European shares turn in mixed performance With a timetable for Brexit now unveiled, the pound dropped sharply but UK shares went in the opposite direction. The UK currency is currently down 1% against the dollar and down a similar amount against the euro to a three year low, while the Bank of England’s trade-weighted sterling index is down more than 1% to a six and a half year low. Uncertainties over the status of trade deals and economic growth once Brexit has happened has hit the pound, but conversely the FTSE 100 was flying, lifted by exporters benefitting from weaker sterling. The Guardian, 3rd October 2016

4.2.5 Global competitiveness Theme 4 Global business Following the Brexit vote the value of the pound fell drastically. How might this affect the global competitiveness of the UK? Write a paragraph to explain cause and effect. Start your paragraph with a definition of global competitiveness. 4.2.5 Global competitiveness

4.2.5 Global competitiveness In this topic you will learn about The impact of movements in exchange rates Competitive advantage through: cost competitiveness differentiation Skill shortages and their impact on international competitiveness

The impact of movements in exchange rates Imagine an exchange rate is in equilibrium at D1S1 with £1 able to buy $1.50. If there was an appreciation in the exchange rate , this would increase the D for £s and there would be a shift to D2. This would mean that £1 is now able to buy $1.60. A depreciation in the exchange rate might mean that £1 is now able to buy $1.40. Price $ per £ S1 S2 $1.60 $1.50 $1.40 D2 D1 Q1 Q2 Quantity

If the exchange rate appreciates….. However, a stronger pound will…. Businesses will struggle to budget as they do not know their exact costs.

Which businesses may be impacted more by an exchange rate slump? John Lewis warns over sterling slump. What is the problem when we look at Global businesses? Is the exchange rate change good/bad for all subsidiaries?

The impact of movements in exchange Rates Changes in exchange rates can eliminate profits for a business or increase returns dependent on which way they move For example, in June 2016 the £ hit a 31 year low against the $ after the UK voted to leave the EU. As a result, when US businesses convert their UK profits into dollars there will be a significant loss as each £ buys less $ In the same way, British businesses that operate heavily in the US market, such as Burberry and Top Shop, should see a significant increase in profit as they turn $s into £s How exchange rate fluctuations affect companies. http://www.euroinvestor.com/ei-news/2012/07/17/how-exchange-rate-fluctuations-affect-companies/19796

Quantitative skill Select any two currencies What is the exchange rate today? What was the exchange rate last year or at any other point in time Use this information to prove the last 2 bullet point on the previous slide – assume a starting profit of 100 000 in each instance

Competitive advantage through cost competitiveness Why does operating globally mean firms have more chance of being the lowest cost producer? Recap Porter’s Strategic Matrix.

Competitive advantage through cost competitiveness Economies of scale Define economies of scale. To what extent do you think international business expansion is likely to also lead to diseconomies of scale? 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.

Competitive advantage through differentiation What enables global businesses do differentiate themselves? 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.

Activity With reference to both Porter’s Strategic Matrix and Five forces explain how a business can achieve global competiveness.

Skills shortages and their impact on international competitiveness How have machines replaced low skilled jobs? http://www.bbc.co.uk/news/technology-36649673 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.

Activity Watch the video “Global competiveness report 2015-2016 Draw a spider diagram to show the factors influencing global competiveness https://www.youtube.com/watch?v=6htIYxlSLjU

4.2.5 Global competitiveness In this topic you have learnt about The impact of movements in exchange rates Competitive advantage through: cost competitiveness differentiation Skill shortages and their impact on international competitiveness