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Discuss the main reason that simply multiplying the country's expected per capita consumption by its population doesn't necessarily lead to a good estimate for potential demand, and why this is an important consideration in the global business environment. You are expected to use some comparisons across different countries to help to illustrate your arguments.
A countries potential demand can be calculated in numerous ways. Global businesses have to consider what factors they have to keep in their account while measuring potential demand in a global business environment. International businesses want to maximize the demand for their products in order to maximize their profitability. Moreover International business has to be aware about the market they want to enter. Companies can create more demand by positioning the company's products in a particular way in the market. A higher market share would lead to more revenue generation for the business and in this way the market leader in a particular industry is able to extract the majority of the demand. Per capita consumption is the amount of goods and services consume by a person in one year. Per capita consumption can be multiplied with the population in order to obtain potential demand. This is a vital measure of calculation therefore there are other factors as well which influence the demand for commodities. Population is a potential demand only if people have income to spend; if the income is high they will have more spending power and vice-versa. Well I disagree with the statement that simply multiplying the country s expected per capita consumption by its population does not necessary lead to a good estimate for potential demand because this is not only the factor effecting potential demand however there are other factors which influence the potential demand as well.
New markets are very beneficial to the firms and that is the only reason why most of the firms enter a new market. These new markets helps firms in various ways, firstly it helps to cut down their cost by using the economies of scale , Secondly it gives an opportunity to expand their business internally ( domestic ) and externally ( internationally ) , thirdly it increases the completion with its new and existing competitors and lastly it helps to generate greater profits. It also helps to remove trade barriers among countries.
This essay will emphasize on various key factors, which are driving business towards the global market, and the factors of demand that will influence them comparatively. By multiplying the countries expected per capita consumption by its population can lead to a good estimate for potential demand but in order to obtain an accurate measure other factors need to be considered.
''Globalization is an increase of trade around the world, especially by the large companies producing and trading goods in many different other countries'' (2009 Cambridge dictionary online). Businesses want to globalize because they want to reach the maximum number of customers from all over the world. Companies expand their product and services to other international markets in order to boost up the company's sales and brand image. Companies which tend to globalize emerge into International Trade and obtain more demand for their products and services. Basically international trade is the exchange of goods and service out of countries boundaries. International trade consist of imports and exports which are accounted in countries balance of payment. However International trade helps to rise in world economy and give consumer a wide variety of goods and services in their reach.
Due to heavy competition from India and China, the UK is facing challenges of globalization. Microsoft chairman Bill Gates has advised UK government on how to respond to these challenges and compete with these fast growing economies. Bill Gates has appointed a 12-member group of world leading business people who will advice Gordon Brown and his government on the impact of globalization. The meetings aim was to focus how UK government can respond to the impact of globalization and remain one of the world's key locations for higher value added activity and as a result it will help to improve UK's competiveness over India and China.
''Inflation is a general and progressive increase in prices'' (Google definitions). Inflation can be very problematic for businesses as demand for products is in on a continuous decline. During the period of inflation customers have low spending powers resulting in loss of demand. There are two types of inflation, demand-pull and cost push inflation, demand pull inflation occurs when customers have high demand for the product, which causes a price hike and causes the demand curve to shift to the right increasing price as quantity supplied is fixed or stable. On the other hand cost-pull inflation occurs when production cost increase leading to a rise in the price of the product in other words demand for products decreases as the price of product has increased. Some examples of rising cost could be high labour cost, increase in price of raw materials, transport cost, higher taxes, expensive machineries, etc.
In Brazil, the interest rates were raised from 12.25% to 13% in order to control the increasing level of inflation. The government of Brazil aimed to keep inflation rate at 4.5% but a survey conducted by economist suggests inflation rate to reach 6.53%. It is likely expected that the Brazilian government will plan to increase interest rates further to main inflation at a healthy rate.
In the United Kingdom, the CPI (Consumer Price Index), which is a key measure of the inflation rate, dropped to annual rate of 1.6% in august from 1.8% in July 2009. The RPI (Retail Price Index) which measures inflation and includes interest payments rose to -1.3% from -1.4%. The bank of England aims to keep inflation rate at 2%.
