BUSS 313 International Business

Lecture 04
Economic Environments of International
Business II: Competitive Environment

September 18, 2014

Jon J. Moon
Korea University Business School

Class Outline

Standard tools in analyzing the market

environment at the industry level
Corporate strategy: definition and sources of
superior returns
Relationship between industry structure, firm
strategy, and value creation
Porters five forces analysis
Value chain

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Market Structure: Industry

Classification
Division

Code

Including:

Agriculture, Forestry, and Fishing

01-09

Mining

10-14

Construction

15-17

Manufacturing

20-39

Food, Textile, Furniture, Chemicals,

Metal, Machinery, Electronics

Transportation, Communications,
Electricity & Gas

40-49

Railroad, Air Transport,

Communications

Wholesale Trade

50-51

Retail Trade

52-59

Restaurants, Auto dealers, Stores

Finance, Insurance, and Real Estate

60-67

Banking, Brokerage, Insurance

Services

70-89

Hotels, Business services, Motion

pictures, Health, Legal, Education

Public Administration

91-99

Government, Tax, National security

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Micro-economic Environment:
Market Structure and Concentration

Structure Conduct Performance paradigm

Concentration ratio: Cx (C4 commonly used)
Herfindahl-Hirschman index (HHI)
Example:
C4 is 0.9 (90%)
HHI is 2350

Firm

Market
share
(%)

10

20

30

30

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A Quote

When a manager with a reputation for

brilliance tackles a business with a reputation
for bad economics, it is the reputation of the
business that remains intact.
- Warren Buffet

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Global Browser
Market Share
Source: StatCounter

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Date

IE

Firefox

Chrome Safari

Opera

Other

Sep-08

67.16

25.77

1.03

2.86

0.18

Sep-09

58.37

31.34

3.69

3.28

2.62

0.7

Sep-10

49.87

31.5

11.54

4.42

2.03

0.63

Sep-11

41.66

26.79

23.61

5.6

1.72

0.62

Sep-12

32.7

22.4

34.21

7.7

1.61

1.38

Sep-13

27.49

18.9

41.26

8.58

1.18

2.59

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A Few Examples of Market

Concentration
Market Share of Firms

C4

HHI

Industry

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60

40

80

20

20

20

20

20

40

12

12

12

12

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Theory and Reality of Market

Concentration
In theory:

Actual data
(US):

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Market Organization

C4

HHI

Pure Monopoly

10,000

5 Equal-sized Firms

0.8

2,000

10 Equal-sized Firms

0.4

1,000

Perfect Competition

Industry

C4

HHI

Breakfast Cereal

0.87

2207

Beer

0.64

1349

Ice Cream

0.26

222

Mens Shirts

0.22

194

Womens Shirts

0.12

80

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Understanding Market Structures

Impact on Performance

# firms and price in a market

Price

# Firms

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How to Make a Profit?

Demand curve
Demand: willingness to pay (WTP) sorted in a
descending order
Supply: cost sorted in an ascending order

Variable cost, fixed cost

Economies of scale
Core competence, innovation
Local adaptation

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Typical Cost Structure

120

100

80

60

AFC
AVC

40

20

0
1

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10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Quantity

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Cost Structure and Margin Scalability

Source: Legg Mason Capital Management

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Core Competence: Example

Nicholas Kachaner (MD, BCG Paris

Office)
Singers monopoly in sewing machines
lasted for 25 years: do you know what the
original patent that enabled the monopoly
was?

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Core Competence: Googles Second

Principle

Its best to do one thing really, really well.

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We do search. With one of the worlds largest research groups

focused exclusively on solving search problems, we know what
we do well, and how we could do it better. Through continued
iteration on difficult problems, weve been able to solve complex
issues and provide continuous improvements to a service that
already makes finding information a fast and seamless
experience for millions of people. Our dedication to improving
search helps us apply what weve learned to new products, like
Gmail and Google Maps. Our hope is to bring the power of
search to previously unexplored areas, and to help people
access and use even more of the ever-expanding information in
their lives.

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Local Adaptation: Example

Risto Siilasmaa (Founder & CEO, F-Secure,

Chairman of the Board, Nokia)
Nokias action plans have about ten thousand
items (due partly to the pressure for local
responsiveness); you have to deal with
technological standards, regulations, and
technological platforms in all the countries you
are doing business; doing business in China is
totally different from doing business in Brazil.

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What Is Strategy?

What is strategy?

A strategy is a coherent mix of policy and action

designed to surmount a high-stakes challenge.
Corporate strategy: where to compete? Identity of the
firm (what kind of businesses should we be in?)
Business strategy: how to compete? Ex. cost
leadership, differentiation, focus
Goal: to achieve sustainable competitive advantage

Sources of competitive advantage

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Positioning
Capabilities
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A Brief History of Strategy Field

General management presidential view

Economics (left-brain science)

Resource based view

Industry analysis
Importance of intangible resources (even those not on the
balance sheet)

Emphasis on human side leadership, creativity (rightbrain activity)

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Animating idea, emotion, energy

Strategy is not a problem to be solved and settled; its a set of
questions to be lived.
Leaders should be strategists.
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Signs of Bad Strategy

It follows the template, blindly.

