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Chapter 2
Business Competitive Environment
Costco• Founded in Seattle in 1983.
• Merged with Price Company which had pioneered the
membership warehouse concept in 1976.
• Operates a chain of membership warehouses that sell
high quality, nationally advertised brands and selected
private label merchandise.
• This business is based on achieving high sales volumes
and rapid inventory turnover.• 32.8 million cardholders worldwide.
Costco
Net Sales $31.6 Billion
Membership Fees $543 Million
Net Income $446 Million
Profit Margin 1.4%
Average Sales per Warehouse $101 Million
Don Burdick, Senior Vice President, Information Systems
Costco
Operates 349 warehouses in 32 states (251 locations).
Nine Canadian provinces (59 locations).
The United Kingdom (11 locations).
19 warehouses in Mexico through a joint venture.
Japan (2 locations)
Taiwan (3 locations)
Korea (4 locations).
Chapter 2
Business
Competitive Environment
Position Some Important Factors:
1. The definition of competitiveness.
2. The key elements of competitive advantage.
3. The role of the nation relative to companies that compete successfully on a global basis.
4. The role of government within a nation.
While contemplating the idea that information
technology might make a difference.
May you live in interesting times!
Confucius
The future sure isn’t what it used to be!
Pogo
Competitiveness is the Pivotal Issue
in the 21st Century
Business Environment
The global market will come to you, if you don’t go to it.
An Essential Roadmap
How nations, companies and individuals can and must build wealth in a knowledge-based global economy.
Breakthrough technologies in microelectronics, biotechnology, new materials, telecommunications, robotics, and computers have fundamentally changed the game of creating wealth.
Relatively new industries are growing explosively and existing industries are being transformed.
The US is Back!• In the 1990s the US was the run away leading performer in the industrial world.
• Unemployment is at historical lows.
• Inflation has been a non-issue.
• The US claimed nine of the ten largest companies in the world by 1998 compared to only two in 1990.
• Nine of the fifteen most profitable banks are in the US compared to none in 1990.
• The wealthiest man in the world is an American.
• American billionaires measure in the hundreds.
• US stock markets have reached new record heights.
Some Important Questions• Is the current, fairly unique US prosperity sustainable?
• Is global integration a boon or a threat to this prosperity?
• Will the forces that sparked the Asian meltdown provoke an
era of stagnation or worse?
• Should global integration be slowed?
• What rules should be applied to the creation and protection
of new ideas.
• What skills are needed to succeed in this new economy?
• How can nations create a social system in which entrepreneurial spirit can flourish without also creating income and wealth inequities that threaten the system?
Some More Questions!
Are you personally ready?
Do you really understand the significance of what is happening, the opportunities that it represents and how to evaluate the implications?
Global (International) Trade
The US has truly become a global economy.
1950 - Global trade represented 10% of the US
economy.
2000 - Global trade is nearly 25% of a much bigger
economy.
Foreign Direct Investment
Since 1985 foreign direct investment in the US has increased five-fold.
Five percent of the total labor force works for companies that are wholly or partially foreign owned.
Employees of companies that work for companies that export earn more than those that do not.
Forty percent of productivity improvements are in exporting companies.
What Countries “Own”:• Nokia
• Burger King
• Chrysler
• Airbus
• Benetton
• Gillette
• Shell
• Finland
• UK
• Germany
• France, Spain, UK, Germany
• Italy
• US
• Netherlands
A Complex Political Environment
Three of five American registered voters approve of free trade.
Most agree that imports give them a larger selection of goods to choose from and that foreign competition forces US companies to be more competitive.
They also feel that imports help lower income families afford a higher standard of living by lowering prices.
Concerns regarding the environment, human rights, jobs, taxes, societal problems and sovereignty.
Trade Issue Attitudes
Attitudes lie along income, education, age and gender divides.
Free trade proponents tend to be those that see themselves benefiting from globalization: men, those that are better educated, richer and live in cities.
Those who question globalization include women, the elderly, those who are less well educated or poorer and those that live in rural areas.
How Trade Works
General Agreement on Tariffs and Trade (GATT)
A loose agreement that had a restricted scope and limited powers based on an agreement that was originally signed in the late 1940s.
World Trade Organization (WTO)
Created in 1995 the WTO has the job of administering trade agreements, resolving trade disputes and conducting future trade negotiations.
WTO
WTO members must abide by the group’s rulings.
The most important of which is to give every member the same set of low tariffs and other favorable trade rules.
Michael Porter Efforts/Contributions
• 1985 - Presidential Commission and Competitiveness Definition
• 1987 - Competitive Model and Value Chain
• 1990 - Competitiveness of Nations Study
Presidential CommissionLetter to President Reagan
Mr. President, it has been a great honor to serve you and the Nation. The competitive challenge calls for the leadership only you can provide. We thank you for your vision, interest and initiatives in making competitiveness a priority on our national agenda.
