Conditions that Prompt Trade (Edexcel A-Level Business): Revision Notes
Conditions that prompt trade
Introduction to international trade
International trade has played a vital role in the UK economy throughout history. As an island nation, the UK has always needed to import raw materials and export finished goods. From Bronze Age copper mining in Wales to 8th century Anglo-Saxon glass imports and iron exports, trade has been fundamental to Britain's development.
The industrial revolution marked a turning point, triggering massive expansion in international trade. British innovation and entrepreneurial activity dominated global commerce throughout the 19th century. The UK exported pumps, steamships, railway locomotives and textile equipment worldwide, establishing itself as a leader in international banking and finance.
Today, the UK remains one of the world's most globalised economies. In 2013, it was the fifth largest national economy by GDP and the fourth largest exporter globally, with exports worth £334 billion. The financial services sector is particularly important, with London serving as the world's largest financial centre. The pharmaceutical industry also represents a major export sector.
Businesses expand internationally to find new resources and markets, produce goods more cheaply, increase profitability, or extend their product life cycles. These motivations can be categorised as either 'push' factors (adverse conditions in existing markets) or 'pull' factors (attractive opportunities abroad).
Push factors
Push factors are adverse conditions in the existing market that force a business to seek international opportunities. These factors compel firms to look overseas to overcome weaknesses in their current markets or reduce costs.
Saturated markets
A saturated market is one where most customers who would buy a particular product already own it, leaving limited opportunity for sales growth.
When a market becomes saturated, businesses face two main options: differentiate their products within the home market, or find new markets abroad where demand still exists. For example, most people in the UK own mobile phones with similar basic functions. Mobile phone manufacturers must either create distinct product features to stand out domestically, or sell their products in markets where demand remains strong.
A cycle manufacturer might struggle to increase sales in countries where cycling is already very popular. However, the same business could find significant growth opportunities in countries where cycling is just becoming popular.
Competition
Intense competition in the domestic market can force businesses to expand internationally. Competition arises when rivals sell similar products at lower prices or higher quality, making it difficult or unprofitable to continue selling in the home market.
The mobile phone market demonstrates this well. Brands like Apple, Samsung, Nokia, HTC, Blackberry and Sony all compete intensively. When all these brands operate in the same market, businesses must either differentiate their products or move to markets where competition is less fierce in terms of price, quality or novelty.
Worked Example: Joe & Seph's Gourmet Popcorn
Faced with domestic competition, businesses may need to adapt their products to suit consumer tastes in new markets. Joe & Seph's Gourmet Popcorn illustrates this approach.
Challenge: While popcorn is typically sold as sweet or salted in UK cinemas, the company needed to differentiate itself in international markets.
Solution: The company experimented with 30 classic British flavours for international markets. Flavours like strawberries and cream and cheddar cheese proved popular with foreign consumers.
Result: By 2015, the company sold in over 1,000 retailers across countries including Australia, Qatar, Saudi Arabia and Switzerland.
Pull factors
Pull factors are attractive opportunities that entice businesses into new overseas markets. These factors represent advantages businesses can exploit when expanding internationally.
The most important pull factors vary depending on the nature of the business and the state of its home market. Common attractions include:
- New or larger markets
- Lower-cost or secure resources (minerals, land, labour)
- Reduced transportation costs
- Access to technological expertise and research facilities
- Managerial or financial expertise
- Organisational skills
- Assets such as brands, patents or intellectual property
These factors help businesses achieve economies of scale or spread their risks more effectively.
Economies of scale
Economies of scale occur when increasing the scale of production reduces the cost per unit of output. Simply put, increasing size or production speed improves efficiency and lowers costs.
When a factory expands, many fixed costs decline relative to output. Larger businesses can:
- Purchase supplies in bulk, usually at discounted prices
- Invest in expensive automation technology
- Train workers in increasingly specialised tasks
- Spread fixed costs across more units of output
However, bigger is not always better. Beyond a certain size, unit costs can actually rise as resources become spread too thinly, creating diseconomies of scale.
Worked Example: Dyson's Scale Efficiencies
The Dyson case demonstrates the principle of economies of scale in action.
Push Factor: The company was refused planning permission to expand its UK factory, preventing it from achieving the scale efficiencies needed to compete against lower-cost foreign competitors.
Pull Factor: Malaysia offered the opportunity to build a large, highly efficient factory, making scale advantages a pull factor for choosing that location.
Outcome: By 2015, the efficiencies gained from the Malaysian factory's economies of scale had generated sufficient profits for Dyson to:
- Expand its UK research and development centre
- Invest £12 million in Imperial College London for an engineering school
- Develop innovative new products
Risk spreading
Risk can be defined as the probability of a negative event happening multiplied by its negative impact. Risks range across financial, strategic, operational and hazard-related categories. While some risks can be recognised, quantified and insured against, others pose threats to business strategy that must be addressed.
