4.2.5 Global Competitiveness

Question 1

What is global competitiveness?

Answer 1

• 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

Question 2

What is an exchange rate?

Answer 2

• The value of one currency in terms of another currency
  Currency appreciation & depreciation have different impacts on a business

Question 3

What is currency appreciation?

Answer 3

• 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 = $1.80, the value of the £ has appreciated against the US$

Question 4

What are the advantages & disadvantages of currency appreciation on global competitiveness?

Answer 4

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

Question 5

What is currency depreciation?

Answer 5

• 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 = $1.20, the value of the £ has depreciated against the US$

Question 6

What are the advantages & disadvantages of currency depreciation on global competitiveness?

Answer 6

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

Question 7

What are the two acronyms used to help explain the impact of exchange rates?

Answer 7

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

Question 8

How can global competitiveness increase?

Answer 8

• When a firm has a competitive advantage
• Two factors that provide competitive advantage include cost leadership & differentiation

Question 9

What is cost leadership and differentiation?

Answer 9

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

Question 10

What is the impact of skills shortages?

Answer 10

• 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