12 Business: Financial Risk, Innovation & E-Commerce

sources of financial risk in export markets

• currency fluctuations

• non-payment of monies

strategies for minimising financial risk in export markets

• documentation

• insurance

• hedging

currency fluctuations

• currency fluctuations refers to changes in the exchange rate between the Australian dollar (AUD) and the currency of the importing country

• risk:

  • if the AUD rises after the exporter sets the price, the revenue received in AUD could be lower than expected, reducing profits

  • if the AUD strengthens after a contract is signed, foreign customers may pay less in AUD for the same product

  • if the AUD weakens, importing materials may become more expensive for the exporter

  • eg. if a business exports to NZ and the NZD drops in value, it will receive less in AUD when the payment is converted

• impacts:

  • reduces predicability of cash flows

  • affects profitability of overseas contracts

  • particularly risky when there is a long delay between contract signing and payment

  • erode profit margins

  • create uncertainty in revenue forecasting

delays in payment or non-payment of monies

• refers to the risk that arises when international customers delay or default on payment for goods or services

• the buyer may delay payment due to cash flow issues, political instability, or simply default

• risk:

  • difficult to pursue legal action across borders

  • time-consuming and expensive to recover debts through foreign legal systems

  • extended credit terms increase the risk of bad debts (debts unlikely to be recovered)

  • international debt recovery is costly and legally complex

• impact:

  • can lead to cash flow issues

  • difficulty meeting operational expenses

  • reduced working capital for reinvestment or expansion

  • eg. a missed payment from a foreign distributor could prevent the exporter from paying suppliers or staff

documentation

• refers to the collection of official papers and records used to facilitate, verify, and secure international transactions

• these documents ensure that exporters and importers comply with trade regulations, confirm orders, and reduce the risk of non-payment or delivery issues

• purpose:

  • to protect both buyers and sellers by ensuring clarity, legal compliance, and secure payment

• types of documentation:

  • documentary letter of credit

  • documents against payment

documentary letter of credit

• is a guarantee issued by the importer’s bank ensuring that payment will be made once specific conditions are met (eg. correct goods delivered on time)

• minimises risk by providing the exporter with assurance that they will receive payment even if the customer defaults

• the bank assumes the risk, reducing uncertainty

• eg. an Australian winery exporting to South Korea can request a letter of credit to ensure payment once the wine arrives and is confirmed to meet order specifications

documents against payment (D/P)

• are a transaction method where the exporter’s bank sends shipping and title documents to the importer’s bank, which releases them only after the buyer has paid

• minimises risk by ensuring that ownership of goods is transferred only after payment, protecting the exporter from non-payment

• this is beneficial for the exporter as it offers control over the goods until payment is received

• eg. a manufacturer in Perth exporting machinery to Indonesia can use D/P to prevent the buyer from collecting the shipment without settling the invoice

insurance

• a financial tool that protects exporters and importers from potential losses caused by risks such as non-payment, political instability, or damage during transit

• purpose:

  • to reduce financial risk for businesses involved in cross-border trade, improving confidence in exporting and allowing for more flexible trade terms

• types of insurance:

  • export credit insurance

  • political risk insurance

  • transit or shipping insurance

export credit insurance

• insurance that protects against the risk of a foreign buyer defaulting on payment due to insolvency, bankruptcy, or protracted default

• purpose:

  • enables businesses to offer competitive credit terms while securing payment assurance

• how it minimises financial risk:

  • covers losses if a foreign buyer becomes insolvent, defaults on payments, or delays payment

  • ensures that exporters receive compensation even if the customer cannot pay, helping maintain cash flow stability

  • encourages exporters to extend credit terms to customers without the fear of financial loss

• eg. an Australian business exports goods to a company in China. If the Chinese buyer is declared bankrupt and cannot pay, the insurer reimburses the Australian exporter for the unpaid amount.

political risk insurance

• insurance covering losses due to political events in the buyer’s country that disrupt trade or payment

• purpose:

  • ensures protection against risks beyond the exporter’s control

• how it minimises financial risk:

  • protects exporters from political instability, civil unrest, war, expropriation, or government restrictions (eg. currency inconvertibility) that may prevent the buyer from paying

  • offers security in unstable or high-risk markets, enabling businesses to trade more confidently

  • ensures that unforeseen political events do not result in total financial loss for the exporter

• eg. an exporter ships goods to a country that suddenly experiences political riots, resulting in blocked transport and frozen bank accounts. Political risk insurance compensates for the losses.

transit or shipping insurance

• insurance that covers loss or damage to goods during transportation (by sea, air, or land)

• purpose:

  • protects against physical damage or theft in transit, including weather-related incidents or accidents

• how it minimises financial risk:

  • covers the value of goods if they are lost, stolen or damaged during transportation

  • reduces the risk of exporters incurring a total loss on shipments before payment is received

  • gives exporters confidence in shipping internationally, knowing that physical risks are insured

