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Bartlett & Ghoshal (Worked Answer to Brompton Bicycle Paper 2 Practice Case Study Question)

Level:
A-Level
Board:
AQA

Last updated 30 May 2019

Here is a suggested answer to the 16-mark "open" question on the relative pressures of costs and local responsiveness for success in international markets (Bartlett & Ghoshal).

Question:

Brompton does not adapt its products for international markets, but faces competitors operating with lower costs. To what extent do you think that cost pressures are more important than pressures for local responsiveness for any business wishing to succeed in international markets? (16 marks)

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For Brompton, cost pressures seem to be increasingly important in determining their success in international markets. By keeping production located in the UK where labour costs are likely to be higher than in locations such as China, and then adding in the transportation costs of exporting, Brompton may be at a cost disadvantage against domestic producers with lower unit costs by using production that is less labour-intensive and uses generic components. Unless Brompton can ensure that their products are price-competitive as well as high quality, they may find themselves at a disadvantage against competitors with lower prices and acceptable quality – particularly if competitors “copy” Brompton’s distinctive designs. On the other hand, Brompton may find it has more pressure to be responsive to local market needs than cost pressure when they enter new product segments (such as e-bikes) where customers may be more demanding. Demand for innovative new products is often less price-sensitive, and if Brompton can design new products that are clearly differentiated and more tailored to local market needs, this may overcome any increased pressure to reduce costs as the products become more widely bought.

There are many other situations where businesses need to be highly globally integrated in order to succeed, particularly in markets where it is important to have efficient operations located in each country they want to compete in. The logistics industry is a good example – firms like FedEx and UPS have to ensure that their systems are tightly integrated across the globe to offer customers the kind of reliable delivery service they expect. High pressure for global integration is also increasingly important in situations where businesses produce relatively standardised products, with little differentiation. Here, economies of scale and high efficiency are vital in order to be competitive – e.g. car manufacturing. On the other hand, customers in some international markets now demand greater authenticity in the goods and services they buy and businesses that fail to respond to local market needs may find themselves losing out to domestic competitors who are both efficient and locally responsive. Starbucks discovered this in Australia where, despite being efficient, it misjudged what customers wanted in terms of product.

In most international markets, however, it is cost pressures that are the most important to determining business success. I justify this because, even if a business is highly responsive to local market needs, it can be undercut by a domestic business that is similarly responsive to customer needs, but is more efficient. This is often how domestic businesses are able to compete against multinationals trying to enter international markets. Of course, where customers demand product differentiation and/or where they want to buy branded products, then cost pressures may be less important. Although sooner or later it is likely a competitor that is both efficient and responsive to market needs will gain a competitive advantage over inefficient firms.

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