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?

Source: Adapted from M. E. Porter, Competitive Strategy, Free Press, 1980, p. 4. Copyright by TheFree Press, a division of Macmillan Publishing Co., Inc. Reproduced with permission.

Threat ofThreat ofsubstitutessubstitutes

Potentialentrants

Threat ofThreat ofentrantsentrants

Suppliers

BargainingBargaining powerpower

Substitutes

Buyers

BargainingBargaining powerpower

COMPETITIVE RIVALRY

Five forces analysis

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

Competitive Rivalry - motor industry

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

Bargaining power of buyers - Wal-Mart

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 substitutes

Substitutes 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

Threat of substitutes - KFC China

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

New Entrants - Citibank

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 conditions

Demand 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