4.2 Global Markets and Business Expansion

Question 1

How is Economies of Scale defined?

Answer 1

Increasing the scale of production leads to a lower cost per unit of output. Increasing size or speed increases efficiency and lowers costs.

Question 2

How is Labour Productivity defined?

Answer 2

The amount of goods and services produced by one hour of labour.

Question 3

How is Off-shoring defined?

Answer 3

Shifting jobs to other countries
the main aim is to lower costs or to hire workers with particular skills, but there is a danger to your reputation if you are cutting lots of jobs in the home nation. Other risks include language, cultural differences and PESTLE, loss of IP.

Question 4

How is Outsourcing defined?

Answer 4

Shifting jobs to other organisations
loss of experience/expertise, poor communication and differing interests (can be indirectly expensive to the business)

Question 5

How is Product Life Cycle defined?

Answer 5

the stages that many products go through:development; introduction; growth; maturity; decline.

Question 6

How is Pull Factors defined?

Answer 6

Factors that entice firms into new markets and are the opportunities that businesses can take advantage of when selling into overseas markets.

Question 7

How is Push Factors defined?

Answer 7

Factors in the existing market that encourage an organisation to seek international opportunities.

Question 8

How is Saturation defined?

Answer 8

The point when most of the customers who want to buy a product have done so already, or there is limited remaining opportunity for growth in sales.

Question 9

What are Push Factors?

Answer 9

• Adverse factors in existing market that encourage the organisation to seek international opportunities. Perhaps overcoming weaknesses in current market or looking to lower costs.
• Saturated Markets
• Competition

Question 10

What are Pull Factors?

Answer 10

Opportunities to entice firms into new markets:
- New or bigger markets
- Lower cost or secure resources, such as minerals, land or labour
- Lower cost of transportation
- Technological expertise, including research facilities
- Managerial or financial expertise
- Organisational skills
- Assets, such as brands, patents or other intellectual property.

Question 11

How is Disposable Income defined?

Answer 11

The amount of money that a person has left over after they have paid their taxes, national insurance and other deductions.

Question 12

How is Exchange Rate defined?

Answer 12

The price of one currency against another.

Question 13

How is Infrastructure defined?

Answer 13

The basic systems, facilities, services and capital equipment required for a country’s economy to function, which might include its roads, communication systems and power services.

Question 14

How is Re-shoring defined?

Answer 14

Bringing production back home after using foreign production facilities for a period of time.

Question 15

How is Trade Bloc defined?

Answer 15

A group of countries situated in the same region that join together and enjoy trade free of tariffs, quotas and other forms of trade barrier.

Question 16

What are the 9 Factors to consider as Assessment of a Country as a Production Location?

Answer 16

1 - Costs of production
2 - Skills and availability of labour
3 - Infrastructure
4 - Location in a trade bloc
5 - Government incentives
6 - Ease of doing business
7 - Political stability
8 - Natural resources
9 - Likely return on investment

Question 17

What are three Quantitative Methods which can be used for Investment Appraisal?

Answer 17

• Payback method
• Average Rate of Return
• Discounted Cashflow

Question 18

What is the Payback method?

Answer 18

• calculates how long it will take to recoup the initial investment
• e.g. if the initial cost if £200m and each year they have a positive cash flow of £50m it will take 4 years to recoup the initial investment

Question 19

What is Average Rate of Return (ARR)?

Answer 19

• the net return ( overall income over the time period minus the initial investment) divided by the initial investment, divided by the time period expressed as a percentage
• the formula therefore is:

[(overall income-initial investment)/(initial investment x time period)] x 100

Question 20

What is Discounted Cashflow?

Answer 20

The value of future cash flows must be discounted to the present.
- the important point about discounted cash flow is that, the value of cash available today is worth less in the future due to inflation

• to calculate this, for each year you take the original discount value (1) and divide by the discount rate e.g. if discount rate is 15% you divide by 1.15 each year. –>
• then multiple the annual return for each year by its respective discount number. this gives you thePresent Value (NPV)
• add all PV’s together to get the Net Present Value (NPV) take away the initial investment to give you the Net Cashflow

Question 21

How is Franchising defined?

Answer 21

Establishing a long-term co-operative relationship whereby one party, the franchisor, contracts with another, the franchisee, to run its business. McDonald’s is a well-known example of a franchise.

Question 22

How is Licensing defined?

Answer 22

A contract with another firm to use its intellectual property or to produce its product or service in return for a fee.

Question 23

What are the reasons businesses might undertake a global merger or join venture?

Answer 23

1 - Spreading risk over different countries or regions
2 - Entering new markets and trade blocs
3 - Acquiring national and international brand names or patents
4 - Gaining access to intellectual property
5 - Securing resources or supplies
6 - Maintaining or increasing global competitiveness

Question 24

Why may a business undertake a global merger to spread risk over different countries or regions?

Answer 24

• During economic downturns, even companies with strong balance sheet can face serious difficulties
• Spreading these risk across multiple countries/regions means that it is less likely that economic downturns will occur at the same time as they occur in the home market
• this means that a business wont face too much difficulties if one market is facing economic issues

Question 25

Why may a business undertake a global merger to entering new markets and trade blocs?

