Competing in Global Markets

Key Ideas

Absolute AdvantageComparative Advantage

Free TradeMeasuring Trade

Economic InstitutionsMacro Factors

Multi-domestic and Global (Competition/Strategy)Entry Strategies

Partnerships

Why Trade?

No country is self-sufficient

Countries need products that other countries produce.

Natural Resources, technological skills and other factors of production are not distributed evenly or

“efficiently” around the world.

Example: Weekly Business Project

Pretend that Each Week the Following Activities Need to be Completed for a Business Project:

Gathering Data through InterviewsStatistical AnalysisReport WritingReport EditingPutting together a PowerPoint PresentationStanding up before the audience and presenting the report

How many hours would it take you to complete each task? How do you value your time?

Absolute Advantage

Exists when a country can produce a product more efficiently than any other country.

Theory of Comparative Advantage

Countries should sell to other countries those products that it produces most efficiently and buy from countries those products it cannot produce as effectively or efficiently.

In other words, comparative advantage is the ability of a country to produce a good at a lower opportunity cost than another country.

Free Trade

The movement of good and services among nations without political or

economic trade barriers.

Examples of Barriers: Tariffs, Quotas, Embargo, Exchange Controls

Measuring Global Trade

Balance of Payments

Balance of Trade

Trade Deficit

Exchange Rates

Important Economic Institutions

World Trade Organization

World Bank

International Monetary Fund

International Macro Environment Factors

Economic

Social/Cultural

Political/Legal

Technological

Economic Factors

Help us to measure the state of the macroeconomic environment and determine the general health and well being of an economy.

Examples: GDP trends, interest rates, money supply, inflationunemployment levels, wage/price controls, energy availabilityand costs, disposable and discretionary income, exchange rates.

Barbados

Land Mass: 166 square milesOakland County, MI: 873 square milesUS land mass: 3,794,083 sq mi

Economic Data

GDP $5.1 Billion (2006)

(United States$12.37 trillion)

GDP Growth Rate 4%

Per Capita Income $18,200

GDP by Sector Agriculture – 6%

Industry – 16%

Services – 78%

Unemployment Rate 10%

Exports $209 million (Main exports: sugar and molasses, rum, other food and beverages,

chemicals, electrical components)

Imports $1.47 billion

Exchange Rates $1 US = $2 Barbadian

Inflation 2.4% (US 3.2% for 2005)

Source: CIA Factbook and Country Commercial Guides

HaitiSource: CIA Factbook

Land mass: 10,714 sq mi

Economic Data

GDP $14.56 billion (2006)

GDP Growth Rate 1.8%

Per Capita Income $1,800

(80% live in abject poverty)

GDP by Sector

Agriculture – 30%, Industry – 20%

Services - 50%

GDP by Labor

Agriculture – 66%, Industry – 9%

Services - 25%

Unemployment Rate 66%

Exports $443.7 million (main exports: light manufactures, coffee, mangoes)

Imports $1.7 billion

Exchange Rates 1$ US = 45.19 gourdes

Inflation 14.4%

Source: CIA Factbook and World Bank

Social/Cultural Factors

This category of factors describe the beliefs, values, attitudes,opinions, and lifestyles of persons in the firm’s externalenvironment as developed from cultural, demographic, religious,educational and ethnic conditioning.

Examples: Lifestyle changes, career expectations, age distribution,regional shifts in population, birth rates, life expectancies,growth rate in population, consumer activism, rate of family formation, literacy levels, language, social institutions, skill level of the workforce

Social/Cultural Factors

Total Population: 279,912 (Oakland County, MI: 1,213,339)

Fertility rate: 1.65 children/woman

Ethnic Groups: Black (90%), White (4%), Asian and Mixed (6%)

Language: English

Years of Compulsory Schooling: 12 years

Literacy Rates: 99% (United States: 97%)

Religious Affiliations: Christian (71%), None (17%), Other (12%)

Other Info: Life Expectancy = 71 (m) and 75 (f)

Source: CIA Factbook

Social/Cultural Factors

Total Population: 8.3 million (2006)

Fertility rate: 4.9 children/woman

Ethic Groups: Black (95%), White and Mixed (5%)

Language: French and Creole

Years of Compulsory Schooling: 6 years

Literacy Rates: 52.9%

Religious Affiliations: Christian (96%), None (1%), Other (3%)

Other Info: Doctors per 100,000 people = 25, Life expectancy = 53.23years

Source: CIA Factbook and World Bank

Political/Legal Factors

These factors define the legal and regulatory parameters withinwhich a firm must operate.

