Hi everyone. Below is a discussion of the Sample Assessment Materials of June 2018 Syllabs revision for Edexcel International Advanced Level Examination. For a complete view of all questions and answers discussed below, check here:
Hi everyone. This discussion will be centered around 2019 Edexcel October Session Question 1. To activate automatic read aloud, highlight the required text.
A business is any activity which provides a good or service, formed by an individual or group of individuals working towards a common objective.
What is a business objective?
A business objective is a result that a company aims to achieve. It also includes the strategies that the company will use to get there.
A business objective usually includes a time frame and list the resources available.
A business objective is more specific and easier to measure than a goal.
All our basic tools that underlie our planning and strategic activities are our objectives. They serve as the basis for creating policy and measuring performance.
Making a profit
Reducing the workforce
Goals on the other hand are statements that business makes regarding 7its future and they represent aspirations and are less specific.
The CEO of a company may say we seek to become the largest maker of bicycles in the world. This is a goal as they do not explain how the company will achieve this. The exact steps a company plans to make, to reach his goals are its business objectives.
For example, the CEO might say we will increase bicycle sales by 2.5 percent each quarter of this year, we will open new branches and factories in Germany and France.
During the next 12 months, sometimes one business objective can clash with another. For example, growth and profit may clash when a company achieves greater sales in the short term by slashing prices. It reduces short-term profit. Long-term business objectives can affect short-term prospects.
If a company invests heavily in plant equipment or new products, its cash flow in the short term will suffer.
There are 7Ps in the international marketing mix, including product, price, place, promotion, people, process and physical evidence.
This is a bundle of things that generate satisfaction for the customer. Products have a life cycle and they are developed and launched. If they are successful, their sales will grow. Eventually the market will mature and it will decline when there are many other rival entrances.
Decisions about the product and how it fits into the market with the competition is the basic marketing decision. These decisions will be different at different stages in the product life cycle.
In this case two generic strategies can be used to set prices. They include
- premium pricing- where there is a premium product
- price competition- where there is no differentiation
In addition to the above, there are various price tactics. They include:
Penetration pricing– Where the companies set low prices to build market share
Price skimming-Where companies take a temporary competitive advantage to charge high prices
Optional pricing– Where additional benefits are priced separately
Captive pricing– This is for additional products or services, once a customer is captured
Price discrimination-This is when the same product has a different price in different market segments or locations.
Usually, the pricing choices are done based on the competitors’ prices and competitors’ likely reactions to price changes. Hence, pricing is a dynamic process in which companies struggle for a position in the market.
- This is the distribution channel that a company uses to get the product to the customers.
- In this case, it should be decided whether the product is supplied directly to customers or intermediaries are used.
- Types of intermediaries include
- Buy the product from the producers
- Break down the bulk into smaller quantities for retailers
- Store the goods
- Take on some of the marketing function
- Do not buy the product
- Find the customers and take orders in exchange for a commission
- Product is stored on behalf of the producer
- They do not own it while it is in storage
- They are commonly used in countries other than the one in which the manufacturer is based
- Sell many brands and may have a strong brand themselves
- Decide what price to charge, carry out advertising and promotion
- Provides credit to the customers
- Offers a direct to customer channel for producers, wholesalers and retailers
- Low set up costs
- An alternative to the use of agents
- Considering the distribution strategy, the choice and mix of channels should be decided.
- Choice of single or multiple channels of distribution
- Choice of changing the distribution channel according to the stage in the product life cycle
- Length of distribution channel from production to sales
- Avoiding conflict between distribution channels
- This involves strategic choices among a range of possibilities
- Personal selling- individual sales people meet customers(this requires high gross margins)
- Public relations- Stories are placed in various media to transmit the company’s message to its customers
- Direct mail- Using databases to identify and target potential customers who are likely to buy the product
- Trade fairs and exhibitions
- Advertising- In a variety of media
- Sponsorship- A company pays to be associated with an event
However, in some markets for some products, personal contacts and commission paid to important people are essential parts of promotion. This is sometimes considered as corrupt. But, it is required for success.
In e-businesses, there is viral marketing, where the customers recommend the product to their friends and news spread like a virus. For example, Hotmail.
- In this case, people involved at the interface and who are in contact with the customers are a valuable source of information about customer requirements and preferences.
- In service industries, process of accessing and receiving the service is an important part of the marketing mix. The strategic choices include in this are
- Technology- to use call centers, direct contact, web based service
- Customer co-production-choosing how much work the customer has to do to get service benefits
- This includes the physical appearance of all the
elements of the product and service that the customer experiences. They
- Physical product design
- Staff uniforms and grooming
- Printed matter
- Website design
- Logos and other branding tools
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The success of a factory depends on rigorous inspection at every stage of the process and ability to meet stringent working conditions required by customers.