Low costs of food kept the consumer price inflation low according to the office for national studies (ONS). The prices of gas and electricity remained little changed but the cost of fuel rose due to the average increase in petrol prices. The concern for the UK economy is the occurring low levels of inflation and the possible risk of deflation.
Elasticity of demand is the responsiveness of the quantity demanded of a good or service to change in its price. The demand for the product can depend on the elasticity. Therefore products which have an elastic demand tend to be more responsiveness to price changes. If the price of the product varies slightly then the demand will change significantly. However if the demand for the product is inelastic and price changes will not affect demand.
In diagram 1 above, the demand curve is elastic which shows that a small change in price from P1 to P2 which lead to a high amount of decrease in demand from Q1 to Q2. An example of elastic goods would be luxuries goods.
In diagram 2 as shown above, Is an inelastic demand curve which shows that a small increase in price from P2 to P1 will result in a small amount of change in quantity demanded, as shown from Q2 to Q1. An example of inelastic goods would be cigarettes.
The potential demand for a product can be influenced by the number of substitutes' and compliments available for that product or service, if a product has a high number of compliments then it is more likely to have a higher demand and vice-versa. The number of substitutes can also very demand as if there are few substitutes then demand for the product will be high as there are no alternatives.
''The political environment includes all laws, government agencies and lobbying groups that influence or restricts individuals or organizations in the society'' (2000, political environment). These factors are issued and controlled by the government; however the government can play a vital role to affect products demand. The government can aid a price decrease in the form of providing subsides to manufacturers or increase products price by levying taxes on it. However these political factors have a high impact on the foreign market companies, if there are more foreign companies in a country then there is high level of attention acquired to political climate because these foreign countries are operating as host countries and government need to supervise their activities and provide them some benefits such as investments, free trade or impose restrictions in order to save local or infant industry such as quotas, tariffs etc.
The UK government implies certain political factors in the food industry as the government has increased the pressure on food supplies to provide more healthy eating foods. The government's aim to control obesity which is emerging in the youth and to encourage people to make more healthy choices. McCain supports the government inventiveness as the potato based food they supply is prepared in the healthy and simple environment.
''Economic factors, such as employment, income, inflation, interest rates, productivity, and wealth, that influence the buying behaviour of consumers and firms'' (2009, economic environment). Economic factors are an important factor for a company that wants to invest in the country or want to export goods or services. However these factors consist of gross domestic product, disposable income, and inflation, interest rates, trading blocs, demographics factors and disposable income. The condition of the economy can affect a potential demand for the product and service for example: the recent credit crunch which occurs all over the world caused major decline in the potential demand of products. Similarly, if there is a bullish trend in the economy then demand is more likely to rise.
''Socio culture environment includes institutions and other forces that affect the basic values , behaviours, and preference of the society all which have an effect on consumer marketing decision''(2000, political environment). Social culture factors are crucial for business to cater to as they can help to increase the demand for the products in international markets. In the social culture environment a multinational company needs to consider religious beliefs, attitudes and values before coming into that country.
For companies to become socio culturally responsible businesses have to
Focus more on the local taste and preferences of the country. For e.g. Mc Donald's sells all their meat products HALAL in Islamic which cover Middle East, Pakistan, Saudi Arabia, etc. Furthermore Mc Donald's does not sell beef products in India and instead have more vegetarian variety because of Indian religious belief.
''The technological environment consist of those forces that affect the technology and which can create new products, new markets, and new market opportunities'' (2000, political environment). Technological advancements can help manufacturers to produce more efficiently and cut cost. The lower prices will entice customers to purchase cheaper products increasing the potential demand.
With improvement of technology. The BAA Terminal 5 is equipped with the latest technology machinery which helps to fasten and secure the process of passengers waiting for their baggage on carousel.
The legal environment is derived partly from political climate and has three distinct dimensions to it, firstly the domestic laws of your home country, secondly the domestic laws of each of your foreign markets and lastly international law in general. However legal system varies from country to country, in other words you are likely to find that the legal systems in operations in the buyer's country are in many respects different from the home country or the country from where the company is dealing (university of Liverpool, the legal environment).
Government can apply certain legal factors which can stimulate potential demand.
Under developed countries for e.g. Pakistan's Government can encourage firms to invest and produce in Pakistan by providing incentives and subsidies. They can invite FDI into country. Furthermore some legal factors can be like this as well, Uk government does not allow to advertise any cigarettes or liquor products on Television as may it not be suitable.
