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Course: Business Management The External Business Environment Level: Advanced Higher

March 2015

2 ADVANCED HIGHER BUSINESS MANAGEMENT

© Education Scotland 2015

This advice and guidance has been produced for teachers and other staff who provide learning, teaching and support as learners work towards qualifications. These materials have been designed to assist teachers and others with the delivery of programmes of learning within the new qualifications framework. These support materials, which are neither prescriptive nor exhaustive, provide suggestions on approaches to teaching and learning which will promote development of the necessary knowledge, understanding and skills. Staff are encouraged to draw on these materials, and existing materials, to develop their own programmes of learning which are appropriate to the needs of learners within their own context. Staff should also refer to the course and unit specifications and support notes which have been issued by the Scottish Qualifications Authority. http://www.sqa.org.uk

Acknowledgement

© Crown copyright 2014. You may re-use this information (excluding logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit http://www.nationalarchives.gov.uk/doc/open-government-licence/ or e-mail: [email protected]. Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. Any enquiries regarding this document/publication should be sent to us at [email protected]. This document is also available from our website at www.educationscotland.gov.uk.

ADVANCED HIGHER BUSINESS MANAGEMENT 3


Contents Global business 4

Reasons for growth 4 Methods of growth 8 Issues raised as a result of growth 11 Foreign control of the economy 12 Effects on host country 14 Effects on home country 18 Effects of globalisation 20 Current EU developments 22 Association of South East Asian Nations and China 31

Case study 1 34 Current issues 36

Business ethics 36 Corporate social responsibility 40 Environmental policies in organisations 42 Technological developments 46 Government influence 53

Case study 2 57 Suggested solutions 59

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Global business Reasons for growth Global business refers to international trade or a business that exchanges goods across the world.

A multinational company is any company that operates in two or more countries. Scottish examples include: • AG Barr (who manufacture in Scotland, England and Russia) • First Group (a UK company with headquarters in Aberdeen and operations

in Denmark, USA and Canada). Other examples of successful multinationals are Range Rover (home country UK with manufacturing plants in Australia), Coca Cola, Unilever and BP. They also normally undertake their research and development, finance and marketing on an international basis while having a definite home base (Coca Cola in the USA, Unilever in the Netherlands). Many of these powerful companies have sales turnover higher than the gross national product (GNP) of nations such as Belgium or Ireland. A transnational company also operates internationally but does not have a clear home base. An example is News Corporation, the organisation that owns a number of TV companies (Sky) and newspapers (The Times), and operates

GLOBAL BUSINESS



in many countries, such as the UK, Australia and the USA, yet has no clear home headquarters. This is how we can distinguish between a multinational and transnational company. However, the term ‘multinational’ is often used to cover both types of company. In 2013, the breakdown of multinationals by region/country was as follows:

Source: http://www.interbrand.com/en/best-global-brands/2013/BGB-Interactive-Charts.aspx From the chart, it is clear that the majority of multinationals originate in the Americas.

GLOBAL BUSINESS



By their very nature, most multinationals are household names:

US multinationals (from the global top 100).

UK multinationals (from the global top 100).

All figures show brand value ($m).

GLOBAL BUSINESS



There are many reasons for the growth of multinationals in recent years:

Sometimes it just makes sense for a company to become a multinational. In the oil industry, for example, it is good sense for Shell or BP to control the operation from extraction to petrol-tank filling, which may well start on an oil rig in the China Seas and end up in a filling station in Scotland. Low-cost transportation has made it more economical to ship products around the world, thereby helping to create global markets serviced by multinationals. The decline in barriers to the free flow of goods, services and capital that has occurred since World War II, ie the work done by the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO), has made trading on a worldwide basis much easier. The exponential growth of the internet has made the global market a local one. A consumer searching eBay can receive goods in a few days from Asia or the Americas. Likewise, global media have created a demand for a range of goods and services throughout the world. It is as easy to find a McDonald’s restaurant in Tokyo as it is in Chicago or to buy an iPad in Rio as it is in Berlin.

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Low-cost air travel has resulted in the mass movement of people between countries and it is quite feasible for senior directors of large multinationals to commute between countries to facilitate business. Methods of growth Organic growth Organic growth occurs internally when a business expands by introducing its products to new markets or by bringing new products to market. This type of growth takes a long time to develop as the business may have to create production facilities and distribution channels in the new markets that it has chosen to enter.

