Global competitiveness 4.2.5

Question 1

What are exchange rates?

Answer 1

The exchange rate decides how much currency has to be spent by a business in order to buy a specific amount of another currency. Exchange rate movements are fluctuations in value between currencies, which can result in losses to businesses that import and export goods and to investors..

Question 2

How do exchange rates impact global competitiveness?

Answer 2

Appreciation:
Exports are less attractive in terms of price competitiveness and businesses will find it harder to compete with competitors as their products will be more expensive in terms of the local currency. Imports will be more attractive in terms of price competitiveness Stronger pound will lower the price of imports and reduce the cost of imported materials.

Depreciation:
The price of imports will increase and potentially inflation. This is especially true for businesses that rely on the import of primary raw materials. This means that the rise in import price will deter FDI as the expected return on investment is unknown. However, for domestic businesses, this could mean that the deterrent of high import costs should be ideal for gaining market share from foreign importers, for example, the UK before Brexit was importing steel from China. However, with the depreciation of the pound making imports so dear, British-made steel became more attractive for UK car manufacturers.

Question 3

What happens during a boom in relation to exchange rates?

Answer 3

During a boom, sterling will appreciate since people will be greater confidence and demand for the pound. This will make exports more expensive but imports cheaper for customers possibly creating a current account deficit (where M>X).

Question 4

How do exchange rates impact business?

Answer 4

• Resource and supply (importing costs)
• Prices
• Transfer pricing
• Strategy for growth (international merger? or new production location)
• Greater business confidence leading to investments
• Conversion of hot money.

Question 5

What is hot money?

Answer 5

Capital that is stored in institutions depending on the interest rates and transferred elsewhere when beneficial.

Question 6

Who are the winners of exchange rate change?

Answer 6

• Businesses exporting into international markets.
• Businesses earning substantial profits overseas to repatriate.

Question 7

Who are the losers of exchange rate change?

Answer 7

• Businesses importing goods/services.
• Overseas businesses trying to compete in the domestic market.

Question 8

What is global competitiveness?

Answer 8

Is the ability of a business, usually an 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.

Question 9

What is a competitive advantage?

Answer 9

Is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Question 10

What is offshoring and outsourcing?

Answer 10

When a company moves various operations to another country for reasons such as lower labour costs or more favourable economic conditions in that other country.

A practice used by companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Outsourcing is an effective cost-saving strategy when used properly.

Question 11

How do firms gain a competitive advantage on a global scale?

Answer 11

• Differentiation
• Cost competitiveness
  (Porter’s Generic Strategies)

Question 12

What is cost advantage?

What is cost leadership?

Answer 12

Where a business is able to produce its product at a lower cost than the competition by exploiting economies of scale.

Cost leadership is a term used when a company projects itself as the cheapest manufacturer or provider of a particular product or commodity in a competition.

Question 13

How is cost competitiveness achieved?

Answer 13

Cost leadership
Outsourcing
Offshoring
Economies of scale

Question 14

How is porters strategic matrix important in achieving competitive advantage?

Answer 14

Michael Porter, Porter’s Strategic Matrix, suggests that businesses can gain a competitive advantage by having the lowest cost. The key to a competitive advantage is to ensure unit costs are lower than those of competitors, achieving cost leadership. With this strategy, the objective is to become the lowest-cost producer in the industry.

Question 15

How can cost leadership be achieved?

Answer 15

• High productivity workforce
• High capacity utilisation
• Lean and efficient distribution
• Lean production
• Innovative technology

Question 16

How does outsourcing gain cost competitiveness?

Answer 16

By giving the work to specialist (or low-wage) suppliers, the business can gain lower unit costs and competitive advantage. Companies such as Sports Direct outsource warehouse work to agencies that employ staff on minimum-wage, “zero-hours” contracts.

Disadvantages of outsourcing are also similar to those of offshoring but also include a potential loss of customer service and brand recognition as outsourcing businesses may work for many other different customers.

Question 17

How does offshoring gain cost competitiveness?

Answer 17

This is often done to take advantage of another business’s specialised skills, which will help them to improve their quality, cost-effectiveness and worker flexibility. For example, Apple outsources the production of its iPhone to Foxconn in China.

However, offshoring includes the fact that public and employee relations may suffer due to moving jobs abroad, higher costs such as training, poor customer services and risks to legal protection for key business information such as patents and brands.

Question 18

How does EOS gain cost competitiveness?

Answer 18

Purchasing economies of scale, where global businesses can buy supply in bulk means that they are able to obtain massive discounts and lowering unit costs.

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

Question 19

How can a competitive advantage be achieved through differentiation?

Answer 19

• Establishing a strong brand image for a good or service
• Making the USP of a good/service clear
• Better design or innovation

Question 20

How do skill shortages impact international competitiveness?

Answer 20

• Greater wages equate to increased fixed overheads which may pass the price onto consumers giving rise to inferior goods.
• Impacts all businesses
• Could alter output and productivity lowering quality.
• If opting for a differentiation focus, a company would be less likely to be able to provide customer service as a USP or reputational distinctive capability.

Question 21

What is a skill shortage?

Answer 21

A skill shortage is when there is a lack of skilled workers in the industry

Question 22

What can governments do to overcome skill shortages?

Answer 22

• Raise the demand among employers.
• Improve apprenticeships.
• Further education.
• Encourage better working practices.

Question 23

What can businesses do to overcome skill shortages?

Answer 23

• Invest in training.
• Invest in machinery to do the work.

Question 24

What could a lack of ability to recruit skilled workers lead to?

Answer 24

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.

Question 25

How can skill shortages impact international competitiveness?

Answer 25

Demand for highly skilled workers outstrips supply which impacts heavily on global businesses many of whom produce differentiated products.

-Imbalance in the global economy with too many low-skilled workers and not enough skilled workers.
Machines can’t replace highly skilled workers E.g. Creative industries.

• This will increase labour costs as the wages of skilled workers will build up.
• Also reduces creative output as less skilled workers are available in areas such as design and new technologies.