Edexcel A level Business Studies notes Unit3

A Complete note for Unit3 | Tesmon Mathew

EDEXCEL

A LEVEL

BUSINESS

STUDIES

UNIT 3 – INTERNATIONAL BUSINESS

A LEVEL BUSINESS STUDIES NOTES

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:

o Selling more can bring more revenue and profit

o Where there are high costs of research and development, selling to multiple

markets speeds progress towards breakeven point

o If a home market is saturated or competition is fierce, exporting can be an

attractive way to increase sales


o As products move through their life cycle, sales will in many cases eventually

diminish

o A new, overseas market could offset the impact of a declining domestic market

o Just as businesses increasingly sell overseas, they are also able to source

materials, components and services from beyond their own national boundaries

o Outsourcing 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

o Global 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

o Economies of scale – selling in large volume will give cost advantage by high

production efficiency and marketing efficiency ( CDs in Asia)

o Avoid uncertainty – It is risky to concentrate on any single country , because

instability in political or economical position or disasters should shatter the whole

business

o Share 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

o Transfer of resources – ( 5 M- men, money , materials , machines, market

information) between various branches , subsidiaries and plants

o To 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


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


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

o Trade liberalisation and WTO have made it easier for b/s to export and to

compete in foreign markets

o Advantages:

Economic growth can increase

Encourages specialisation & improved efficiency through comparative

advantage

Customers may benefit from improved choice and lower prices

Improved international trade

o Disadvantages:

× 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


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.

o Depending 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

o Advantages:

Lessens international isolation which increases gains

Better trade within trading bloc (no tariff)

o Disadvantages:

× 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)


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.


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


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.


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.

http://en.wikipedia.org/wiki/Switching_costs

http://en.wikipedia.org/wiki/Linguistics

http://en.wikipedia.org/wiki/Accents


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

o Population – 1,156 million (Comparative advantage)

o Population growth rate – 1.4%

o Abundance of cheap labour – cheap wage rate

o Over populated – empower women

o Environmental damage – large population

o Widespread corruption

o Regulation on FDI

o Import substitution policy – Not importing goods but making them instead.

o Reduces imports and corrects balance of payments

o Created their own brands

o India’s economic growth is faster than most LEDC’s

o Indian economy is still very diverse – large primary, secondary and tertiary

sectors


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


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


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.


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

2 1


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


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


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

http://www.tutor2u.net/blog/index.php/economics/C57/


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?

http://www.tutor2u.net/blog/index.php/economics/tagged/tag/interest+rates/


http://www.tutor2u.net/blog/index.php/economics/tagged/tag/profits/


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



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.


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.


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


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


-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


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,


-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


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


- 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


× 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


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 .


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


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


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


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


- 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

http://en.wikipedia.org/wiki/Management

http://en.wikipedia.org/wiki/Corporation


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').

http://en.wikipedia.org/wiki/Shareholder

http://en.wikipedia.org/wiki/Organization

http://en.wikipedia.org/wiki/Entity

http://en.wikipedia.org/wiki/Television_series

http://en.wikipedia.org/wiki/University

http://en.wikipedia.org/wiki/Business_incubator

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Corporation

http://en.wikipedia.org/wiki/Stock_swap

http://en.wikipedia.org/wiki/Takeover

http://en.wikipedia.org/wiki/Brand


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.

http://en.wikipedia.org/w/index.php?title=Congeneric_integration&action=edit&redlink=1


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.


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


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:


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