The Environment of Global Trade• capital movements (not trade) are driving forces of the world economy• production is ‘uncoupled’ from employment e.g security guards in India using webcams• primary products have become uncoupled from the industrial economy e.g steel from South America into Europe• the world economy is in control• 75-year contrast between capitalism and socialism is over
Barriers to Trade• Tariff barriers - direct taxes on imports • Bahamas has 30% on all goods • Australia and US impose on cars and agricultural goods e.g Japanese manufacture in Australia • Average now 5% was 25% in1945• Non-tariff Barriers • Increased govt. participation, US wheat subsidy • Customs entry procedures • Quotas (quantitative restriction) US textile imports from China
Forms of Market Agreement• Free Trade Area - remove all tariffs amongst members • e.g NAFTA USA/Canada Mexico • e.g EEA (European Economic Area) EU, EFTA and LAFTA• Customs Unions - as above but with common external barriers • e.g EC prior to 1993.
• Common Market - as above but also the free flow of all factors of production • e.g EU since 1993• Economic Union - • common market characteristics are combined with the harmonisation of economic policy. • Supranational authority to design policy for a group of nations • objective of Maastricht Treaty in 1991. EU was formed in 1993.Monetary Union commenced in 1999. Now political union in 2000’s? More convergence and less national autonomy?
Five forces analysis Potential entrants Threat of entrants Suppliers COMPETITIVE Buyers RIVALRY Bargaining Bargaining power power Threat of substitutes Substitutes Source: Adapted from M. E. Porter, Competitive Strategy, Free Press, 1980, p. 4. Copyright by The Free Press, a division of Macmillan Publishing Co., Inc. Reproduced with permission.
Competitive Rivalry• Entry is likely• Substitutes threaten• Buyers or suppliers exercise control• Competitors are in balance• There is slow market growth• Global customers increase competition• There are high fixed costs in an industry• Markets are undifferentiated• There are high exit barriers
Buyer power• There is a concentration of buyers• There are many small operators in the supplying industry• There are alternative sources of supply• Components or materials are a high percentage of cost to the buyer leading to “shopping around”• Switching costs are low• There is a threat of backward integration
Supplier power• There is a concentration of suppliers• Switching costs are high• The supplier brand is powerful• Integration forward by the supplier is possible• Customers are fragmented and bargaining power low
Bargaining power of suppliers - Bill Gates - Microsoft
Threat of substitutesSubstitutes take different forms:• Product substitution - Bt for Orange• Substitution of need - international not local calls (satellites not wires)• Generic substitution - mobiles for land based telephones• Doing without - no communication
The threat of entryDependent on barriers to entry such as:• Economies of scale• Capital requirements of entry• Access to distribution channels• Cost advantages independent of size (eg the “experience curve”)• Expected retaliation• Legislation or government action• Differentiation
Citibank - ‘Firstmover’• High brand recognition• More positive brand image• More customer loyalty• More distribution• Longer market experience
Country- Specific Advantages (CSAs)• E.g low cost production of Volkswagens in Portugal• Comparative advantage - e.g France apples, UK lamb• International Product Cycle (IPC) - Raymond Vernon 1966 • USA production shifted over time to new locations • USA begins to export goods and technology • Countries such as Korea then become low cost producers and export back to USA
Porter’s Determinants of National Advantage (1990) Firm strategy, structure, and rivalry Factory Demand conditions conditions Related and supporting industries
National Competitive Advantages• Factor conditions e.g skilled labour, infrastructure• Demand conditions e.g. ‘home’ demand for the product of service• Related and supporting industries e.g raw materials, components• Firm strategy, structure and rivalry