5UIBE Level 5 International Business Economics and Markets: Open Book Exam Question Answer
5UIBE Level 5 International Business Economics and Markets
NOTE – The organisation summary must be completed and must accompany the submission otherwise the assessment will not be marked.
|Business profile (200 words)|
Zara is a specialist in the fast fashion industry operating from its headquarters in Spain along with over 2200 stores that the company has established worldwide. The company, performing within the clothing retail sector, was established in 1975 and is a subsidiary of Inditex Group which is the largest apparel retailer in the world. The organisation has a well-established and diversified product line that include clothing apparels, shoes, accessories, beauty, perfumes, as well as, swimwear. Zara represents that largest subsidiary that is owned by the Inditex Group. As of the 2018 financial report generated by the organisation, it made a stunning revenue of 18 million Euros. The key geographical locations in which the business operates include Spain (with 306 stores representing the highest number of Zara-owned stores in a market), China (with 183 stores representing the second highest), France (127 stores) and Italy (104) stores. The brand has further been able to penetrate well in the fashion-based markets of the UK and the US with 65 and 87 stores established throughout the nations within these regions respectively. Being a fast fashion retailer, Zara faces intensive competition within the regions where the organisation operates from companies like Ralph Lauren, Gucci, Huge Boss, H&M, Hermes International, Versace and Burberry. In the strategic positioning statement of Zara, the organisation mentions that it produces its unique range of apparel offerings for people that have a combined attitude of work and play (Xuejie et al. 2019). The key consumer segment of Zara is presented by consumers having medium to high buying power and that love to stay fashionable at all times.
Analyse the key economic principles associated with international business and their impact specifically on the activities of your chosen organisation.
Note – ensure you have chosen an organisation with international business interests.
Three key economic principles that are faced by any company operating in international capacity include transaction costs, transport costs, as well as, tariff and non-tariff costs. In this section, the impacts of these costs on the business of Zara in association with its operations in the international markets have been explored and elaborated.
Trasaction Costs: The transaction cost refers to the costs associated with economic exchange that occurs in international trading. The transaction costs are generated from a wide range of factors including information gathering, the negotiation, as well as, the enforcement of contracts, monetary exchange rates and other types of economic rates associated with letters of credit and transactions. The transaction costs that occur internally to an organisation are lower compared to the transaction costs that occur externally or happen between two or more corporations. The hypothesis of transaction costs sets that the ideal authoritative structure is one that accomplishes monetary effectiveness by limiting the expenses of trade. The hypothesis proposes that each kind of exchange produces coordination expenses of checking, controlling, and overseeing exchanges (Memili et al. 2017). As postulated by the transaction cost theory further, as to complete a market exchange, it is important to find who it is that one wishes to manage, to direct arrangements paving the way to a deal, to draw up the agreement, to attempt the examination expected to ensure that the conditions of the agreement are being observed properly (Zylbersztajn 2019).
Transport Costs: The transport costs refer to the cost involved with shipping produced items and products from the manufacturing point to the point where the products or the items will be consumed. The factors that influence or impact transaction costs include intermodal transportation, containerisation, as well as, the economies of scale.
Tariff and Non-Tariff Costs: The tariff and non-tariff costs refer to the cost associated with government-imposed levies in association with the realised trade flows within a nation. These costs can entail direct monetary costs associated with the items or goods that are traded between the nations, as well as, the standards to be abided by corporations for ensuring that a produced item or product is eligible for being allowed entry into a foreign market. There are several bilateral, as well as, multilateral trade agreements that impose the tariff and non-tariff costs bearable by international businesses. The most typical type of responsibility or tariff will be the ad valorem: a tax evaluated on merchandise worth. In many nations, ad valorem fees are applied in order to the cost of merchandise, in addition to the associated insurance coverage and freight (Cheong and Tang, 2018). Because as a result, whenever issuing a bill for the overseas purchaser, it is very important to itemize these types of costs. Specific responsibilities are charged simply by weight, volume, size, or some kind of another unit (e. g., charging 10 cents per square yard on fabric). Compound duties demand both an ad valorem and a specific duty on the same product. Alternative duties are those in which the customs recognized calculates the ad valorem duty and the specific duty and applies whichever will be higher. In inclusion, a processing charge along with a VAT may become assessed on top of the duties, plus an import processing fee, harbor tax, and other taxes.
