Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

International
Business
Notes

Reasons for Trading Internationally
•

Gain market share
–
–

•

2008: Vodafone = 25%
2010: T-Mobile + Orange = 43%

Domestic market Saturation
–

•

125 phones per 100 people in developed countries

Market Penetration
–

Room in new markets

Limits in Domestic Markets
•

Encouraged competition
– Leads to lower prices

•

Tesco
–

UK monopoly

–

However failed in USA as “Fresh and Easy”

•

Foreign Imports

•

Airbus (needed Global markets!)

•

Global markets encourage innovation

Extending Product Life Cycle
•

Have to try and halt “decline”

•

Changing fashions = potentially failing business
...


Benefits of Imports
•

Some products not available domestically

•

Some skills are best found elsewhere
–

Silk making in China

•

More choice = more competition = lower prices = better standard of living

•

Standardised components (semi-manufactures / Intermediate products)

Can just outsource one specific process
•

Manufacturer of high quality men’s shoes

•

Couldn’t cope with rising costs

•

Stitching leather uppers done in Thailand

•

Still “made in UK”

•

Cost more in Transport

•

Easily covered by savings made on labour costs and taxes

What made globalisation possible?
•

World Trade Organisation – reduction of tariffs

•

Removal of trade barriers

•

“Trade Liberalisation”

•

Creation of Free Trade blocs (EU – Mercosur)

•

China Joined WTO in 2001
–

1980: 2
...
5% of global output

Should we let in Imports? 

(i) Singapore
•

Open Economies (fewer restrictions on Imports)

•

Imports create a competitive environment where businesses have to cut costs

•

Exports become more competitive

Should we let in imports? 

(ii) China
•

Restrictions allow domestic producers to grow

•

Must have low labour costs to keep prices low

•

Must relax restrictions to raise wage (improve living standards)

•

Growing firms can import equipment and increase productivity

•

Businesses then compete on efficiency, not low wages

Trading Blocs
(i)

Loose groupings of countries without trade restrictions (NAFTA)

(ii)

Common Market (Harmonisation of Regulations and Free Trade) (EU)

FDI (Foreign Direct Investment)
•

Companies investing in a country (building factories etc
...
g
...


Harmonisation and the Single Market
•

Set of rules the same for every country

•

E
...
Labour laws add costs (nobody can avoid them to save money)

•

Helps with economies of scale and long production runs (standardised products)

•

EU competition laws stop unfair prices

•

Quicker, cheaper, easier to trade with EU

•

Not all the same though (level of unemployment)

How does trade policy work?
•
•
•
•
•
•

Common External Tariff (CET)
Import duties on the rest of the world are the same
EU negotiates as one “country” in WTO
Trade Creation: Easier trade = more choice = more production = economies of scale
= lower prices
Trade Diversion: Trade is diverted away from non-EU countries
In EU – big trade diversion in agriculture

Common Agricultural Policy (CAP)
•

Designed to protect EU farmers

•

Very high import taxes on non-EU agriculture

•

EU is generally above world prices

•

EU effectively produces own food (Diversion)

Policy Making
•

European Commission: Makes EU policies

•

European Parliament: Like UK parliament, but for the EU – debates proposed laws

•

Council of ministers: National ministers give points and make changes

•

European Court of Justice (ECJ): Court for arguments relating to EU Law

•

Used to have rotating presidencies – now 3 year terms

EU Benefits
•

More trade = economic growth

•

UK trade with EU has increased (compared with our trade with rest of world)

•

Larger markets = more customers = economies of scale

•

Increased competition provides incentives to:
–
–

•

Cut costs (enhanced productive efficiency)
Meet customer needs efficiently (Allocation Efficiency)

European Commission has been good at stopping anti-competitive
– E
...
Car manufacturers holding technical info

EU Constraints
•

Need agreements between 27 governments

•

How much control do we give to European Commission?

•

Still barriers to trade (tightly regulated service industry)

•

Some member states don’t want integration into EU economy

What difference does the Euro make?
•

Much closer to a full-on single market

•

Price transparency: Everything in €, can’t hide what it really costs

•

Cheaper costs as no exchanging currencies

•

BUT: Common policies not right for everyone
–

Also can’t depreciate currency

Key Players in World Economy
Economic Growth
•

When poor economies develop – often fast!

