The Environment of Global Trade

‡ capital movements (not trade) are driving forces of the world economy ‡ production is µuncoupled¶ 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

g Japanese manufacture in Australia ‡ Average now 5% was 25% in1945 ‡ Non-tariff Barriers ‡ Increased govt. taxes on imports ‡ Bahamas has 30% on all goods ‡ Australia and US impose on cars and agricultural goods e. US wheat subsidy ‡ Customs entry procedures ‡ Quotas (quantitative restriction) US textile imports from China .Barriers to Trade ‡ Tariff barriers .

remove all tariffs amongst members ‡ e. EFTA and LAFTA ‡ Customs Unions .g NAFTA USA/Canada Mexico ‡ e.g EEA (European Economic Area) EU. .Forms of Market Agreement ‡ Free Trade Area .as above but with common external barriers ‡ e.g EC prior to 1993.

‡ Supranational authority to design policy for a group of nations ‡ objective of Maastricht Treaty in 1991.‡ Common Market . Now political union in 2000¶s? More convergence and less national autonomy? .Monetary Union commenced in above but also the free flow of all factors of production ‡ e. EU was formed in 1993.g EU since 1993 ‡ Economic Union ‡ common market characteristics are combined with the harmonisation of economic policy.

Inc. Porter.Five forces analysis Potential entrants Threat of entrants Suppliers Bargaining power COMPETITIVE RIVALRY Buyers Bargaining power Threat of substitutes Substitutes Source: Adapted from M.. Reproduced with permission. 1980. . Free Press. a division of Macmillan Publishing Co. Competitive Strategy. E. 4. Copyright by The Free Press. p.

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 ³shopping 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 .

Microsoft .Bargaining power of suppliers Bill Gates .

Threat of substitutes Substitutes take different forms: ‡ Product substitution .Bt for Orange ‡ Substitution of need .no communication .mobiles for land based telephones ‡ Doing without .international not local calls (satellites not wires) ‡ Generic substitution .

Threat of substitutes KFC China .

The threat of entry Dependent on barriers to entry such as: ‡ Economies of scale ‡ Capital requirements of entry ‡ Access to distribution channels ‡ Cost advantages independent of size (eg the ³experience curve´) ‡ Expected retaliation ‡ Legislation or government action ‡ Differentiation .

New Entrants .Citibank .

µFirstmover¶ ‡ ‡ ‡ ‡ ‡ High brand recognition More positive brand image More customer loyalty More distribution Longer market experience .Citibank .

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 .Specific Advantages (CSAs) ‡ E.g France apples.Country.g low cost production of Volkswagens in Portugal ‡ Comparative advantage .e.

structure. and rivalry Factory conditions Demand conditions Related and supporting industries .Porter¶s Determinants of National Advantage (1990) Firm strategy.

National Competitive Advantages ‡ Factor conditions e.g raw materials. structure and rivalry .g skilled labour. µhome¶ demand for the product of service ‡ Related and supporting industries e.g. components ‡ Firm strategy. infrastructure ‡ Demand conditions e.

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