer.

• India becoming an open economy lead to export and imports forming a significant part of GDP.

• They have skilled human capital from unemployed graduates.

3.2

Purchasing Power

• There is a strong, growing middle class set of consumers, leading to the purchasing power of India increasing. This can make it more lucrative for businesses.

• Luxury goods and electronics become higher in demand, resulting in more FDI.

• However, 40% of the Indian population live in the poorest states, with 25% under the poverty line.

3.2

Foreign Direct Investment

• FDI is limited due to the government believe in self-sufficiency.

• FDI has increase purchasing power, allowing consumers to purchase more sophisticated goods and services.

• Technology transfer has helped the IT sector, making it a powerhouse for IT services.

3.2

Barriers to Trading • Foreign companies have to pay higher corporation tax, making

imported goods more expensive • Culture and language is a big problem • Political corruption leads to long business legal formalities• Inconsistent industrial policy and rules• Labour regulations and protections • Limited to the amount of loans they take• Smuggled imported goods make them cheaper, making it harder to

compete with locals• Barred from investing into key sectors such as agriculture and

infrastructure• Lack of infrastructure

3.2

Trade Opportunities

• Considerable human capital with an English speak population.

• Skilled labour can be recruited at cheap wages and the cost of living is much lower.

• Educating promoting nation, meaning there are many opportunities for western universities to make money from students.

3.2

How Does a Company Decide Which Country to Target?

3.3

Country Markets

• It would be sensible to suggest the further the country, the higher the transport costs. However, it sometimes it is cheaper to transport through miles of cargo ships than by trucking.

• For certain industries, however, (such as cars) it would be best to locate nearest to the manufacturing factories which makes transportation easier and quicker.

• Businesses who provide services may find that there is very little need for transport.

3.3

Government Policies

• Businesses will try to avoid paying high taxes as they minimise profits, therefore invest in low tax countries which maximises profits. Transfer Pricing and asset movements are used to reduce profits declared in countries in order to maximise profits. Low taxes attract FDI.

• Barriers to trade include tariffs and quotas • Exchange rates that are unstable would cause uncertainty.

Undervalued exchange rates would make foreign goods more expensive.

• Grants and subsidies may be given to businesses for cheaper production. Governments use this to lure businesses in poverty stricken places to offer employment.

3.3

Government Policies

• Targeting areas of high HDI (Human Development Index) and GDP (Gross Domestic Product) per capita will be good for business as the people are healthy, educated and rich.

• Strong infrastructure can allow businesses to have better communication as well as transportation of goods and services, allowing them to reach a wider target market.

• Business target economies that provide the best competitive advantages due to its economic efficiencies.

3.3

Political and Legal System

• Businesses want economic stability so they can make long term predictions on growth that could be made. Some businesses must take risks in order to make profits in volatile nations where there may be corruption and instability.

• Some businesses win over corrupt political leaders in order to gain safety.

• Legal systems may not always be dependable. If assets from a business are not protected, there will be a lot of risk involved in doing business.

3.3

Resources & Commodity

• High commodity prices for natural resources may give companies enough incentive to start doing business in volatile regions. There may be abundant material and cheap labour available.

• Lower commodity prices may make a location more attractive. It is however, unlikely that this will be a major factor in location as they can be imported easily.

3.3

Labour & Technology

• Businesses may have a trade off between additional training costs with low wages in certain countries. Lower wages would provide a greater return on investment.

• Infrastructure and good telecommunication is a key factor when deciding where to locate in the research and development sector.

3.3

Comparative Advantage

• Absolute Advantage exists if the real resource cost of a product is lower in one country than another.

• Comparative Advantage is a situation where a country can produce a good at a lower opportunity cost than a competitor.

• Fears for nations joining free trade is that they may be out produced by another country with absolute advantages, leading to imports and not exports.

3.3

Competitive Advantage

• A Competitive Advantage is an advantage that enables a business to preform better than its rivals. This is more to do with sales and how a product is sold in relation to competition.

• Absolute Advantage is more to do with production. It involves using fewer resources to make a product than a competing business. If a business has an absolute advantage it can charge at a lower price, however this is only one part of a competitive advantage, both are not the same.

3.3

Other Considerations Before Trading Internationally

3.4

Stakeholders

• Corporate Social Responsibility is a business policy that ensures a business will work ethically and responsibly, and how they may achieve this.