•

Developed countries – growth = 2 or 3%

•

China have been averaging 12%
–

This has slowed to about 8%

Inequality
•

Too much income to the rich (over poor)

•

China used to be run on communist lines
–
–

•

Health and education were free (but not great)
Now people must pay
• Better quality – can everyone afford it?

If income distribution is unfair – not all businesses are viable
–

Shanghai has enough rich people for luxury goods

–

Not every part of China does

Joint Ventures
•

Often businesses enter China through joint ventures

•

Partly due to protectionist policies

•

Partly due to Cultural / Language barriers

FDI
•

More FDI = more trade = growth

•

Lots of joint ventures with foreign partners

•

FDI facilitates “Technology Transfer”

•

FDI and technology have increased labour productivity a lot!

•

Most Chinese are educated – learn skills quickly

•

Investment in Human Capital leads to growth

Economic Growth
•

Ingredients for fast growth
–

Investment in infrastructure (E
...
transport and communication)

–

Investment in equity capital (Raise productivity)

–

Investment in Human Capital

–

Market for the output (Can compete on price / quality – decent distribution)

Social Migration
•

Chinese moving from countryside to cities

•

Job opportunities in factories etc
...
e
...


•

Big Companies (Oil etc
...
)

Absolute Advantage
•

Country can make a product with fewer resources

•

E
...
Would you make computers in USA or Somalia? Why?

•

Makes sense to specialise where you have an absolute advantage over everybody

•

Why doesn’t the UK grow bananas?

•

Don’t need an absolute advantage to trade in something though

Comparative Advantage
•

Taking advantage of trade where you don’t have absolute advantage

•

Even where you have 2 products and 2 countries (2 country having absolute
advantage in both products)

•

Simply: If 2 countries both specialise in the product with the lowest opportunity
cost and trade, real incomes will increase for both countries

Assumptions:
•

Transport costs are insignificant

•

Resources can be easily (and cheaply) relocated

•

BUT raising exports raises GDP
–

Will always be a good thing to trade

Competitive Advantage
•
•
•
•
•

Why do the UK and USA trade office supplies?
Design and technology matter for manufactured goods
Often businesses have the advantage, not countries
Businesses have competitive advantage
– Price, quality, after-sales service
Competitive advantage works regardless of exchange rate
– BUT exchange rate dictates whether you import or export more

CSR
•

Becoming more of an issue nowadays

•

Some say businesses do it to boost profits

•

Some say they just want to be altruistic

•

Either way, locals benefit
–

Could be investment

–

Could be direct help (time, resources) (Google)

Shareholder Value
•

Everything a business does is for shareholders

•

Managers are employed to do their bidding

•

E
...
Generating short-term profits at expense of long-term growth

•

“Short-termism” – UK is often accused of this
–

Looking at short-term gains, mergers etc
...
(harms locals)
Where to advertise? (Tobacco in China)
How labour/capital intensive should production be?
– Government wants new jobs
– Some companies save labour to avoid hassle
– Labour-intensive could even be cheaper!
Pay and working conditions (outsourcing)

The Role of Social Audits
•

Measuring progress towards responsible decision-taking

•

Informing the public

•

Values of employees considered

•

“Social Accounting”

•

Need defined corporate vision (Publicised)(BT)

•

Some companies can’t (too expensive!)

•

Need two-way stakeholder communication

•

BUT, look at Nike – HAD to change!

Ethics and the Environment
•

Developed countries tend to have les strict pollution rules

•

“Exporting” pollution to save costs

•

Poor countries need money and jobs

•

Rich countries blame poor for not caring

•

Poor countries blame rich for creating mess

•

Do we care about climate change?

Social and Cultural Differences
•

People from different cultures are different

•

“Culture”: Shared attitudes, values, customs and expectations

•

Social: How we look and behave

•

Leads to the basis for market segmentation

Areas of Difference
•

Cannot assume that a product liked in one country will be liked elsewhere

•

Need to know market and design appropriately

•

Need people who speak the local language

•

Need to know negotiating customs (China)

•

Need to make adverts make sense (Pepsi)

•

Distribution systems will need to be looked at

•

Less than ½ new entrants are “very successful”

What to do?
•

40% of companies in emerging markets make goods locally

•

Unilever focusses its products towards specific markets

•

Low incomes means cheaper prices (need decent quality though)

•

“Products must be appropriate, not just cheap”

Appropriate Marketing
•

“Pepsi beings your ancestors back from the grave!”

