Value Proposition canvas- Customer needs and pains
Enu international competition 120812
1. Go Global !
Global Economic Environment :
International Competition
By
Stephen Ong
Edinburgh Napier University Business School
chong@mail.tarc.edu.my
Visiting Professor, College of Management, Shenzhen
University
12 August 2012
2. Agenda
1. International
trade theories
2. Competitive
advantage of
nations
3. Porter’s
Diamond
3. Learning Objectives
To discuss the
underlying factors
which contribute to
competitive success in
international markets.
To analyse the basis
for national
competitive
advantages in
establishing specific
globally competitive
industries.
4. Laissez-Faire vs. Intervention
Trade theory helps answer
What products should we import and export?
How much should we trade?
With whom should we trade?
Laissez-faire approach
Free trade theories – absolute advantage and
comparative advantage
Intervention approach
Mercantilism and neomercantilism
10. Mercantilism
Mercantilism countries should export more
than they import
Maintain a favourable balance of trade
trade surplus
Avoid an unfavourable balance of trade
trade deficit
12. Free Trade Theories
Two theories that
support free trade
Absolute advantage
theory
Comparative advantage
theory
Market forces should
determine trade
specialization
13. Theory of Absolute Advantage
Theory of absolute advantage
different countries produce some goods more efficiently than others
Free trade brings
Specialization
natural advantage
acquired advantage
product technology
process technology
Greater efficiency
Higher global output
14. Theory of Absolute Advantage
Production Possibilities under Conditions of Absolute
Advantage
15. Theory of Comparative Advantage
Theory of comparative advantage
free trade can increase global output even
if one country has an absolute advantage
in the production of all products
Consider
comparative advantage
absolute disadvantage
16. Theory of Comparative Advantage
Production Possibilities under Conditions of Comparative
Advantage
17. Theories of Specialization:
Assumptions and Limitations
Theories of specialization make assumptions that may
not be valid
full employment
economic efficiency
division of gains
two countries, two commodities
transport costs
statics and dynamics
services
production networks
mobility
18. How Much Does A Country
Trade?
Theory of country size
large countries depend less on trade than
small countries
Large countries usually
export a smaller portion of output and import
a smaller part of consumption
have higher transportation costs for foreign
trade
19. What Does A Country Trade?
Factor proportions theory
factors in relative abundance are cheaper
than factors that are relatively scarce
But
production factors are not homogenous
labour
Process technology
capital versus labour
20. What Does A Country Trade?
Worldwide Trade by Major Sectors
21. Choosing Trading Partners
Country similarity theory
most trade occurs among developed countries
share similar market
characteristics
produce and consume much more
than developing countries
Trading partners are affected by
Cultural similarity
Political relations between countries
Distance
22. Product Life-Cycle Theory
Raymond Vernon 1966
Optimal location in the world to produce a
product changes as the market for the
product matures
Growth in demand and production in
advanced nations shifts to developing nations
Developed nations over time shifts from
being an exporter to an importer
Globalization and integration of the world
economy makes this theory less relevant
23. Product Life Cycle Theory
The product life cycle theory
the production location of certain
manufactured products shifts as they go
through their life cycle
Four stages
1.Introduction
2.Growth
3.Maturity
4.Decline
26. New Trade Theory
Emerged in the 1970’s when economists
questioned the assumption of diminishing
returns to specialization
When substantial economies of scale are
present, the returns on specialization will
result in
increased productivity and lower unit costs
ability to enhance economies of scale increases
Trade is mutually beneficial because it allows
for the:
specialization of production
realization of scale economies and “learning
effects”
greater variety of goods produced
decrease in the average costs of goods
27. Economies of Scale and First Mover Advantage
Industries with high fixed costs require a
substantial proportion of the world demand
to spread fixed costs over a large volume
and to utilize specialized assets
World market may only support a few
competitors
First Mover Advantage
economic and strategic advantages to early entrants
ability to capture economies of scale and low cost
structure
scale-based cost advantage can create entry barriers
28. Implications of New Trade Theory
Nations may benefit from trade even when
