Download International Business

GCSE
Business Studies
International Business
For first teaching from September 2009
For first award in Summer 2011
International business
At the end of this unit students should be able to:
 Explain the benefits and drawbacks of international trade;
 Explain how the marketing mix of a business would be affected by
international trade; and
 Analyse and evaluate the role of the EU.
Setting the scene: Whisky firm sees profits rise on the back of strong exports
Ian Macleod Distillers, one of the largest independent family companies in the UK spirits
industry, has announced a 53% rise in profits to £1.5m.
The company which was founded in 1933, employs 185 people and makes Glengoyne,
King Robert II and Smokehead whisky, as well as gin, rum and vodka.
The group has combined sales of more than one million cases, with 85% being exported
to over 65 countries.
Managing director, Leonard Russell, said: "We are developing our products for markets
that have the best growth potential, such as India and China."
The company said that because it was independent it could focus on the longer term,
rather than short-term returns for shareholders.
(Source BBC news)
International trade
International trade refers to the exchange of goods and services across international
boundaries.
The amount of international trade conducted by firms has increased rapidly in the last 20
years. Indeed exports from Northern Irelands manufacturing sector are worth over £4
billion to the NI economy.
Why do firms wish to trade internationally? (Benefits of international trade)
There are a number of reasons why firms in NI are keen to trade on an international basis.
They include:
1. To gain access to larger markets.
One of the most obvious reasons for trading internationally it that it allows firms to
increase the size of their potential market. For example if Ian Macleod Distillers only
sold its products in the UK then its potential market would be limited to the adult
population of the UK which is approximately 45 million. By selling in India and China,
Ian Macleod Distillers are increasing their potential market to over 1 billion.
2. To gain economies of scale
If firms produce on a larger scale in order to meet the demands of the increased market,
they should be able to avail of economies of scale. Economies of scale are the advantages
that large firms have over small firms that lead to falling average costs. If Ian Macleod
Distillers can gain these economies of scale it will become more competitive and as a
result more profitable.
3. To diversify and spread risk
Another reason why firms trade internationally is to diversify and therefore reduce the
risk of sudden changes in demand. For example if Ian Macleod Distillers only operates in
its domestic market then its performance will be closely linked to the performance of that
economy and if the economy experiences a recession then the firm’s sales will fall as a
result. However if a firm operates in a number of markets then it will be able to rely on its
sales to other countries if it finds that sales to one country are falling.
4. To increase profit levels.
A final reason which might explain why firms are very keen to trade globally is that they
may be under pressure from their shareholders to increase profit levels. Operating on a
global level should allow the firm to increase sales and therefore gain greater levels of
profits.
What difficulties do firms face when trading internationally? (Drawbacks of
international trade)
Trading internationally brings many benefits, however buying and selling products in
other countries also poses many difficulties.
1. Language barriers.
Trading internationally requires the firm to have a working knowledge of the language of
each country in which the firms sells its products. Ian Macleod Distillers will need to
employ staff who are capable of speaking, writing and translating all marketing materials
into the languages spoken in the countries they are hoping to sell in.
2. Currencies need to be exchanged.
Most countries have their own currency. Therefore, when selling goods abroad, firms
such as Ian Macleod Distillers must price their products in the target currency. After the
firm has sold the good and accepted payment in the foreign currency they then need to
exchange this currency for their own currency. This process is complicated by the fact
that exchange rates can change significantly from one day to the next.
3. Increased transport costs
Selling products on a global scale will significantly increase distribution costs. This is
particularly true for firms which produce large bulky items such as alcohol. Ian Macleod
Distillers will need to spend time and money setting up secure and efficient distribution
networks.
4. Increased administration costs
Firms who wish to sell goods in other countries are often required to complete significant
amounts of documentation which adds to the costs of doing business.
5. Cultural differences
Each country has its own unique culture, value system and tradition. Ian Macleod
Distillers need to be aware of these cultural differences when marketing their products in
other countries. Just because a product and marketing campaign is successful in one
country does not mean that it will be successful in another.