John A. YoungChairmanPresident’s Commissionon Industrial Competitiveness
Competitiveness Definition
The degree to which a nation can, under free and fair market conditions, produce goods and services that will meet the test of international markets while simultaneously maintaining or expanding the real income of its citizens.
Source: President’s Commission on Industrial Competitiveness
Competitiveness: A Link to National Goals
HumanResources
Capital
Technology
ImprovedDomestic
Performance
More andBetter Jobs
IncreasedStandard of
Living
StrongerNational Security
DecreasedBudgetDeficit
TradePolicy
NewCompetition
Increased World Market Competitiveness
ReducedTrade Deficit
Figure 2-1
Presidential Commission
Recommendations:
1. Create, apply and protect technology.
2. Spur new industries and revive old ones.
3. Pursue productivity gains through technology.
4. Reduce the cost of capital to American industry. Increase the supply of capital available for investment, reduce its cost and improve its ability to flow freely to its most productive uses.
Who is going to make it happen?
1. Government cannot legislate competitive success.
2. Government should highlight the importance of competitiveness.
3. Everyone must recognize the competitive challenge and its significance.
How Does a Company Compete?
If the bottom line to a business is
profit, then the top line is value to
customer.
The Best Alternative Strategy?
To produce quality products and
services through effective leadership
of skilled employees using advanced
methods through the innovative use
of technology.
A Good Competitor:
1. Knows its products and services.
2. Knows its customers.
3. Knows its competitors.
Competitiveness of Nations
The striking internationalization of competition in the decades after World War II has been accompanied by major shifts in the economic fortunes of nations and their firms.
1. How did this happen?
3. What can companies and countries do about it?
2. What can one learn from this?
Competitiveness of Nations
Why (how) are companies in a particular nation able to gain a dominant competitive position in a specific industry against the world’s best competitors?
Competitiveness of Nations
• Helps to anticipate from what country future competition is likely to come from?
• Helps to understand as least in basic terms what types of companies will be primary competitors?
• Could help to anticipate what could be their primary competitive strategies?
The point of all of this:
Organizations Compete
Within Industries
What is the role of the nation?
• How Measure Success?
• Basis of Analysis?
Previous Basis of Competitive Analysis
• Porter Companies and Industries• Economists Unit Cost of Labor Adjusted
for Inflation• Politicians Balance of Payment• Companies The Right Strategies to
Compete in Global Markets
To Understand Competition
• The industry was the basic unit of analysis.
• Industries are organizations that directly compete with each other.
• Some industries are well-defined, while others are not.
The role of the nation has increased as competition has
shifted more to the creation and assimilation of knowledge.
A Major Message
Competitiveness of Nations Study• Denmark: Copenhagen School of Economics
• Germany: Deutsche Bank
• Italy: Ambrosetti Group (transportation company)
• Japan: MITI, Hitotsubashi University and Industrial Bank of Japan
• Korea: Seoul National University
• Singapore: Economic Development Board
• Sweden: Institute of International Business, Stockholm School of Economics
• Switzerland: University of Basel, University of St. Gallen, Union Bank of Switzerland
• United Kingdom: The Economist
• United States: Harvard Business School
Industry Case Studies DenmarkAgriculture Machinery
Building Maintenance
Services
Consultancy Engineering
Dairy Products
Food Additives
Furniture
Pharmaceuticals
Specialty Electronics
Telecommunications
Equipment
Waste Treatment
Equipment
GermanyAutomobiles
Chemicals
Cutlery
Eyeglass Frames
Harvesting/Threshing
Combines
Optical Instruments
Packaging, Bottling
Equipment
Pens and Pencils
Printing Presses
Rubber, Plastic Working MachineryX-ray Equipment
ItalyCeramic TilesDance Club and Theater EquipmentDomestic AppliancesEngineering/ConstructionFactory Automation EquipmentFootwearPackaging and Filling EquipmentSki BootsWool Fabrics JapanAir Conditioning MachineryHome Audio EquipmentCar Audio EquipmentCarbon FibersContinuous Synthetic WeavesFacsimile EquipmentForklift TrucksMicrowave and Satellite Communications Equip.Musical InstrumentsOptical Elements and Instruments
RoboticsSemiconductorsSewing MachinesShipbuildingTires for Trucks and BusesTrucksTypewritersVideocassette RecordersWatches
KoreaApparelAutomobilesConstructionFootwearPianosSemiconductorsShipbuildingSteelTravel GoodsVideo and Audio Recording TapeWigs
SingaporeAirlinesApparelBeveragesShip RepairTrading
SwedenCar CarriersCommunication ProductsEnvironment Control EquipmentHeavy TrucksMining EquipmentNewsprintRefrigerated ShippingRock DrillsSemihard Wood FlooringTeller-operated Cash Dispensers
SwitzerlandBankingChocolateConfectioneryDyestuffsFire Protection EquipmentFreight ForwardingHearing AidsHeating ControlsInsuranceMarine EngineersPaper Product Mfg. EquipmentPharmaceuticalsSurveying Equipment
Textile MachineryTradingWatches
United StatesAdvertisingAgricultural ChemicalsCommercial AircraftCommercial Refrigeration and Air-ConditioningComputer SoftwareConstruction EquipmentDetergentsEngineering and ConstructionMotion PicturesPatient Monitoring EquipmentSyringesWaste Management Services
The ways that firms achieve and sustain competitive advantage in global industries provide the necessary foundation for understanding the role of the home nation in the process.