Justify suitable criteria that your organisation could use when evaluating potential international regions for marketing its goods or services.
A business operating with international capacity has access to a wide number of markets and economies throughout the world. However, the opportunities and threats within these markets are not equal and therefore, the performance of a business can be different in different markets depending on a wide range of factors starting from the demographic attributes of the consumers, the conditions of the national economic, political, as well as, legal governance of the nations and the intensity of competition within the nations (Rosado-Serrano and Paul, 2018). Therefore, before choosing a potential international region of marketing the produced offerings, Zara must consider a wide range of elements.
The first factor is the market environment of the nations in which the organisation desires to operate in the future. In the first stage of international market selection, several countries can be shortlisted on the basis of primary market research based on their representation of whether the countries have potential or existing concentration of the target market. The different variables that are to be investigated and analysed for each country include:
Discuss THREE different market entry methods and state, with reasons, which would be the most appropriate for your organisation to use to launch an existing product into a new international market.
The first market entry method is direct exposuring. This method of market entry is associated with selling directly into the chosen market with the utilisation of resources that are already owned by a company at first. However, once an effective sales program is developed and established, typical companies turn to distributors, as well as, agents to represent them further in the market for improving market penetration and reach. These parties can work collaboratively with the companies to represent their interests.
The second market entry method is franchising. This method of market entry is associated with rapid and efficient expansion of companies that typically operate with an international capacity. Franchising works especially well for organisations that have a business model that can be easily replicated or repeated and transferred into the chosen markets. However, two limitations can be faced by the international businesses that implement the franchising method for international expansion. The first limitation is that in case an international business decides to implement the franchising mode of market entry, it must have strong brand recognition in the chosen market to ensure that the potential consumers are willing to access and engage in business with the franchisees (Zekiri, 2016). Another limitation is that with franchising, a business model gets open to third-parties and vendors or agents extrinsic to the company which significantly increases the chances of competition in future.
Licensing is another market entry method that is implemented by international businesses while expanding in overseas markets. It is a relatively sophisticated arrangement in which a corporation typically transfers the rights to use the offerings of the corporation to another organisation. Lincensing can occur in the cases of production, as well as, marketing. As a sophisticated market entry mode, this model is especially useful if in the context of the chosen market, the buyer of the license has a relatively large market share.
Among the aforementioned marketing modes, the franchising model may be most beneficial to Zara due to several reasons that are discussed below:
Evaluate the significance of international trading blocs and other trade arrangements in the context of markets in which your organisation operates or might operate in the future.
A trading bloc acts as a conventional understanding between at least two local nations that expel exchange obstructions between the nations while at the same time keeping exchange hindrances for different nations (Hartland-Thunberg, 2019). Imposing a tax on products that cross-national fringes return hundreds of years. Taxes come in various assortments: import obligations charge an assessment on merchandise from different nations, for example, while trade obligations demand duty on things delivered out of the nation. Duties fill two essential needs. One is to raise income for the legislature by gathering a duty on cross-outskirt shipments. The other is to ensure the country's household businesses, as burdening imports can make them costly enough that buyers will purchase residential to set aside cash. Nations build-up exchanging alliances since they accept organized commerce benefits their buyers by giving higher caliber at a lower cost (Ogbor and Eromafuru, 2018). Such coalitions will in general be provincial since it is simpler to go to a concurrence with a couple of neighbors than with numerous remote accomplices. Little organizations face difficulties when their home markets open up to the outside rivalry and their local rivals become significantly greater. In the event that private companies can address these difficulties effectively, territorial exchanging alliances can give them extra open doors for development.
