Global Markets and Business Expansion
Unit 4: Global Business
Global Markets and Business Expansion
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A push factor is a condition at home that drives a business to look abroad: a market that has stopped growing, or competition that squeezes its share and margins.
A push factor comes from the home market and makes staying there less attractive. There are two to know.
A saturated market is one where almost everyone who wants the product already owns it, so sales can only come from replacement or from taking customers off rivals. Lumora, a Singaporean appliance maker, has sold 400,000 rice cookers a year at home for three years running. Its factory could make more, but the home market will not buy more.
Competition pushes in a different way. When new rivals arrive, or existing ones cut prices, a firm's share and its margin both come under pressure at home. Selling abroad lets it grow where it is not fighting the same rivals for the same customers, and it keeps the factory busy when home orders are being lost.
The two often arrive together: a saturated market is exactly where firms fight hardest over the customers who are left.
Real Example: Lumora's home sales have been flat at 400,000 a year, and two low-priced importers have taken space on the same supermarket shelves. Both push factors are present at once.
Exam Matters: When a case says sales are "flat" or "mature", name the push factor as a saturated market and explain what it means for growth, rather than only saying the firm "wants more sales".
A pull factor is an opportunity abroad that draws a firm in: more sales and profit, risk spread across markets, and lower average costs from producing on a larger scale.
A pull factor is the attraction of the foreign market itself. There are two pairs to know.
Increased sales and profitability. A new market adds customers the home market no longer has. Lumora plans to export 200,000 rice cookers a year at $48 each after freight. Its profit rises from $4.8m to $9.2m, because the extra sales carry no extra fixed cost.
Economies of scale. Fixed costs of $4.8m spread over 400,000 units are $12 a cooker; over 600,000 they are $8. With variable cost at $26, average cost falls from $38 to $34 — on every cooker, including those sold at home.
Risk spreading. A firm that sells in one country depends on one economy. If home sales fall 20% in a downturn and exports hold up, Lumora's total sales fall by 13.33% rather than 20%. Markets that do not move together cushion each other.
Real Example: A juice maker in Nigeria starts selling in Ghana. The extra volume lets it run its bottling line on a second shift, which cuts the cost of every bottle it sells at home too.
Exam Matters: Profitability is a pull factor only if the extra revenue exceeds the extra cost of serving the market. Show the arithmetic where the case gives it, and say what could stop the gain arriving.
Off-shoring moves an activity to another country; outsourcing hands it to another firm. Either can cut costs, and a firm can do both at once.
Cost competitiveness is the ability to produce at a cost that lets a firm match or beat rivals' prices. Two routes to it cross borders.
Off-shoring is about LOCATION: the activity moves to another country, and the firm may still own it. Outsourcing is about OWNERSHIP: another business is paid to do it, at home or abroad. When a firm pays a foreign company to do the work, it has done both.
Lumora's assembly labour costs $12 a cooker at home and $5 in a neighbouring country, plus $1.50 to ship the cooker back. Off-shoring assembly saves $5.50 a cooker — about a sixth of the $34 average cost.
The saving is not free. Distance slows the response to a fault, quality is harder to watch, and an outsourced supplier may also work for rivals.
Real Example: A Pakistani shirt brand keeps design in Lahore, off-shores cutting to its own plant in Bangladesh, and outsources its customer helpline to a call-centre firm in the Philippines.
Exam Matters: If the case gives unit costs, net the freight and any extra quality cost off the labour saving before calling the move "cheaper". The net figure is the cost competitiveness gained.
A product in decline at home can still be new somewhere else, so launching it abroad keeps its sales going and earns more from what was already spent developing it.
Every product passes through introduction, growth, maturity and decline. What stage it is in depends on the market: a model that most homes in one country already own may be something few homes own in another.
Lumora's basic single-pot cooker is in decline at home as customers trade up to multi-cookers. In Belmar, where far fewer households own a cooker at all, the same model is at the start of its growth.
Selling it there extends the product life cycle: sales abroad rise while sales at home fall, so the model's total sales last years longer. The development, tooling and design costs were paid long ago, so each extra year of sales earns a margin on an investment that is already covered.
The limit is fit. A model that is declining because it is out of date may meet the same judgement abroad, and it may need changes to plugs, voltage or labelling before it can be sold.
Real Example: A Kenyan maker of basic feature phones sees sales fall at home as smartphones take over, and finds buyers for the same handset in rural markets across the region.
Exam Matters: Say which stage the product is in at home and which it is in abroad. The whole argument rests on the two being different, so an answer that does not name both has not made it.
Whether people can afford the product now, whether they will be able to afford it soon, and how much time and cost it takes to trade there legally.