Advantages

• The gradual and sustained gain of economies of scales as the business develops

• By manufacturing its own equipment and building its own factories a business can ensure all operations work to the highest quality

• A business that develops its own equipment is highly efficient and mobile, and can respond quickly to change

• The needs of customers are met more quickly as a result

• The business can strengthen the existing corporate culture

• The expert workforce can be further utilised and developed

• Technology can further develop organic growth, for example the music industry has naturally grown with digital downloads and traditional newspapers are seeing incomes rise once more with the introduction of paywalled webpages

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External growth Many multinational businesses use acquisition or merger as a method of growth and entering new markets. Purchasing or joining forces with a successful company provides quick access to new geographical markets and also allows businesses to benefit from the skills and local knowledge that exist within the acquisition’s workforce. Examples of growth include the following. Horizontal integration

This is the combining of two firms operating at the same stage of production, for example EE buying Orange. One firm might merge with another in this way in order to: • eliminate competition and increase market share • achieve greater economies of scale, such as greater discounts

as a result of being able to buy inputs in larger quantities • acquire the assets of other firms • become stronger and therefore more secure from hostile take-

over bids

Backward vertical integration

This is when a firm takes over another at an earlier stage of production, for example Starbucks buying Alsacia, a Costa Rican coffee plantation. This allows Starbucks to be sure of the availability and quality of its input. Although this move will save Starbucks money, as they are no longer having to purchase the coffee at an inflated price, that was not the main driver for the move. The world’s stock of coffee beans is depleting and Starbucks realised that by buying their supplier, they could limit the amount of coffee being purchased by their competitors, namely McDonalds and Dunkin Donuts.

Forward vertical integration

This is when a firm takes over another at a later stage, for example a pie manufacturer taking over a chain of delicatessens. The main reason for this is to control the distribution outlets for the product. Advantages are that this: • eliminates the middleman and his profit • gives the firm greater economies of scale • allows the firm to link processes more easily.

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Conglomerate integration (diversification)

This refers to the combining of firms which operate in completely different markets, for example eBay merging with Skype in 2005 (they later demerged as they could not align their strategies). Reasons for diversification: • It allows the firm to spread risk – failure in one area can be

compensated for by success in another. • It enables a firm to overcome seasonal fluctuations in its

markets. • It makes the firm larger and more financially secure. • The firm acquires the assets of other companies.

De-merger This involves splitting up the conglomerate so that its subsidiaries become new companies in their own right. Shareholders are given shares in the new company according to how many they have in the original one. Reasons for demerging: • The most common reason is a realisation that both businesses

would be stronger apart, perhaps allowing them to make different strategic decisions or take new directions.

• One part of the business may be losing money, preventing the other part from growing.

• The management team feel they have taken a business as far as they can and it would benefit from being broken up.

Contracting out/ outsourcing

This is when, instead of the firm undertaking certain activities itself, it pays other firms to do them. Many businesses nowadays contract out services like transport and catering. Reasons for outsourcing: • It allows the business to concentrate on its core activity. • The outsource firm are specialists and can carry out the work

more efficiently or to a higher standard.

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Issues raised as a result of growth Proposals for growth may look attractive on paper, but can face major problems in reality due to the speed of growth or lack of proper planning. Duplication of effort • Functions of business may be duplicated, leading to the wrong decisions

being made or staff not knowing who to take direction from. Duplication of staffing • When one business acquires another, it may reach a deal with trade unions

to retain the services of existing staff or to have no compulsory redundancies. This will lead to duplication, meaning inefficiencies are created. Staff and human resources costs will rise, and increased costs lead to reduced profit margins.

Compulsory redundancies • It may not be sustainable to continue the employment of workers from both

firms and as a result the new business may need to make some workers redundant, especially at management levels. This may have an effect on motivation.

Diseconomies of scale • If the new business becomes too large, higher unit costs can occur. This is

because a larger business can lose the close working relationship with suppliers and larger production runs can lead to increased waste.

Clashes of culture • Contrasting cultures can reduce the effectiveness of the integration and

lead to disputes and demotivation.

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Foreign control of the economy Foreign direct investment (FDI) occurs when a firm invests in production facilities abroad. There are two ways to achieve FDI: • invest directly in new production facilities abroad • buy an existing enterprise abroad. Buying an existing enterprise has the added advantage of having knowledge and experience of local market conditions available from the initial stages. An example of this is Abellion, the Dutch railway company who have acquired the rights to the Scotrail rail franchise for the next 10 years. They are entering the ‘unknown’ Scotland market – they have the product but not knowledge of the local market to sell their product. Often, companies buy up loss-making companies abroad very cheaply, invest in management (either from headquarters or by training local managers) and technology, and turn around the company much more quickly than set up a business from scratch. This method of investment takes considerable time, effort and finance. New modern production facilities, including the most up-to-date technologies, need to be built. Employees must be hired and trained. This can be a very time-consuming and costly process. However, a company operating this policy can be sure that they can effectively replicate facilities across the world, manage them in a similar way and more easily instil new company culture in a foreign land. Both options of FDI present different managerial problems and have a variety of advantages and disadvantages, which means that some organisations use both methods of FDI to expand internationally. Governments can both encourage and restrict FDI. Host governments can encourage FDI by providing incentives for foreign countries to invest in their economies, and they can restrict FDI through a variety of laws and policies. Many high-tech companies from the USA and Japan have been encouraged by a variety of grants to set up plants in Scotland. Likewise, governments can restrict FDI. For example, companies in the USA are prohibited from investing in or exporting to Iran. Countries such as Poland, the Czech Republic and Russia are now sought-after markets that have, until recent years, been largely untapped by Western goods such as electronics, fashion and advanced pharmaceuticals.

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