At the point when exchange hindrances drop, producers in various nations contend with one another legitimately. That compels them to turn out to be progressively effective so as to keep or develop their piece of the overall industry. Exchanging alliances can likewise impact the shoppers on the grounds that outside items become all the more broadly accessible, at less expensive costs. Rivalry decreases costs, giving shoppers better purchases for their cash. As costs go down, shoppers can purchase more, which helps the economy. Various nations have various qualities, for example, an informed workforce, access to crude materials, or loads of farmland. Accomplices in an exchange coalition can have practical experience in what they excel at, realizing they can offer their yield to different countries.
A key contention for the making of exchanging alliances is that the bigger markets bring about higher proficiency and efficiency through bigger manufacturing plants and lower overhead. Such factors advantage huge organizations that can scale up their creation and set aside cash. Notwithstanding economies of scale, provincial exchanging alliances permit huge organizations to put offices where the expenses are most reduced, without bringing about taxes or obligations. They may create work escalated parts where laborer pay is low and innovative merchandise where the workforce is instructed. As costs go under weight from economies of scale and the movement of processing plants, the expense of provisions and parts drops too (Ntara, 2016). While their costs are feeling the squeeze, organizations, for example, Zara may find that they can source crude materials and produce parts at a lower cost from new providers.
The EU apparel business is actually a trailblazer in world marketplaces. EU admissions to the majority of the planet address more than thirty percent of the sector as the EU Single Market is additionally the biggest with respect to calculating, quality, and framework. The European Commission endeavors to guarantee a level playing area in worldwide trade. It performs this at a multilateral fitness level through the use of World Trade Organization understandings, at that corresponding amount by using trades on Free Trade Agreements, and also by techniques for talk, for example, the Euro Mediterranean Dialog on the material as well as clothes business, and unique talked with China and Colombia. The essential planet activity of the EU materials, as well as clothing division, is actually linked to its outstanding specialization, the versatility of its, the constant change of its framework to the market, as well as the improvement of items that address brand new requirements, (for example, certain substances for existing jobs). Thusly, and paying small brain to a bad swap balance, the region gave its tolls by thirteen % before scarcely any kind of many years, while imports have lengthy by four %. The material and apparel business is actually an entire business, with ceaselessly raising trade streams anywhere all throughout the world. The extending centrality of company areas in growing economies, as well as the headway of completely new uses as well as a thing, uses in domains, for example, flying, medication, plan and improvement, automobile, individual security, and transport, make the requirement for much better access to non-EU features more huge compared to various other time in late mind. This's the explanation the zone is actually huge concerning particular discussions right currently being held to build Free Trade Agreements (FTAs) with nations, for example, the United States (Transatlantic Trade as well as Investment Partnership), Vietnam and Japan. The EU starting up late examined FTAs with Canada, South Korea, Moldova and Ukraine.
ZARA is a top-positioned Spanish retailer of attire and embellishment. It was established in 1975 and it is the main lead chain store of Inditex. ZARA has been effectively fulfilling the needs of its clients by utilizing an altogether unique system from its rivals. ZARA follows a separation methodology of Porter's conventional procedures and spotlights on improving the worth chain by growing profoundly proficient and powerful coordinations, appropriation and gracefully chain frameworks. ZARA used to follow a time-to-showcase methodology for example contending based on time before the arrangement of the European Union. After 1993, it moved its strategy to a spry gracefully chain which implied that each progression in coordinations and flexibly chain was noticeable and very much planned. It is accepted that the organization needs just fourteen days of time to build up the interesting items and convey them to the stores and it has made notoriety of propelling in excess of ten thousand new structures on a yearly premise. The three key achievement variables of ZARA are short lead times, a set number of items and a broad scope of styles. Market vulnerability has been made in the worldwide style industry due to Brexit and the US-China exchange war. The variances in the conversion scale have squeezed costs. The substitution of economic accords may build organization and asset expenses and put further focus on costs. As indicated by the UK Fashion and Textile Association (UKFT), the material and attire providers of the UK may encounter a few challenges while exchanging with the EU during the change time frame. Henceforth, it is encouraged to permit additional time for delivery products and be set up to confront a few deferrals at customs. The impact of the Brexit Elections results, as well as, the US-China trade war may significantly influence the business of Zara negatively in these locations as these elements may lead to higher tariff and non-tariff costs making it difficult for overseas businesses to conduct their business at these locations due to higher prices and costs.