• eg. a shipment of tarts from Tartology Ltd is damaged in transit due to extreme weather. Shipping insurance reimburses the company, protecting its revenue.

hedging

• a financial strategy used to protect businesses from potential losses caused by exchange rate fluctuations by locking in a rate or providing flexible options

• it ensures that the business receives a known value for their goods, even if the currency rate fluctuates

• hedging is particularly beneficial for businesses who trade in a volatile market or to tight margins, or require large amounts of currency and so have a greater risk of losses resulting from unfavourable foreign exchange rates in relation to turnover

• types of hedging:

  • forward contracts

  • option contracts

forward hedging/contract

• an agreement to exchange currency at a fixed rate on a future date

• it is an agreement between the exporter and their bank (or financial institution) to lock in a specific currency exchange rate on a future transaction, regardless of what the market rate is at that time

• purpose:

  • locks in today’s rate, eliminating future uncertainty

• how it minimises financial risk:

  • eliminates uncertainty about future exchange rates

  • protects the exporter from currency depreciation or appreciation that could reduce profits

  • ensures predictable cash flow, making budgeting and pricing more accurate for export sales

  • ideal for businesses dealing with predictable payments and fixed timelines

• impact:

  • ensures predictable cash flow and profit margins

  • however, if the market moves in the exporter’s favour, they still have to stick with the agreed rate

• eg. Tartology Ltd agrees to sell a shipment of chocolate tarts to a New Zealand customer in 3 months. With a forward contract, they lock in an exchange rate today. Even if the NZD weakens before payment, Tartology receives the pre-agreed value in AUD, avoiding losses from currency fluctuations.

option hedging/contract

• gives the business the right (but not the obligation) to exchange currency at a specific rate before a set date

• purpose:

  • offers flexibility - if the market rate is better than the contract rate, the business can choose to use the better one

• how it minimises financial risk:

  • offers flexibility: the exporter can choose to use the agreed rate only if it is better than the market rate

  • protects against unfavourable currency changes while allowing exporters to benefit from favourable changes

  • ideal for businesses dealing with volatile markets or uncertain payment timelines

• impact:

  • more expensive than forwards due to premiums but less restrictive and provides upside potential

innovation

• the implementation of a new or improved product, process, or service that enhance performance, efficiency, or value

• it can be radical (new concepts) or incremental (refinements of existing ideas)

• it supports business growth, efficiency, global competitiveness, and sustainability, and helps businesses respond to market demands

• types of innovation:

  • process

  • product

  • service

process innovation

• improves operations such as manufacturing, marketing, logistics, or accounting

• reduces cost, increases safety, efficiency, and quality

• eg. Henry Ford’s moving assembly line, Grupo Bimbo’s mobile dashboard for sales data

product innovation

• involves creating new products or enhancing new ones (eg. new features, improved quality)

• driven by technological advancements, changing customer needs, or outdated designs

• leads to greater customer satisfaction, increased demand, competitive advantage

• generally visible to customers

• examples:

  • new product: Fitbit, Kindle

  • improved product: iPhone camera upgrades

  • added features: power windows in cars

service innovation

• enhances the customer experience

• includes better support, delivery, warranties, user education, or digital engagement

• increasingly delivered via digital tools (apps, automated systems, etc.), but human connection remains key

• enhances customer loyalty and brand value

• eg. Alibaba focusing on service over price to gain customer loyalty

benefits of innovation

• financial gain:

  • increase revenue by improving the quality, features, and performance of their products, which can extend a product’s lifecycle and maintain consumer demand

  • increased revenue from new markets

  • extended product life cycles

  • increased efficiency and reduces costs (especially through process innovation)

• expansion of global market presence:

  • innovation in operations or product design can give businesses a competitive edge in international markets

  • innovation gives a competitive edge that can be scaled globally

  • supported by technologies like e-commerce, global logistics, and IP protections

  • may enable franchising or licensing models

• increased market share:

  • through innovation, businesses can meet emerging customer demands and tap into new markets

  • eg. innovation in environmental sustainability has become a key driver of consumer loyalty

  • innovative products or processes attract new customers and retain exisiting ones

  • responds to market trends more effectively

  • enhances brand image and customer loyalty, particularly when linked to sustainability

sources of innovation

• based on data and feedback:

  • customer preferences

  • competitor analysis

  • staff and supplier suggestions

  • market research

  • sales and production data

  • technological trends

factors that impact on the success of innovation

• timing

• cost

• marketing strategy

• technology

timing

• innovation is more successful during economic booms when consumer confidence is high

• strong economic condition = more consumer spending and business investment

• products in the growth/maturity stage of their life cycle are more likely to succeed due to exisiting brand loyalty and available market data

• allows firms to leverage past performance and customer data to target innovation effectively

cost

• innovation requires substantial investment in time, people, and money

• innovations must be assessed by net cash flow (earn vs burn)

