Comprehensive Exam Review Dr. Chayo Trangadisaikul BP 6910 International Business Management 27/7/2017

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1 Comprehensive Exam Review Dr. Chayo Trangadisaikul BP 6910 International Business Management 27/7/2017 Referencing Textbook (choose one) Hill, C. (2010), International Business: Competing in the Global Marketplace, 8th edition. McGraw Hill. Hill C. W. L. (2015) International Business; Competing in the global market place. 10th Edition. McGraw Hill Hill C. W. L. & Hult G. T. M (2016) Global Buisiness Today; 9th Edition. McGraw Hill Economic Integration

2 FTA - ASEAN 10 countries (6+4) AFTA ASEAN Economic Community (AEC) by 2015 Three Pillars of security, socio-cultural and economic integration More info at ASEAN Comprehensive Investment Area (ACIA) ACIA will encourage the free flow of investment within ASEAN. The main principles of the ACIA are as follows All industries are to be opened up for investment, with exclusions to be phased out according to schedules National treatment is granted immediately to ASEAN investors with few exclusions Elimination of investment impediments Streamlining of investment process and procedures Enhancing transparency Undertaking investment facilitation measures

3 ASEAN Comprehensive Investment Area (ACIA) Full realization of the ACIA with the removal of temporary exclusion lists in manufacturing, agriculture, fisheries, forestry and mining is scheduled by 2010 for most ASEAN members and by 2015 for the CLMV (Cambodia, Lao PDR, Myanmar, and Vietnam) countries ASEAN & Competitiveness New Trade Theory Porter s Diamond Model ASEAN Consumers? ASEAN Products? ASEAN standard harmonization? Opportunities & threats for firms inside and outside of ASEAN

4 New Trade Theory New trade theory suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade New trade theory suggests that: through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods in those industries when output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of enterprises Increasing Product Variety And Reducing Costs Without trade, nations might not be able to produce those products where economies of scale are important With trade, markets are large enough to support the production necessary to achieve economies of scale So, trade is mutually beneficial because it allows for the specialization of production, the realization of scale economies, and the production of a greater variety of products at lower prices

5 Economies Of Scale, First Mover Advantages, And The Pattern Of Trade The pattern of trade we observe in the world economy may be the result of first mover advantages (the economic an strategic advantages that accrue to early entrants into an industry) and economies of scale New trade theory suggests that for those products where economies of scale are significant and represent a substantial proportion of world demand, first movers can gain a scale based cost advantage that later entrants find difficult to match Implications Of New Trade Theory Nations may benefit from trade even when they do not differ in resource endowments or technology A country may dominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good An extension of the theory is the implication that governments should consider strategic trade policies that nurture and protect firms and industries where first mover advantages and economies of scale are important

6 National Competitive Advantage: Porter s Diamond Michael Porter tried to explain why a nation achieves international success in a particular industry and identified four attributes that promote or impede the creation of competitive advantage: Factor endowments Demand conditions Relating and supporting industries Firm strategy, structure, and rivalry National Competitive Advantage: Porter s Diamond Figure 5.6: Determinants of National Competitive Advantage: Porter s Diamond

7 Factor Endowments Factor endowments refer to a nation s position in factors of production necessary to compete in a given industry A nation's position in factors of production can lead to competitive advantage These factors can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how) Demand Conditions Demand conditions refer to the nature of home demand for the industry s product or service The nature of home demand for the industry s product or service influences the development of capabilities Sophisticated and demanding customers pressure firms to be competitive

8 Relating And Supporting Industries Relating and supporting industries refer to the presence or absence of supplier industries and related industries that are internationally competitive The presence supplier industries and related industries that are internationally competitive can spill over and contribute to other industries Successful industries tend to be grouped in clusters in countries - having world class manufacturers of semiconductor processing equipment can lead to (and be a result of having) a competitive semi-conductor industry Firm Strategy, Structure, And Rivalry Firm strategy, structure, and rivalry refers to the conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry impacts firm competitiveness Different management ideologies affect the development of national competitive advantage Vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced features

9 Evaluating Porter s Theory Government policy can: affect demand through product standards influence rivalry through regulation and antitrust laws impact the availability of highly educated workers and advanced transportation infrastructure. The four attributes, government policy, and chance work as a reinforcing system, complementing each other and in combination creating the conditions appropriate for competitive advantage Implications For Managers There are three main implications for international businesses: location implications first-mover implications policy implications How is each element of Porter s Diamond and Krugman s theories affected by the changing environment of ASEAN? How does a bigger market as in the case of ASEAN Economic Community (AEC) affect business operations? How can companies in the member countries adapt to the new norm of AEC?