This is core because there is greater transparency in flat world. For example, in 2000, activists with the Hong Kong Christian Industrial Committee(HKCIC) reported that toys for Mc Donald’s Happy Meals were being produced by a supplier that employed children as young as 14 years old. The story had roots like follows.
Mc Donald’s had outsourced the production of its Happy Meal toys to Sinon Marketing Hong Kong Ltd. This company in turn hired a factory in Hong Kong-City Toys, Ltd- to make the toys. However, when the above story broke out, both the factory and Mc Donalds stated that they did not know it. But, the damage had been done and all what the consumers and critics saw were Mc Donald’s toys being made by underage workers. For instance, The Child Labor News service ran the headlines as “Little slaves pack (Un)happy meals”
Furthermore, in the U.S., Germany, Australia and Canada, one fifth of the customers claim to read company CSR reports when making investment decisions.
Thereby, the best thing to do is to have a code of conduct and business processes. This will help to ensure compliance even when manufacturing is dispersed. This is because, where a rigid control of day to day operations is not possible, a set of laws and policy manuals will be a powerful way to ensure that all players understand what is expected of the entire network.
However, creating a code is not enough, rigorous monitoring and certification is also needed. For instance, an annual recertification process ensures that companies are actively tested for their ability to meet expectations, rather than waiting for problems to emerge. In this case, keeping the monitoring division independent from the business is important.
Also, the compliance division should be able to act autonomously and swiftly to address problems even at the expense of short term earnings.
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According to Farell (2004), most managers focus on globalisation as a lever to reduce costs. Yet, they should be viewing it as a means to generate new revenues too.
In order to realize the full potential of globalisation, the place where the industry falls along the globalisation spectrum should be assessed first. To do this, the ratio of annual value of global trade to the annual value of industry sales should be considered. Ratios over 100% indicate that these industries are global.
Next, globalisation’s full potential for your company should be defined. In this case, it is difficult to figure out how different forces will strenghten or weaken your business over time and how to capitalize on that evolution.
Three types of factors usually determine the course of globalisation in an industry.
In this case, there are two factors which determine an industry’s potential for disaggregating its value chain.
- relocation sensitivity- how feasible and attractive it is for an industry to relocate parts of its production process
- location specific advantages
Relocation senstitivity can be figured out using metrics like
- bulk to value ratio(currency value per pound of production material)
- ease with which your company can ensure quality standards remotely
- how quickly your products or components become obsolete
- volatility of the demand for your service
- sunk costs
Location specific advantages can be determined using
- labor intensity
- skill requirements
- natural resources intensity
- economies of scale and scope
Particularly countries’ efforts to restrict imports or foreign investment are among the biggest constraints to globalisation in many industries.
- minimum content from local production
- ban foreign investment outright
- failure to invest in regulatory and legal infrastructure
The main organisational factors that can limit globalisation for a company or an industry include
- internal management structures
- incentive systems
Yet, all production, regulatory and organisational forces evolve over time. Along the line, the full potential of globalisation for companies and industries change with the geopolitical and macro economic environment.
Thereby, with escalating competition, steady trade liberalisation and continuous introduction of new technologies, the pressure on companies to globalise tend to increase.
Then, the options to capture value in the new global environment should be considered.
According to Farrell (2004), industries and companies both tend to globalise in stages and in each stage, there are different opportunities for creating value.
Stage 1: Market Entry
This is when companies enter new countries using production models that are very similar to the ones they deploy in their home markets. In this case, typically companies need to establish their production presence due to the nature of their businesses or due to local tariffs and import restrictions.
Stage 2: Product Specialisation
This is when companies transform the full production process of a particular product to a single low cost location and export the goods to various consumer markets. For example, GM now manufactures all Pontiac Azteks in Mexico ad all Chevrolet TrailBlazers in the U.S.
Stage 3: Value Chain Disaggregation
This is when companies start to disaggregate the production process and focus each activity in the most advantageous location. Eg: Recent trends for U.S companies to offshore business processes and IT services
Stage 4: Value Chain Re-engineering
This is where processes are re-engineered to suit local market conditions. For example, Indian car makers have a manufacturing process tailored to take advantage of low labor costs. They also design and build the capital equipment for their plants locally.
Stage 5: Creation of New markets
This is the expansion of the market.
However, these 5 stages are not necessarily a rigid sequence that all industries follow. Companies can skip or combine steps.
If the business wants to shape rather than react to the industry’s evolution, it is necessary to size up the opportunities that emerge for your business at each stage of globalisation. This means determining potential cost savings from global industry restructuring and identifying new market opportunities which it can create.