Case study: International trade leads to sweet profits for snowball firm, Lees
Lees Foods, which makes snowballs and macaroon bars, has reported an increase in
annual profits to £612,000 in 2009. The Coatbridge firm said both companies in the
group, Waverley Bakery and Lees of Scotland, enjoyed a record year with sales up 13%.
Lees said that the key to its success was the new export customers they had acquired in
Kuwait, France, USA and Australia.
A spokesman for the company said that “our future growth strategy was based on making
the most of the opportunities presented in overseas markets”. The domestic market place
in which we operate continues to be extremely competitive, although the emergence of
competition from European manufacturers has eased due to the current strength of the
Euro against sterling”.
(Source BBC news)
1. Explain the term international trade
2. Explain 3 benefits that Lees Foods would gain from trading internationally
3. What difficulties might Lees Foods face when trying to sell its products in
countries such as Kuwait, France and the USA
The impact of international trade on the marketing mix
The marketing mix is the term used to describe the range of marketing activities a firm
can use to ensure that its products meets the needs and wants of its target market.
The marketing mix consists of four key elements which are often referred to as the 4 P’s:
Product, Price, Promotion and Place.
To ensure that it is successful when trading internationally the firm may need to make
changes to all 4 elements of its marketing mix.
Product
Differences in culture between countries may mean that a firm has to make changes to its
products to ensure that they are a success in different countries. For example the taste and
flavour of a product might need to be changed slightly to meet the differences in tastes
between countries.
The different laws and regulations which apply in different countries may mean that the
firm has to change the product to meet these regulations. For example in the UK all cars
are right hand drive while in most other parts of Europe cars are all left hand drive.
Therefore car manufacturers need to adapt their cars to ensure they are suitable for the
UK.
Price
The price of a product can vary hugely between countries. In the UK the prices of a wide
range of goods from toothpaste to ice cream have traditionally been higher than in other
parts of the EU. This has led to accusations that firms are ripping off UK consumers.
When a firm is setting the price at which it hopes to sells it products in different markets
it will be influenced by a range of factors including:
 the income of the country
 the price set by local firms
 the exchange rates between the two currencies
 and the level of sales taxes such as VAT
Promotion
When promoting a product abroad, firms must consider the language of the country they
are selling the product in. All advertising, labelling, and promotional material needs to be
translated into the target language. In addition, firms need to be aware of the impact
cultural differences will have on the success of a particular promotional strategy. For
example using an American football player to endorse a product may be very successful
in the USA but much less successful in France or Germany. Firms will need to adapt their
promotional strategies to suit the interests, hobbies and traditions of the particular
country.
Place
Clearly engaging in international trade will have an impact on both the channel of
distribution and the method of transport. Firms need to consider the cost of transporting
their goods to other countries. In some cases, firms may need to set up production
facilities in other countries in an attempt to overcome the costs associated with
transporting their goods over large geographical areas.
Case study: Wrightbus
Ballymena-based bus manufacturers The Wright Group has secured an £11 million order
from the Netherlands for 102 left-hand-drive buses.
The order follows a major contract won earlier this year for the supply of 89 vehicles to
Holland and establishes Wrightbus as the largest British bus exporter to the European
mainland.
Patrick Hurst, Managing Director of Wrightbus, said: “We’ve seen our investment in
drawing up in-depth marketing strategies pay dividends in the last few years and we’re
projecting an increase in output of 35% over the next 12 months.
We’re confident that our European focus will result in a further growth in export sales,”
he said.
The company’s export sales already account for 25% of total Group revenue and with a
prototype double-deck bus currently in development for Hong Kong, the company expects
its export business to grow from strength to strength.
In addition to recent export orders won, the company’s Expotech division exports buses
in kit form to the USA for final assembly, with more than 250 units supplied in the last
two years. Earlier this month, the company was awarded, the Chartered Institute of
Marketing Excellence Award NI 2002, and the Market Development Award.
