Globalisation

The first thing that usually comes into our minds when people mention the word "globalisation" is a globe, right?
So, what does globalisation actually mean?
In terms of business, globalisation means "the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration and the spread of technology".

As always, there will be benefits and drawbacks.
Benefits of globalisation:

• Choice of goods 

When a country imports goods from other countries, it gives the local consumers a wider choice of goods and services.

• Competition

Globalisation creates competition for the local companies. As a result, price of the products will be decreased.

• Specialisation

Countries begin to specialise in products they are best at making.

• Economic interdependence

Nations build political relations and social relations because of economic interdependence. This helps to improve relations between different countries.

Drawbacks of Globalisation:

• Unemployment in developed countries

Cheap imports from developing countries may lead to unemployment in developed countries where the total costs of production is high. Companies would want to go where the labour is cheaper. 

• Unemployment

Unemployment may happen in sectors which are not prioritised due to specialisation of certain products.

• Competition

Competitiveness in globalisation will lead to failures of the smaller companies. They are obviously less competible compared to large companies.

An example of globalisation is the iPhone 4.

Did you know that different parts of the iPhone 4 are manufactured in different countries?

Below is a diagram of the different components that make up an iPhone 4, their costs and origins.

Interesting, isn't it?

Hope you had fun reading my blog!
That's all for today. See you soon! :)

Multinational Companies

A multinational company is a business that has operations in more than one country.
Exporting goods to many countries doesn't make your company a multinational company.
A multinational company must have production, sales or facilities in more than a country.

Similar to international trade, companies have several reasons why they want to become a multinational company.

However, there are impacts which will affect the host country and home country of the multinational company.
Impacts on the host country are such as:

Most of the impacts on the host country are positive, except for the fact that it doesn't earn profit. All the profit goes to the home country.

On the other hand, impacts on the home country are such as:

Although there are both positive and negative impacts on both the host country and home country, there are still many multinational companies in the world today.
In Malaysia itself, there are many such as Apple, Intel, Cisco, etc.

PEST

PEST
What does these four letters mean?
It's actually a tool used for understanding the growth of a business, including competitors'.
These four letters mean political, economical, social and technological respectively.

Political factor includes many areas, such as current legislation, international legislation, government policies, trading policies, international pressure groups, wars and conflicts, etc.

Areas that economical factor covers include economy trends, general taxation, seasonality issues, trade cycles, distribution trends, exchange rates, etc.

Social factor includes lifestyle trends, demographics, consumer attitudes and opinions, media views, consumer buying patterns, advertising and publicity, ethical issues, etc.

Technological factor covers areas like competing technology development, research funding, maturity of technology, innovation potential, intellectual property issues, global communications, etc.

Identifying the PEST influences is a useful way of summarising the external environment in which a business operates. However, it should be followed up by how a business should respond to these influences.

So, businesses better check these factors out! :)

International Trade

Every company's aim is to develop globally. 

Why? They want to increase their market.

Meanwhile, international trades also bring about benefits to consumers.

For example, there are more choices and availability of products for them, leading to low prices of products because of competitiveness. 

The quality of products are is higher, so is the quality of customer service.  

The opportunities and threats of an international trade are shown below. 

In every country, the government will definitely set some trade barriers to protect their local businesses. 

This has also become one of the aspect to consider while going into an international trade.

The trade barriers are such as:

• Tariffs

Import duty or surcharge on the price of goods entering a country. This is to increase the price of import goods, which helps local producers to compete more effectively with foreign producers.

• Quotas

Similar to tariffs, but this is a limit on the amount of goods allowed into a country. 

• Subsidies

Rather than taxing imports, the government helps its local producers by subsiding their money. This effectively makes local products more attractive to buy.

• Exchange Control

Government's restriction on the amount of foreign currency available for consumers' purchase. For example, if a government wishes to reduce the flow of imports from China, it can set limits to the amount of Chinese yuan that the citizens and businesses can get hold of to buy Chinese products. 

• Non-tariff Barriers

Examples are such as government contracts given to local companies even where their tenders are not competitive, insisting on technical standards for locally produced products that are different from imported products. 

So, before a company makes its decision whether to go for international trade, it must consider all of these factors. 