It is all performance goals.

20 % annual sales growth / 20% profit margin

It is fluff.

Vision, mission, values, strategies dj vu?

Our bank provides value-oriented financial intermediation to

customers.
Our university educates future leaders and pushes the frontier of
knowledge.

There is no diagnosis.
It is a dogs dinner.

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47 strategies and 178 action items, one of which reads: Develop

a strategic plan.
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Example of a Coherent Strategy:

by Steve Jobs in September 1997

When Jobs was back in charge at Apple, Apple had only

2 months reserve of cash.
He secured $150M investment from Microsoft.
Cut 15 desktop models to 1
Cut all printers and peripherals
Cut all software development
Cut hardware engineers by 40%
Cut 5 of the 6 national retailers
Moved all manufacturing to Taiwan
Opened a web store to sell direct to customers

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Achieving Competitive Advantage:

Positioning

Structure Conduct Performance paradigm (IO paradigm)

In the long run, however, structure is affected by performance.

Monopolistic competition

New entry / exit

Merger and acquisitions
Changes in government regulation
Product differentiation

Finding ones own niche

Enjoying monopoly profit via entry barrier

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Government regulation
Geographic separation
Natural resources
Proprietary technology
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The Five Forces Model of Industry Structure

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The Five Forces Model Application:

Automobile Industry Surrounding HMG
Substitute
providers
Competing for
consumers

HMG

Within-industry
competition

Suppliers
Bargaining

Other car manufacturers

Entry with
advanced
technology

Consumers
Low price
Better gas
mileage
Better safety

Potential
entrants
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Achieving Competitive
Advantage: Capabilities

Cost leadership

Cost structure: fixed vs. variable

Size of capital investment
Operational efficiency

Quality competition: Perceived quality WTP profile

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Almost flat: no return to quality; focus on diversity

Increasing with diminishing returns : oligopolistic market
structure expected
Increasing with increasing returns: monopolistic market
structure expected
Leads to different R&D strategies
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The Power of Network

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Achieving Competitive Advantage:

Value Chain

The value chain lets managers deconstruct the general idea

of create value into a series of discrete activities.
The function of the value chain is shaped by how managers
opt to configure and then coordinate discrete value activities.
There are the following dimensions:

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Primary activities that create and deliver the product.

Support activities that aid the individuals and groups engaged in
primary activities.
Profit margin reports the difference between the total revenue
generated by sales and the total cost of the activities that led to
those sales.

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The Firm as a Value Chain

Primary and Support Activities

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The Firm as a Value Chain

Primary and Support Activities

+40

+36

+7

+10

+5
12

20

20

12

20

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Sources of Superior Returns: Non-market

Markets can fail.

Government and social groups also respond to market
failures.

Strategies beyond the market(SBM)

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Recognize market failures and the resulting opportunities for

strategic success.
Predict how governments and social groups will respond to
market failures.
Learn how to formulate strategies that build on these responses
to improve your companys financial performance.

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Non-market Strategy

Business and the public: strategy of firms vis-vis the public, activists, and the news media
(CSR, ethics)
Strategy in the political environment: lobbying,
legislation, regulation
Strategy in the legal environment: torts (product
safety), antitrust, intellectual property
Strategy regarding natural environment:
sustainable development

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Writing the Rules of the Game

The first step in any defined strategy is

writing the rules of the game honorably and
fairly in a manner that gives everyone a
chance with predictable rules. Our company
has started industries. We have helped write
standards We have helped write national
laws of countries where we have engaged,
always in a respectful way

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Robert Galvin, former CEO of Motorola (1992)

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Strategies beyond the Market (SBM)

Firm 1
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Firm 2
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Fuel
economy
38

Toyotas Stock Price

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Comparison: Market Strategies and

Strategies beyond the Market (SBM)

The Importance of noncustomers

Rivals cost, willingness to pay, and price

Many SBM opportunities and threats arise from noncustomers.

Classic strategic management: concerned with the companys own cost
advantage or price premium.
SBM: concerned with rivals cost and WTP, as well as its own.
SBM aims at increasing rivals cost or reducing the WTP for their product.

Outcomes, processes, and intentions

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A difference between market and non-market business environment lies

in the relative importance of processes and intentions.
Actions are largely evaluated on the basis of outcomes in the market
environment.
Intentions and processes are more important in non-market environment.
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To Wrap Up

The structure of the industry and the competitive environment

is a critical factor determining the profitability of international
business.
Industry structure influences a companys profitability.
Competitive advantage can arise from three distinct sources:
positioning, resources and capabilities, and nonmarket.
Managers anchor analysis of industry structure in the context
of the five-forces model and its representation of competitive
rivalry, threat of new entrants, substitutes, supplier power, and
buyer power.
The value chain lets managers deconstruct the idea of create
value into a series of discrete, sequential activities.
Nonmarket environment is very important especially in
international business, and clever nonmarket strategy can
help firms achieve competitive advantage.
Next class: strategies of IB (Ch. 12)

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