Global Competitiveness Flashcards
What is global competitiveness?
Measures a business’s ability to compete both at home and abroad against foreign firms
How can movements in exchange rates affect a firm’s global competitiveness?
The exchange rate affects both the price of imported and exported goods
What is the impact of a high exchange rate on firms with large export markets?
· Firms that sell a high proportion of their output overseas worry about the appreciation of the pound because the rise in the pound would force the firm to increase the US (for example) price to maintain the current UK profit per product
· Exporters lose price competitiveness when their currency appreciates in value so the impact of a high exchange rate is to make it harder for UK manufacturers to trade profitability, this can threaten jobs in the UK
What is the impact of a high exchange rate on firms that face competition from imports?
· UK based firms that import a high proportion of their raw materials from abroad benefit from a stronger currency because it reduces the pound cost of buying these imports
· For firms who don’t import their raw materials, they want a weaker currency because a strong pound isn’t going to reduce the operating costs, this means they would lose price competitiveness because a stronger currency won’t allow them to lower their prices
What are the impacts of a low exchange rate?
· A weak pound makes exports seem cheaper to foreign customers so more products are sold
· Companies that import their stock will pay more in pounds, if these companies raise the prices of these products then fewer would sell, if this happens then the demand will decrease for the imported products and increase for domestically produced substitutes
· A depreciation of the pound helps UK manufacturers and those who face competition overseas but the increase in import prices may hurt UK retailers and UK households
What is a cost leader?
A business that operates with the lowest average cost in its industry, it can be used as a source of competitive advantage
What are some strategies to achieve cost leadership?
· Raising productivity - maximising labour productivity would achieve low costs
· Outsourcing - reduces costs, eg using specialist companies in another countries with lower minimum wage
· Offshoring - can avoid environmental regulations and employment laws which add to firm’s costs
Why would businesses use product differentiation as competitive advantage?
Businesses based in high wage economies find it hard to match low prices set by competitors who operate from other countries where wages are lower so they can’t compete on price
