2.4.1 How UK businesses compete internationally

Globalisation and UK businesses

1. Cheap container shipping, the internet and the lowering of trade barriers have made buying and selling abroad normal even for small UK firms.
2. Trade runs in both directions for a UK business, as imports coming in and exports going out.
   1. Many UK manufacturers do both at once, importing components and exporting the finished product, so globalisation reaches them from two sides.

How UK businesses compete internationally

1. Better design: a product that works in a way rivals cannot copy gives overseas customers a reason to choose it, as Dyson does with its bagless vacuum cleaners and cordless motors.
2. Higher quality: better materials, reliability and finish let a firm charge more and still win the order, which is how JCB machinery and Jaguar Land Rover vehicles sell abroad.
3. Lower prices: a business with genuinely lower costs, from large-scale production or efficient methods, can undercut overseas rivals and still make a profit.
   1. Few UK firms beat producers in low-wage countries on price alone, so the realistic version of this is offering better quality at a competitive price rather than the cheapest price on the market.
4. Strong branding: a trusted name and British origin let a firm charge a premium, as Burberry does with its coats and Scotch whisky does with its protected name.
5. E-commerce: selling through its own website and online marketplaces lets a UK business take orders from overseas customers without opening a single shop abroad.
   1. The website has to work for that customer, which means overseas delivery, a returns route and prices and product information they understand.

Benefits of globalisation for a UK business

1. A much bigger market: exporting puts millions of extra customers within reach, so sales can keep growing even when the UK market is full.
   1. Selling in several countries also spreads risk, because weak demand in one market can be offset by stronger demand in another.
2. Cheaper supplies: buying materials and components from overseas suppliers cuts costs, so the business can widen its profit margin or pass the saving on as a lower price.
   1. A wider choice of suppliers also means access to materials and parts that are not made in the UK at all.
3. Producing abroad: a UK business can set up or use factories overseas where wages are lower or where it is closer to its customers, cutting production and delivery costs.

Drawbacks of globalisation for a UK business

1. Tougher competition at home: overseas firms sell into the UK too, often at prices a UK producer cannot match, so a business can lose sales in its own market.
   1. The response is either to cut price and accept a thinner margin, or to improve design, quality or service so customers still choose it.
2. Longer, riskier supply chains: goods travel thousands of miles, so delays at ports, rising shipping costs and faulty batches are slower to spot and harder to put right.
   1. A late shipment can stop production or empty the shelves, so some firms hold extra stock as protection, which ties up cash.
   2. Checking quality and working conditions at a distant supplier is difficult, and a problem there becomes the UK brand's problem.
3. Extra cost and effort in selling abroad: the product and its packaging often have to be adapted to local tastes, languages and rules, and transport adds cost to every sale.

2.4.2 Exchange rates

What an exchange rate is

1. Exchange rates move every day, so a UK business that trades abroad finds the price its overseas customers see, and the cost of the supplies it buys in, changing without it deciding anything.
2. Two kinds of business feel the movement: the exporter that sells abroad, and the importer that buys from abroad.
   1. A movement that helps one of them hurts the other, so the effect only makes sense once you have said which of the two you are talking about.

A weaker pound

1. UK exports become cheaper abroad. An overseas customer needs less of their own currency to buy the same British product, so it looks better value against local rivals.
   1. Export sales tend to rise, so the exporter's revenue and profit rise, and it may need extra output to meet the orders.
   2. The alternative is to leave the overseas price alone and collect more pounds from each sale, which raises profit per unit instead of raising sales.
2. Imports become dearer. A UK business buying stock or raw materials priced in another currency must hand over more pounds for exactly the same goods.
   1. Its costs rise, so profit falls unless it puts its own prices up, and raising prices risks losing customers to a rival that has not.

A stronger pound

1. UK exports become dearer abroad. An overseas customer needs more of their own currency for the same British product, so it looks expensive next to a local rival and export sales tend to fall.
   1. To keep those customers the exporter can cut the price it charges overseas, but then it receives fewer pounds per sale and its profit margin is squeezed.
2. Imports become cheaper. A UK importer hands over fewer pounds for the same stock, so its costs fall and its profit rises if it keeps its selling prices where they are.
   1. It can also pass the saving on as a lower shelf price and try to win sales from competitors.

Always say who the change is good for

1. Name the business before you name the effect, because the same movement that lifts a UK exporter's sales raises a UK importer's costs: a weaker pound is good news for JCB as an exporter and bad news for a retailer importing its stock.
2. Plenty of UK businesses are both at once, importing materials and exporting the finished product, so a weaker pound lifts their export sales and their input costs together.
   1. Which side matters more depends on how much of the product's cost is imported and how much of its output is sold abroad, so use those details from the case.