•

Need to know customers

•

Joint ventures may be appropriate

•

Maybe hire local employees or trial products

•

Of course, this means investment…
...
)

•

E
...
Chinese Tyres

When Tariffs are Used
•
•

•

•

Protect industries from foreign competition (EU Agricultural policy)
- Businesses do well – living standards do not!
Raise Tax Revenue
- If inelastic demand for import, people will buy anyway
- Tariffs mean extra taxes
Can deter “dumping”
- When exporter can sell product cheaper abroad
”Dump” cheap imports – harm domestic producers
Infant industry argument
- If protect businesses when small, may become expert
- Can then compete without protection

Inward-Looking Policies
•

Government aims to protect domestic producers
- Often harms your home-grown exports

•

If inelastic demand, people just end up paying more (annoy other sectors)

•

Two main problems then:
1
...
Tariffs cut export revenues in other country

(import less)

How do Quotas Work?
•

Set a limit on how much of a product can be imported

•

Doesn’t matter if demand is low

•

High demand will cause price surge

•

However, if inelastic demand, higher prices mean higher profits

Other Trade Barriers
•

Using subsidies to help a domestic industry
–

•

Keeping the exchange rate undervalued
–

•

US did for cars in 2008-09 with strict rules
China is accused of this (helps to drive exports)

Safety standards (how could these be protectionist?)

What can a business do when faced with trade barriers?
•

When looking to export, have to look for barriers

•

Nissan and Toyota set up in UK to avoid EU import tariffs

•

Businesses sometimes lobby governments

•

Should we buy British to protect British jobs?

How can the WTO help?
•

Researched trade issues, formulates rules, supervises trade negotiations

•

Facilitates agreements between governments

•

WTO favours tariffs and subsidies over quotas

•

Governments can make formal complaints

•

Can lead to penalties for dumping (if you can prove it)

Globalisation – Good?
•

Brings wealth and development to new countries

•

Makes millions better off

•

See how China has grown!

•

“Golden Arches Theory”
–

Is globalisation making the world safer?

The Rise of Outsourcing
•

Highly populous, low-wage, developing economies

•

China, India, Malaysia etc
...
g
...


•

May be deviating too much from core strengths

•

E
...
Rover / BMW

The Domestic Approach (Ethnocentric Model)
•

Standardise marketing mix

•

Reap benefits of economies of scale

•

If it works here, it’ll work there

•

Will be cheaper and give a competitive advantage

The International Approach (Polycentric Model)
•

Countries have social and cultural differences

•

Some businesses make a new marketing mix for each country

•

Sales will increase

•

Why might profit decrease?

The Mixed Approach (Geocentric Model)
•

Advantages of a standardised approach (EOS etc
...
g
...
g
...
g
...
g
...
)

MNCs Employment
•

Starting operations overseas means FDI

•

MNC will need to buy land and materials

•

Creates local employment and income

•

May employ local people (assuming they have skillz)

•

May train local people

•

Will use suppliers and services – creates more jobs

•

Money (wages etc
...
g
...
g
...
5%
Corporation tax in France: 33
...

Nike and Primark famously found to be doing this
BUT could be MNC or a 3rd party supplier
Many MNCs are not involved with child labour – suppliers might be
– E
...
Unilever accused for cotton farms
Take advantage of more lax H&S laws in other countries
Bhopal: Union Carbide plant leak (20,000 dead)
Cape Plc (mining) accused of exposing ppl to 30x British limit on asbestos
Wal-Mart is anti-union (low wages and conditions)

Environmental Impact of MNCs
•

BP Oil Spill!