Firm Strategy, Structure and
Rivalry
Factor
ConditionsDemand
Conditions
Related and Supporting Industries
Government
Chance
Diamond of National Advantage
• Natural Resources
• Labor Pool
• Interest Rates and Currency Value
• Economies of Scale
Competitive Success Is Not Determined By:
. . . Traditional Economic Thinking
Factor ConditionsThe nation’s position in factors of productionthat are prerequisites to compete in a specificindustry.
• Infrastructure• People Skills and Training• Factors Unique to a Specific Industry
A nation does not inherit but creates the most important factors.
Physical Resources:
• Abundance, quality, accessibility and cost of
land, water, minerals, timber, hydroelectric
power, etc.
• Climatic conditions.
• Location and geographic size.
• Time zone re: global communication.
Factor Conditions
Infrastructure: Type, quality, and user cost.
• Transportation
• Communication
• Mail/freight Delivery
• Health Care
• Schools
• Housing Stock
Factor Conditions
. . .Quality of life--to live and to work.
Capital Resources: (Amount and cost of
money)
Factor Conditions
• Secured Debt
• Unsecured Debt
• Equity and Venture Capital
• Savings Rate
• Tax Incentives• Fiscal and Monetary Policies
Knowledge Resources: Scientific, technical and
market knowledge that pertains to goods and
services.
Factor Conditions
•Universities
•Government Research Facilities
•Private Research Facilities
•Business and Scientific Literature
•Market Research Databases
•Trade Associations
Factor Conditions
Human, knowledge and capital factors are mobile.
Other elements of the diamond are more important to explain international success.
Factor Conditions
The availability of factors
is not enough to explain
competitive success.
Factor Conditions
Competitive advantage from factors depends on how effectively and efficiently they are mobilized by a company and deployed in the economy.
Factor Conditions
The Japanese created and expanded needed factors at a rate far exceeding that of all other nations.
Brazilian Chicken Industry
• Second largest chicken producer after the US.
• Two large poultry companies: Perdigao and Sadia
• Has factor condition advantages:
• A large domestic market that allows an economy of
scale.
• Cheap, abundant corn and soya for feed.
• A large number of farmers to raise chickens.
US Semiconductor Industry
• Engineers and other technical employees.
• Creative skills of the above employees.
• Economic space for manufacturing facilities.
• Good transportation facilities.
• Good communications system.
• Access to raw materials.
• Water.
International Math and Science Study
Financed by the World Bank and participating governments and carried out
according to international guidelines.
U.S. Students Still Trail in Science, Math Tests
America's eighth-graders still are largely outperformed by children in industrialized Asian and European nations,scoring only at average levels on the latest round of international math and science tests.
Despite more than four years of efforts to improve American student performance in science and math there has been little improvement for the middle-schoolers from the first set of uniform tests in 1995.
US Status
U.S. educators generally blamed a lack of follow-through on improvement plans developed after the 1995 tests, which also included fourth- and 12th-graders.
The earlier tests showed not only that U.S. students madeaverage scores but seemed to do worse as they grew older. The latest tests, conducted in 1999, covered only eighth-graders.
In 1999 math and science testing, a dozen nations out of 38participating in the study outperformed of the United States.
Better Than the USAustraliaFlemish (Dutch) part of Belgium Canada TaiwanFinland Hungary Japan Korea Netherlands Singapore Slovak Republic Slovenia.
US Compared To
U.S. students shared the average field with:
Bulgaria Latvia New Zealand
American children did better than those in 17 other countries in both science and math.
Student TestStudents were asked questions about algebra, geometry, physics, chemistry and other topics that children would have been expected to have covered at their grade level.
Questions went well beyond simple math and science knowledge. In a typical math question from the test, which was translated into each country's language, testers were given the problem 691+208 and asked to show which of several other sums were closest.
The choices were 600+200, 700+200, 700+300 and 900+200.
Some questions required detailed calculations or explanations.
Test Scores
With average national performance set around 500, math scores ranged from 604 in Singapore to 275 in South Africa.
Science scores ranged from 569 in Taiwan to 243 in South Africa.
The U.S. score was 502 in math; 515 in science.
More than 100,000 children, including 9,072 from the United States, were picked randomly from each nation's eighth-graders or the national equivalent and were tested in the primary language of instruction.
Country Participants
France and Germany did not participate, the only major industrialized nations that didn't.
The tests, which all nations were invited to give and were expected to pay for, drew three African countries, Middle Eastern states including Jordan and Iran, several Eastern European countries and a lone South American nation, Chile.
Evaluation Reaction
The study also analyzed results from 23 nations that gave the eighth-grade tests both in 1995 and 1999.