Location

Before a company starts off its business, it'll have to choose a location.
But, how do they choose their location?
Keep reading to find out the answers! ;)

There are a few areas a company will need to consider when finding the suitable location.
They want to save cost as much as possible.

1. Labour
Companies would want to locate their factories in places where cheaper labour can be found. For example, if the labour in India is cheaper than in US, then the company would definitely go for India.

2. Natural Resources
If a company locates its factory near where they can get their natural resources, they can save the cost of transporting these raw materials to the factories. For example, if it is a rubber company, the company would most likely go to places such as Malaysia.

3. Suppliers
The nearer the suppliers are to the factory, the more a company can cut down cost.

4. Competition
If the location is too competitive, the company will have to work extra hard in order to earn more profit. This means spending more money on advertising, etc. Whereas if the company chooses a location where its product fits the gap in the market, it'll be easier for the company to earn money. For example, if there are not many suppliers of washing powder in Africa, then a company locating itself in Africa will be expected to gain more benefits.

5. Infrastructure
Infrastructure in a location, including road and rail networks, plays an important role in the decision making of the location of a company. The location has got to have a good infrastructure system to ensure that the process of transporting raw materials and finished goods to different places is smooth.

6. Legislation
Building new factories may need permissions from the local government. This is easy to get in some places, compared to others. Sometimes new businesses are encouraged in certain areas, whereas sometimes the government aims to protect their local businesses by implementing laws.

7. Proximity of Suppliers and Consumers
Businesses need to get raw materials from their suppliers, they also need to deliver their finished goods to customers. This factor works both ways. If heavy or bulky raw materials are more costly to transport, the company would want to keep its factory closer to the supplier. If the raw materials are cheap to transport, while the finished goods are more costly, the company would keep its factory closer to customers. Besides, businesses providing services would usually stay closer to their customers.

Wow, it's been a long post with lots of words.
Time to take a break! See you next time! :)

Economies of Scale

As companies grow in size, they get certain advantages known as economies of scale.
In short, economies of scale refers to the benefits enjoyed by a company because of its production on a large scale.
Economies of scale can be separated into five categories:

• Purchasing Economies

When businesses buy in bulks, they are able to get discounts and special prices. This helps to cut down the costs of raw materials. 

• Marketing Economies

The cost of advertising and distribution increases at a lower rate compared to the sales and incoming profits. This allows the company to advertise more cheaply and more effectively.

• Financial Economies

A large company often finds it easier to raise finance compared to small firms. Banks treat large companies more favourably and they are able to negotiate loans at preferable interest rates. Besides, large companies can also issue shares.

• Managerial Economies

Large companies are able to employ many highly specialised members on its management team, such as marketing managers, accountants, etc. This results in better decisions being made.

However, there is a downside to economies of scale.

And, it is called diseconomies of scale. 

These are some of the factors that lead to an increase in average costs as a business grows in size. 

• Human Relations

Companies may find it hard to organise a large number of employees. Chains of command may take too long to reach its destination, there may even be miscommunication in between. There will be less personal communication between decision makers and staff, which can result in lack of motivation and industrial relations problems. 

• Decisions and Co-ordinations

In a larger company, the quality of information reaching from the management to the workers, or vice versa, can lead to poor decision making. There may be a lot of paperwork and many meetings.

• External Diseconomies

Recently, consumers have been more aware of activities carried out by big companies. So, these companies have to spend money to deal with environmental issues and social responsibility acts. This will lead to a higher average cost.

An example of diseconomies of scale would be the newly built world's largest cruise ship, Oasis of the Seas.

This cruise ship costs Royal Caribbean around $1 billion. 

It has 20 restaurants, 17 bars, a walk through mock-up of New York's Central Park and two rock-climbing walls. 

The possible problems which may happen in this cruise ship are such as, miscommunication between the captain and workers, the amount of water or fuel the company needs to prepare for the cruise ship, etc.

There are always two sides to a coin, the same goes to companies!

That's all for now, see you! :)

Production (Part 2)

Continued from Production (Part 1)..

Lean Production
It is simply a set of techniques used by businesses to cut down any waste in operations.
Its aim is to reduce the quantity of resources used in production. At the same time, it is to improve the efficiency of the organisation.
Lean production includes eliminating waste, resulting in using less labour, materials, space and time. This reduces cost as well.