• Businesses may need large areas of land in order to operate, which can sometimes damage the livelihoods of local people and negative environmental damage.

• To compensate, businesses may spend money on local environmental projects and offer jobs to local people. Environmentally sensitive locations are volatile and a small change may have a large impact on the ecosystem.

3.4

Capital & Labour

• Businesses may seek to reduce production costs by making their production capital intensive.

• Capital Intensity is when a large amount of production uses physical capital such as tools and machinery and relatively little labour.

• This may result in fewer jobs being available. • In poorer countries, cheap labour is often

heavily exploited.

3.4

Working Conditions

• Giving workers better working conditions will increase overall costs. However, it can lead to increased motivation which improves productivity and gives the business a better image.

• Businesses often outsource production in order to form lower wage costs as the cost of living may be much lower in these countries.

3.4

Environmental Factors

• There are often laws in countries that limit the amount of pollution that business can emit, which fines being issued if they have crossed the limit.

• Companies therefore relocate to developing countries where laws on pollution are more relaxed, in order to reduce costs. The damage to the environment, however stays the same.

• Businesses are adopting more responsibility for their actions, choosing fair trade products and greener energies in production.

3.4

Ethical Behaviour

• Ethical Decision Making is applying standards of fairness and morality to decisions made by a business.

• Ethical decisions are done with the intentions to genuinely benefit the community, whilst CSR is often done because of laws and regulations and public relations.

• CSR focuses some attention on responsibility, however ethical decision making often goes further, setting their own standards for environmentally friendly-ness.

3.4

Society & Culture

• Culture refers to the attitudes, customs, vales and expectations that define groups of people.

• As there are differences in culture, there may be mannerisms and customs that a business must understand by doing businesses in that country.

• Changing brand names or altering designs may be used in order to appeal to consumer tastes.

• Adverts are also carefully worded to ensure people are not offended by it, therefore local firms may undertake the tasks to reduce risk of failure.

3.4

International Branding

• Brands with international appeal can be marketed simply in a range of different countries (e.g. Coca-Cola). Production is made a lot easier as marketing products can be done with fewer changes, making the product marketable to a wide range of countries with limited modifications.

• Brand loyalty may be exploited, whereby travelling consumers may use products and brands that are familiar with rather than choosing local alternatives.

3.4

Joint Venture

• Joint Ventures are often used when businesses outsource to another country. This means that profits will be shared as well as the tasks of operating the business. These are used often to spread risk when entering a market a businesses is unfamiliar with.

• Products with a brand image may have to quality of products in order to sell them. Marketing can use high prices to prove the product's superiority, however this may not be good as Asian consumers may not be as rich as western countries.

• Tariffs are taxes improved on goods and services into a country.• A Quota is a limit on the amount of goods that can be imported.

3.4

Tariffs & Quotas

• Tariffs and quotas are used in order to protect domestic industries. As foreign goods are more expensive, domestic brands become the cheaper alternative.

• They are also used to raise tax revenue. As some goods are price inelastic, increasing taxes will give the government a significant rise in revenues.

• Used to prevent dumping, which is when one country sells a product at a much cheaper price in domestic markets in order to get rid of competition.

• They are used to protect infant industries, allowing them to strengthen their production so when they are strong, tariffs will be lifted as they have prospects of high profitability.

3.4

Tariffs & Quotas

• Tariffs may have negative consequences as countries may retaliate, leading to countries exporters suffering. Protectionist policies have a very high price, which can lead to unstable relations with other countries.

• Quotas can help exporters when demand for goods are inelastic as there is a lower supply but same demand. This will increase the price of the good. Exporting businesses can make more profits from fewer units sold.

3.4

Other Barriers

• The government could provide subsidies so that businesses can sell goods at a cheaper price, cut costs or ensure survival through a recession.

• Undervalued exchange rates provide exporting businesses a competitive advantage when exporting as it makes goods cheaper.

• Safety standards can be used to prevent certain goods from competing.

3.4

Consequences

• Implementing tariffs and quotas can make goods more expensive and reduce consumer purchasing power.

• Retaliation by foreign nations could damage exporting industries, reducing GDP.

• If a company is dependent on a particular nation, it may be proved to set up operations in that country.

3.4

Globalisation

3.5

Global Strategy

• Globalistation is when regional economies, cultures and societies become integrated through a global spanning network of trade.

