hsc business studies-global business strategy_2001

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2001 HSC Business Studies | Topic 5 | Global Business

Global Business Strategy Unit 2-1- of -3-

Global Business Strategy Topic 5 Unit 2

ZeE ZuGgS Productions 2Khttp://www.hscstudy.cjb.net

GLOBAL BUSI NESS STRATEGY

The Me t hods o f I n t e r na t i ona l Expans ion

Exporting

Usually the business first experience with global business. Expo r t i ng Is the selling of products in overseas domestic markets. Usually a low cost, low risk way of penetrating into global markets. Sole traders and SMEs commonly use intermediaries to export their goods, in a process known as

i nd i r ec t expo r t i ng . Government departments such as the DFAT and Austrade provide information to small business

about exporting to other countries.

FDI Foreign Direct Investment

Method of international expansion, by controlling interest in property, assets or companiesoversees.

Involves a higher level of commitment money, equipment and personnel transfers do occur. Usually requires large amounts of capital, therefore the players are usually multinational or

transnational corporations. Originates from a variety of business arrangements, including:

o W h o l l y o w n e d subs id ia ry s A business that is entirely owned and controlled by the parent company. Achieved with by establishing a new business, or buying an existing business

o Jo in t Ven t u r es Part ownership of another business with other business and partners. Each share contributions such as personnel, equipment, capital etc.

o St r a teg ic A l l iances Arrangements between two or more businesses with a common busies objective. Partys are willing to cooperate, but dont wish to form a separate business. Examples The Star Alliance encompassing many airlines from around the globe.

Reallocation of Production

This is where the production of the business is reallocated to one of many potential locations thatexist worldwide.

There are many reasons why companys engage in this practice including:o Reducing labour Costs

Taking advantage of lower labour costs in other countries.o Get around trade barriers

In order to penetrate into domestic markets, to avoid the barriers incurred whenimporting, a business may set up production in that particular country (producingbehind enemy lines).

o Be Closer to Customers This results in cheaper, more time efficient means of getting gods and services to the

customer.


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Management Contracts

M anagem en t con t r ac t s are agreements where one business provides managerial assistance,technical expertise or specialised services to another organisation.

The business providing the service usually gets a flat fee or percentage of sales. This form of expansion opens up new markets which the business providing assistance can operate

within, whilst providing capital inlay.

Licensing and Franchising

Licensing is an arrangement where a business seels the right to use intellectual property toanother business.

This intellectual property includes such things as technology, work methods, patents, designs,copyrights etc.

This form of expansion minimises expenditure and risk. The licensor learns information about thisnew market without investing a lot of time and effort.

Disadvantages include loss of control, including quality standards and geographic distribution. Franch is ing is an arrangement where one business supplies another with intellectual property and

ongoing support. Gives the franchisor more control over the sale of its products. There are strict guidelines which

must be followed, else a loss of the franchising licence will occur.

Advantages include low cost and low risks in entering new markets, maintenance of product serviceand consistency, access to cultural knowledge from managers, and arranged favourable deals with

suppliers.

The Reasons f o r I n t e r n a t i ona l Expans ion

Increasing sales and finding new markets

By expanding operations to an international scale means that business can increase their totalsales. The product may also differ in its life cycle in other countries. It is quite possible that a mature

product in Australia is only an emerging product in another oversees country. Business can take

advantage of this.

Acquiring New Resources

Other markets in the global economy may have extra resources that the business needs to expand. These same resources may also be less productive or more expensive than that of the domestic

operations of the business.

Diversification

Business may engage in expanding its operations in order to diversify its suppliers and markets. This avoids volatile swings in market prices and sales in any one market, allowing other markets to

support these occurrences. If a business has a range of suppliers from different countries, then the business is less likely to

come under threat from supply shortages or price increases.


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Minimising Competitive Risk

The operation of a business in many countries means that it is less likely that a competitor willhave a crucial impact on the business operations in one particular market.

Gaining Economies of Scale

Where a business endures cost savings by increasing the scale or size of its operations. Through international expansion, business obtain a better economies of scale by selling worldwide

or establishing production opportunities in low cost labour localities.

Through this increase in the size of the market, the price per unit of output falls, allowing for areduction in price or an increase in profits.

Cushioning the Economic Cycle

If a business has operations in a variety of economies, it may lessen the impact or cushion thenature of the economic cycle.

The economic cycle is the stages an economy experiences over an amount of time; moving from abooming economy where sales and employment is high to a recession or boom where there are

lower sales and increased unemployment. Although the economies of the world are becoming more integrated, this cycle still varies from

economy to economy and thus can be used as an advantage to multinational or transnationalbusiness.

Regulatory Differences

Some countries of the word have more lenient stances towards regulations involving environmentalemissions and award rates for workers.

Business may use this to their advantage, and set up operations where it will cost them less tooperate due to the nature of government regulations in a particular country.

Minimising Tax

Taxes in various countries around the world differ. Therefore business may take advantage of countries with lower taxation rates, saving on the costs

of production.

These types of countries are known as t a x h a v e n s countries having little or no corporate incometaxes. Three types of tax havens include:

o Tax Paradises No corporate taxation

o Tax shelters No tax at all or very little tax occurs.

o Financial Centres Give special tax privileges to certain types of companies or operations.

Compiled from: Longman Business Studies (D. Sykes, V. Hansen, E. Codsi) School Resources Teacher Notes My own understanding of Globalisation from doing economics and business studies.

hsc business studies-global business strategy_2001

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