1. List the 4 elements of the marketing mix.
2. Explain why Wrightbus would be keen to trade internationally.
3. Explain how Wrightbus could adapt its marketing mix to ensure success in
international markets such as the Netherlands, the USA and China.
The EU
The EU is an economic union of 27 member states which is designed to encourage
economic growth, employment, peace and prosperity for all its citizens. As a single
market the EU allows the free movement of goods, services, capital and labour
throughout the whole of the EU. This means that companies can buy and sell products
without being subject to trade barriers, workers can work in any member state and have
their qualifications recognised, and firms are free to set up and operate in any member
state.
Benefits of the EU
The UK’s membership of the EU has brought many benefits to UK businesses and
consumers. These benefits include:
 Increased potential market
Any business in the EU can benefit from the huge potential market that is the
European Union. Membership of the EU allows firms to sell their goods and services
in 27 countries with over 480 million potential customers.
 Reduced red tape
Single Market rules have replaced a large number of complex and different national
laws with a single framework, which reduces the compliance costs for businesses. For
example EU rules have made it easier to start or buy a business with the average cost
for setting up a new company in the EU falling by about 30% and the time needed to
register a company falling by a half since the EU was formed
 Lower prices
The increased competition brought about by the single market has led to lower prices
for consumers and firms. UK firms can now source their raw materials in any of the
27 member states free from any trade barriers.
 Greater choice
UK consumers and firms can now choose from a greater number of suppliers who
must compete on the basis of price and quality if they are to survive in the
competitive environment that is the EU.
 Easier travel
EU citizens can travel across most of the EU without carrying a passport and without
being stopped for checks at the borders. Shoppers have full consumer rights when
shopping outside their country and there are no limits on what they can buy and take
with them, as long as the products purchased are for personal use. Workers are free to
seek employment and work in any member state and have their qualifications
recognised.
Problems with the EU
 Increased competition
While higher levels of competition are generally seen as being good for the economy
and consumers, it can have negative effects on firms. While some firms have
benefited greatly from the EU, some firms have struggled to cope with the increased
competition and have shut down as a result.
 Limits trade with non members
The creation of the single market has led to increased trade between EU member
states; however this has often been at the expense of trade with non member states.
The price of lamb increased after the UK joined the EU as it could no longer import
lamb tariff free from New Zealand.
 Immigration
The single market allows the free movement of labour between member states. While
this is generally regarded as a good thing, some people are concerned with the high
levels of immigration witnessed in the UK and the impact this will have on UK wages
and public services.
 Loss of sovereignty
Opponents of the EU argue that the EU takes political power away from
democratically elected national governments.
Case study: MP calls for EU exit
A Tory MP has called on the government to leave the European Union if the price of
membership is too high,
Dr Fox said there was an intellectual dilemma - either you believed the UK should be
inside the EU or you did not.
He said the decisive areas were monetary policy and national security - which could deny
Britain the right to remain a sovereign nation.
He said he wants a Europe where countries which want to integrate further can do so but
others do not have to follow. However a pro EU MP stated that the UK had gained
hugely from membership of the EU and that leaving now would consign the UK to years
of lower growth rates and higher unemployment.
1. Explain what is meant by the European Union (EU).
2. Explain 2 reasons why some people would wish for the UK to leave the EU.
3. What benefits do UK firms get from membership of the EU?
Knowledge review/ Key terms
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International trade refers to the exchange of goods and services across
international boundaries.
Economies of scale are the advantages that large firms have over small firms that
lead to falling average costs.
The marketing mix consists of four key elements which are often referred to as
the 4 P’s: Product, Price, Promotion and Place.
The EU is an economic union of 27 member states which is designed to
encourage economic growth, employment, peace and prosperity for all its
citizens.
Revision questions
1. Give 3 reasons why firms would wish to trade internationally.
2. Explain 3 difficulties a firm might face when trading internationally.
3. What are the 4 elements of the marketing mix?
4. Explain how 2 of these elements would be affected by international trade.
5. How many countries are members of the EU?
6. What is the population of the EU.
7. Give 3 advantages and 3 disadvantages of the UK’s membership of the EU.