U.S. Education Department officials, which funded and administered the U.S. tests, cautioned against comparisons - either to current nations or to 1995 rankings.
''It would be incorrect to assume no learning is taking place,'' said department researcher Patrick Gonzales. The scores ''could indicate a pace of change in other nations that is significantly faster.''
US Analysis
Some experts pointed to parts of the report where children and their teachers also were asked about homework, lessons and study habits.
The U.S. version, released separately from an international version that lacked details about American students, said U.S. children spent more time on computers and using tools like calculators and workbooks than their foreign peers.
But they did less homework.
Department of Education Announcement
U.S. EIGHTH GRADERS ABOVE INTERNATIONAL AVERAGE IN MATH, SCIENCE
"Our students are successfully learning more math and science every year they're in school," said U.S. Secretary of Education Richard W. Riley.
US Reaction (Rationalization?)
This finding validates the results of the previous 1995 study that after the fourth-grade, students in the United States fall behind their international peers as they pass through the school system. The lack of improvement is consistent with findings from recent administrations of the Long Term Trend assessment from the National Assessment of Educational Progress.
“However, over a much longer time span there have been improvements in the U.S. in both math and science." Rileyadded that four years may not be enough time to register the effectiveness of education reforms.
Study Habits and TeachersIn addition to measuring student performance in mathematics and science, the TIMSS-R study also looked at students’ study habits and activities in the classroom and at teachers’ instructional practices, academic and professional preparation, and beliefs about their teaching abilities. Findings indicate that:
U.S. eighth-grade students were more likely than students in other nations to be taught by teachers who majored in education, as likely as others to be taught by teachers who majored in mathematics education, and less likely than their international peers to be taught mathematics by teachers who majored in mathematics. The same is true for Science.
Homework in Class
In both mathematics and science, U.S. students reported more often than students in other nations that they use class time to begin homework.
Seventy-four percent of U.S. eighth-grade mathematics students reported often beginning homework in class compared to the international average of 42 percent.
In science, 57 percent of students reported often beginning homework compared to the international average of 41 percent.
Mercury News Article 1/7/00
The connection fallacy of education by Larry Cuban, Stanford University professor of education and former school superintendent.
The political appeal of linking improved test scores to an improved economy sparked a great delusion in the 1990s, obscuring other legitimate goals of education.
The idea of schools as the engine for a stronger economy is simply false.
Power of schools to spur economy is political fallacy.
Demand Conditions
• The sophistication of customer demand.• The more demanding the local buyers the
better to hone the global competitiveness of home-based companies..
• The local market provides an early picture of the emergence of buyer needs.
• This factor is a major positioner for success.
Related and Supporting Industries
• Successful companies need suppliers who are:
1. Home-based.
2. Competitive on an international level.• A close relationship with suppliers contributes
to innovation and upgrading of products.
• Prompts a range of interconnected suppliers
that are all internationally competitive.
Firm Strategy, Structure and Rivalry
The way in which companies are
created, managed and choose to
compete domestically is affected
by national circumstances.
Firm Strategy, Structure and Rivalry
Study Findings:• Company and individual goals vary.• No one management style is universally
appropriate.• Differences in background of CEO and
different company structures.• Company structures are different.• Contrasts in people motivation to work and
learn.• Career choices of the best students varies.
Firm Strategy, Structure and RivalryGermany• The preeminent trading nation when considering the entire
postwar period.
• They compete in highly sophisticated products and segments rather than high-volume ones.
• International success is built on many small and medium sized companies
• The breadth and success of German industries can only be understood in a historical context--achieved over decades
• Industry success includes a wide range of industries but Germany does not dominate them as does the U.S. or Japan.
• Have a very international orientation and export early.
• The economy is extensively clustered.
• There is wide-spread private and state ownership.
• The structure of companies tends to be hierarchical and patriarchal.
• Pragmatism characterizes German management.
• Managers and workers are well trained in their industries.
• Discipline and order is evident in the way that companies are managed.
• Owners often have a deep involvement in all aspects of the business, especially in technical areas.
• They maintain an enduring relationship with employees.
• Particularly adept at complex production processes.
• Selling is technical versus advertising or intangible appeals.
• Complex product service requirements.
• Customers tend to be conservative and cautious about new products.
• High levels of customer loyalty.
• Labor is very organized and is represented on company boards.
• New business formulation has traditionally been weak.
• Most executives have technical or scientific backgrounds.
• Have a stubborn desire to achieve technical and quality excellence.
• Invariably compete on the basis of differentiation versus cost.
• Unrelated diversification is rare.
• Do not hesitate to invest abroad.
• Industry is prestigious and attracts outstanding people.
• The unique strength of the German economy is its capacity to upgrade its advantage by increasing the quality of human and technical resources.
