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2001 HSC Business Studies | Topic 5 | Global Business -1- of -3Global Business Strategy Unit 2

GLOBAL BUSINESS STRATEGY The Methods of International Expansion Exporting Usually the business first experience with global business. Exporting 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 indirect exporting. 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 companies oversees. 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 Wholly owned subsidiarys 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 Joint Ventures Part ownership of another business with other business and partners. Each share contributions such as personnel, equipment, capital etc. o Strategic Alliances 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 that exist 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 when importing, a business may set up production in that particular country (producing behind enemy lines ). o Be Closer to Customers This results in cheaper, more time efficient means of getting gods and services to the customer.

Global Business Strategy Topic 5 Unit 2 ZeE ZuGgS Productions 2K

2001 HSC Business Studies | Topic 5 | Global Business -2- of -3Global Business Strategy Unit 2

Management Contracts Management contracts 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 to another 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 this new market without investing a lot of time and effort. Disadvantages include loss of control, including quality standards and geographic distribution. Franchising 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 service and consistency, access to cultural knowledge from managers, and arranged favourable deals with suppliers.

The Reasons for International Expansion Increasing sales and finding new markets By expanding operations to an international scale means that business can increase their total sales. 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.

Global Business Strategy Topic 5 Unit 2 ZeE ZuGgS Productions 2K

2001 HSC Business Studies | Topic 5 | Global Business -3- of -3Global Business Strategy Unit 2

Minimising Competitive Risk The operation of a business in many countries means that it is less likely that a competitor will have 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 a reduction 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 the nature of the economic cycle. The economic cycle is the stages an economy experiences over an amount of time; moving from a booming 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 transnational business.

Regulatory Differences Some countries of the word have more lenient stances towards regulations involving environmental emissions and award rates for workers. Business may use this to their advantage, and set up operations where it will cost them less to operate 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 tax havens countries having little or no corporate income taxes. 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.

Global Business Strategy Topic 5 Unit 2 ZeE ZuGgS Productions 2K