Global Competition

Chapter- 6

National Sources of International

Competitive Power

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 LEARNING OBJECTIVES
• GLOBAL STRATEGY
• FACTOR CONDITIONS
• DEMAND CONDITIONS
• RELATED AND SUPPORTING INDUSTRIES
• FIRM STRATEGY, STRUCTURE AND RIVALRY
• GOVERNMENTAL REGULATIONS & CHANCE

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 Global strategy
• Globalization refers to the strategy of
approaching worldwide markets with
standardized products.
• Multinational companies (MNCs) are firms that
compete in more than one national market.
Reasons why firms internationalize/ globalize :
1. Additional resources; Various inputs including
natural resources, technologies, skilled
personnel and materials may be obtained more
readily outside the home country.
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Ctd……

2. Lower costs; Costs including labour, materials

etc. may be lower outside the home country.
3. Incentives; These may be available from the
host country or home government to
encourage foreign investment.
4. Taxes; Different corporate tax rates in different
countries provide opportunities for firms to
maximize their after-tax, worldwide profits.
5. Economies of scale; National markets may be
too small to support efficient production.
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Ctd….
6. Synergy; operations in more than one national
environment provide opportunities to
combine benefits from one location with
another.
7. Protecting home market; through offense in
the competitors’ home i.e. a strong offense in
a competitors market can put pressure on the
competitor that results in a pull back from
foreign activities to protect itself at home.

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 Ctd….
8.Trade barriers e.g. tariffs, quotas and other
restrictive trade practices can make exports to
foreign markets less attractive hence local operations
in foreign markets become attractive.
9.International competition; If a company’s
competitors become international and the company
wants to remain competitive, foreign operations
become necessary.
10.Restrictions and regulations imposed by the home
government may increase the cost of operating at
home and it may be possible to avoid these by
establishing foreign operations.
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 Characteristics of global industries
• Barriers to entry decline and it becomes easier for
foreign companies to penetrate national markets.
• Industry concentration declines as a result of entry by
foreign producers. Concentration refers to the amount of
market share controlled by the top 1-4 producers in the
industry. A low concentration ratio indicates a highly
competitive industry.
• Competition rises with internationalization and the
diversity of competitors also increases.
• Consumer buying power rises with increased
internationalization because they have many new options
from which to choose.
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 International strategic choices
Deciding whether to go abroad and engage in
international operations requires a company to
develop an international strategy that involves
three steps:
a. Determining the company’s preparedness for
international operations.
b. Deciding on the company’s mode of entry into
different markets.
c. Developing the organizational structure that
supports the chosen strategy.
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Ctd….
• A firm should not decide to go international
because every competitor is doing so but
should first analyze the suitability of its
structure, culture, people and resources for
international operations.
Before making a decision to go international the
company must weigh several risks:
1.The firm might not understand foreign
customer preferences and fail to offer a
competitively attractive product.
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Ctd….
2. The firm might not understand the
foreign country’s business culture.
3. The firm might realize that it lacks
managers with foreign experience.
4. The foreign country might change its
laws or undergo a political revolution
and expropriate foreign property
(Zimbabwe).

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 The Global Economy: A Brief Overview
• Opportunities and risks when firms diversify
abroad
– Trade across nations will exceed trade within
nations
– Rise of market capitalism around the world
– Transfer of money from rich to poor countries
• Equity
• Bond investments (Fixed-Income
Investments)
• Commercial loans(Debt-based funding
arrangement)
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 Ctd….

• Opportunities and risks when firms diversify abroad

• Economies of East Asia have grown rapidly,
but little progress in the rest of the world
• Shifts in global power balance due to
Covid19 pandemic.
• Poor education levels in many countries
• Failure to manage broader economic factors
in some countries
 Interest rates
 Inflation

 Unemployment

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 Porter’s Diamond Model
• Michael Porter’s Diamond Model (also known
as the Theory of National Competitive
Advantage of Industries) is a diamond-shaped
framework that focuses on explaining why
certain industries within a particular nation
are competitive internationally, whereas
others might not.
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 Ctd…

• Porter argues that any company’s ability to

compete in the international arena is based mainly
on an interrelated set of location advantages that
certain industries in different nations posses,
namely: Firm Strategy, Structure and Rivalry;
Factor Conditions; Demand Conditions; and
Related and Supporting Industries.