Examples: Antitrust regulations, environmental protection, tax laws,employment laws, stability of government, foreign trade protectionForm of government, political ideology, protectionist sentiment, terrorist activity, legal system, government’s attitude toward foreign firms, corruption.

Politics in Barbados

Government Type: Parliamentary democracy; independent sovereignstate within the Commonwealth

Legislative Branch: Bicameral Parliament (Senate (appointed by the Governor General) and House of Assembly (elected by popular vote))

Political Parties: 2

Corruption: Ranked 21 in the world by Transparency International

CIA Factbook and http://www.transparency.org

Politics in Haiti

Government Type: Bicameral National Assembly

Legislative Branch: Senate and Chamber of Duties)/All elected by popular vote

Political Parties: 24

Corruption: Ranked 145 by Transparency International

CIA Factbook and http://www.transparency.org

Technological Factors

This factor deals with the general technological infrastructure, the rate of change in technology, and those things impacting the development and introduction of new technologies.

Examples: Total government spending for R&D, Total industryspending for R&D, focus of technological efforts, patent protection,new developments in technology transfer, productivity improvements through automation, Regulations on technologytransfer, information flow infrastructure, patent and trademark protection.

Barbados – Technological FactorsSource: World Bank (2000, 2004)

Haiti Technological FactorsSource: World Bank (2000, 2004)

See Handout

Balancing Macro Factors is Key

Do low wages in developing countries translate into lower manufacturing costs? What about higher profitability?

Globalization in Competition

Multi-domesticCompetition

GlobalCompetition

Multidomestic Competition

Competition is essentially segmented from country to country.

Competition in one country is independent of competition inother countries.

Examples: Grocery, healthcare

Global Competition

Global competition occurs when competition crosses national borders.

A firm’s strategic moves in one country can be significantly affected by it’s competitive position in another country.

Examples: Automobiles, Consumer electronics, Petroleum

How should firms position themselves to compete in the global marketplace?

Competing Pressures

Pressure for Local Responsiveness

Consumer’s Tastes and Preferences

Differences in Infrastructure or Traditional Practices

Differences in Distribution Channels

Demands of Host Governments

Pressure for Cost Reductions

Commodity-type product

Universal needs of customers

Competitors use a low cost position

Multidomestic Strategy

Focus: Local Responsiveness

Customize the strategy to fit the circumstances of each host country

Little to no coordination of strategy across countries

Form subsidiary companies to handle operations in each host country; each subsidiary operates more or less autonomously

Focus: Cost Reduction

Same basic strategy worldwide (minor variations where essential)

Takes advantage of location economies

Locate subunits near high-quality raw materialLocate subunits near sources of high-quality or low cost laborSeek low cost financing anywhere in the world

Much more worldwide coordination

All major strategic decisions are closely coordinated at global headquarters. Structure is designed to unify subsidiaries.

Global Strategy

Amount of Commitment, Control, Risk and Profit Potential

Licensing Exporting FranchisingContract

Manufacturing

JVand

StrategicAlliances

ForeignDirect

Investment

Least Most

Entry Strategies

A BA B

C

Strategic Alliance Joint Venture

Can be leveraged internationally by linking

value chain activities

Examples of Partnerships

Motivations for Partnerships

1. Generate scale economies: Toyota/GM joint venture (Toyota couldspread fixed investment over more units)

2. Gain access to strategic markets: Japanese firm, JVC, provided designtechnology to partner in exchange for access to European market.

3. Overcoming trade barriers: Inland Steel and Nippon Steel built coldsteel plant in Indiana (Nippon supplied technology, capital andaccess to Japanese firms in the US).

4. Use excess capacity: Toyota/GM joint venture used an idle GM plant

5. Gain access to low-cost manufacturing capabilities: GE sourcingmicrowaves from Korea.