• Global Strategy is having a common strategy for al countries.

• Global Localisation is adapting to the local expectations in order to succeed in doing business there.

3.5

Mergers & Takeovers

• Merger means combining with another country on a collaborative basis.

• Takeover is when one company bids for another and secures over 50% of shares.

• These are forms of inorganic growth. This occurs when a business expands by combining or taking over another company.

• Organic growth is when a business expands using its own resources.

3.5

Mergers & Takeovers

Advantages of mergers and takeovers include: • Growth, there will be greater prospects for profit• Fame, business may become the largest provider

of a particular good• Access to brands, gaining customers that are

loyal to them • Gaining access to market segments, access to a

larger part of the market making the business more influential

3.5

Mergers & Takeovers

• Access to greater markets and access to research and technology the business has.

• Cost savings can be high, reducing administration costs significantly

• Greater efficiency• Access to new markets and a greater foot-hold in

emerging markets• Expand when a businesses reaches market

saturation in domestic industry

3.5

Mergers & Takeovers

• Increased stability and reduced risk • Gain access to new technologies that may allow

a business to offer more innovative products. • May merge in order to stay within the industry. • Conglomerate organisations means they have

operations in several countries, reducing overall risk involved if one industry fails.

3.5

Mergers & Takeovers

Disadvantages of takeovers and mergers include:• Less than 50% of companies get what they

expect from mergers and takeovers• Businesses may not be able to function properly

due to culture clash and management styles• Businesses that become conglomerate through

expansion tend to move away from their core business and become weaker.

3.5

Sourcing

• Takeovers and merger facilitate sourcing as their business can gain access to more countries, allowing it to exploit the economic efficiencies of that region.

• Outsourcing and FDI can be used to improve the standards of living in the countries significantly.

3.5

Ethnocentric Model

• The Ethnocentric Model is where marketing strategies are based on looking at the world primarily from the perspective of one’s own culture. In order for this to success, two markets have to be very similar.

• This can bring the benefits to economies of scale as no extra reach of investment has to be made when marketing. This standardisation reduces average costs.

• This model is often adopted in a rapidly changing technological market, where there are high development costs, so specialising could make products very expensive.

3.5

Polycentric Model

• The Polycentric Model is an approach that considers each host country to be unique. Firms adapt to local markets, believing they are distinct and so require tailored products.

• This is likely to increase sales, however, average cost per product is likely to rise as there is more expenditure on market research and new product development.

3.5

Geocentric Model

• The Geocentric Model sees the world as a potential market with similarities and differences in domestic/foreign markets.

• This takes advantage of all possible economies of scale. However, may be difficult to achieve as it requires market research. This is associated with Glocalisation.

3.5

Sales Incentives

• Orientation of products are done only to increase the prospect of sales.

• Price strategies that have worked in western economies will not work in eastern economies as the level of economic development is low.

• Special pricing strategies and deals are used to be tailored in order to appeal to consumers and offer an incentive.

• Adaptation to culture is important as it reduces the barrier that the person is buying something foreign, allowing for greater intergradation into the country.

• Specialising products can also increase sales.

3.5

Global Market Niches

• Global Market Niches are smaller, specialised parts of a global market where needs are met that are not met in a global mass market.

• Subcultures are groups of people who have interests and values in common. With the advancement in technologies, subcultures are able to communicate internationally and increase demand for global market niches.

• Subcultures have needs and a sense of brand loyalty to companies producing a product. This adds stability to sales are brand loyalty to these products means that they will be more tolerant of faults as there are few alternatives.

3.5

Global Market Niches• International businesses may start a global market niche when

competition becomes too aggressive in mainstream markets where quantity and prices are main factors. Businesses work hard to distinguish them from mainstream products, including:

• Gaining a clear understanding of the needs and wants of their market segment

• Excellent customer service• Expertise in their field• Prioritising profit rather than market share• Innovation to adapt to changes in the market • Cost efficiency that does not affect quality• Effective use of the marketing mix

3.5

Multinational Corporations

3.6

Multinational Corporations

• A Multinational Corporation (MNC) is one that is active in several different countries.

• MNCs bring in FDI and invest into countries, creating employment for local people.

• Technology transfer is likely due to additional training that may be required for certain roles.

