Please enable JavaScript.
Coggle requires JavaScript to display documents.
4.2.5 Global Competitiveness - Coggle Diagram
4.2.5 Global Competitiveness
Key Terms
Economic risk - Risk that future cash flows will change due to unexpected exchange rate changes
Competitive Advantage - The advantage one company has over another, or several others, in the provision of a particular product or service
Barriers to Entry - Factors that make it difficult for a business to enter an industry or type of business and compete effectively. These can include incumbents' high capital investment and strong economies of scale, restrictive government policies, and labour unions
Cost Competitiveness - Through acquiring ever-increasing economies of scale, a company creates the cheapest product on the market
Cost Leadership - A concept developed by economist Michael Porter, used in business strategy. It describes the way to establish the competitive advantage and essentially means the lowest cost of the operation in the industry
Differentiation - Rather than focusing on costs, differentiation is when a firm selects certain attributes of its products/services and tries to match these with specific customers. The business may then try to command a higher price for creating this differentiated product.
Global Competitiveness - The extent to which a business or a geographical area such as a country, can compete successfully against rivals
Skills Shortages - Where potential employees do not have the skills demanded by employees
Achieving Global Competitiveness
Being multinational can help an enterprise to develop competitive advantages that are not open to single-nation companies
Multinational corporations can benefit from:
Global operations can bring much bigger economies of scale
Global sourcing can give firms more scope to find the best-quality sources at the right pprices
Global operations allow companies to get closer to their international customers, both befor and after sales
MNCs can tap into a much bigger range of knowledge and scope for innovation
MNCs can diversify risk
Effects of Exchange Rate Fluctuations
The exchange rate between currencies is important for businesses that export and import goods and services
A depreciation in the exchange rate will make exports cheaper and so exporters could benefit
An appreciation will make exports more expensive and will have an impact on the competitiveness of exporting firms
The rising buying power of the pound might allow it to pay a lower price for the raw materials to make its products
This could help it lower its costs, giving it room for lower prices
It may then be able to maintain above the profit margin
Where the pound depreciates, the demand for the manufacturer's products may increase
The costs may rise with it
It is therefore essential that a business considers all of the potential implications of changing exchange rates upon its current and future competitiveness
The Significance of Changes in the Exchange Rate
Elasticity of Demand
If there is a depreciation in the value of the pound, the effect it will have on a business depends on the price elasticity of demand
If UK businesses sell goods where demand is price inelastic, the the fall in price would have only a relatively small increase in demand
If the demand for exports is price elastic, then there will be a bigger percentage increase in demand
The evidence is that demand for British exports tends to be price inelastic, which is good news for exporters if there is appreciation, but bad news if there is depreciation
Economic Growth in Other Countries
If the pound depreciates in value, but the economy in another country is in recession, the demand for UK exports will be weak
Significance of the Cause of the Fluctutation in Exchange Rates
The pound can appreciate because of improvements in efficiency and productivity
Businesses will be able to absorb the stronger pound more easily
However, if the pound rises due to speculation or due to weaknesses in other countries, then businesses could be uncompetitive
The rise in the pound is not related to either improved competitiveness or productivity
Fixed Contracts
Many businesses used fixed contracts to counter fluctuations in the exchange rate
This means that temporary changes in the exchange rate will have a smaller impact
The prices of buying raw materials is often set 12 to 18 months in the future
Exporters may also use future options to hedge dramatic changes in the exchange rate
It is these fixed contracts that help to lessen the uncertainty around exchange rate fluctuations
It also means that there are time lags between changes in exchange rates and the impact on the business
Economic Risk
The most serous risk is a long-term risk that a strategy of locating in a low-cost production area is undermined by the appreciation of the target country's currency
Economic risk is one of the gravest financial risks facing an international firm
Future cash flows form the basis of a business's overall value
Consequently, managing economic risk requires careful analysis of the political, regulatoruy and cultural environments affecting the currency over time
For example, the US dollar is the most important international currency
Besides having one of the largest economies in the world, the dollar has a role in almost every international transaction, either directly or indirectly
As a consequence, any movement in the dollar will have an impact on international trade
The areas that are most likely to feel the impact of any rise in the dollar are the emerging market economies
This is because many companies from the develping world take out loans in dollars
Competitive Advantage
A firm is said to have a competitive advantage when it has a distinctive strength that its competitors do not, such as:
Cost advantages
Size
Technical or managerial expertise
The ability to innovate
Having a competitive advantage is the key to entering and succeeding in an overseas market
MNCs will want somewhere to operate where they can find the resources and capabilits to maximise their competitive advantages
Cost Competitiveness
This is where an international firm is able to achieve scale and scope economies, which may give it a cost advantage over its competitors
Cost competitiveness allows the firm to deliver the same productor service as its competitors, but at a lower cost, which allows it to make more profits
For example, through acquiring ever-increasing economies of scale, a company may attempt to create the cheapest product on the market
This cost leadership strategy can be a competitive advantage provided that the firm meets the minimum quality standards of the industry
Differentiation
Differentiation is where, rather than focusing on costs, the firm selects certain attributes of its products or services and then tries to match this with specific customers
The firm may then try to command a higher price for creating this differentiated product
In order to sustain differentiation over the long term, a firm must fully understand its own strategy and its customers, who may be following similar strategies themselves
This is where barriers to entry are important
A large firm would have advantages over a new entrant to the industry who face barriers to entry because they don't have brand recognition
The firm needs to either have brand recognition, intellectual property, or protected supply and distribution chains if it is to use differentiation to remain competitive
Skills Shortages
Many industries require highly trained professionals to compete
Companies that have long-term access to skilled and low-cost labour have an advantage over competitors who do not
Where a firm owns these advantages in its home market, it may be able to produce and export more effectively than its competitors
Where it wishes to expand production and chooses to locate abroad, it will hope to enhance these competitive advantages, or at least ensure that they are not eroded
Governments and businesses define skills shortages slightly differently
From the perspective of national comparative advantage advantage, a government will be concerned that the relative education and skills of other countries make them more competitive
However, employers are most concerned when they cannot fill specific vacancies, or cannot do so at the right skill level