Answer 25

• Instead of organic growth, a shorter route to international growth is through mergers and acquisitions. Sometimes it’s the only route, as the maturing industry they are in is too competitive for organic growth.
• An example of this is when 4 big brewers- (AB-InBev, SABMiller, Heineken and Carlsberg) have undertaken various global mergers to gain EoS and new growth that they now own 50% of the global market volume

Question 26

Why may a business undertake a global merger to acquire national and international brand names or patents?

Answer 26

• A business may want to become a global player in the international market. however , it may lack brand recognition or a patent that prevents other business form copying its product or producing a similar product
• by purchasing a business or a product with a strong brand name and strong brand loyalty, it could obtain both quickly
• This can limit competition for the product, a business will not face the high risk, cost and uncertainty of launching a new product
• However, brands can easily be damaged if mergers are not done correctly, they can impact staff morale leading to poor customer satisfaction.

Question 27

Why may a business undertake global merger to gain access to intellectual property?

Answer 27

• developing IP internally, through in-house research and development can take a very long time and involve a lot of financial risk.
• IP is protected through:
  
  • patents - inventors
  • Copyright - literary works and computer program
  • trademarks - brand names and designs
• Since establishing intellectual property can be expensive it is often easier to gain access to intellectual property by buying it in an acquisition or through a joint-venture agreement

Question 28

Why may a business undertake a global merger to Secure resources or supplies?

Answer 28

• Buying businesses to cover each step of sector of industry – Primary/Secondary/Tertiary – also known as backward vertical integration. A business might want or even need to merge with another firm because:
  
  • The resources maybe scarce or hard to require, so
    you want to ensure reliable sourcing.
  • You need to ensure the supplies are of a suitable
    quality/price.
• Eg Starbucks has bought its on coffee farms after multiple disease threats to coffee plants.

Question 29

Why may a business undertake a global merger to maintain or increase global competitiveness?

Answer 29

• Merging can provide bigger markets, scale and scope economies and cost savings. This can make the firm more competitive with pricing power over customers AND suppliers.
• when there is lots of competition in a market, or where the firm is hoping to become a dominant player on a global scale, merging or acquiring another firm can be part of a successful strategy
• Alternatively, two firms can cross-sell product ranges or services, thereby increasing overall l sales and perhaps lowering internal costs e.g. banks and financial services firms have merged in order to provide one contact point for customers to a range of financial services products
• Merging to other countries can lead to tax benefits as you base your head quarter in the country with the lower tax, but can be consider unethical
• Some take overs are also defensive - to stop them growing into a formidable competitor or to stop other competitors taking it over e.g. Facebook bought WhatsApp - which was making a loss but was a superior form of messenger

Question 30

How is Barriers to Entry defined?

Answer 30

Factors that make it difficult for a company to enter an industry or type of business and compete efficiently. These can include incumbent’s high capital investment and strong economies of scale, restrictive government policies and labour unions.

Question 31

How is Competitive Advantage defined?

Answer 31

The advantage one company has over another, or several others, in the provision of a particular product or service. For instance, a car maker may have a competitive advantage because its car break down less often - in other words are of a higher quality - even thought it may be more expensive

Question 32

How is Cost Competitiveness defined? triangle

Answer 32

Through acquiring ever-increasing economies of scale, a company create the cheapest product on the market.

Question 33

How is Cost leadership defined? triangle

Answer 33

A concept developed by Michael Porter, it describes a way to establish the competitive advantage and essentially means the lowest cost of operation in the industry.

Question 34

How is differentiation defined? triangle

Answer 34

Rather than focusing on costs, differentiation is when a firm selects certain attributes of its products and tries to match these with specific customers. The business may then try to command a higher price.

Question 35

How is Economic risk defined?

Answer 35

Risk that future cash flows will change due to unexpected exchange rate changes.

Question 36

What effect can exchange rate fluctuations have on a business in the global market?

Answer 36

• A depreciation in the exchange rate means exports are cheaper so an exporter can benefit from more sales
• However If the pound appreciates, their exports will be more expensive and will have an impact on the competitiveness of exporting firms
• a firm may have to consider lowering their profit margin and reducing their price to stay competitive
• A appreciation in the pound would benefit manufacturer as the rising buying power of the pound might allow it to pay a lower for the raw materials to make its product
• And when the pound depreciates demand, demand for the manufacture’s products may increase, but so might the cost of making them/

Question 37

What is the significance of change in the exchange rate on a business?

Answer 37

• Elasticity of demand –> if the pound depreciates the
  effect it will have on a business and its products
  depends on its PED
  
  • if they a price inelastic, then the fall in price would
    have only a relatively small increase in demand (UK
    tend to be price inelastic)
  • if exports are price elastic the there will be a bigger
    percentage increase in demand
    -Economic growth in other countries –> if it is slowing, demand will drop regardless of exchange rates
• If there is an appreciation in the pound because there have been improvement in efficient and productivity then businesses will be able to absorb the stronger pound more easily
• However if the pound rises due to speculation or due to weaknesses in other countries, then businesses could be uncompetitive because the rise in the [pound is not related to either improved competitiveness or productivity.

Question 38

how is appreciation defined

Answer 38

a rise in the currency - makes exports more expensive and imports cheaper

Question 39

how is depreciation defined

Answer 39

a fall in the currency, makes exports cheaper and imports expensive