•

Gasberg mine: Mount Jaya in West Papua
– Home to 3/8 of World’s Equatorial glaciers
– Sacred site for the indigenous people
– Now there’s an open pit visible from space!
– Mine used 1bn gallons of water a month
–

230,000tonnes of toxic waste in rivers A DAY

•

2008 UN study but the figure at £1
...
g
...
cross borders)
Some legal systems are inefficient: Ecuadorian rainforest / Chevron (going since
1993)
Sometimes successful (P
...
g
...
3m people
–
–

Relaxed a little since joining WTO
Need approval before joining – can be revoked

•

Might require a licence, might have to make joint venture

•

May be restrictions on foreign ownership, non-local labour etc
...
g
...
g
...
g
...
the individual

•

Attitude to hard work

•

Customer vs
...
Business will not understand new market
• 2
...
g
...
g
...
g
...
Intensity of rivalry with direct competitors
- Too many competitors forces prices down
2
...
Threat of new substitutes
- Margarine hurt the profits of farmers (milk)
4
...
Bargaining with customers
- Customers (businesses) are usually more powerful than suppliers

Shareholder Influence on Corporate Objectives
•
•

•

Each stakeholder affects and is affected by decisions
Some managers focus on profit for shareholders (Shareholder concept)
– Shareholders employ managers to run the company
• Therefore everything they do should be for shareholders
• Usually shareholders want maximum “Shareholder value”
Some managers focus on all stakeholder groups (stakeholder concept)
– Believe that firms can benefit from this approach
• Improving worklife of employees (better pay and conditions)
– More motivated and effective workforce
• Giving back to community
– Help (E
...
planning permission)
• Treating suppliers with respect and including them in plans
– Better relationship

What are the gains of the stakeholder approach?
•

Employees stick around (more people apply)

•

Better relationships with community, suppliers etc
...


CSR
•

Going above and beyond legal requirements

•

I
...
how it treats stakeholder groups

•

Environment, employees, local community (big concerns)

•

In 2010 Nestle started branding Kit Kat as fair-trade – what about other brands?

Are the stakeholder concept and CSR new?
•

People expect a lot more now

•

Companies can really be hurt by bad stories (Dasani, Primark, Nike)

•

Leads more companies towards a stakeholder approach

•

Started with paternalistic approach of companies like Cadburys

Can a firm satisfy all stakeholder groups?
•

DOES go against shareholders wishes (most of the time)

•

BUT maybe in the long-term it leads to more profits
–

Better rewards for employees leading to more productivity etc
...


Power Cultures

2
...


Task Cultures

4
...
Power Cultures
•

One or a small group of power holders

•

Staff focus on pleasing the boss

•

Most communication by personal contact – encourages flexibility

•

Sometimes questionable (unethical) decisions taken to please the boss

•

Think Alex Ferguson / Alan Sugar

2
...
Task Cultures
•

No single power source

•

Employees allocated from departments to specific projects

•

Disbanded after completion

•

Power lies within expertise (not status or role)

•

Good at dealing with change (short PLC)

•

Mixture of paternalistic and democratic

4
...
g
...


•

Democratic leadership

Investment Appraisal Methods
•

Always making decisions

•

Tactical Decisions: Short-term response to events

•

Strategic Decisions: Mid-Long term plans

•

Strategic decisions need investment appraisal

•

Might take weeks / months to do investment appraisal properly
–

May need to make sales forecasts

–

May need to do primary research

Quantitative methods of investment appraisal
•

2 questions need answering
1
...
How profitable will the investment be?

•

3 methods we can use
1
...
Average rate of return
3
...
Calculate total profit of investment (total net cash-flow – outlay)
2
...
Stick it into the formula!

•

Easy to interpret – the higher the better

•

Easy to compare 2 projects

•

More difficult to decide on one on its own

•

Need to analyse “Reward for risk”

Reward for Risk
•

Need to look at current interest rate is (0
...
25% - highest was 17% (in 1979)

•

This is what you would get leaving your money in a bank

•

So, need an ARR above the interest rate to make it worth it

•

Is now a good time to “take a punt” on projects?