An example of a company which uses lean production is Aldi.

Aldi's shopping trolleys have a £1 deposit system. 
This ensures that customers return them after use, resulting in fewer trolleys going missing and needing replacing. 
Aldi also doesn't need to employ workers to collect the trolleys, because customers will need to return them to the front of the store by themselves. 
All of these little actions help Aldi to reduce costs.

One of the lean production techniques is called JIT (Just In Time).
The finished goods are produced just in time for them to be sold, rather than storing them. The different parts of the product also arrive just in time for them to be put together, rather than being stored in a warehouse.
This means there is no need to find storage space for raw materials or finished goods, which helps to reduce costs like rent, wages, etc.
The JIT technique helps to prevent outdated or expired stocks, and it also avoids the buildup of unsold finished goods in case there's a change in demand.

However, disadvantages of the JIT technique include the little room for mistakes, as there is minimal stock kept for replacing faulty products.
The production is very reliant on the suppliers, if the suppliers don't deliver the stock on time, the entire production can be delayed.
Other than that, there is also no spare finished goods kept for unexpected orders, because all goods are produced to meet actual orders.

An example of a successful JIT production is Toyota.

Toyota's production strategy is to only make "what is needed, when it is needed, and in the amount needed".
They highlight the fact that raw materials are not brought to the production floor unless an order is received and the product is ready to be built.
This has allowed Toyota to keep minimum stock, which means lower costs. It also allows Toyota to quickly adapt to changes in demand, because they don't need to dispose the unnecessary stock.

Cell Production
Cell production has a flow production line split into a few "cells". Each "cell" is responsible for a part of the finished good.
Rather than each worker carrying out only one task, team members are skilled at several roles, so they can do a job rotation every now and then.
Cell production is a means of team working, it helps to make sure workers are committed to their job.

An example of cell production is the leading manufacturer of electronic equipments in Japan, called Nihon Kohden.

They practice cell production in the company by having their entire production broken down into smaller cells, which includes incoming inspection, PCB mounting, assembling and final inspection.

Kaizen  
In Japanese, Kaizen means "improvement". Kaizen activities in the workplace continuously improve all aspects of a business, from manufacturing to management, from the CEO to the factory workers.
The aim for Kaizen is to eliminate waste.
There are three key principles to Kaizen, which are:

• Considering the process and results so that actions to achieve goals are done.
• Systemic thinking of the big picture, not just the narrow view to avoid creating additional problems.
• A learning, non-judgemental, non-blaming approach. 

An example of Kaizen will be Canon.

In 1975, the concept of Kaizen was implemented in the company. Their aim was to excel in international competition and expand its operation globally in 6 years. 

Techniques such as Canon production system, quality assurance, production assurance and personnel training were introduced in the company.

Eventually, Canon successfully achieved a 3% productivity increase every month.

And.. that's the end of "Production"!

Preview for next blog post: Economies of Scale.  

Be excited for it! :) 

Bibliography:

BSC Designer – Balanced Scorecard Software. Examples of Real-life Usage of Kaizen. 13 January 2013 <http://www.bscdesigner.com/examples-of-real-life-usage-of-kaizen.htm>.

The Times 100 Business Case Studies. Competitive Advantage through Efficiency - An Aldi Case Study. 13 January 2013 <http://businesscasestudies.co.uk/aldi/competitive-advantage-through-efficiency/reducing-costs-and-eliminating-waste.html#axzz2Hlk8CCUi>.

tutor2u. Cell Production. 13 January 2013 <http://www.tutor2u.net/business/production/cell-production.html>.

tutor2u. Just In Time Production (JIT). 12 January 2013 <http://www.tutor2u.net/business/production/just-in-time.html>.

Wilson, Jack. Real-Life Examples of Successful JIT Systems. 18 May 2010. 13 January 2013 <http://www.brighthubpm.com/methods-strategies/71540-real-life-examples-of-successful-jit-systems/>.

Opportunity Cost

Just a quick update about Opportunity Cost today.

What is opportunity cost?
Let me give you an illustration..

So, opportunity cost is basically the option not chosen by us when we make a decision.

Here's a video about opportunity cost.

Like the saying "Pictures speak a thousand words", this video speaks more clearly than I do! Haha.

Have fun watching the cute and simple video!