10 Location Different countries have advantages in different productive activities It makes sense for a firm to disperse its various productive activities to those countries where they can be performed most efficiently International trade theory suggests that firms that fail to do this, may be at a competitive disadvantage First-Mover Advantages Being a first mover can have important competitive implications, especially if there are economies of scale and the global industry will only support a few competitors Firms that establish a first-mover advantage may dominate global trade in that product

11 Government Policy Government policies with respect to free trade or protecting domestic industries can significantly impact global competitiveness Businesses should work to encourage governmental policies that support free trade Firms should also lobby the government to adopt policies that have a favorable impact on each component of the diamond Current Events European Union & ASEAN Economic Community (AEC) (developments, troubles, challenges, etc.) Economic situations of major economies. Important issues surrounding economic integrations. The future of ASEAN based on the experience of the EU and their challenges to stay integrated and maintain mutual & sustainable benefits among members despite Brexit which is currently destabilizing the whole EU.

12 Cost Pressures And Pressures For Local Responsiveness Firms that compete in the global marketplace typically face two types of competitive pressures: pressures for cost reductions pressures to be locally responsive These pressures place conflicting demands on the firm Pressures for cost reductions force the firm to lower unit costs, but pressure for local responsiveness require the firm to adapt its product to meet local demands in each market a strategy that raises costs Cost Pressures And Pressures For Local Responsiveness Pressures for Cost Reductions and Local Responsiveness

13 Pressures For Cost Reductions Pressures for cost reductions are greatest: in industries producing commodity type products that fill universal needs (needs that exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon when major competitors are based in low cost locations where there is persistent excess capacity where consumers are powerful and face low switching costs Pressures For Local Responsiveness Pressures for local responsiveness arise from: differences in consumer tastes and preferences - strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries differences in traditional practices and infrastructure - pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries

14 Pressures For Local Responsiveness differences in distribution channels - a firm's marketing strategies needs to be responsive to differences in distribution channels between countries host government demands - economic and political demands imposed by host country governments may necessitate a degree of local responsiveness Choosing A Strategy There are four basic strategies to compete in the international environment: global standardization localization transnational International The appropriateness of each strategy depends on the pressures for cost reduction and local responsivness in the industry

15 Choosing A Strategy Four Basic Strategies Global Standardization Strategy The global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies The strategic goal is to pursue a low-cost strategy on a global scale The global standardization strategy makes sense when: there are strong pressures for cost reductions demands for local responsiveness are minimal

16 Localization Strategy The localization strategy focuses on increasing profitability by customizing the firm s goods or services so that they provide a good match to tastes and preferences in different national markets The localization strategy makes sense when: there are substantial differences across nations with regard to consumer tastes and preferences where cost pressures are not too intense Transnational Strategy The transnational strategy tries to simultaneously: achieve low costs through location economies, economies of scale, and learning effects differentiate the product offering across geographic markets to account for local differences foster a multidirectional flow of skills between different subsidiaries in the firm s global network of operations The transnational strategy makes sense when: cost pressures are intense pressures for local responsiveness are intense

17 International Strategy The international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization The international strategy makes sense when there are low cost pressures low pressures for local responsiveness Classroom Performance System Which strategy tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects, and differentiate the product offering across geographic markets to account for local differences? a) Internationalization b) Localization c) Global standardization d) Transnational

18 The Evolution of Strategy An international strategy may not be viable in the long term To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors Similarly, localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures, and the only way to do that may be to shift toward a transnational strategy The Evolution of Strategy Changes in Strategy over Time