Germany Share of Total World Exports
• Bisquettes of Coal, Coke 70.4%
• Potassium Sulfate 59.4%
• Reciprocating Pumps 58.1%
• High Pressure Steel Conduit 55.4%
• Fresh Milk and Cream 54.5%
• Rotary Printing Presses 51.1%
• Iron, High Carbon Steel Coil 49.8%
• Synthetic Luminophores 47.1%
• Spinning, Reeling Machines 42.7%
• Clothes Dryers 41.3%
• Aircraft over 15,000 kg 38.1%
•Jukeboxes 36.5%
•Polyvinyl Chloride Plates 35.9%
•Rubber, Plastics Machines 35.5%
•Combine Harvester-Threshers 35.3%
•Packaging, Bottling Equip. 34.1%
•Sewing Machine Needles 33.2%
Seventeen industries where Germany has 33% or more of the world’s export market.
German CompaniesBASF AG - Chemicals (1861)Bayer AG - Chemicals (1863)Bayerische Motoren Werke AG - Autos, Motorcycles (1913)Bertelsmann AG - Publishing (1835)Daimler-Benz AG - Autos and Aerospace (1882)Henkel KGaA - Detergents and Chemicals (1876)Hoechst AG - Chemicals (1863)Friedrich Krupp GmbH - Steel, Engineering, Trading (1587)Mannesmann AG - Steel Tubes, Auto Parts, Etc. (1885)Robert Bosch GmbH - Electronic Auto Equipment (1886)Siemens AG - Electrical and Electronics (1847)Volkswagen AG - Automobiles (1937)
Daimler-Benz Globalization Jürgen Schrempp, Chief Executive of Daimler-Benz ,
For a company like Daimler-Benz globalization is not an optional strategy. It is the only one. In 10 years time we want to be number one or two in each of our businessareas. For example we are the world leader in commercialvehicles, number one in rail systems through Adtranz and number two in aircraft through Airbus. We want to double our turnover and be among the top quartile of global companies in performance.
Globalization Plan1. Be in the growth markets around the world with the right products and the right services in the right places. 2. Be a leader in innovation. Only companies which anticipate people's needs, translate great ideas into products and services, and get them into the market fast, will succeed.
3. Be exciting and rewarding for our people. Globalization creates jobs both in other countries and in the home market. For every three jobs created abroad, one is created in Germany.
Globalization Plan4. Have the right corporate culture. To be a successful global requires exceptional executives - people who have industrial skills, but can also adapt to local communities and respond to their needs. 5. Access to global capital. That means listing on the leading stock markets. And it means presenting your financial accounts to the standards of the transparency demanded by investors.
But most of all, globalisation is about creating value for people. Producing products they want, creating interesting jobs, and delivering excellent returns for shareholders.
Firm Strategy, Structure and RivalryItaly• Joined the ranks of advanced nations in the past two decades.• Overall growth in world export share is second only to Japan.• Clearly contradicts its image as a country.• Achieved advantage based on segmentation, differentiation
and process innovation.• Illustrates the power of a growing alignment between
national circumstances and the shifting demands of modern global competition.
• Remains a study in contrasts--industry successes and failures.• Successful industries are highly clustered including
geography.
• The world’s leading exporter in textile/apparel, household goods and personal products and third in food and beverages.
• Companies tend to be medium to small that compete primarily through export with limited direct foreign investment.
• Large private firms tend to dominate the home market.
• Companies are often managed by a commanding leader involved in all activities.
• Below the leader is often fluid, relatively unstructured (chaotic?) operation involving an interpersonal competition that would be rare in Japan.
• Managers are resourceful improvisers and able to adjust to changes, to circumvent constraints and to adapt to new rules.
• Companies tend to be highly specialized and compete through constant model changes and innovation.
• Deal with customers on a family-like and personal basis.
• Combine product design with innovations in process technology.
• Are generally not successful where standardization, high-volume mass production, or heavy investments in fundamental research are involved.
• Most companies are privately owned and owners, managers and workers are closely attached to an industry.
• These factors lead to a long-term orientation and a commitment to sustained investment.
• Business is important and a magnet for talented individuals.
• Entreprenuership thrives in Italy--they are risk takers who are individualistic and desire independence.
• Benefited from a shift from standardized, mass-produced products toward more customized, higher-style, higher-quality goods. In many cases style was combined with investment with state-of-the-art production equipment.
Italy Share of Total 1985 World Exports
• Meal and Pellets of Wheat 69.5%• Worked Building Stone 62.2%• Aperitifs 58.1%• Glazed Ceramic Sets 56.6%• Precious Metal Jewelry 49.6%• Fresh Stone Fruit 45.5%• Rubber and Plastic Footwear 41.9%• Fabrics of Combed Wool 41.8%• Domestic Washing Machines 38.2%• Steel High Pressure Conduits 35.9%• Sweaters of Synthetic Fibers 34.0%• Handbags 33.7%• Woolen Sweaters 33.1%• Leather Footwear 32.8%
Italy• Fiat SpA - Autos and Farm Equipment (1899)• Olivetti - computers and office equipment (1908)• IRI Holding Co. (state owned) - 541 companies 5% of GNP• Ente Nazionale Idrocarburi - Petroleum & Petrochemical (1953)• Perelli SpA - Power Transmission, T/C Cables, Tires (1872)• Benetton - clothes manufacturer (1955)• Luxotica - frame manufacturers (NY Stock Exchange)• Gewiss - electrical fittings• Marposs - precision measuring equipment• Safilo - frame manufacturers• Persol - frame manufacturers• Iris - ceramics
Small Businesses in Italy
• Exemplify flexibility and thrive in niche markets.