Five factors are used to judge a country as a market: levels and growth of disposable income, ease of doing business, infrastructure, political stability, exchange rates. The first two decide whether there are customers and whether they can be reached at a reasonable cost.
Levels and growth of disposable income. The level says how many households can afford the product today; the growth says how many will be able to soon. Average household disposable income in Tarsia is $9,000, growing 1% a year. In Belmar it is $4,000, growing 7%. After 10 years that is $9,942 against $7,869: Tarsia is richer, but Belmar is where the number of new buyers is rising fastest.
Ease of doing business is how simple it is to register a company, obtain import permits, enforce a contract and get paid. Every delay is a cost before a single sale is made, and a slow court system makes an unpaid invoice hard to recover.
Real Example: A Malaysian snack firm compares two neighbours: in one, an import permit takes a week; in the other, three months and several agents' fees. It starts in the first, although the second has more people.
Exam Matters: Compare the two countries on the same factor, using the figures given, and say which factor matters most for THIS product. A cheap staple and a luxury good weigh income very differently.
Can goods be delivered reliably, will the rules stay the same long enough to earn a return, and what will the foreign revenue be worth once it is changed back?
Infrastructure is the roads, ports, power and telecoms a market runs on. Poor roads raise delivery costs and damage goods; weak internet limits online sales; an unreliable power supply limits how many households can use an electrical product at all.
Political stability is the confidence that laws, taxes and trade rules will not change suddenly. Instability raises the risk of new import restrictions, unrest that closes shops, or a government that stops honouring contracts. A firm facing that risk wants a higher expected return before it commits.
Exchange rates decide what the foreign revenue is worth at home. If Belmar's currency is expected to weaken against the dollar, every sale made there will bring back fewer dollars unless prices are raised — and raising them loses customers.
These factors also shape a PESTLE analysis, the Unit 3 tool for the external environment (3.3.1); here each is judged on its own, with the evidence in front of you.
Real Example: An air-conditioner maker finds strong demand in a hot, fast-growing market, but power cuts there run to several hours a day. It sells solar-ready models first.
Exam Matters: Link each factor to a cost or a risk for the specific firm. "Political instability is bad" earns little; saying what could happen to THIS firm's sales or assets, and how likely it is, is the argument.
Before entering, a firm can judge how profitable the market is likely to be from five competitive pressures, not just from how big it is.
Application of Porter's five forces in assessing potential markets means rating each force for a market before entering it. The five forces are rivalry among existing firms, the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers and the threat of substitutes. The stronger they are, the less profit a newcomer can expect.
Applied to Lumora and Belmar: rivalry is moderate, with two local brands; the threat of new entrants is high, because tariffs on cookers are low and others could follow; buyer power is high, since three supermarket chains sell most small appliances and can demand low prices; supplier power is low, because Lumora brings its own components; the threat of substitutes is moderate, as many households still cook rice in a pot on the stove.
The result is a market with growing demand but thin margins unless Lumora can reach customers without depending on the three chains.
Real Example: A Gulf dairy firm considering a new market finds just two retailers controlling most sales. Strong buyer power, not the size of the market, is what decides that its margins there would be thin.
Exam Matters: Pick the two or three forces the case gives evidence for, rate each, and say what they imply for price and profit in that market. A complete list with no ratings is description.
The cheapest wage is not the cheapest place to produce: what matters is the cost of each finished unit delivered to the customer, and whether the right workers exist.
Nine factors are used to judge a country as a place to produce: costs of production, skills and availability of labour force, infrastructure, location in trade bloc, government incentives, ease of doing business, political stability, natural resources, likely return on investment. The first two decide what each unit will cost to make.
Costs of production include labour, materials, energy, rent and the cost of getting the product to market. Lumora compares two sites for a new factory. Inside the trade bloc its main customers belong to: labour $6, other costs $10, freight $1 — $17 a cooker delivered. Outside the bloc: labour $4, other costs $10, a 10% tariff of $1.40 and freight $2 — $17.40. The lower wage loses.
Skills and availability of labour force. A low wage is no saving if workers cannot be found, or need months of training, or leave for better-paid jobs. Output per worker matters as much as pay per worker.
Real Example: A garment exporter pays less per hour in its new country, but output per machinist is lower and staff turnover is high. After training costs, a finished shirt costs more than it did before the move.
Exam Matters: When a case gives costs for two sites, add every line to a delivered cost per unit before comparing. Then ask whether the cheaper site can supply the workers the plan needs.
Producing inside a trade bloc avoids its tariffs; incentives cut the outlay; infrastructure decides whether inputs arrive and output leaves on time.
