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EDEXCEL
A LEVEL
BUSINESS
STUDIES
INTERNATIONAL BUSINESS(UNIT-3)
Unit-. 1: Why does a business seek international market?
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
o Outsourcing/off shoring
o Increased trade liberalisation
dramatic miracle of the 20th century. All types of companies can flourish under WTO
initiative from leading MNCs like Exxon-Mobile, Toyota, and Microsoft to SMEs (Small
and Medium size Enterprises with employee strength below 250).
Exists to reduce barriers to trade and to ensure that countries keep to
the agreements they have made
The organisation also deals with complaints between members,
organizing negotiations and, if necessary, making judgements against a
country
WTO agreements can mean that customs unions and single markets
must sometimes reduce their external barriers to trade
It encourages trade liberalisation by operating a system of trade rules
and by providing a forum for the negotiation of trade disputes
Promotes peace
Trade rises incomes
System encourages good government
oTrade liberalisation and WTO have made it easier for b/s to export and to
compete in foreign markets
oAdvantages:
oDisadvantages:
Countries can become over dependent on foreign trade
Changes in demand can lead to unemployment
Less equal distribution of income
Destruction of environment
Loss of sovereignty lose ability to make decisions which affects them
Loss of national identity as it lowers living standards by destroying good
habits and native culture
Trading blocs
o
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
oDisadvantages:
Distracts governments from large gains
Distribute the gains from trade unequally
Low economic benefits
Lessens national sovereignty
A.European Union
EU is the community of countries that form a single market as a result of laws on
free movement of goods and services between its member countries. It was created
for common market for monitory gain and opens new markets and manufacturing hubs.
Now there are 27 member countries like Ausrtia ,Belgium,Denmark,Poland,France etc.
European Union generates 30% of worlds economic activities.
Features of EU
1. Single Market
EU has become a common market.The single market was designed to create
the free movement of goods,service,capital,and people. To do this a
large number of trade barriers were removed.
2. Euro.(Single Currency)
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.
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.
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.
Chinas 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 worlds factory and
export power house, while India is called worlds 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
8 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
Advantages of Outsourcing
1. Huge Cost Savings:Numerous surveys and studies conducted have shown that the
prime outsourcing benefit lies in 40-60% savings in cost due to complete elimination or
minimization of overheads like travel allowance, leave bonus, rent allowance etc. Besides
these outsourcing benefits cost savings on account of offshoring also occur due to large
savings on employee salary bills.
2. Access to Specialized Skills at fraction of the cost:
Outsourcing to countries like India has many benefits like availability of trained,
hardworking and experienced manpower in large numbers and that too at just a fraction
of what it would cost in the parent country. Indian IT professionals are skilled in all the
current and emerging technologies and are known for their competence and excellent
communication skills. In most of the companies the biggest cost consideration are the
employee salaries and with this vital expenditure minimized bottom lines are bound to
rise.
3. Focus on the core activities.
Outsourcing non-core or peripheral services for instance house keeping, lets you
concentrate on your core business activities letting the specialists handle non-core
services for you. This saves you enormous costs on wage bills, employee benefits, legal
hassles and more.
4. Quicker Project Completion:
Outsourcing enables projects to be completed faster as the service providers are bound
by pre-decided schedules. Quicker completion enables faster delivery of services to
your clients whether in the parent country or in other countries. This way you can take
up and outsource more projects thus setting in chain a continuous growth cycle.
5. Outsourcing increases customer satisfaction:
As non-core but essential services like customer support are outsourced to domain
specialists who are skilled in the task, customer satisfaction is bound to increase as
queries and problems are resolved quickly, deliveries are faster and company interaction
is more satisfying for the customers.
6. Continuous Development becomes possible:
Another important outsourcing benefit is the possibility of continuous development.
What this means simply is while your in-house development team sleeps after working in
the day, the outsourced team in India or other country that enjoys a similar time zone
advantage takes over from where the first team left. This not only saves costs but
boosts productivity as well.
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.