• Provide more than 2/3 of private-sector industrial employment.
• Escape many of Italy’s oppressive labor laws.
• Exports increased 20% during 1993’s down economy.
• 99% of Italy’s businesses are owned by one or two families.
• To survive Asian competition they will have to concentrate on a higher level of specialization and devote more time to quality and innovation versus price.
• Many were founded following the end of WWII.
(Less than 100 employees)
Olsa• A Bertuzzi family-owned company with a head office
in Milan and a factory in Bergamo.
• Produces plant and equipment for the chemical, pharmaceutical and cosmetics industries but thrives in niche markets.
• Niche products include a liquorice extractor and a special sterilization autoclave for candied-fruit that are made to order.
• Employ 80 people.
• 1998 Sales of $14.5 million with 70% from exports.
• Primary competitors are Swiss and German.
Firm Strategy, Structure and RivalryJapan• Not far behind Germany in becoming a war economic power.
• Lacked Germany’s historical position.
• Achieved competitive advantage in some industries and failed in others.
• The role of the government and management practices does not explain the success of Japanese industries.
• Has an extraordinarily high share of world exports in many industries with a complete absence of a natural resource intensive industry.
• There is a unique ability in Japan for the “diamond” to function as a system.
• Possesses a large pool of literate, educated and increasingly skilled human resources.
• Benefit from a large pool of trained engineers.
• Created and upgraded needed factors that far exceeded that of all other nations.
• Japanese companies are hierarchical and disciplined.
• Cooperation and subordination are the norm with a unique ability to coordinate across functions.
• Relationships between labor and management are respectful and strikes are rare.
• Many of the talented people flow to industry.
• A technical orientation is pervasive and many managers have engineering backgrounds.
• Strategies often follow a path of standardization and mass production with a major emphasis on quality.
• Ownership of companies is predominantly held in institutions and other companies.
• Japanese companies often define their goals in terms of volume and market share.
• Workers define their status on how well the company is doing.
• Continual learning is emphasized and accepted.
• Adopt an international outlook promoted by the amount of domestic rivalry which is the single biggest explanation for the success of Japanese industries.
• More willing to form new companies.
• Companies relentlessly upgrade their competitive advantage.
Japan Share of 1985 World Exports
• Motorcycles 82.0%
• TV Image and Sound Recorders 80.7%
• Dictating Machines 71.7%
• Calculating Machines 69.7%
• Mounted Optical Elements 67.5%
• Photo & Thermocopy Apparatus 65.9%
• Still Cameras and Flash Equip. 62.2%
• Cash Registers and Accounting
Machines62.0%
• Outboard Marine Piston Engines 61.0%
• Electric Gramophones 59.0%
•Microphones, Loudspeakers and Amplifiers 55.7%
•Motorcycle Parts & Accessories 53.4%
•Track-Laying Tractors 51.8%
•Pianos & Musical Instruments 51.0%
• Self-Propelled Dozers 50.6%
• Color TV Receivers 49.5%
• Portable Radio Receivers 48.4%
• Other Radio Receivers 47.9%
• Special-Purpose Vessels 46.8%
• Electric Typewriters 45.0%
• Steam Boiler Plants & Parts 42.8%
• Motor Vehicle Radio Receivers 42.5%
• TV Picture Tubes 42.2%
•Prepared Sound Recording Equipment. 41.5%
•Photo Chemical Products 41.5%
•Metalworking Lathes 39.7%
•Coarse Ceramic Housewares 39.3%
•New Bus or Truck Tires 39.1%
•Buses 38.7%
•Sewing Machines 38.7%
•Iron, Steel Seamless Tubes 38.7%
•Self-Propelled Shovels, Excavators 38.4%
•Computer Peripheral Units 37.9%
•Lorries and Trucks 37.5%
•Other Electronic Tubes 36.5%
•Metal Cutting Machine Tools 36.5%
•Generating Sets with Piston Engine 36.1%
•Other Cargo Vessels 35.7%
•Iron, Simple Steel Rolled Plate 35.2%
•Continuous Synthetic Weaves 34.7%
•Clocks, Watch Movements 33.8%
•Rolling Mill Parts and Rolls 33.4%
•Liquid Dieletic Transformers 33.4%
Forty-three industries with over one third of theworld’s export market share.
Japanese Companies• Honda Motor - Autos and Motorcycles• Sony Crop. - Consumer Electronics• Bridgestone Corp. - Tires• Matsushita Electric - Consumer Electronics• Toyota Motor Corp. - Automobiles• Nissan Motor Corp. - Automobiles• Nomura Securities - Brokerage• Hitachi - Computers and Electronics• NEC - Computers and Electronics• Fujitsu - Computers and Electronics• Mitsui Group - Trading and Holding Co.• Sumitomo Group - Trading and Holding Co.• Mitshubishi Group - Trading and Holding Co.