they do not differ in resource endowments or
technology
A nation may predominate in the export of a
good simply because it has one or more firms
among the first to produce that good which
creates entry barriers
Those economies of scale that result from
first mover advantage translate into a
comparative advantage
Some argue that it justifies government
intervention and strategic trade policy
29. Theory of National Competitive Advantage
Michael Porter 1990
Attempts to analyze the reasons for a nation’s
competitive advantage in a particular industry
Studied 100 industries in 10 nations
Identified four major attributes promote or
impede the competitive advantage of a nation
30. Porter’s Diamond of National
Advantage
The diamond of national advantage
Four conditions are important for gaining and
maintaining competitive superiority
1. Demand conditions
2. Factor conditions
3. Related and supporting industries
4. Firm strategy, structure, and rivalry
31. Porter’s Diamond of National
Advantage
The Diamond of National Competitive Advantage
32. Porter’s Diamond
Success occurs where the diamond is most favorable
Diamond is mutually reinforcing and interdependent
Chance and government can influence the national diamond
Fig 4.6
32
33. Determinants of
National Competitive Advantage
1. Factor endowments
nation’s position in factors of production (skilled labor or
infrastructure) necessary to compete in a given industry
1. Demand conditions
nature of home demand for industry’s product/service
1. Related and supporting industries
presence or absence in a nation of supplier industries or
related industries that are nationally competitive
1. Firm strategy, structure and rivalry
conditions in the nation governing how companies are
created, organized, and managed
nature of domestic rivalry
35. Relationship of Basic to Advanced Factors
Basic factors can provide an initial advantage
Basic factors must be supported by advanced
factors to maintain competitive advantage
If weak basic factors, the government must
invest to upgrade advanced factors
Advanced factors are more likely to lead to
competitive advantage
Advanced factors are the result of investment by
35
people, companies, government
37. 3. Related and Supporting Industries
Creates clusters of supporting industries
that are internationally competitive
Must also meet requirements of other
parts of the Porter’s Diamond
38. 4. Firm Strategy, Structure and
Rivalry
Management ‘ideology’ and structure of the
firm can either help or hurt the firm
Presence of domestic rivalry and strong
competitors improves a company’s
competitiveness
39. Evaluating Porter’s Theory
If Porter is right:
his model should predict the actual pattern
of international trade in the world
countries should be exporting products from
those industries where all four components
of the diamond are favourable
Countries should be importing goods from
those industries where the components are
not favourable
Too soon to tell
40. Implications for Business
Location implications:
Disperse production activities to countries where
they can be performed most efficiently
First-Mover implications:
Invest substantial financial resources in building
a first-mover or early-mover advantage
Policy implications:
Promoting free trade is generally in the best
interests of the home-country, although not
always in the best interests of the firm
41. Why Production Factors Move
Factor mobility theory
focuses on why production factors move, the
effects of that movement on transforming factor
endowments, and the impact of international
factor mobility on world trade
Capital and labour move internationally to
gain more income
flee adverse political situations
42. Effects of Factor Movements
Factor movements alter factor
endowments
Factor movements can be substantial
for some countries, and insignificant for
others
The movement of labour and capital
are intertwined
Pros and cons of outward and inward
migration
Brain drain
Remittances
43. Trade and Factor Mobility
There are pressures for the
most abundant factors to move
to areas of scarcity
The lowest costs occur when
trade and production factors are
both mobile
44. Trade and Factor Mobility
Unrestricted Trade, Factor Mobility, and the Cost of
Tomatoes
45. Trade and Factor Mobility
Factor mobility through foreign
investment often stimulates trade
because of
the need for components
the parent’s ability to sell
complimentary products
the need for equipment for
subsidiaries
46. In What Direction Will Trade
Winds Blow?
Issues to consider
1. Displacement of jobs as developed
countries shift production to more rapidly
developing countries
2. Relationships among land, labour, and
capital will continue to evolve
3. Continued trend toward a more finely
tuned specialization of production among
countries
47. In What Direction Will Trade
Winds Blow?