Discuss the potential impact of foreign currency exchange and interest rates on your organisation.
As a business that operates in an international capacity, the business of Zara is associated with imports and exports from several countries. In any case, importing materials and exporting produced items or products involves sending or receiving foreign currency due to which, the business is exposed to the various impacts of foreign currency exchange, as well as, impact rates. There are several ways in which the exchange and interest rates can affect the business of Zara including transactional, liquidity, translational, as well as, credit risks. There are further subdivisions of these categories. However, the impacts of the exchange and interest rates can be most observed in the transactional category.
The first subcategory of transactional costs that could impact the business of Zara due to forex and interest rates is supplier payments. While paying a supplier for the purchased items or services, the exposure to forex rates can influence the financial performance of the business (Bagh et al. 2017). Zara brings in a majority of its raw materials and items from France. For example, it could be stated that in case the organisation is to pay a supplier a total of 50000 Pounds for a shipment of goods at 6-month periods, the perchance of change in the GBP/EUR rate could impact the bottom line of the business directly. For instance, at the time of filing the purchase costs, the exchange rate may be 0.91 owing to which, the business will be liable to pay a total of 45500 Pounds if the payment is made on the same day when the invoice is received. On the other hand, if the company is to wait for the receival of the items before initialising the payment, the forex and interest rates could fluctuate, for instance, at a 2.5% rate that would cause to GPB/EUR exchange rate to rise over 0.93 which would consequently lead to an additional cost of 1000 Pounds to be paid to the supplier for the same shipment of goods at the same period.
Another financial area within the business that could be impacted by forex, as well as, interest rates include the forecasting of sales performance of the company. As Zara operates with an international capacity, the revenues and profits made by products sold in different countries may be listed in the currencies of the respective countries that may complicate the sales forecasting process significantly. Given the fact that at the time of forecasting sales performance, companies typically do not take into account major fluctuations of the forex and interest rates, as well as, the economy, this may significantly damage the bottom line of the company (Iqbal and An, 2017). Sales forecasts enable companies to plan their budget accordingly and invest in necessary areas. However, major fluctuations in the forex and interest rates due to economic barriers are typically unforeseeable owing to which, the company’s ability to predict the market and make budget-related decisions accordingly could be impacted significantly.
Inflation in the markets where Zara operates could also lead to the increment of the interest, as well as, forex rates. An economy that is devalued can consequently lead to ‘imported’ inflation. A sudden or unpredictable drop in the domestic economy of the markets in which Zara operates can be attributed by many factors including pandemics, reduction of production or increment of labor costs that would lead to increment in the costs of imported products. Furthermore, in a broader sense, the foreign exchange and interest rates faced by an international business such as Zara can also influence the costs of the assets and liabilities held by the organisation in different currencies in case the currency markets are changing, unpredictable and volatile (Oriaku and Oriaku, 2016). Interest rates, on the other hand, can be a major determinant in the determination of exchange rates and currency value. In this context, it may be stated that higher interest rates lead to perceived higher value of a national currency whereas lower interest rates reduce the relative value and thereby, are unattractive for FDI. A majority of Zara’s consumer base is represented by Asian countries such as China and India where the interest rates are moderate to high and therefore, in such economies, the organisation has opportunities for attracting foreign investment contributing to further expansion and growth in these markets.
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