Conditions that Prompt Trade (Edexcel A Level Business)

Push Factors

• 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

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

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

• 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

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

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, political and other types of risks that could impact their operations and profitability

  • E.g. Aston Martin produces motor cars in the UK, but 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

Offshoring & Outsourcing

• 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 

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 

Product Life Cycle Extension

• 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 lengthen the life cycle of a product or service 

  • E.g. a business could sell the product in new international markets

    • A product could reach maturity in one market but could then be introduced into another market

    • This allows the business to generate more revenue