What will be the likely impact of growing economic power of China & India on
Both countries still have significantly poverty problems for large sectors of their
populations
China:
o
economy
o
infrastructure
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
Much of what China has produced has been relatively labour-intensive and
low-technology
o
parts and components, once precise specifications and quality standards have
been agreed
o
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
Young people are now training to go into business and moving more out of
Bad infrastructure
(For China)
Even though Mandarin is the most spoken language in the world it is only
China has grown rapidly in recent times with huge increases in GDP, a growth rate
of 10.4%. This compared to the UKs 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
13 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
has had two consequences. Low wages have corresponded to low labour costs for
business. At the same time, low incomes have held back domestic consumption, so
exporting has played a significant role in development.
o
Not only does China have a huge GDP growth rate but they also have a large
population growth rate. With their current population at1,330 million it continues to
grow at a rate of 0.65% per year. This gives them a comparative advantage over the
UK as it means that they have a large, cheap abundance of labour which gives the
Chinese businesses a large choice of employees and means that they can charge low
wages meaning that they reduce their costs leading to profits increasing. Due to these
low wage rates it enables the businesses to have an edge over their competition in the
UK for example and to produce cheaper goods then their competition leading to
demand increasing. It will therefore affect the UKs 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 (MNCs) 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.
India has grown rapidly in recent times with huge increases in GDP, a growth rate
of 8.8%. This compared to the UKs 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 UKs 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
1
2
Another opportunity it will have led to is that UK firms (MNCs) 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 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
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
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 macroeconomy 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?
Competition:
Absolute advantage:
Comparative advantage:
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
Specialisation
-
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
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
is
the
continuing
commitment
by
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
employees,
meeting the
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.
-
CSR obliges businesses to consider more than just profit, to take account
-Greater productivity
Disadvantages
1. Use of money not directly linked to the business
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
25 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
Pricing strategies:
-To comply with possible restrictions from the govt. and therefore gain access
to the market etc.
Disadvantage: share profit, build relationships over large distance
A tax on imported goods. This adds to the price of imports, shifting the
Tariffs are a tax on imports. The higher the taxes the more expensive
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
The people who do benefit are the home producers and their employees
Tariff protection allows them to sell more because they gain a price
Non-Tariff Barrier:
All other measures employed to protect domestic production other than tariffs.
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
Unit7 Globalisation
Global industries:
- 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 doesnt 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
29 Shaviyani Atoll School Kanditheem/Business Studies/Grade12/ By Tesmon Mathew
Disadvantages
-Incompatibility with culture will lead to tragic failure
-Shall co-ordinate divergent culture
-Ignores and disrespects cultural differences
2. Localization
It is also argued that when companies operating across the global will have to modify
their products in order to be successful in their new world markets. International
markets are flooded with different products and there have been many evidences
where businesses that tried to shift their existing products and business models into
overseas markets had failed even with their best of the marketing strategies. Some
common causes of failure are;
-Language / interpretation problems
-Misunderstanding the culture
-Mistiming economic or political mistiming
These can be minimized by careful research to ensure a good understanding of the
market before a company enters to do business in such new markets.
Advantages of localisation :
-Firm can compete with local firms
-Firm can get acceptability in foreign soil due to their adaptation create local
customer loyalty
-Close match with local customers 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 .
of which the price of product may be higher when compared to the massmarketed products.
In a new firms 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:
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)
Can often charge a higher price customers are prepared to pay for
expertise
A. A MISUNDERSTANDING OF CULTURE
1. Culturally bound products Some products may be specific to a certain
culture.
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
PACKAGING
Some firms may use the wrong colours, packaging, shape etc. which may
insult the consumers unintentionally
home country
- 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.
-
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
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
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
LOreals 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').
Main Interests
Shareholders
Election of directors
Directors and
managers
Employees
Suppliers
Customers
Community
Government
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 companys 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
Key players
Take notice of them
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:
Stakeholder conflicts
There are two main approaches to handling the often conflicting needs of stakeholders:
Shareholder Approach
Stakeholder Approach
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