Study Postscript
1. The second largest economy in the world.
2. Arrogance based on what they had accomplished
including an assumption that the only way their economic
endeavors go is up.
3. A rigidity in approach that takes too long in a fast paced,
global economy.
What happened to Japan since 1990?
Forget the North Pole!
Santa’s Workshop is in China
Irony
What makes Christmas festive for Americans is produced in the world’s officially atheistic country whose human rights abuses are deplored by officials of the US government.
What this picture provides is a lesson in globalization and an example of how trade and tradition have brought together China and the US in a mutually beneficial relationship.
Minimal Inflation in the US?
Because of China!
Imports from ChinaBased on the first eight months of 2000
Artificial Christmas Trees - $78 million
Christmas Tree Ornaments - $535 million
Christmas Lights - $211 million
Stuffed Toys - $755 million
Dolls - $639 million
Electric Trains - $32 million
Puzzles - $21 million
If not available, over half of this type of merchandise in US stores would disappear.
U.S. Merchandise Trade with China: 1988-2000
Year U.S. Exports U.S. Imports U.S. Trade Balance 1988 5.0 8.5
-3.5 1989 5.8 12.0 -6.21990 4.8 15.2 -10.41991 6.3 19.0 -12.71992 7.5 25.7 -18.21993 8.8 31.5 -22.81994 9.3 38.8 -29.51995 11.7 45.6 -33.81996 12.0 51.5 -39.51997 12.8 62.6 -49.71998 14.3 71.2 -56.91999 13.1 81.8 -68.72000* 15.0 99.4 -84.4* estimate
China Imports to the US
0 20 40 60 80 100
All Commodities
Toys, games,etc
Footwear
Office machines
Telecom andsound
Apparel
Top 5Categories
1999
1995
US Exports to China
0 5 10 15
All Categories
Top 5 Categories
Transport Equipment
Electrical Equipment
Fertilizer
Office Machines
Industrial Machinery
1999
1995
Critics of US-China Trade
Much of what the US counts as exports to China are parts for assembly and return for sale in the US. The value of these goods rose 979% between 1997 and 1998.
China Trade Barriers
China remains a difficult market to penetrate, due largely to Chinese government policies, which attempt to protect and promote domestic industries. Chinese trade policies generally attempt to encourage imports of products which are deemed beneficial to China's economic development and growth (and which are generally are not produced in China),such as high technology, as well as machinery and raw materials used in the manufacture of products for export.
Goods and services not considered to be high priority, or which compete directly with domestic Chinese firms, often face an extensive array of tariff and non-tariff barriers.
China Trade Barriers
Such policies make it difficult to export products directly to China. As a result, many U.S. firms have established production facilities in China to gain access to the China market.
However, foreign-invested firms in China face a wide variety of barriers as well. U.S. government officials maintain that China's restrictive trade and investment policies are a leading cause of the surging U.S.-China trade imbalance.
China Trade Barriers
High tariffs. The average Chinese tariff rate is currently 17% (down from an average rate of 42% in 1996), but tariffs on selected items, such as autos and various agricultural products, can rise to 100% or more.
Non-tariff barriers. Arbitrarily used to control the level of certain imports into China, including quotas, import licenses, registration and certification requirements, andrestrictive technical and sanitary standards (especially in respect to agricultural products).
China Trade Barriers
Non-transparent trade rules and regulations. China's trade laws and regulations are often secretly formulated, unpublished, unevenly enforced, and may vary across provinces, making it difficult for exporters to determine what rules and regulations apply to their products. In addition, foreign firms find it difficult to gain access to government trade rule-making agencies to appeal new trade rules and regulations.
Trading rights. China restricts the number and types of entities that are allowed to import products which limits the ability of both Chinese and foreign firms to obtain imported products.
China Trade Barriers
Distribution rights. Most foreign companies are prohibited from selling their products directly to Chinese consumers.
Investment restrictions. Chinese officials pressure foreign investors to agree to contract provisions which stipulate technology transfers, exporting a certain share of production, and commitments on local content. Other problems faced by foreign firms include the denial of national treatment (i.e., foreign firms are treated less favorably than domestic firms), foreign exchange controls, distribution and marketing restrictions, and the lack of rule of law.
Competitiveness of Nations
It is helpful to ask what companies need to do and where does government need to play a key role?
Role of GovernmentServe as a challenger and catalyst to companies to
compete successfully:
• Focus on specialized factor creation.
• Avoid intervening in capital factor and currency markets.
• Enforce strict product, safety and environmental standards.
• Limit cooperation among industry rivals.
• Promote goals that lead to sustained investment.
• Deregulate competitors.
• Enforce domestic antitrust policies.
• Reject managed trade.