Monitor
As economies grow, efficiencies of multiple
production locations also grow because they can all
gain sufficient economies of scale
Small-scale production methods may enable
countries to produce many goods efficiently for their
own consumption
Output from 3D printers
Services are growing more rapidly than products as
a portion of production and consumption within
developed countries
48. Conclusion
“Made in one or more of the following
countries: …. The exact country of
origin is unknown”
Integrated Circuit label
49. Casestudy : TESCO
1. Read and prepare the
Casestudy on TESCO
(Johnson, Whittington &
Scholes (2011)) for
discussion and presentation
next week.
2. Identify and evaluate the
challenges facing TESCO’s
global expansion by
conducting External
Environment, Industry,
Competitor analysis, SWOT
and Porter’s Diamond
analysis of overseas
locations.
50. Core Reading
Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a
Global Environment, Napier University Edinburgh
Daniels, J.D., Radebaugh, L.H. and Sullivan,
D.P. (2012) International Business:
Environments and Operations. 14th edition,
Pearson
51. Next Week’s Discussion:
Comparative advantage of nations
► Reading
“Can the US bring
jobs back from
China?”
Businessweek 30 June
2008
DISCUSSION
Discuss the different national
competitive advantages of
the USA, China and
Germany in manufacturing
capabilities.
The Learning Objectives for this chapter are To understand theories of international trade To explain how free trade improves global efficiency To identify factors affecting national trade patterns To explain why a country’s export capabilities are dynamic To understand why production factors, especially labor and capital, move internationally To explain the relationship between foreign trade and international factor mobilitys
Why do countries trade? Countries trade in order to meet certain economic objectives, but they struggle with questions on what, how much, and with whom they should trade. They need to ensure that their decisions on what to produce make sense from an efficiency standpoint, and whether there are ways to improve competitiveness. Some countries allow market forces to determine trade relations, others intervene to control the process.
This Figure shows that trade in goods and services and the movement of the production factors are the means by which countries are linked internationally.
Theories that explain trade patterns explore how much countries depend on trade, in what products, and with which countries. Some theories suggest that governments should influence trade patterns, other support a laissez-faire approach.
This Figure shows the major trade theories and their emphases. Managers can use the theories to predict and understand how government policy decisions could affect business competitiveness.
Factor mobility is also an important issue in trade because it influences a nation’s competitiveness. The three factors of production are land, labor, and capital.
Some theories including mercantilism and neomercantilism explore how governments can interfere with trade flows in order to achieve certain national objectives.
The mercantilist theory suggests that countries should try to achieve a favorable balance of trade. This theory was the basis of economic thought from 1500 to 1800. Under mercantilism, governments restricted imports and subsidized the production of goods that would otherwise not be competitive in domestic or export markets.
Countries with a neomercantilist approach seek a favorable balance of trade, but do so in order to achieve some social or political objective.
Why shouldn’t countries just be self-sufficient? According to the theories of absolute and comparative advantage, specializing in the things a country does best and trading for everything else can be beneficial.
Adam Smith’s theory of absolute advantage suggested that a nation’s wealth is based on its available goods and services rather than on gold. Therefore, if trade is unrestricted, a country can specialize in what it can produce most efficiently, and trade for everything else. Consumers benefit from free trade and specialization with lower prices and more choices. A country’s advantage in the production of a particular good may be a result of a natural advantage like climate, or an acquired advantage like technology.
This Figure illustrates the production possibilities for two countries under the conditions of absolute advantage. Notice that with free trade and specialization both countries benefit.
What happens when a country can produce all products at an absolute advantage? Well, there are still gains to be made from specialization and free trade. David Ricardo explored this issue in 1817 and discovered that gains from trade occur even in a country that has an absolute advantage in all products because the country gives up less efficient output in order to focus on more efficient output.
