PP3/4

• Drivers of becoming global

  • Lower trade barriers
  • Lower transportation costs
  • Spread of technologies
• Lower trade barriers


  • Some countries benefit from unrestricted movement of financial resources
  • Reduction of trade barriers increases incentive for firms to transfer technology resources
• Lower trade barriers


  May damage local companies, increasing unemployment
• Lower transportation costs


  Enable products made in one country to be produced and distributed internationally at lower cost, increasing product's competitive position
• Lower transportation costs


  Produce more competition among firms
• Spread of technologies


  • In some countries, technologies are more taxed or hard to be implemented, while other countries rely more on technologies
  • New technologies create new needs, incentivizing firms to "colonize" those markets
• 3 ways of going global

  • Offshoring
  • Outsourcing
  • Foreign direct investment
• Offshoring

  Transferring activities or ownership of a business process to a different country
• Outsourcing

  Another firm becomes involved in the process, can be domestic or international
• Foreign direct investment

  Investing in another branch of my company in another country
• These 3 ways of going global can get along perfectly
• Offshoring

  Relocating business processes, such as manufacturing or service provision, to a foreign country to take advantage of lower costs, labor, or other advantages
• Outsourcing

  Contracting out specific tasks or functions of a business to a third-party company, often located domestically or internationally
• Risks of outsourcing

  • Misaligned interests of clients and vendors
  • Increased reliance on third parties
  • Lack of in-house knowledge of critical business operations
• Benefits of outsourcing

  • Access lower costs
  • Take advantage of different skills
  • Provide more cost efficiency and efficacy
• Risks of offshoring

  • Transferring jobs to other countries
  • Geopolitical risks
  • Risks related to cultural differences, language differences and poor communication
• Benefits of offshoring

  • Lower costs
  • Better availability of skilled people
  • Getting work done faster thanks to an international pool of expertise
• All companies want to exploit economies of scale in their production, but there is a point where they have no convenience producing their own goods and shall look for other sources
• Offshoring and outsourcing are operations designed to find the scale point where companies lose their competitive advantage in producing their own goods
• Cost

  The value of a good or a service, not a negative cash flow
• Classification of costs

  • Direct costs (production costs)
  • Indirect costs (administrative costs)
• Indirect costs are usually higher than direct costs, which is a problem
• Types of costs

  • Fixed costs (do not depend on volume of production)
  • Variable costs (vary according to the volume)
• Marginal cost

  Cost of one product if you produce one more
• Unitary costs

  • Unitary variable costs are fixed
  • Unitary fixed costs are variable
  • Global fixed costs are fixed
  • Global variable costs are variable
• Total cost

  Fixed cost + variable cost
• Variable cost

  Volume x variable cost per unit
• Total income/revenues

  Price x volume
• Gain/loss

  Total income - total costs or (P x Q) - (FC + (Vcu x Q))
• Contribution margin

  Portion of sales revenue that is not consumed by variable costs, contributing to the coverage of fixed costs
• Unit margin

  Price - variable costs per unit
• Formula for contribution margin

  Cmu = P - VCu
• Improving the contribution margin can be done by outsourcing and offshoring
• Break-even analysis

  Used to determine the convenience of an operation, by finding the volume or price to obtain 0 gain or loss
• Target gain

  Total revenues - total costs
• Formula to calculate volume to obtain target gain

  Qt = (TG + FC) / (P - VCu)
• Taxation

  • Strongly influences the ability to obtain a gain or loss
  • Net income = gross income - (tax rate x gross income)
  • Gross income = net income / (1 - tax)
• Formula to calculate volume to obtain target gain considering taxation

  NI + FC / Qt = 1 - t / (P - VCu)
• Economies of scale

  Cost advantages a business can achieve by increasing the scale of production, leading to decreased average cost of production
• KPMG is one of the Big Four accounting firms, providing audit, tax, and advisory services