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

• how it works:

  • the buyer arranges with their bank to issue a letter of credit

  • the seller ships the goods and provides the required documents to the bank

  • once verified, the bank releases payment.

• benefits:

  • reduces risk of non-payment for the seller

  • gives buyer confidence that payment is only made when all conditions are met

  • facilitates trust in new or high-risk international trade

• 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

• how it works:

  • the seller’s bank sends the documents to the buyer’s bank

  • the buyer must pay to receive the documents

• Benefits:

  • lower cost than a letter of credit

  • provides a level of payment protection to the seller

• risk:

  • less secure than a letter of credit; if the buyer refuses payment, the seller may struggle to recover goods or payment

• 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

documentary letter of credit vs documents against payment

Feature	Letter of Credit	Documents Against Payment
Payment Guarantee	Guaranteed by bank	Not guaranteed
Risk for Exporter	Low	Moderate to high
Complexity and Cost	Higher (more secure)	Lower (less secure)
Preferred For	High-value or high-risk transactions	Medium-value, trusted trade partners

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

product vs process vs service innovation

Innovation Type	Definition	Examples	Visibility to Customers
Product	Changes or new introductions in physical goods or features	New smartphone model, new car tech	High
Process	Improvements in the way a product is made, delivered, or operated	Automation in manufacturing, CRM system	Low (mostly internal)
Service	Enhancing how the customer experiences or receives the product/service	Online help chat, home delivery services	Medium to high

• Similarities:

  • All aim to increase efficiency, customer satisfaction, or profitability.

  • Can be driven by market trends or technology.

• Differences:

  • Product: Often tangible and customer-facing.

  • Process: Focuses on internal efficiency, not always visible to the customer.

  • Service: Enhances interaction and delivery of products or support to customers.

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

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• Financial gain: New products or processes can generate new income streams and increase efficiency. E.g., process improvements may lower production costs.

• Competitive advantage: Unique or improved offerings can differentiate a business from its competitors.

• Market expansion: Innovations can open access to new markets, especially global ones.

• Increased productivity: Technological or process innovations can streamline operations.

• Enhanced brand reputation: Being seen as innovative can improve customer loyalty and public image.

• Adaptability: Innovation helps a business stay relevant amid changing market trends and technologies.

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

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• In an Economic Boom:

  • Consumers have more disposable income and are more willing to try new products or services.

  • Businesses experience higher profits, making it less risky to invest in R&D and innovation.

  • Greater consumer confidence means faster market adoption.

• In a Downturn/Recession:

  • Consumers reduce spending, becoming more conservative.

  • Businesses may be reluctant to invest in innovation due to cash flow pressures.

  • However, innovations focused on cost-saving or value for money may succeed.

• Conclusion: Innovation introduced during strong economic times is more likely to succeed due to lower financial risk, increased spending, and greater market optimism. Strategic innovations during downturns, however, can also provide long-term advantages if they address consumer pain points.

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/indicators of successful innovation

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

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• Commercialisation: The innovation has been successfully launched and marketed.

• Market adoption: Strong customer interest and uptake.

• Sales growth: Increase in revenue directly tied to the innovation.

• Customer satisfaction: Positive feedback, reviews, or increased customer loyalty.

• Process efficiency: Reduced costs or improved output if it’s a process innovation.

• Return on Investment (ROI): The financial return outweighs the cost of development.

• Competitive advantage: The business gains a unique position in the market.

• Cultural integration: The innovation is accepted and supported internally by employees.

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

benefits of e-commerce

From the Consumer's Perspective:

• 24/7 access to products and services from anywhere in the world.

• Greater product variety and price comparison options.

• Convenience in delivery, payment options, and customer support.

From the Business’s Perspective:

• Ability to earn revenue around the clock with minimal geographical limitations.

• Entry into new international markets without needing physical storefronts.

• Lower operational costs (e.g., fewer staff, no physical premises).

• Access to real-time customer data to improve marketing and services.

• Increased competition, requiring businesses to continually innovate and enhance customer experience.