Discounted Cash Flows
•

Payback and ARR need to be used together

•

Payback tells time, ARR profitability

•

DCF is rooted in opportunity cost

•

E
...
when investing £10,000 in machinery need to ask:
–

How much will this make me; AND

–

What else could I do instead

Present Values
•

How much today’s money will be worth in the future

•

£100 now, if interest rates are 10%, will be worth £90 next year

•

Need to see how much our future profits from a project will be worth relative to
today’s money: Discounting

•

Look this up in discounting tables

How do we decide which interest rate to use? (when discounting)
•

2 ways

•

1
...
Decide what the minimum return will be and use that
–

E
...
if you want a 15% return, use the values for 15% and ensure that it’s
positive

Net Present Value
•

Calculates present values of all money coming in future

•

Compares against money being spent on project

•

Allows 2 projects to be compared easily

•

Projects are only worth doing where NPV is positive

•

Has advantages over the over methods
–

Pays attention to the timing of cash flows

–

Pays attention to depreciation of value of money

•

Can easily amend projections (Interest rates, cash-flows etc
...
Company Objectives
• - E
...
long-term growth
2
...
g
...
Company finances
• - Can it really afford either investment?
4
...
g
...
Repositioning the product: New market segment (Land Rover)
2
...

• - Sony budgeted for a 15year payback period when set up in UK

Product Development
•

Launching new products into existing market (Pepsi Max!)

•

About 1/5 new products succeeds (when big budget!)

•

Strategies can help:

(i) Changing an existing product
•

Keep it attractive “New recipe, same great taste!”

(ii) Developing new products
• iPhone worked out well for Apple

Diversification
•

New product in a new product

•

The ultimate risk (dun dun dun)

•

Virgin Cola flopped pretty bad :’(

•

Nintendo went from playing cards to video games

•

Nokia made car tyres and toilet rolls!!

Decision Trees
•

Allow us to visualise a decision

•

Assign a probability to likely outcomes

•

Use where sequences of
events and uncertainty

•

E
...
Product launch or buying
new equipment

•

Allows for uncertainty or
chance

•

Laid out left to right

•

Square is decision to be
made

•

Circle is chance event (with
probability – add up to 1)

•

Can use it to make decisions

•

Use for decisions – go left to right

•

Decisions are squares – chances are circles

•

Estimate probabilities for chances (Add up to 1)

•

2 monetary values represented:
–

(i) Cost of the decision (negative – in brackets)

–

(ii) Benefit (or cost) of a decision – at the end

•

Calculate expected value at each circle

•

Cross out each decision arm not made

Advantages
•

Set out problems clearly – encourage a logical approach

•

Encourage a quantitate approach (Assess chances of success and failure)

•

Show average values and chances of success / failure

•

Best when can look at similar things in past (to assess chances)

•

Tactical rather than strategic decisions

Disadvantages
•

Can be difficult to estimate probabilities

•

Less useful for new or one-off strategic problems

•

Can easily manipulate data to “prove” a result

•

Does not account for variability of business environment

•

Encourages ignorance of qualitative data

Network Analysis
•
•
•
•
•

Shows to complete complex project in shortest amount of time
“Critcial Path”: activities that MUST be completed on time
– Or will delay project – can focus on these
Ensure customer satisfaction AND save money
Do it by minimising wasteful resources
Network shows:
– (i) Order in which tasks must be done
– (ii) How long it should take
– (iii) Earliest date at which later stages can start

Rules for Drawing Networks
•

Must start and end on one “node”

•

No lines must cross each other

•

Only add the end node when you’ve checked the activity follows

•

Must be no lines that are not activities

•

Need to write figures into nodes (large circles, short lines)

The Critical Path
•
•
•
•
•
•

The activities that take longest to complete
In the example: B, D, F, I
Delayed any of these by 1 day will delay the project
Other tasks need less supervision (can also be delayed)
Can move resources from non-critical to critical
How to spot the critical path:
– 1
...
Will be the longest route through these nodes

Earliest Finish Time (EFT) / Latest Finish Time (LFT)
•

•

•
•
•

Earliest and latest finish times
– E
...
Cannot order materials until packs designed (14days)
– E
...
Selling into shops can happen after 1 day
• Doesn’t need to happen until after 42 days
Calculating EST tells us 2 things:
– (i) Earliest date when resources will be needed (save money)
– (ii) Earliest end date (final node)
LFT is the latest a manager will accept the project completed
Then count back to other nodes
– E
...
if finish node 6 on day 70, and takes 7 days, node 5 must be done by day
60
Calculating LFT tells us 3 things
– (i) Deadlines that must be met to be done on time
– (ii) Identifies activities with “float time” (spare time between EFT and LFT)
– (iii) Identifies the critical path

Non-Critical Activities
•

Any activity not on the critical path

•

Has some “float time”

•

May get it out of the way asap

•

May take advantage of extra time to do a better job

Advantages of Network Analysis
•

Should ensure smooth approach

•

Shortens time to completion (imperative in new markets)

•

Can hire resources at right time – save money

•

Allows you to plan when problems happen

Disadvantages of Network Analysis
•

Complex projects won’t work (E
...
Olympics)

•

Provides a plan – doesn’t guarantee it’ll work!

