Global Competitiveness (Edexcel A Level Business)

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Written by: Jennifer Aryiku, Economics Content Creator

Reviewed by: Steve Vorster, Economics & Business Subject Lead

Exchange Rate Fluctuations

Global competitiveness is 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
- An exchange rate is the value of one currency in terms of another currency
Currency appreciation and depreciation have different impacts on a business

Currency appreciation

An appreciation of the exchange rate means the value of a currency increases against another currency
- E.g. if £1= $1.60 and then increases to £1 = $1.80, the value of the £ has appreciated against the US$

The Impact of Currency Appreciation on Global Competitiveness

Advantages of an Appreciation	Disadvantages of an Appreciation
If businesses import raw materials and components from abroad, they will now be cheaper This will help the business to reduce their costs and possibly increase their profit margin	If businesses exports goods/services to foreign consumers, the goods will be more expensive for international customers This may lead to a fall in sales as consumers now shift demand to domestic businesses

Currency depreciation

A depreciation of the exchange rate means the value of the currency decreases against another currency
- E.g. If £1 = $1.60 and then falls to £1 = $1.20, the value of the £ has depreciated against the US$

The Impact of a Currency Depreciation on Global Competitiveness

Advantages of Depreciation	Disadvantages of Depreciation
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	If a business imports raw materials or components from abroad, they are now more expensive This leads to an increase in the costs for a business, which could then be passed onto consumers in the form of higher prices

Examiner Tip

Paper 1 and Paper 3 frequently question you on the impact of exchange rate changes on a business. The information may be presented as a) a written extract or b) a table or graph showing the fluctuations in the exchange rate. It is important to be able to explain whether an appreciation or depreciation has occurred

Acronyms to help explain the impact of exchange rate changes include:

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

You can use the ‘pound’ interchangeably with any other currency used in the exam

Competitive Advantage

Global competitiveness increases when a firm has a competitive advantage
- Two factors that provide competitive advantage include cost leadership and differentiation

Cost Leadership and Differentiation

Cost Leadership	Differentiation
Cost leadership is when a business becomes the lowest cost producer in their industry Cost leadership can be achieved using strategies such as: Increasing the productivity of their workforce Using machinery and 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 the 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 and customer service

Cost Leadership

Differentiation

Cost leadership is when a business becomes the lowest cost producer in their industry
Cost leadership can be achieved using strategies such as:
- Increasing the productivity of their workforce
- Using machinery and 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 the 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 and customer service

The Impact of Skills Shortages

If a business is unable to find the labour with the required skills, it will affect their ability to gain a competitive advantage
Cost leadership could be difficult to achieve if the 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 and expertise to produce highly differentiated products
In order to overcome these issues, a business can use outsourcing and offshoring to access the skills needed for their business

Last updated: 25 October 2024

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