Chapter 75- Global Competitiveness Flashcards
Multinational corporations (MNCs) often benefit from the following:
- global operations = larger economies of scale
- Global sourcing can give firms more scope to find better- quality sources at the right prices
- Allows companies to get closer to their international customers, both before and after sales.
- Can tap into much bigger range of knowledge and info.
- Can diversify risk
HOWEVER, global competitiveness is something that firms seek, as well as the competitiveness of a firm affecting its market.
Effect of exchange rate fluctuations on business
- 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.
Therefore if manufactured products become more expensive for the country buying them then the manufacturing company must figure out a way to stay competitive so the company will continue to buy their products. Could maintain same price but maintain quality as an advantage, even though high price may cost it sales. Or could lower the price, maintaining the quantity sold, and make a smaller profit margin.
However, appreciation of the pound may have advantages as this will rise the buying power of the pound, allowing the manufacturer to lower the price for raw materials, maintaining profit margins. The outcomes would be the opposite if the pound depreciates. Therefore essential that a business considers all implications of changing exchange rates.
The significance of changes in the exchange rate on business
- Elasticity of demand - If goods sold are price inelastic = fall in price = relatively small increase in demand. If demand for exports is price elastic = bigger percentage increase in demand.
- Economic growth in other countries - in 2009/2010 the pound depreciated in value, but the EU economy in particular was in recession = demand for UK exports was weak.
Fixed contracts
Businesses use fixed contracts to counter fluctuations in exchange rate = temporary changes in exchange rate will have smaller impact.
Economic risk
Defined as a risk that future cash flows will change due to unexpected exchange rate fluctuations. The most serious is the long-term risk that a strategy of operating in a low-cost production area is undermined by the appreciation of the target country’s currency.
Risks associated with exchange rates:
- Long term risk that a strategy of locating in a low-cost production area is undermined by the appreciation of target country’s currency. E.g. no longer as low-cost to remove production to China.
- Cash flow issues therefore always need careful analysis of the political, regulatory and cultural environments.
Competitive advantage
When a firm has some sort of distinctive strength that its competitors do not, such as cost advantages, size, technical or managerial expertise, or an ability to innovate.
This is key to entering and succeeding in an overseas market. MNCs will want somewhere to operate where they can find the resources and capabilities to maximize their competitive advantages.
Two types of competitive advantage that play a role in many international firms’ success:
1.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.
This allows the firm to deliver the same product or service as its competitors, but at a lower cost, which allows more products to be made. E.g. could become the lowest cost producers in that market – cost leadership strategy. E.g. Aldi and Lidl
2.Differentiation – this is where rather than a business focusing on costs, the firm selects certain attributes of its product or services and then tries to match this with specific customers.
The firm may try to achieve a higher price for creating this differentiated product. E.g. some big beer breweries have brought small-scale ‘craft brewer’ in order to satisfy more customer tastes that may be loyal to particular brands.
Skill shortages and their impact on international competitiveness
This is where potential employees do not have the skills demanded by employers.
Many industries require highly trained engineers, scientists, technicians or professionals to compete. Companies that have long term access to skilled and low-cost labour have an advantage over their 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. If the company wishes to expand production and chooses to locate abroad, it will hope to enhance these competitive advantages or ensure they are not eroded.