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 Ctd…
• Porter’s original model contains four main
components and later two components are included
in the model: the role of the Government and
Chance. Together they form the national
environment in which companies are born and learn
how to compete.
• The Diamond Model could be used when analyzing
foreign markets for potential entry or when making
Foreign Direct Investment decisions.
• It is advised to also conduct a macro-environment
analysis and an industry analysis by using PESTEL
Analysis and Porter’s Five Forces respectively.

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 Porter’s Diamond Model of National
Competitive Advantage

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 Factors Affecting a Nation’s Competitiveness
• Factor conditions
– Nation’s position in factors of
Factor production
conditions
• Skilled labor(Created factor condition)
• Infrastructure
Demand
conditions

• Demand conditions
• Nature of home-market
demand
• Industry’s product
• Industry’s service
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 Ctd…

• Related and supporting industries

Factor
conditions – Presence or absence in the
nation of internationally
Demand competitive:
conditions
• Supplier industries
Related and • Other related industries
supporting
industries

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 Ctd…
• Firm strategy, structure, and
rivalry
Factor
conditions – Conditions in the nation
governing how companies
Demand
conditions
are:
• Created
Related and
supporting
industries
• Organized
Firm strategy, • Managed
structure, and
rivalry – Nature of domestic rivalry

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 Factor Conditions
• To achieve competitive advantage, factors of
production must be created
– Industry specific
– Firm specific
– Pool of resources at a firm’s or country’s
disposal is less important than the speed and
efficiency with which the resources are
deployed.

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 Demand Conditions
• Demands that consumers place on an industry
for goods and services
– Demanding consumers push firms to move
ahead of companies from other nations
– Demanding consumers drive firms in a
country to:
• Meet high standards
• Upgrade existing products and services
• Create innovative products and services

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 Related and Supporting Industries
• Related and supporting industries:
– Enable firms to manage inputs more
effectively
• Strong supplier base adds efficiency to
downstream activities
• Competitive supplier base lets a firm
obtain inputs using cost-effective, timely
methods
– Allow joint efforts among firms
– Create the probability that new entrants will
enter the market
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 Firm Strategy, Structure and Rivalry

• Rivalry is intense in nations with

conditions of:
– Strong consumer demand
– Strong supplier bases
– High new entrant potential from related
industries

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 Ctd…

• Competitive rivalry increases the efficiency

with which firms:
– Develop products within the home country
– Market products within the home country
And
– Distribute products and Provide services
within the home country

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 Ctd…
• Domestic rivalry provides a strong
impetus for firms to:
– Innovate
– Find new sources of competitive
advantage
• Domestic rivalry forces firms to look
beyond national borders for new
markets

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 GOVERNMENTAL REGULATIONS & CHANCE
• The role of the government in Porter’s Diamond
Model is described as both ‘a catalyst and
Challenger ‘. Porter doesn’t believe in a free
market where the government leaves
everything in the economy up to ‘the invisible
hand’.
• However, Porter doesn’t see the government as
an essential helper and supporter of industries
either.

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Ctd..
• Governments cannot create competitive
industries; only companies can do that.
• Rather, governments should encourage and
push companies to raise their aspirations and
move to even higher levels of competitiveness.

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 The above can be done by:
• Stimulating early demand for advanced
products (demand factors);
• Focusing on specialized factor creations such
as infrastructure, the education system and
the health sector (factor conditions);
• Promoting domestic rivalry by enforcing anti-
trust laws; and encouraging change.
• The government can thus assist the
development of the four aforementioned
factors in the way that should benefit the
industries in a certain country.
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 Chance
• Even though Porter originally didn’t write anything
about Chance or Luck in his papers, the role of chance
is often included in the Diamond Model as the
likelihood that external events such as war and
natural disasters can negatively affect or benefit a
country or industry.
• However, it also includes random events such as
where and when fundamental scientific
breakthroughs occur. These events are beyond the
control of the government or individual companies.

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 Ctd…
• The discontinuities created by chance may lead to
advantages for some and disadvantages for other
companies.
• Some firms may gain competitive positions, while
others may lose.
• While these factors cannot be changed, they should at
least be monitored so you can make decisions as
necessary to adapt to changing market conditions.
• For instance, the heightened border security, resulting
from the September 11 terrorist attacks on the US
undermined import traffic volumes from Mexico,
which has had a large impact on Mexican exporters.

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 Porter’s Diamond Model factors

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Porter’s Diamond of National Advantage: As Applied to
India…….(Develop for Ethiopia???)

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 THE END!!!

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