Opportunities & Threats of Global Strategy (AQA A Level Business): Revision Note

What is global strategy?

• Globalisation is the increasing interconnectedness and interdependence of economies, markets, businesses and cultures across the world

  • It has been driven by improvements in transport and communication technology, and the reduction of trade barriers between countries

Reasons for increased globalisation

• A global strategy is a business's plan for operating, selling or producing across multiple countries, rather than remaining focused solely on its domestic market

Examples of global strategies

• Pursuing sales growth in larger or faster-growing markets

  • When demand in the home market begins to level off, entering overseas markets allows a firm to attract new groups of customers to keep revenue rising

Example

Apple expanded aggressively into China and, more recently, India

International sales now account for well over half of its total revenue

• Spreading risk through market diversification

  • Operating in several economies means that an economic downturn or a government policy change is less likely to threaten the whole business

Example

Starbucks relies on rising sales in China and the Asia–Pacific region to offset periods of weaker sales in North America

• Gaining economies of scale and lower unit costs

  1. Supplying a global customer base supports longer production runs, bulk purchasing and shared research and development

Example

Toyota builds cars like the Corolla on shared global designs, making them in large numbers for sale worldwide, which lowers the cost of each car

• Extending the product life cycle

  • A product that is mature at home may still be in its introduction or growth phase abroad, allowing the firm to generate additional revenue without having to change the product's design

Example

Netflix launched its streaming service in South America and Africa after US subscriber growth slowed

Global opportunities

• Globalisation offers businesses huge chances to grow and cut costs

  • Companies that plan well, perhaps by adapting products, securing reliable global supply chains and understanding local cultures, can turn global reach into long-term success

Why globalisation matters to business

Larger markets

• More customers

  • Selling in several countries multiplies the potential customer base well beyond the limits of the home market

• Economies of scale

  • A bigger output allows fixed costs, such as R&D, marketing and equipment, to be spread over more units, lowering average costs and helping prices stay competitive

Cheaper or better inputs

• Global sourcing

  • Firms can shop around the world for raw materials, components or services at the best balance of price and quality

• Specialist skills

  • Access to clusters such as India’s IT sector or Germany’s precision engineering brings in expertise that may be scarce at home

Risk spreading

• Diversified revenue

  • Weak demand in one region can be balanced by strength in another, making overall sales less volatile

Knowledge and technology transfer

• Learning from partners

  • Joint ventures, licensing and worldwide supply chains expose firms to new ideas, production techniques and management practices

• Innovation stimulus

  • Competing on a global stage pushes businesses to improve products and processes faster

Access to finance

• Broader funding sources

  • Listing on foreign stock exchanges or issuing global bonds widens the pool of investors and can lower the cost of capital

Global threats

• Global strategy also brings significant challenges, including greater competition, more complex operations and risk

Global strategy and functional areas

• Pursuing a global strategy can have significant impacts on a business's functional areas

Marketing

• Products, branding and pricing often need to be adapted for different cultures and markets

• Inadequate market research increases the risk of costly mistakes

Example

McDonald's adapts its menu significantly across different countries, for example offering the McAloo Tikki burger in India and avoiding beef products, to suit local tastes and religious requirements

Finance

• Must manage foreign exchange risk and navigate more complex international tax rules

• The finance function often faces a higher cost of raising finance to fund overseas expansion

Example

Starbucks faced heavy criticism from UK tax authorities and Parliament over how little UK tax it paid, because profits were moved through countries such as the Netherlands and Switzerland

This shows how complicated tax rules can get for a business operating in many countries

Human resources

• Must manage a more culturally diverse workforce and comply with different employment laws across countries

• This creates additional complexity in recruitment, training and staff management

Example

Unilever manages a hugely diverse international workforce across more than 190 countries, requiring HR policies flexible enough to comply with a wide range of different national employment laws

Operations

• Needs to manage more complex, geographically dispersed supply chains

• It may face difficult decisions about where to locate production

Example

IKEA sources materials and makes its products through suppliers in around 50 different countries

It has to carefully manage logistics, quality and delivery times across a much bigger and more complicated network than a business that only operates in one country