Location in trade bloc. Goods made inside a trade bloc move between its members without tariffs, while goods from outside pay the common external tariff. That is the $1.40 a cooker that made Lumora's cheaper-labour site the dearer one.
Government incentives. Governments compete for factories with grants, tax holidays, cheap land and special economic zones. A $5m grant towards Lumora's $20m factory cuts the money it must find by a quarter. Incentives can end, though, and some come with conditions on local hiring or exporting.
Infrastructure. A factory needs reliable power, water, roads and a port. Every power cut stops a production line; every day a container waits at a congested port is a day of stock tied up and a customer waiting.
Real Example: An electronics assembler chooses a site next to a new deep-water port in a special economic zone: no duty on imported parts, five years without profit tax, and ships leaving twice a week.
Exam Matters: Weigh the incentive against the lasting factors. The strongest judgements say how long the advantage lasts and what happens to the site's case once it has gone.
A factory is a long commitment, so the rules must last, the inputs must be close, and the likely return has to justify the risk of putting money in one country.
Ease of doing business and political stability matter more for a factory than for a market, because a factory cannot be withdrawn quickly. Permits, inspections and the security of the firm's property all bear on it for years.
Natural resources. A firm whose product uses a raw material heavily — timber, minerals, cotton, water — cuts transport costs and supply risk by producing near the source.
Likely return on investment brings the other factors together. Lumora's factory is expected to earn $3m a year on an outlay of $20m: a return of 15% a year. The $5m grant lifts it to 20%, because the same profit is earned on $15m of the firm's own money.
The word that matters is likely. A higher expected return in an unstable country may be worth less than a lower one in a stable country, because it is less likely to be earned.
Real Example: A furniture maker builds its new plant close to forests it can buy timber from, accepting slower permits there because the raw material no longer has to cross a border.
Exam Matters: Treat the return figure as the conclusion the other factors feed into, not as a separate point. Say which factor makes the forecast more or less reliable.
A merger joins two firms into one, a takeover puts one firm under another's control, and a joint venture creates a new business that both partners own.
Growing abroad by building everything from scratch is slow. Combining with a business that already operates there is faster, and there are three ways to do it.
A merger is two firms agreeing to combine into a single business, usually with the owners of both sharing the new company. A takeover (an acquisition) is one firm buying enough of another's shares to control it; the target may or may not agree. After either, the two businesses are one.
A joint venture is different: two or more firms each put in money and skills to create a NEW business, which they own and run together, while each parent carries on separately. Nothing is bought outright, and the venture can be limited to one product or one country.
So mergers and takeovers are permanent and total; a joint venture is shared and can be partial. That difference is what the reasons in this chapter turn on.
Real Example: A Saudi builder and a Korean engineering firm form a joint venture to bid for desalination plants. Each keeps its own business; the venture owns only the new plants.
Exam Matters: Say which of the three the case describes before giving reasons for it. Several reasons — such as sharing costs — apply to a joint venture far more than to a takeover.
Firms combine across borders to spread risk and gain scale, to get inside new markets and trade blocs, to acquire brands and patents, and to stay globally competitive.
Spreading risk and economies of scale. Two firms selling in different countries are less exposed to one economy, and the combined output spreads fixed costs further — the same logic as exporting, reached in one step.
Entering new markets/trade blocs. Buying a firm inside a trade bloc gives the buyer local production, so its output sells inside the bloc without the common external tariff, and it gets the target's customers on day one.
Acquiring national/international brand names/patents. A brand takes decades to build and a patent cannot be copied. Buying the firm that owns them is often the only way to get them.
Maintaining/increasing global competitiveness. When rivals are growing to global scale, a firm that stays national may find its costs and its research budget too small to keep up; combining is a way to stay in the race.
Real Example: A Chinese appliance group buys a long-established European brand. It gains a name shoppers there already trust, patents on its motors, and factories inside the European Union.
Exam Matters: Tie the reason to evidence in the case: a named brand, a patent, a bloc the buyer is outside. A reason with no link to the case is a list item.
Some deals are about what the partner already has: secure supplies, knowledge of the local market, and supply chains or distribution networks that took years to build.
Securing resources/supplies. A firm that depends on one raw material or component can buy or partner with the business that produces it, so rivals cannot outbid it and a shortage does not stop its own production.
Making use of local knowledge. A local firm knows what customers there want, how to deal with officials, and which suppliers to trust. That is expensive to learn from outside and is a common reason for a joint venture rather than going alone.
Accessing supply chains/distribution networks. A supply chain is the set of suppliers, warehouses and transport links that gets inputs in and products out. A distribution network is the wholesalers, retailers and delivery routes that get a product to customers. A firm entering Belmar alone would need to persuade shop by shop; a partner that already supplies ten thousand outlets gets the cooker onto their shelves at once.