Expanding into other countries and markets helps businesses limit various risks. Over-dependence on one market creates vulnerability:
- Short-term risks: If a market faces economic challenges like recession, where growth slows and unemployment rises, sales may decline significantly
- Long-term risks: A region with a rapidly ageing population may not remain viable for businesses selling mainly to under-30s
Expanding abroad helps firms minimise the impact of risks on overall profitability by diversifying their market base. This strategy ensures that problems in one market don't threaten the entire business.
Off-shoring and outsourcing
Businesses can reduce costs and improve efficiency through two distinct strategies: off-shoring and outsourcing.
Off-shoring
Off-shoring involves moving manufacturing or service operations to locations with lower costs, typically in other countries.
A classic example is the 1980s relocation of many UK call centres to India, where well-educated workers speaking good English could be employed at lower wages and for longer hours than British workers.
Firms typically off-shore to:
- Reduce operational costs
- Access workers with particular skills
Risks and Challenges of Off-shoring:
Off-shoring carries significant risks that businesses must carefully consider:
- Reputational damage: Job losses in the home country can harm the company's public image
- Communication barriers: Language or cultural differences can complicate operations
- Country risks: Political instability, economic volatility, technological limitations or intellectual property concerns in the host country
- Hidden costs: Increased management costs, reduced efficiency or quality, exposure to corruption, and loss of intellectual property may outweigh cost savings
- Failed implementation: Some businesses find off-shoring ultimately proves too expensive to continue
Outsourcing
Outsourcing involves transferring an entire business function or project to a specialist external provider, which may be domestic or international.
Many large firms outsource functions such as:
- Information technology
- Payroll processing
- Human resources
- Accounting
- Supply chain and logistics
- Transportation
Businesses typically outsource to:
- Reduce costs
- Specialise different areas of the business
- Focus on core competences rather than support functions
- Improve speed, flexibility or quality
- Comply with rules or regulations
Outsourcing generally carries less controversy than off-shoring but still involves risks:
- Loss of expertise: Reliance on third parties can result in losing internal knowledge and capabilities
- Misaligned interests: The external provider's priorities may diverge from the business's needs, reducing expected efficiencies
- Communication problems: Poor coordination can be disruptive and indirectly expensive
Labour productivity
When evaluating potential locations for off-shoring, businesses should focus on labour productivity rather than simply "cheaper labour."
Labour productivity is the amount of goods and services produced by one hour of labour. What matters is not just lower wages, but lower labour cost per unit of output.
Several factors affect worker productivity:
- Skills and qualifications
- Working conditions
- Technological support and equipment
- Rules and regulations governing work practices
A location with slightly higher wages but significantly better productivity may prove more cost-effective than a location with very low wages but poor productivity.
Extending the product life cycle
Selling products in multiple international markets can extend the product life cycle. When a product reaches maturity or decline in one market, it may still be in the growth stage in another market.
Benefits of Life Cycle Extension:
This allows businesses to:
- Continue generating revenue from products that would otherwise be discontinued
- Maximise return on product development investments
- Maintain production volumes and economies of scale
- Adapt products for different market stages and consumer needs
This strategy proves particularly valuable for businesses with significant research and development costs or capital-intensive production facilities.
Real-world application: the Dyson case
Comprehensive Case Study: Dyson's International Expansion
James Dyson designed his first vacuum cleaner in 1983. His appliances cost double the price of existing brands but featured innovative design and very high quality, leading to strong sales. Despite initially producing all products domestically and establishing a UK research and development centre in 1993, the company struggled with profitability.
Push Factors Affecting Dyson:
Multiple push factors affected Dyson's operations:
- High UK employment costs relative to competitors
- A strong pound making exports expensive
- High logistical costs
- A factory too small to optimise economies of scale
- Refusal of planning permission to expand the UK factory
These factors left Dyson with limited options, prompting the decision to move production abroad.
Pull Factors in Malaysia:
Malaysia provided several pull factors:
- Proximity to most of Dyson's suppliers
- Access to new markets for Dyson products
- Significantly lower overall production costs
- Space to build a large, efficient factory
Strategic Outcome:
The improved profit margins from Malaysian production enabled Dyson to:
- Expand the UK research and development centre
- Invest £12 million at Imperial College London for an engineering school
- Create innovative new products
This demonstrates how strategic international expansion can ultimately strengthen a business's competitive position.
Remember!
Key Points to Remember:
- Push factors (saturated markets and intense competition) force businesses to seek overseas opportunities to overcome domestic market weaknesses
- Pull factors (economies of scale and risk spreading) attract businesses to international markets offering specific advantages
- Saturated markets occur when most potential customers already own a product, limiting growth opportunities
- Economies of scale reduce unit costs as production volume increases, but excessive scale can create inefficiencies
- Risk spreading through international expansion protects businesses from over-dependence on single markets
- Off-shoring moves operations to other countries, while outsourcing transfers functions to external providers
- Labour productivity (output per hour of labour) matters more than simple wage costs when evaluating locations
- International expansion can extend product life cycles by accessing markets at different stages of development