4.2.5 Global Competitiveness Flashcards
What is global competitiveness?
- The ability of a business to perform better than its rivals across markets in different countries
Fluctuations in exchange rates can influence the competitiveness of business
What is an exchange rate?
- The value of one currency in terms of another currency
Currency appreciation & depreciation have different impacts on a business
What is currency appreciation?
- An appreciation of the exchange rate means the value of a currency increases against another currency
E.g. if £1= $1.60 & then increases to £1 = $1.80, the value of the £ has appreciated against the US$
What are the advantages & disadvantages of currency appreciation on global competitiveness?
Advantages:
- If businesses import raw materials & components from abroad, they will now be cheaper
This will help the business to reduce their costs & possibly increase their profit margin
Disadvantages:
- If businesses exports goods/services to foreign consumers, the goods will be more expensive for international customers
May lead to a fall in sales as consumers now shift demand to domestic businesses
What is currency depreciation?
- A depreciation of the exchange rate means the value of the currency decreases against another currency
E.g. If £1 = $1.60 & then falls to £1 = $1.20, the value of the £ has depreciated against the US$
What are the advantages & disadvantages of currency depreciation on global competitiveness?
Advantages:
- If businesses export goods/services abroad, they become more competitive because their products are cheaper to purchase
- In the domestic market, there may be less competition from foreign firms as imports are now more expensive for domestic consumers to purchase
Disadvantages:
- If a business imports raw materials or components from abroad, they are now more expensive
This leads to an increase in costs for a business, which could then be passed onto consumers in the form of higher prices
What are the two acronyms used to help explain the impact of exchange rates?
S.P.I.C.E.D:
- Strong Pound Imports Cheaper Exports Dearer (dearer means more expensive)
W.P.I.D.E.C:
- Weak Pound Imports Dearer Exports Cheaper
How can global competitiveness increase?
- When a firm has a competitive advantage
- Two factors that provide competitive advantage include cost leadership & differentiation
What is cost leadership and differentiation?
Cost Leadership:
- When a business becomes the lowest cost producer in their industry
Cost leadership can be achieved using strategies such as:
- Increasing productivity of their workforce
- Using machinery & technology efficiently
- Outsourcing
- Offshoring
Businesses can utilise this position as a cost leader to reduce their prices or keep their prices the same, which results in an increase in profit margins
Differentiation:
- Occurs when business makes the characteristics of their products/services different to those of their competitors
Methods of differentiation include developing a strong brand, better design, better quality & customer service
What is the impact of skills shortages?
- If a business is unable to find the labour w the required skills, it will affect their ability to gain a competitive advantage
- Cost leadership could be difficult to achieve if workers lack skills, as they may not be as productive
- This could increase unit costs due to factors such as waste
- Product differentiation is less likely to occur where workers lack the skills & expertise to produce highly differentiated products
In order to overcome these issues, a business can use outsourcing & offshoring to access the skills needed for their business