Chpt 3 - Competitive and Global Trade

direct competitors

in the same industry, solving the same problem the same way (TB)

indirect competitor

solving the problem a different way, but solving the same need (TB)

competitive spectrum

Marketers need to have a clear understanding of the competitive nature of the industry in which they function

monopoly

one firm, regional electricity companies

oligopoly

few firms, airlines

monopolistic competition

many firms, running shoes

perfect competition

many firms, identical products

competitive advantage

Competitive Advantage: when a company succeeds in creating more value for customers than its competitors do it

• Measured relative to industry rivals

• Types of Competitors:

1. Local

2. National

3. Global

porters fives forces model

1. Threat of new entrants

2. Threat of substitutes

3. Bargaining power of buyers

4. Bargaining power of suppliers

5. Rivalry among competitors

1. Threat of new entrants

– New capacity

– New entrants mean downward pressure on prices and reduced profitability

– Barriers to entry determine the extent of threat of new industry entrants

barriers to entry: economies of scale

Refer to the decline in per-unit product costs as the absolute volume of production per period increases

barriers to entry: product differentiation

The extent of a product’s perceived uniqueness

barriers to entry: capital requirements

Required investment for manufacturing, R&D, advertising, field sales and service, etc.

barriers to entry: switching costs

costs related to making a change in suppliers or products

barriers to entry: distribution channels

If channels are full, or unavailable, the cost of

entry is substantially increased

barriers to entry: government policy

Regulations may restrict competitive entry

barriers to entry: Cost advantages independent of scale economies

Access to raw materials, low-cost labor, favorable locations, and government subsidies

barriers to entry: competitor response

Market reaction in anticipation of increased

competition

2. Threat of substitutes

– Availability of substitute

products places limits on

the prices market leaders

can charge

– High prices induce buyers

to switch to the

substitute

3. Bargaining power of buyers

– Buyers refer to manufacturers and retailers (rather than consumers)

– Buyers seek to pay the lowest possible price

– Buyers have leverage over suppliers when:

▪ They purchase in large quantities (enhances supplier dependence on buyer)

▪ Suppliers’ products are commodities

▪ Product represents a significant portion of buyer’s costs

▪ Buyer is willing and able to achieve backward integration

4. Bargaining power of suppliers

– When suppliers have leverage, they can raise prices high enough to affect the profitability of their customers

– Leverage accrues when

▪ Suppliers are large and few in number

▪ Supplier’s products are critical inputs, are highly differentiated, or carry

switching costs

▪ Few substitutes exist

▪ Suppliers are willing and able to develop and sell product themselves

5. Rivalry among competitors

– Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other

▪ Price competition; Positive when firms rationalize costs; Negative when prices and profits decline

▪ Industries with high fixed costs need to operate at capacity; Excess capacity drives price and profit down

▪ With lack of differentiation or absence of switching costs, buyers treat products as commodities which drives price and profit down.

▪ Firms that focus on achieving success are destabilizing when they are willing to accept below-average profit margins.

when is competitive advantage achieved

when there is a match between a firm’s distinctive competencies and the factors critical for success within its industry

• Two ways to achieve competitive

advantage

1. Generic strategies

2. Strategic intent

generic strategies

Generic strategies for creating competitive advantage:

1. Broad market strategies

2. Narrow market strategies

generic strategies: broad, cost leadership

• low price

– Based on a firm’s position as the

industry’s low-cost producer

– Must construct the most efficient

facilities

– Must obtain the largest market

share so that its per-unit cost is the

lowest in the industry

– Only works if barriers exist that

prevent competitors from achieving

the same low costs

generic strategies: broad, product differentiation

• premium price

– Product that has an actual or perceived uniqueness in a broad market has a differentiation advantage

– Extremely effective for defending market position

– Extremely effective for obtaining above-average financial returns; unique products command a premium price

generic strategies: narrow, focused differentiation

• premium price

– Product that has an actual or perceived uniqueness in a broad market has a differentiation advantage

– Extremely effective for defending market position

– Extremely effective for obtaining above-average financial returns; unique products command a premium price

generic strategies: narrow, cost focus

– Firm’s lower cost position enables it to offer a narrow target market and lower prices than the competition

▪ Sustainability is the central issue for this strategy

▪ Works if competitors define their target market more broadly

▪ Works if competitors cannot define the segment even more narrowly

strategic intent

– Created on the continuous improvement

principles of W.E. Deming:

1. Building layers of advantage - Successful companies build portfolios by establishing layers of advantage on top of one another

2. Searching for loose bricks - Search for opportunities in the defensive walls of competitors whose attention is narrowly focused

3. Changing the rules of engagement - Refuse to play by the rules set by industry leaders

4. Collaborating - Use the know-how developed by other companies

competitor matrix

A visualization of key competitors in an industry based on relevant attributes

the WTO and GATT

Forum for trade-related negotiations among 140 members

– Formed on January 1, 1995

– Based in Geneva, Switzerland

– Serves as dispute mediator through Dispute Settlement Body (DSB)

– 60-day negotiation period

– Has enforcement power and can impose sanctions

preferential trade agreement

Many countries seek to lower barriers to trade within their regions

• Preferential trade agreements (PTAs) give partners special treatment and may discriminate against others

• Over 350 PTAs have been notified to the WTO

• Categories:

1. Free Trade

2. Customs Union

3. Common Market

4. Economic Union

preferential trade agreements: free trade

– Two or more countries agree to abolish

tariffs and other barriers to trade amongst

themselves

– Countries continue independent trade

policies with countries outside agreement

– Rules of origin requirements restrict

transshipment of goods from the country

with the lowest tariff to another

Preferential Trade Agreements: Customs union

Evolution of Free Trade Area

– Includes the elimination of internal barriers

to trade (as in FTA) and establishes common

external barriers (CETs) to trade

▪ Examples: The EU and Turkey, the Andean

Community, Mercosur, CARICOM, Central

American Integration System (SICA)

Preferential Trade Agreements: Common market

– Includes the elimination of internal barriers

to trade (as in free trade area)

– Establishes common external barriers to

trade (as in customs union)

– Allows for the free movement of factors of

production, such as labor, capital, and

information

Preferential Trade Agreements: Economic union

– Includes the elimination of internal barriers to trade (as in free trade area)

– And establishes common external barriers to trade (as in customs union)

– And allows for the free movement of factors of production, such as labor, capital, and information (as in common market)

– And coordinates and harmonizes economic and social policy within the union

– Full evolution of economic union

▪ creation of unified central bank

▪ use of single currency, leads to central government in time

PTA: north america

• Includes Canada, the United States, and Mexico

• The United States is home to more global industry leaders than any other nation

• Canada boasts Bombardier and Lululemon

• Mexico is becoming a manufacturing center

• China is the #1 trading partner of the United States, Canada is #2, and Mexico is #3

• The North American Free Trade Agreement (NAFTA) created a free trade area

• The United States-Mexico-Canada Agreement (USMCA) replaced NAFTA in 2020

PTA: Latin America: SICA, Andean Community, Mercosur, and Caricom

Includes the Caribbean, Central, and South America

• History of no growth, inflation, debt, and protectionism has given way to free

markets, open economies, and deregulation

• Four important preferential trading arrangement in Latin America

• El Salvador, Honduras, Guatemala, Nicaragua, Costa Rica,
  and Panama

• EU is the #1 trading partner of Mercosur

PTA: Asia-Pacific: The Association of Southeast Asian Nations

• ASEAN is comprised of Brunei, Cambodia, Indonesia, Laos, Malaysia,

Myanmar, Philippines, Singapore, Thailand, Vietnam

• “ASEAN plus six” (Japan, China, Korea, Australia, New Zealand, India) working toward an economic community

• China/ASEANFTA established in 2010 removes 90% of tariffs on traded goods

PTA: Western, Central, and Eastern Europe

• Countries of Western Europe among the most prosperous in the world

• Significant income differences

• Pan-continental issues

• Brexit

• Greece’s turnaround

• the EU: Objective is to harmonize national laws and regulations so

  that goods, services, people, and money could flow freely

  across national boundaries

• strict product regulation, rising costs

PTA: middle east

• Oil prices drive commerce

– 18% of world’s oil reserves are in Saudi Arabia

– Saudi Vision 2030

– Arab Spring 2011

• marketing issues

PTA: Africa

– Republic of South Africa

– North Africa

– Non-Mediterranean Africa

Marketing issues in Africa

– African Growth and Opportunities Act (AGOA)

▪ “trade, not aid”

– Agreement on Textiles and Clothing