•

Activity lines are not in proportion to duration of activities

Ratios
Profitability ratios: Compares net profit from revenue employed
...

Gearing: Extent to which a firm is dependent on borrowing
...

Financial efficiency ratios: Analyse how well a firm uses its assets and liabilities
...

Return on capital employed = (operating profit / capital employed) x100

- Higher is better
...

- Annual return on money invested as a %
...
5 : 1
- Higher means many resources not being used
...

Acid test ratio = (current assets - stock) : current liabilities
Also known as quick ratio or liquid ratio
...

Can pay debts without stock
...


-

Gearing = (long term loans / capital employed) x100
50% optimum
...

High gearing = more risky investment
...


-

Financial efficiency ratios:
Stock (inventory) turnover = cost of goods sold / stock

- How many times a year a company replaces stock
...

Debtor days = (debtors / annual income) x365

- How long it takes for a company to collect debts
...
(Better for cash flow)
Creditor days = (creditors / cost of sales) x365

- Taking longer to pay suppliers is better
...


Shareholder ratios:
Earnings per share = profit after tax / number of shares
- Measures profit performance
- Meaningless alone - should compare to other years figures
Dividend per share = total dividend / number of shares
- Expressed in pence
- Shows money received for 1 share
...


• Gross profit margin = (gross profit / revenue) x100
• Return on capital employed = (operating profit / capital employed) x100
• Current ratio (liquidity ratio) = current assets : current liabilities
• Acid test ratio = (current assets - stock) : current liabilities
• Gearing = (long term loans / capital employed) x100
• Stock (inventory) turnover = cost of goods sold / stock
• Debtor days = (debtors / annual income) x365
• Creditor days = (creditors / cost of sales) x365
• Asset turnover ratio = annual income : assets employed
• Earnings per share = profit after tax / number of shares
• Dividend per share = total dividend / number of shares
• Dividend yield = (share dividend / value of share(s)) x100

Why do we measure performance?
•

(i) Is the workforce motivated?

•

(ii) Is the workforce as productive as it can be?

•

(iii) Are the HR policies of the business helping to meet goals?

•

Can’t actually measure these things directly

•

2 main indicators we can use
–

1
...
Labour turnover

Labour Productivity
•

Compares number of workers and output

•

Output per period / number of employees

•

The higher the number, the better they’re working
– So, if 10 people are employed and 150 windows cleaned?

•

Also looking for increases here

•

Higher productivity lowers labour costs and increases competitiveness

Labour Turnover
•

How often people leave (and new join) the workforce

•

(No
...
) x 100
–

•

So, if they hire 50 people and 5 leave in a year?

As always, no good just looking in isolation

Causes of Labour Turnover
•

Internal Causes
–
–
–
–

•

Poor recruitment and selection process
• Hiring the wrong people
Ineffective motivation / leadership
People lacking commitment (look outside for opportunities)
Wage levels lower than rivals

External Causes
– More local vacancies arising
–

Better transport links

Consequences of High Labour Turnover
•

Negative Effects
–
–

Cost of training replacements

–

Time taken for new people to settle into culture

–
•

Cost of recruiting replacements

Loss of productivity while new workers adjust

Positive Effects
–

New ideas / enthusiasm

–

Hire people with specific skills (rather than training)

–

New perspectives (problem solving)

Evaluating the Success of Personnel Management
•

Poor figures may show poor management

•

But need to identify:
– Changes over time
–
–

How firm compares to competitors
Performance against targets

•

Need to look at reasons before jumping to conclusions

•

E
...
Low productivity due to installing new machines

Downsides of Personnel Management (Redundancy / Dismissal)
•

Redundancy is when a job is no longer needed

•

Cannot then hire someone to do that job

•

How much does it cost?
– Ages 18-21 = ½ week’s pay (per year working there)
–
–

Ages 22-40 = 1 week’s pay
Ages 41-65 = 1
...




---