''Unemployment is the state of an individual looking for a paying job but not having one'' (2009, unemployment). Unemployment is a menace for the economy; as unemployment can lead to many problems such as low GDP (Gross Domestic Product), increase crime, low living standard, etc. If unemployment persists then the government faces pressure as they have to provide for healthcare and at the same time low income revenue is generated in the form of taxes in other words unemployment leads firms to face loss and government losses tax revenues, VAT, because unemployed workers do not pay income tax to the government. In an international market where unemployment is high and poverty exist then there will be extremely low demand for goods and services and it's likely that new businesses will be consider before getting into new market.
In the United Kingdom unemployment rate is 2.46 million, with joblessness rate at 7.8% slightly lower than the highest level in mid-1995. 12,900 people claimed unemployment benefits in October 2009.
Some economists believe the UK economy is growing again, but there are forecasts that the unemployment rate can reach 3 million in 2010. The UK government must try to keep unemployment rate at lower levels in order to achieve economic growth and maximize business activity in the economy.
Competition is a very important factor for a company when it comes to increasing it potential demand for its products and services. It leads to better quality good at same price, because every company will be targeting more and more customer to increase their potential demand for their products. Competition is fierce and high number of competitors will increase the amount of substitute available and hence decrease the potential demand. A high number of competitions will lead to the business to have less amount of market share thus reducing the company sales. Businesses must consider the types of competitors present in the market and develop an appropriate strategy in order to penetrate into the market.
Oil is necessity for every country. Likewise India searches for the best Oil quotes so that it could beat the price and competition in the country. By implementation of this process customers will be getting the oil in low prices with good substitutes of oil.
''Income inequality is techniques used by economists to measure the distribution of the income and economic inequality among the participants in a particular economy such as that of a specific country or of the world in general. These techniques are typically categorized as either absolute measure'' (2009, definition of income inequality). Furthermore Gini coefficient is a measuring tool which helps managers to calculate an approximately income distribution in a particular country which result in finding out the income distribution among the other countries and population.
Income inequality is also define as not every single individual has the same earning income, these individuals can be categorized into different social classes so high income holders will demand more or demand for higher class products or luxuries products however low income holders will demand less or will demand just for the necessities products or services.
Leapfrogging it is the defined as when an economy of country does not moves through the conventional stages of development but directly adopts technology advancements. Likewise customers in higher income countries usually not follow stages of technology like developing countries do for e.g '' In China, consumers have leapfrogged the use of landline telephones by jumping from having no telephones to using cellular phones'' ( John & Daniels, 2009 , pg 497 ). As the technology advancement takes place, the price of goods decreases and leads to create potential demand for its customers.
Trading bloc is be defined as a 'preferential trade agreement' (PTA) among the countries in other words it's a group of countries which unite together to form a one trading group. This trading bloc is between a subset of countries and designed to significantly reduce or remove trade barriers within member countries (Bhagwati & Panagariya 1996)
'' The EU has become the most powerful trading bloc in the world with a GDP nearly as large as that of United States'' (2005, A guide to trading bloc). In this EU trading bloc, member countries can trade without any restrictions or barriers. And because of that the potential demand for goods increased within the trade blocs and the potential demand for goods decreases outside the trading blocs.
Corporate social responsibility (CSR) helps the company to follow its long term objectives that are good for the society, Moreover company have to behave ethically and should contribute towards economic development. In short CSR is the process of giving a good impact of their company to the society. As the customer is made aware of the environmental friendly products, contributing to the society the customer will tend to demand more. This is also important for international business while they focus to implement a product, which benefits the society, and intern makes business more effective.
Likewise Honda Car Company is launching new model of cars which are environmentally friendly and keeps the society clean. With the new implementation of the technology of Honda Fcx clarity the car runs on hydrogen fuels cell and the only emission is water. This helps to save 3million trees a year.
It can be concluded as by simply multiplying countries per capita consumption by its population does not necessary leads to a good estimate of potential demand because there are other factors which also help to measure potential demand such as '' International trade, Macro environment , Unemployment'' . Therefore Companies should be considering these factors before going global or into new markets. Failure to considering these factors will result in a great disappointed for a company.
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