Conditions that Prompt Trade (Edexcel A Level Business)

• Push factors are factors that push a business to expand outside of their domestic country
   
• When faced with saturated markets or intense competition, businesses may consider engaging in international trade as a way to access new markets, diversify their customer base, and gain a competitive advantage
   
• There may be adverse conditions within a domestic market which may cause a business to look at opportunities in countries abroad
  • E.g. Due to the UK leaving the European Union, some businesses have decided to move their operations outside the country
    • Sony has moved their headquarters from the UK to the Netherlands
    • Honda closed a production plant in Wales in 2021
    • HSBC chose to move their London base to France
       

1. Saturated Markets

• Saturated markets occur when the demand for goods and services has reached a peak and it becomes challenging for businesses to grow and expand within the local market
• This often prompts businesses to explore opportunities in other global markets, which can help sustain their growth and profitability
   

2. Intense Competition

• In a competitive market, businesses need to find ways to differentiate themselves and gain a competitive advantage
• One way to achieve this is by exploring new markets and expanding their customer base
• By exporting goods and services to new markets, businesses can reduce their reliance on a single market and diversify their revenue streams, thereby reducing their exposure to market volatility and competition

• Pull factors encourage businesses to operate within markets abroad which present significant growth opportunities
   
• Two pull factors that can prompt trade are economies of scale and risk spreading
   

1. Benefiting from economies of scale

• Economies of scale usually occur when a business expands its production in new markets abroad
• Businesses may also be able to purchase raw materials and labour at lower prices than within their domestic markets
  • E.g. Ikea expanded into China as there was opportunity for growth as families were demanding more furniture due to the removal of the one-child policy
  • Producing furniture in China helped to reduce transportation and distribution costs
     

2. Spreading risk

• By accessing multiple markets, businesses can diversify their customer base and reduce their exposure to risks associated with operating in a single market
• This can include economic risks, political risks, and other types of risks that could impact their operations and profitability
  • E.g. Aston Martin produces motor cars in the UK, however it exports them to multiple markets to reduce exposure to risks associated with operating in a single market
    • There may be a recession in the UK but not in the USA

• Businesses use offshoring and outsourcing to develop their international trade
  
  

Offshoring

• Offshoring is when a company moves part of the production process, or all of it, to another country 
  
  
• Reasons for offshoring include
  • Lower labour costs 
  • Access raw materials
  • Access skilled labour
    
    

The Advantages and Disadvantages of Offshoring 

Advantages of offshoring	Disadvantages of offshoring
Lower labour costs may be available in other countries which help businesses to keep costs down and increase profitability	Public relations and employer/employee relations may suffer due to relocation  as domestic workers lose jobs
Access to specialised suppliers in countries abroad who provide better quality service, raw materials or components	Increased costs in short term such as relocation costs, acquiring new premises and training new staff
Economies of scale as businesses sell to a larger international market	Possibly poor customer service due to language and cultural differences between the domestic consumers and foreign workers E.g. In 2011, Santander moved their call centre back to the UK from India after customers expressed dissatisfaction with the quality of service they were receiving

Outsourcing

• Outsourcing occurs when a business hires an external organisation to complete certain tasks or business functions
  • E.g. Apple outsources the production of the iPhone to Foxconn in China 
    
    
• The key reasons for a business choosing to outsource include
  • Reduced costs 
  • Allows business to focus on core competencies
  • Easier to comply with rules and regulations in other countries as they are often less demanding
    
    
• The main difference between offshoring and outsourcing is that offshoring is still carried out under the same business whereas outsourcing is done by a completely different business
  
  

The Advantages and Disadvantages of Outsourcing 

Advantages of Outsourcing	Disadvantages of Outsourcing
Businesses can take advantage of specialist skills that another business has or  that can complete a particular task more efficiently	Damage to brand image as the values of the two businesses may not be in alignment E.g. Foxconn workers producing Apple products were committing suicide due to the low pay and poor working conditions
Cost effectiveness as businesses avoid having to spend money investing in new facilities abroad	Poor communication between the businesses can cause issues which can lead to increased costs and disruption for the business choosing to outsource
Businesses can benefit from higher labour productivity in other countries Labour productivity is the volume of output obtained from each worker per hour This can lead to lower costs for the business overall if workers are more productive

• The product life cycle represents the value of sales from the time a product is introduced into the market until it is no longer sold 

The four stages of the Product Life Cycle show the value of sales over a period of time
 

• The stages of the product life cycle include Introduction , growth , maturity and decline
  
  
• An extension strategy is a method used by a business to extend the life cycle of a product or service 
  
  
• One extension strategy that can be used by a business is to sell the product in new international markets to extend the life of the product
  • A product could reach maturity in one market but could then be introduced into another market
  • This allows the business to generate more revenue