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:
oSelling more can bring more revenue and profit
oWhere there are high costs of research and development, selling to multiple
markets speeds progress towards breakeven point
oIf a home market is saturated or competition is fierce, exporting can be an
attractive way to increase sales

oAs products move through their life cycle, sales will in many cases eventually
diminish
oA new, overseas market could offset the impact of a declining domestic market
oJust as businesses increasingly sell overseas, they are also able to source
materials, components and services from beyond their own national boundaries
oOutsourcing is buying in products and services rather than undertaking work
within the company. This means that a business can focus on what it does best and
use other people for the rest of the work
oGlobal reputation – A company or its brand that is popular in many countries will
take better hold than others who focus on one country. People are looking for
familiar brands than unfamiliar one and the popularity spread faster across the
globe
oEconomies of scale – selling in large volume will give cost advantage by high
production efficiency and marketing efficiency ( CDs in Asia)
oAvoid uncertainty – It is risky to concentrate on any single country , because
instability in political or economical position or disasters should shatter the whole
business
oShare production and marketing knowledge in other countries. Toyota managers
were trained in Ford .General motors’ shared its production facilities with
competitor Toyota. to utilise its under capacity and also learn from their style
oTransfer of resources – ( 5 M- men, money , materials , machines, market
information) between various branches , subsidiaries and plants
oTo reduce cost – companies can go for low cost destinations in specific areas. This
will involve physical movement or by electronic exchange. IT business, call centres,
education, health ( India ) , manufacturing ( China ) ,
What market conditions encourage international trade:
o Improvements in infrastructure
o Improved communications
o National differences disappearing
o Home markets may be saturated
o Declining home market
o Sell in multiple markets
o Government schemes in place
o Source materials
o More variety of suppliers

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
oTrade liberalisation and WTO have made it easier for b/s to export and to
compete in foreign markets
oAdvantages:
 Economic growth can increase
 Encourages specialisation & improved efficiency through comparative
advantage
 Customers may benefit from improved choice and lower prices
 Improved international trade
oDisadvantages:
×Countries can become over dependent on foreign trade
×Changes in demand can lead to unemployment
×Less equal distribution of income
×Destruction of environment
×Loss of sovereignty – lose ability to make decisions which affects them
×Loss of national identity as it lowers living standards by destroying good
habits and native culture

Trading blocs
o A trading bloc is a type of intergovernmental agreement to reduce regional trade
barriers. Trading blocs are countries belonging to mutual trade agreement giving each
other reduced trade tariff while imposing trade barriers and restrictions to non member
countries.
o Example
NAFTA-North American Free Trade Agreement.
ASEAN-Association of Southe East Asian Nations
EU-European Eunion
SARC-South Asian Agreement for Regional Cooperation.
oDepending on how closely the members wish to integrate their economies
they may form different types of trading blocs such as free trade
areas, customs unions, common markets and full economic & monetary
union
oAdvantages:
 Lessens international isolation which increases gains
 Better trade within trading bloc (no tariff)
oDisadvantages:
×Distracts governments from large gains
×Distribute the gains from trade unequally
×Low economic benefits
×Lessens national sovereignty
A.European Union
EU is the community of countries that form a single market as a result of laws on
free movement of goods and services between its member countries. It was created
for common market for monitory gain and opens new markets and manufacturing hubs.
Now there are 27 member countries like Ausrtia ,Belgium,Denmark,Poland,France etc.
European Union generates 30% of worlds economic activities.
Features of EU
1. Single Market
EU has become a common market.The single market was designed to create
the free movement of goods,service,capital,and people. To do this a
large number of trade barriers were removed.
2. Euro.(Single Currency)

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.

Unit-2.Key players in the world economy
o Both China and India have grown rapidly in recent times with huge increases in GDP.
Businesses based in these countries are now competing with other multinationals to be
world leaders in many sectors.
o Both countries have seen rapid industrialisation yet both retain traditional rural
areas. One consequence of this is that the benefits of growth are not shared
equally,income distribution had become increasingly uneven. Starting from relatively
low income levels has had two consequences. Low wages have corresponded to low
labour costs for business. At the same time, low incomes have held back domestic
consumption, so exporting has played a significant role in development.
o China
o Population – 1,330 million (Comparative advantage)
o Population growth rate – 0.65% Still growing (half a billion)
o Legislation – 1 child per family. Trying to reduce population rate
o China used to be a command economy.
o Foreign capital investment is allowed.
o They are now wanting to make profit and therefore becoming more efficient
o India
oPopulation – 1,156 million (Comparative advantage)
oPopulation growth rate – 1.4%
oAbundance of cheap labour – cheap wage rate
oOver populated – empower women
oEnvironmental damage – large population
oWidespread corruption
oRegulation on FDI
oImport substitution policy – Not importing goods but making them instead.
oReduces imports and corrects balance of payments
oCreated their own brands
oIndia’s economic growth is faster than most LEDC’s
oIndian economy is still very diverse – large primary, secondary and tertiary
sectors

 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
21

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

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?

 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

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').

 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.

 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

Edexcel A level Business Studies notes Unit3

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (20)

Ähnlich wie Edexcel A level Business Studies notes Unit3

Ähnlich wie Edexcel A level Business Studies notes Unit3 (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

Edexcel A level Business Studies notes Unit3