- Re-engineering their production processes
- Utilizing capital equipment more intensively
- Hiring local engineers in low wage environments to design and build cheaper capital equipment
- Manage other fixed costs of doing business
For example, Maruti Udyog, an Indian carmaker designed its won robots for its assembly lines. This cost the company a fraction of what Suzuki, its Japanese partner paid a third party vendor for similar machines.
However, experiences of French retailer Carrefour and U.S. retailer Walmart in Brazil and Mexico indicate the need for both optimism and caution in the pursuit of globalisation.
In order to ensure success as your industry restructures along the global lines, a sound strategy, consistent execution and new ways of viewing the business and managing people are required.
Accordingly, the following are some lessons drawn from the experiences of companies that have ensure success.
- Abandon incremental thinking- Adopt bold performance targets sooner rather than later
- Use global assets effectively and efficiently- Get the best mix by increasing labor resources to better use expensive capital, improving shift utilization, developing cheaper capital equipment.
- Tailor your best practices to local conditions- Leverage the best practices in ways that fit conditions in the host country. For example, in Mexico, Walmart uses the same trademark “Everyday low price” strategy which it uses in U.S.
- Aim for higher quality
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When a European or North American manufacturer thinks about off shoring a factory or function, it often looks first at China and India. This is because both of these countries offer an attractive combination of
- low costs
- well developed capabilities
- business friendly regulatory environments
- large domestic markets
However, for people considering offshoring, it is dangerous to take a narrow geographical view. This is mainly because every country has a different mix of strengths and weaknesses.
For example, a country may have very low labor costs but a high degree of political instability and a small domestic market. Another might have engineering talents, but quickly rising labor rates.
Hence, to obtain the maximum benefit from offshoring, the foreign operations should be spread over a broader and well balanced mix of regions and countries.
Vestring et al(2005)’s research into industrial offshoring confirms the wisdom of a portfolio approach. Accordingly, in creating their offshoring portfolios, cost leaders take into account a wide range of decision criteria. For example, current labor rates, related costs like facility construction and utilities, education and skill levels of local workers, their business experience, maturity and stability of the nation’s infrastructure. Also, these cost leaders consider both short term and long term benefits which affect all relevant criteria.
However, maintaining production facilities in higher cost countries makes sense when labor is a minor cost component or when transportation costs are high. For example, call centers and textile industry.
Thereby, deciding whether to shift costs requires making focused decisions for each product line, while looking deeply into issues like relative labor costs, logistics costs, customer requirements and time to market.
For example, Emerson Electric Co a U.S. based conglomerate embarked on a strategy to methodically and progressively shift sourcing, manufacturing and engineering from its traditional bases in Western Europe and U.S. to a variety of low cost countries around the world in Asia, Latin America and Eastern Europe.
It set up production operation in Mexico, for its low costs and proximity of the operation to U.S. Also, production capacity was established throughout in Asia to tap both into low costs and ensure a high degree of responsiveness to rapidly growing Asian markets. For example, Emerson hedged its risks by accessing skilled labor pools in Phillipines, India and China. By 2002, low cost countries accounted for 44% of Emerson’s total manufacturing labor cost. This has led to improvement in the company’s operating profit margin.
Emerson is thus known to have benefited from being earlier and bolder in its pursuit of cost migration.
This has led to the understanding that offshoring is not limited to routine production and assembly jobs. This is why cost leaders examine specific functions like finance, ICT, marketing on a case by case basis.
For example, Boeing Co. has a center that designs and does technical work in Russia. P & G gets its taxes done in Costa Rica, which has a strong cadre of workers with accounting skills. General Electric Co, has an R&D center in India with a staff of about 500 with about a third of them being locales with doctorates.
Considering portfolio diversity, it should be highly disciplined, balancing the risk advantages of consolidation. For example, Emerson concentrates its activities in 4 major production centers.
Achieving such a balanced portfolio requires a centralized approach to planning, with headquarters overseeing and coordinating a company wide offshoring program. This is mainly because leaving offshoring decisions upto individual business units has its own drawbacks.
- It provides no mechanism to temper risk by distributing functions across a range of countries
- It prevents companies from reaping savings across business units
Thereby, cost-migration leaders take a number of practical steps to ensure that their portfolios are constructed successfully.
- Establish and constantly update a detailed and robust database of current costs and other key criteria across low cost countries
- Carefully set priorities for both functions and countries
- For each activity, a short list of target countries are evaluated on the basis of long term competitiveness, current costs and capabilities
- Upfront investment in building its infrastructure and capabilities
Thus, benefits of off shoring can be maximized.
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