• sunken cost fallacy must be avoided - do not continue investment if returns are unlikely

• poorly managed innovation costs can harm the business

marketing strategy

• purpose of a marketing strategy for innovation is to communicate the benefits of an innovation to consumers and generate awareness

• innovations often need education and promotion to drive adoption and explain benefits to consumers

• strong branding and reputation make it easier to build trust around new products and gain customer acceptance

• techniques include advertising, PR campaigns, packaging changes, promotions

technology

• technology enables new product development, improves distribution efficiency, and enhances customer experiences

• however, the availability and cost of technology can influence whether an innovation can be executed

• vital for managing market data, generating ideas, and protecting intellectual property (IP)

• managers must:

  • conduct market analysis

  • encourage a culture of creativity

  • manage project timelines and budgets

  • protect IP

• technology is both a tool for innovation and an object of innovation itself

innovation success criteria

1. it works:

   • the innovation has got to the stage where it is fully developed, it works and can be taken to the next stage of commercialisation and market launch

2. commercialisation:

   • an innovation has been developed into a product or service, and packaged with marketing strategies and launched into the market

3. integration into a product or service:

   • the innovation has been incorporated into existing products or services, eg. improved quality, added features, better performance

4. income:

   • sales and revenue can be attributed to the innovation

service innovation trends

1. Higher Customer Expectations – Personalisation, convenience, instant support.

2. Mobile Internet – Smartphones drive accessibility and engagement.

3. Big Data & Analytics – Tailor services using consumer insights.

4. Internet of Things (IoT) – Enhanced product and service connectivity.

Example: Alibaba focuses on innovation and service rather than price to maintain customer loyalty and global success.

e-commerce (electronic commerce)

• involves buying and selling goods or services via the internet

• transformed how businesses operate in a global environment by offering an online platform where goods and services can be bought and sold across borders

• enables 24/7 access to international customers and streamlining the buying and selling process

• enhances business efficiency through automated systems for secure payment processing (eg. PayPal), real-time order tracking, and automated inventory control, ensuring accuracy and reducing manual workload

• businesses can now reach a global audience without physical stores, lowering overhead costs and expanding sales opportunities

• features like language translation, currency conversion, and data protection tools build consumer trust

• this increases sales, improves customer experience, and enhances global competitiveness

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• involves buying and selling goods or services via the internet

• the development of global communication and technology systems has significantly boosted global business

• technological advancements have created secure platforms for online payments, 24/7 shopping, and digital product distribution

• key features:

  • automated currency conversions, language translation, and encrypted communications support international trade

  • businesses can reach global markets without physical presence, reducing costs and accessing global talent

  • specialised tech like nanotechnology and biotechnology open new industries and opportunities

online and digital technologies in business

• websites allow businesses to operate 24/7 globally, with integrated delivery and payment systems

• automation helps manage high volumes of emails and online orders

• free or low-cost tools like online spreadsheets and design software reduce operating expenses

• broadband internet supports fast, secure file sharing and video conferencing (eg. Zoom)

• mobile devices improve communication among staff, customers, and suppliers

e-business (electronic business)

• broader than e-commerce - it involves using ICT (information and communication technology) in all areas of business operations, not just sales

• features:

  • cost savings and faster project completion

  • 24/7 business availability online - boosts sales but increases pressure to manage customer communication

• activities include:

  • email/SMS communication with clients and suppliers

  • online sales via websites

  • online research, industry trend monitoring, banking, and payments

  • staff can work remotely using online platforms

m-commerce (mobile commerce)

• conducting business via mobile devices over high-speed internet

• it uses mobile phones and wireless technology to access specially coded mobile web pages

• features:

  • mobile phones act as digital wallets, supporting apps, purchases, gaming, and service access

  • allows entry into global markets without needing physical infrastructure

  • enables easier international expansion without needing physical infrastructure

  • enables easier international expansion through online marketplaces and international shipping

• risks/challenges:

  • spams, scams, and privacy issues

  • consumers may not fully understand terms and conditions, leading to disputes

  • easy use may result in consumer debt (eg. Afterpay or hidden mobile charges)

  • requires constant investment in promotions, SEO (search engine optimisation), social media, and website maintenance

success factors for online businesses

• optimise digital platforms for smartphones/tablets with integrated shopping carts and payment systems

• use social medial and SMS marketing for engagement, sales, and promotions

• provide exceptional service with real-time stock updates, product suggestions based on history, and product personalisation

e-commerce strategies

1. international shipping:

   • add international delivery to existing sites

   • requires investment in marketing to reach global audiences

2. branded website:

   • establish an online store to expand brand visibility and share information

3. wholesale online:

   • partner with foreign retailers (eg. Macy’s David Jones) using their infrastructure

4. local market URL:

   • create a localised site (eg. .com.uk or .com.eu) with local currency, language, and cultural content

   • builds trust with overseas customers by appearing as a local business