4.2.5 global competitiveness

Question 1

The impact of movements in exchange Rates

Answer 1

• If the exchange rate appreciates this will make exports less attractive in terms of price competitiveness and imports more attractive
• However, a stronger pound will lower the relative price of imports and may reduce the cost of imported materials
• There is no certainty as to the exact price of a currency on a daily basis, meaning that businesses will struggle to budget as they do not know their exact costs

When an exchange rate weakens, it increases the price of imports, and potentially inflation. This is especially true for businesses who rely on the import of primary raw materials
This might deter investment made by businesses as they do not know the expected return on investment
Given that we are looking at global businesses it is likely that there will be both benefits and disadvantages of exchange rate movements e.g. if the £ appreciates against the $ then UK subsidiaries of the business will benefit from cheaper imports and the opposite will happen to the American subsidiary

Changes in exchange rates can eliminate profits for a business or increase returns dependent on which way they move

Question 2

Competitive advantage through cost competitiveness

Answer 2

Michael Porter suggested that businesses can gain a competitive advantage through having the lowest cost.

A business that operates with the lowest cost can charge the lowest prices but does not necessarily have to.

Global organisations operate on multiple sites on a global basis. This allows them to source their production at the lowest cost site.

Using their supply chain management effectively allows them to buy their supplies from the cheapest sources globally.

Purchasing economies of scale, where global businesses can buy supplies in bulk means that they are able to obtain massive discounts.

Technical economies of scale allow them to lower unit costs by investing heavily in the best machinery making it quicker to produce better quality mass market goods at a lower price.

Marketing economies allow them to have global brand awareness reducing the cost of having to do different branding in each country.

As a result global businesses will have significant competitiveness from being low cost organisations.

Question 3

Competitive advantage through differentiation

Answer 3

With high competition in most markets global businesses will try to differentiate themselves from the competition in order to sell.
Global businesses have the ability to differentiate by adapting the actual product in some way or by distinguishing the product through advertising and branding. Massive marketing budgets allow this to happen.
With significant budgets available for Research and Development it is likely that product innovation is ongoing with new ideas being developed and new products coming to fruition.
This continuous range of new products, often with wide product ranges allows the global business to develop brand loyalty so that it has major market share that will last well into the future.
The fact that global businesses patent and trademark a large range of products ensures that they create significant barriers to entry meaning that other businesses find it difficult to produce similar products.

Question 4

Skills shortages and their impact on international competitiveness

Answer 4

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.
This will increase labour costs as the wages of skilled workers will be bid up.
At the same time it will reduce the creative output as less skilled workers are available in areas such as design and new technologies.