• MNCs have a demand for many services, indirectly increasing employment through the multiplier effect.

3.6

Wages

• Wages should increase as MNCs will want the best people that the country has to offer.

• Wages may be lower on international standards as developing countries have a lower standard of living, but higher on a local standard as workers will be motivated.

• MNCs are often critisised by low wage policies, however research and statistics proves this wrong.

3.6

Technology Transfer

• Transfer of technology through training will make domestic businesses more competitive.

• Efficiency will rise if new technologies are used in production.

• Production of more sophisticated goods will make the economy stronger due to the transfer of technology.

3.6

Exports & Taxes

• Exports will rise as businesses are producing goods and selling them to foreign countries, raising GDP.

• The government will get tax revenue from exports and production through corporation taxes and tariffs.

• Increases in employment means government will gain income tax as well as spending less on unemployment benefits.

3.6

Corporate Social Responsibility

• MNCs that offer high wages will force domestic businesses to increase wages, improving overall standards of living.

• MNCs help local communities by investing into environmental projects and offering compensation for taking up things such as farm land. They may also invest into schemes such as fair trade to build better relations with local producers.

3.6

Government Corruption

• Multinational corporations are accused of giving bribes to gain advantage of tax breaks and other forms of financial assistance.

• Governments can turn a blind eye to MNCs exploiting local people.

• These advantages benefit MNCs as they will grow and make more profits from cheaper production costs. This reduces competition as other companies cannot cope with low prices.

• This increases unemployment in smaller firms as the MNCs are too influential.

3.6

Exploitation of Labour

• Child labour may be used within production, such as within factories and exposed to harmful chemicals. This means that the working conditions are harmful for workers.

• MNCs are often accused of paying very low wages in order to make large profits. However, they are often shown as paying higher rates than local levels, as there is a lower standard of living in these areas.

• It is also argued that MNCs sell unsafe products in order to minimise costs, despite causing serious harm.

3.6

Environmental Damage

• Deforestation is a growing environmental issue, pushing animals close to extinction due to large companies needing natural resources.

• MNCs use high levels of natural resources, with high levels of competition pushing companies to make money through unsustainable means.

• Pollution often occurs on a very large scale, destroying delicate ecosystems, leading to the destruction of natural environments.

• Capital intensity has led to the vast pollution of CO2 in the atmosphere.

3.6

Cultural Imperialism

• Cultural Imperialism is when countries promote, distinguish, separating or artificially injecting the culture of one society into another. This leads to the degradation of nation's cultures.

• Younger generations often follow ‘modern culture’ which is often western, adopting new cultures and forgetting the true heritage of their own culture, leading to the loss of identity for the nation.

3.6

Footloose Capitalism

• MNCs have the power to jump from producing in one country to another, creating and destroying jobs and prosperity.

• Production can be shifted from developed countries to developing nations where it is easier to produce and there is cheaper labour. This will lead to increases in those unemployed, leading to the government having to pay may towards unemployment benefits.

3.6

Pressure Groups

• Pressure Groups are organisations that express the opinions of people with common interests. This, along with media coverage, can influence public opinion, leading to a dramatic change in consumer purchases.

• Bad coverage can impact the way a company does business, including the removal of ‘sweatshops’ and groups such as Greenpeace saving the environment through putting companies through negative media coverage, forcing them to change their actions due to falling profits.

3.6

Internet

• The Internet has become one of the largest places for groups to express the wrong-doing of large corporations, where there are exposed for practicing illegal activities or treating people badly.

• This has the ability to allow consumers to influence the action of large companies as social media can be used to gain a large global following, ensuring a company stops practices that goes against public interest.

3.6

Self Regulation

• Businesses have become more conscious of how public relations can affect their image and directly affect their profits.

• Businesses are adopting and strengthening CSR policies in order to improve their image, giving workers better conditions, making the business more transparent and Prioritising to protect the environment.

• More companies are adopting the fair trade logo on products in order to show that they care about farmers.

3.6

Legal Constraints

• Multinational corporations are difficult to control through the law as they operate in several different countries. When businesses are taken to court, they can be very lengthy and costly processes.

• The competition and markets authority are able to fine 10% of a company’s turnover, which can be very bad for companies profits.

• Stronger governments are able to enforce their restrictions more effectively. China and India insist on joint ventures and strict labour laws as they operate in large markets.

3.6