Real Example: A Kenyan tea packer forms a joint venture with an Egyptian food wholesaler, whose trucks already visit thousands of grocery stores the packer could never reach on its own.
Exam Matters: Name the specific asset the partner brings and why the firm could not quickly build it itself. That comparison is what turns a reason into an argument.
A deal can remove a rival, it can be the only legal way to operate in a country, and it can split the cost and risk of a project too big for one firm.
Reducing competition. Buying a rival removes it. With fewer sellers, the combined firm faces less pressure on price, although competition authorities may block a deal that goes too far.
Government or legal requirement. Some countries do not allow a foreign firm to operate in certain industries unless it has a local partner, or they cap foreign ownership at a share such as 49%. In those markets, a joint venture is not one option among several; it is the only legal way in.
Sharing costs/risks. A new plant, mine or research programme may cost more than one firm wants to risk. In a joint venture each partner pays part of the cost and bears part of any loss — at the price of sharing the profit and the decisions.
Real Example: A European retailer wants to open stores in a country where foreign firms may own at most half of a retail business. It forms a joint venture with a local partner that holds the other half.
Exam Matters: If the case mentions an ownership limit or a rule about local partners, that is the reason — the firm has no choice. Recognising a legal requirement, rather than listing advantages, is what the evidence points to.
When the home currency appreciates, exports become dearer abroad or earn less at home; when it depreciates, the reverse. The firm chooses which of the two it absorbs.
Movements in exchange rates have an impact on businesses that sell abroad. An exchange rate is the price of one currency in another; Lumora sells a $50 cooker in Belmar at $1 = 4 units, so the Belmar price is 200 units.
The dollar appreciates to $1 = 5 units, a rise of 25%. Lumora now has two choices. It can keep its $50 price, and the Belmar price rises to 250 units, so buyers turn to local brands. Or it can hold the Belmar price at 200 units, and each sale now brings back only $40. Either way the appreciation costs it sales or margin.
How much it hurts depends on how sensitive Belmar's buyers are to price, and on whether rivals face the same change.
Real Example: A Thai rice exporter sees its currency strengthen by a tenth in a year. It holds its prices abroad to keep customers, and its profit per tonne falls instead.
Exam Matters: Show the new foreign price or the new home-currency receipt with the figures given, then say which option the firm is likely to take and why.
An appreciation makes imported inputs cheaper but shrinks the home value of profits earned abroad; a depreciation does the opposite. Most global firms feel both.
The same movement has a second side. Lumora buys a heating element invoiced at 60 units. At $1 = 4 units that is $15; at $1 = 5 units it is $12. The appreciation that hurt its exports lowers its costs.
Profit earned by a subsidiary abroad is converted back too. A Belmar operation earning 8,000,000 units is worth $2m at the old rate and $1.6m at the new one, although nothing about its performance has changed.
Firms reduce the uncertainty in several ways: buying inputs in the currency they earn in, producing inside the market they sell to, agreeing a rate in advance with a bank, or invoicing in their own currency so the buyer carries the risk. None of these changes the rate; each changes who bears it.
Real Example: An Indian electronics firm imports chips priced in dollars and sells phones in rupees. When the rupee weakens, its costs rise while its prices are fixed in shops, and its margin narrows.
Exam Matters: For a firm that exports and imports, work out both effects before judging the net impact. The side with the larger sums decides whether the movement helps or hurts overall.
When the skills a firm needs are scarce, wages and delays rise, so its costs climb and its quality or innovation can slip — weakening it against rivals in other countries.
International competitiveness is a firm's ability to win sales against rivals from other countries. It has two sides: price competitiveness, which rests on cost competitiveness, and non-price competitiveness — differentiating the product through quality, design, reliability and service.
A skill shortage is when employers cannot find enough workers with the skills they need. Its impact reaches both sides. On price: firms bid for the few skilled workers, so when technicians are scarce Lumora's technician pay rises from $2,000 to $2,400 a month, a 20% rise that feeds into unit costs. On non-price: unfilled posts delay new models, and less-skilled staff make more faults, so quality and innovation fall behind.
Real Example: A Nigerian engineering firm cannot hire enough welders. It pays overtime, delays two contracts, and loses a third to a rival in a country with a larger trained workforce.
Exam Matters: Follow the shortage through to a specific loss of competitiveness — a higher price, a later launch, a quality problem — and then weigh the firm's options for closing the gap.
A push factor is a condition at home that drives a business to look abroad: a market that has stopped growing, or competition that squeezes its share and margins.
A pull factor is an opportunity abroad that draws a firm in: more sales and profit, risk spread across markets, and lower average costs from producing on a larger scale.