Price Elasticity

Back in September 2007, Hovis was the first bread brand to sell its bread at £1 per loaf, while its competitors only raised their prices in December 2007.

So, what happened to Hovis after this? 
A fall in demand of its bread products, as it lost market to Kingsmill and Warburtons.
This is an example of price elasticity.

The exact definition of price elasticity is "the change in demand for a product when the price of the product changes".
There are two key terms, PRICE ELASTIC and PRICE INELASTIC.
Price elastic is when there is a major change in demand for the product following a change in price. 
Example: Flight tickets. If the price of a flight ticket to UK is increased, there will be a sudden decrease in the demand for it, because there is a limited market who can afford to go for holidays.

Meanwhile, price inelastic is when there is only s minor change in demand for the product following a change in price.
Example: Petrol. Not much changes will happen even if the price of petrol is increased, because there isn't an alternative fuel to petrol. We'd still have to stick with it no matter how much the price goes up.

Just a short post today to keep you updated!

Bibliography: 

Riley, Jim. A Good Example of Price Elasticity of Demand. 4 March 2008. 12 January 2013 <http://www.tutor2u.net/blog/index.php/business-studies/comments/a-good-example-of-price-elasticity-of-demand>.

tutor2u. Price Elasticity of Demand. 12 January 2013 <http://www.tutor2u.net/economics/gcse/revision_notes/finance_elasticity.htm>.

Determinants of Demand & Supply

Hi there! In the previous post, I mentioned that I'll be posting about the determinants of demand and supply.
And here I am today, to reveal the answers! :)

Determinants of Demand

• Tastes and Fashions

As time goes by, fashion changes. Everyone would want to keep up to the latest fashion trend. Other than that, advertising and health considerations are two factors which affect tastes and fashions as well. If there is a large market in a product, the demand for that product will increase.

• Seasons

The demand for different clothes will change as we go into different seasons. For example, the demand for winter clothes will increase in winter, while the demand for summer clothes will go down.

• The number and prices of related goods 

Substitutes: The higher the price of substitutes, the higher the demand for this product. For example, if the price of coffee rises, then the demand for tea will increase. 

Complements: The higher the price of complements, the lower the demand for this product. This applies for products that go together. For example, if the price of ice cream increases, then the demand for ice cream toppings will decrease. 

• Income

A person's increase in his income will lead to an increase in demand. He would want to go for products which are of better qualities. For example, if he used to wear a RM500 secondhand watch, he would want to go for a RM1000 watch once he earns more. 

• Expectations of future price changes

If the think the price of a product will rise in the near future, they will try to save money by buying early, which increases the demand for the product. For example, sugar.

• Population

The higher the population, the more the demand for products. For example, if the population in a country grows rapidly, more food is demanded. 

Determinants of Supply

• Costs of production

Every company aims to maximise their profit. Higher production costs will only decrease the profit, indirectly affecting supply. Factors affecting production costs include wages, price of raw materials, government taxes, etc. 

• Profitability

The higher the profitability of a product, the higher the supply of the product. For example, if a farmer finds rice more profitable than durians, he will go for rice. The supply of rice will increase but the supply of durians will decrease.

• Natural disasters

If natural disasters such as earthquakes and floods often happen, the amount of products supplied by the country will decrease. For example, many banana plantations were destroyed by the Typhoon Bopha in Phillipines on 7 December 2012. 

• Expectations of future prices

If the price of a good is expected to rise, the supplier may reduce supply now to increase his profits in the future by increasing his supplies later. 

• Profitability of related goods

When the supply of a product increases, the supply of its by-product will also increase. For example, when the supply of beef increases, there will be an increase in the supply of leather.

That's all for today. Hope you had fun while reading the blog post! :)

Bibliography:

Chan, Franny. Determinants of Demand. 12 December 2013 <http://staffwww.fullcoll.edu/fchan/Micro/1determinants_of_demand.htm>.

Chan, Franny. Determinants of Supply. 12 January 2013 <http://staffwww.fullcoll.edu/fchan/Micro/1determinants_of_supply.htm>.

Times of News. Official ‘national calamity’ in Philippines. 8 December 2012. 12 January 2013 <http://timesofnews.co/2012/12/09/official-national-calamity-in-philippines/>.