This Figure illustrates the production possibilities for two countries under the conditions of comparative advantage. Notice that by specializing in the production of goods in which a country has a comparative advantage and trading for goods in which a country has an absolute disadvantage both countries still gain.
While the theories of specialization – absolute advantage and comparative advantage – offer policymakers a greater understanding of free trade, they are based on a number of assumptions that may not always be valid. Specifically, the theories assume that full employment exists, that economic efficiency is the primary goal of countries, that the division of gains is acceptable to both countries, that the world is composed of only two countries and two products, that there are no transportation costs, that advantages are static, and that while resources can move freely within a country, they are immobile internationally. Keep in mind that the theories can apply to trade in services as well as trade in products and that they apply to situations in which multi-country production takes place.
Every country produces so-called nontradeable goods like haircuts. When it comes to tradeable goods though, country size can be a determining factor in the production choice. Larger countries typically have more varied climates and natural resources and are usually more self-sufficient than smaller countries. Moreover, because production and market centers in large countries are more likely to be located farther away from other countries, transportation costs are higher.
What types of products does a country trade? We can use the factor proportions theory to help answer that question. The theory suggests that factor costs are determined by a country’s relative endowments of land, labor, and capital. These costs then determine which goods can be produced most efficiently. Keep in mind though that not all production factors are equal especially when it comes to labor. Moreover, how a product is produced – with capital or labor – is important as is the size of the production run required for greatest efficiency.
This Figure shows the changing composition of world trade. Most new products are developed in industrialized countries.
With whom do countries trade? Well, developed countries largely trade with other developed countries. Companies create new products in response to market conditions in their home market, and then look for markets that are close to home and most similar to what they’re accustomed to.
How do countries develop, maintain, and lose their competitive advantages? The international product life cycle theory, or PLC, offers one explanation. According to the PLC, companies manufacture products initially in the country where they were developed and researched – typically a developed country. Later, production shifts to foreign locations, and in the later stages of the product’s life, to developing economies. The theory is based on four stages: introduction, growth, maturity, and decline.
This Figure provides more details on exactly what occurs at each stage in a product’s life cycle. Keep in mind that while the theory holds for many products, it does not explain all products. In fact, today, many products are introduced at home and abroad simultaneously. Moreover, because costs drive production decisions, the initial production location may or may not be in the home country.
Another theory that helps explain why some countries have developed and sustained different competitive advantages is the diamond of national advantage theory. According to this theory, four conditions must be favorable for an industry: demand conditions, factor conditions, related and supporting industries, and firm strategy, structure, and rivalry.
This Figure provides more details on each factor that makes up the diamond of national advantage. Keep in mind though, that the existence of all four factors does not guarantee that an industry will develop, nor is it necessary given globalization. For example, today, because capital and managers are internationally mobile, it may not be necessary to depend on domestic factor conditions. Similarly, thanks to freer trade and advances in transportation, local related and supporting are not as important.
The mobility of capital, technology, and people affects trade and relative competitive positions. The factor mobility theory helps explain why production factors move, and what that means for transforming factor endowments, as well as the impact of international factor mobility on world trade.
The mobility of capital and population plays a role in a country’s factor endowments. For some countries, the movement of people can be significant. In Luxembourg for example, foreign- born people make up some 20 percent of the total population, but in Japan, account for just 2 percent. Outward migration can have a negative impact on a country if it involves the departure of educated people, but if these people then send remittances back home, it can have a positive effect. Finally, keep in mind that the movement of capital and labor is intertwined – think for example, about skilled foreign workers.
What is the relationship between trade and factor mobility? In general, if free trade is coupled with the free moving factors of production, the most efficient resource allocation should occur. The most abundant factors should move to areas of scarcity.
This Figure illustrates the substitutability of trade and factor movements under different scenarios.
When companies invest abroad they often stimulate exports from their home country through sales of components, equipment, and complimentary products.
Will the trend toward the freer movement of trade and production factors continue?
We don’t know what the future will hold, but these four interrelated factors could cause product trade to become relatively less significant in the future.