4.2.5 Global competitiveness Flashcards
Global competitiveness
Global competitiveness measures the ability of a business to succeed against both domestic rivals and foreign competitors in international markets.
If a business can achieve the ability to compete effectively on a global
scale, the key benefits are likely to be:
dominating their domestic markets with minimal penetration from
imports.
ease of entry and strong competitiveness in foreign markets due to global brand recognition.
How competitiveness can be achieved
As Porter has pointed out, competitiveness can be achieved through cost
leadership, since the firm with the lowest costs should always be able to
undercut their rivals’ prices. Porter’s alternative strategy is to compete
through a high level of product differentiation. This is especially feasible in
wealthier markets where price is likely to be less important, with consumers
valuing other features such as design, branding and functionality.
The impact of movements in exchange rates on competitiveness- Impacts of a high exchange rate for companies who rely on export markets
• Companies which rely on export markets will find it harder to sell
their goods in foreign markets due to increased prices, or must accept
lower profit margins. For a company selling a product for which they
need to receive £10 of revenue, at the original exchange rate they
would need to charge $15 in the USA. Once the pound has appreciated
in value, they will need to charge $20 to achieve the same £10 of
revenue, or accept a lower revenue of €7.50 if they maintain the $15
selling price in the USA.
Impact of a high exchange rate (an appreciation in the value of the pound for UK businesses)
For example, if f1 is worth $1.50, and the exchange rate changes to
£1:$2, the pound has strengthened against the dollar.
Impacts of a high exchange rate for • Companies whose domestic market is subject to competition from
imports
their foreign rivals’ imported products seem cheaper
to UK consumers if the pound increases in value. An American
product that sells for $150 would have cost a UK consumer £100 at
the £1:$1.50 exchange rate. When the pound appreciates to £1:$2, the
$150 item will now only cost a UK consumer $75, giving imported
goods a significant advantage over domestic rivals.
Impact of high exchange rates for Companies which need to import significant quantities of raw
materials or components
The stronger pound buys more
foreign currency, meaning that their imported materials will cost them
less in pounds, lowering their production costs.
Impacts of a low exchange rate (effects of a falling pound) - Companies which rely on export markets
Products will seem cheaper in foreign markets, boosting
export sales
Impacts of a low exchange rate- Companies whose domestic market is
subject to competition from imports
Imported products will become more expensive in sterling
terms, increasing the competitiveness of domestic producers in their home markets
Impacts of a low exchange rate- companies which need to import significant quantities of raw materials or components
Imported materials will now cost more, pushing up production
costs unless the same materials can be sourced at home .
More advantages of being globally competitive
Global organisations operates multiple sites on global basis - allows to source production
Allows to buy supplies from cheaper sources
Economies of scale can buy in bulk - able to obtain discounts
Lower costs by heavy investment - quicker to produce high quality goods at lower prices
Allows to have global brand awareness and lowers cost - significant competitiveness at a low cost organisation
With increased competition in most markets - they try to differentiate from competition
Have the ability by adapting actual products via advertising
It is likely that product innovation is ongoing with new ideas
Allows global business to develop brand loyalty and create barrier of entry - difficult to produce
Competitive advantage through cost
competitiveness
The ability to produce goods and deliver services cheaper than anyone
else in the market provides a secure competitive position for a business.
The ability to lower its prices below any rival yet still make a profit
when others are making a loss means the business can always rely on
value-seeking customers. However, being the cheapest supplier in a
market is a difficult and relentless challenge. Three key strategies to
achieving cost leadership are raising productivity, outsourcing and offshoring
Raising productivity
Key resources from which more efficiency may be squeezed are:
• human resources
• tangible non-current assets. Finding a way to increase labour productivity: motivated staff, well planned and organised processes. The assets that a business uses to generate revenue include property,
machinery and equipment. If a way can be found to gain more output
or revenue from the same assets, the unit cost will fall.
Outsourcing
Outsourcing means contracting another business to perform a business function on your behalf. Frequently that function will be production, often performed by a business located in a lower cost country. Not only can this reduce running costs, it can also free up capital and space to invest further in those processes which you can do cheaper than anyone else.
Offshoring
Offshoring means moving
one or more business
functions to a foreign
country, usually to take
advantage of lower labour
costs. If a business can do something more efficiently than any other, but unit
costs are high simply because of the prevailing local rates of wages and
land, the solution may be offshoring: transferring the business’s successful
methods and expertise abroad.
Difference between outsourcing and offshoring
with offshoring, the original business still owns the
facilities that have been moved abroad. Outsourcing, which need not
mean a change of country, means paying another company to perform
a process for you.
Competitive advantage through product
differentiation
Branding, different functions, engineering, performance. Perceived product differentiation: branding, advertising, sponsorship, celeb endorsement
Skills shortages and their impact on global competitiveness
If companies have failed to plan for future workforce needs, or provide
appropriate training for staff, they may find themselves lacking in staff
with appropriate skills to cope with changes in the market.
To overcome
the problem of being unable to fill newly created positions with
appropriately skilled staff,
a company may need to poach staff from other
businesses. This will almost certainly require paying higher wages to
coax staff from their existing employers. So the failure to invest, which
may have been seen as a way of boosting competitiveness by cutting costs,
may result in damaging competitiveness by leaving roles unfilled, or
necessitating the payment of higher wages in order to fill those gaps.
Where a national skills shortage exists,
Where a national skills shortage exists,
businesses may need to consider outsourcing abroad, or even relocating a
particular function to a country where the required skills are more readily
available.
Global competitive advantage can come
through
Global competitive advantage can come
through cost competitiveness or product
differentiation.
Global competitiveness - alternative definition
the ability of a business, usually a MNC, to perform better than its rivals across markets in different countries. This can be achieved through performance on price and quality or customers’ perception of these factors.
Skills shortage
Demand for highly skilled workers is outstripping their supply. This is impacting heavily on global businesses, many of whom are producing differentiated products. There is an imbalance in the global economy, with too many low skilled workers and not enough skilled workers.
This is partly accounted for because many low skilled jobs have now been replaced by machinery. Machines find it more difficult to replace highly skilled workers e.g. the creative industries.
A lack of ability to recruit skilled workers could lead to a decline in competitiveness as global businesses will not be able to take advantage of lower unit costs and/or higher-quality products. This will be a particular risk for businesses that take the differentiated approach, such as products that rely on a high level of expertise and craftsmanship. This risk can be reduced by good corporate planning to ensure skills are available to create a competitive advantage and this may involve outsourcing or offshoring.
Comparative Advantage
One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost (more efficient). Max. production achieved if each person concentrates on the activities for which his or her opportunity cost is lowest