Singapore Model• Strong Government (The smartest and most
capable should govern)
• Long Term Planning
• Foreign Investment
• Clean Administration
• Education for All
• No Welfarism
• Family Values
• Law and Order
• Communal Harmony
Singapore
• An economic powerhouse.
• Three million people on a small island.
• Passed the US in average income in 1999.
• World’s best infrastructure!?
• Safe, clean (smoggy).
• Interesting racial, religious and language mix.
• Could go from great to awesome.
Companies gain an advantage against competitors by responding to pressures and challenges.
The Company Agenda1. Creating pressure within the company for innovation.
2. Seeking out the best, most successful competitors
3. View as a positive factor the presence of domestic competition.
4. Staying alert to customer, market and competitor trends.
5. Emphasizing the home base as the place to strengthen competitiveness.
6. Selectively pursuing international advantage opportunities.
7. As a company, playing a role in strengthening the national competitive diamond.
:
Conclusion
• Today’s competitive realities demand leadership.
• Leaders believe in change.
• They energize their people to innovate continuously.
• They recognize the need for pressure and challenges to accomplish this.
Not Everyone Agrees
Kenichi Ohmae: The Borderless World
The key global economic entityis the true multinational company.
Ohmae Contentions
Four factors are usurping economic power
once held by nations:
1. Capital.
2. Corporations.
3. Consumers.
4. Communication.
Putting Global Logic First
Although political leaders will resistacknowledging the demise of the nation-state, only those who can accept it andpromote region-states within and acrosstheir borders will be able to provide thebest quality of life for their constituents.
Kenichi Ohmae
Country CompetitivenessOpenness
Government Policies
Finance
Infrastructure
Technology
Management
Labor
Institutions
1998 Rankings1. Singapore 2.16
2. Hong Kong 1.91
3. US 1.41
4. UK 1.29
5. Canada 1.27
6. Taiwan 1.19
7. Netherlands 1.13
8. Switzerland 1.10
9. Norway 1.09
10. Luxembourg 1.05
11. Ireland 1.05
12. Japan .97
13. New Zealand .84
14. Australia .79
15. Finland .70
16. Denmark .61
17. Malaysia .59
18. Chile .57
19. Korea .39
20. Austria .37Source: World Economic Forum
21. Thailand .27
22. France .25
23. Sweden .25
24. Germany .15
25. Spain .02
26. Portugal -.02
27. Belgium -.03
28. China -.15
29. Israel -.17
30. Iceland -.18
31. Indonesia -.19
32. Mexico -.23
33. Philippines-.31
34. Jordan -.42
35. Czech Republic -.47
36. Argentina -.48
37. Peru -.50
38. Egypt -.52
39. Vietnam -.53
40. Turkey -.57
41. Italy -.69
42. South Africa -.84
43. Hungary -.85
46. Brazil -1.10
49. Poland -1.18
50. India -1.61
51. Zimbabwe -1.70
52. Russia -2.02
53. Ukraine -2.51
From Third World to World Class
Is globalization by definition a zero sum game?
Or can it be a win-win proposition?
They are coming!!!From the earliest times of which we have record--back to two thousand years before Christ--down to the beginning of the 18th century, there was no very great change in the standard life of the average man living in civilised centres of the earth. Ups and downs certainly. Visitation of plague, famine and war. Golden intervals. But no progressive, violent change. This slow rate of progress, or lack of progress, was due to two reasons: the remarkable absence of technical improvements and to the failure of capital to accumulate.
John Maiynard Keynes
Essays in Persuasion, 1930
Major PointsTechnological innovations in transportation and communication have given birth to a truly global economy.
The percentage of developing world people living in poverty has halved since 1960.
Improvements can be measured by increased rates of literacy, daily caloric intake, improved life expectancy and decreased infant mortality.
Developing countries comprise 85% of the world’s population, 77% of the earth’s land mass, 63% of global commodity production. Their economies constitute less than 22% of world income and only 12% of global stock market capitalization.
Major PointsIt is no longer possible for a country to insulate itself from the rest of the world.
The possible decline of the industrialized world is merely the narrowing of the gap between it and third world countries.
The accelerated pace of change is what disturbs the pessimists, because they can see it happening.
It took Britain 60 years to double its output, the US 50 years but developing countries are doubling output every 12 years. China has actually doubled its GDP in seven years.
In many respects the developing world is unknown economic and financial territory.
Major Points
A typical American consumes 310 cans of Coca-Cola per year, while the developing countries average is only 32.
While global economic integration is inevitable, its greatest obstacle is protectionism. If a country’s way of life is threatened economically it is also impacted politically and culturally.
The coming decades should provide the most enriching ride for more people than ever before in history.
Conclusions
The diamond makes sense as a means of understanding global economic success.
Domestic success does prepare companies to compete globally.
Major European and an increasing number of Asian countries are capable of competing on a global basis.
The global marketplace is only going to get tougher based on more, tougher competitors.
The diamond can help to anticipate new competitors.
Chapter 2 Summary
By Simon Au
Business Competitive EnvironmentDefining Competitiveness and a Competitive Defining Competitiveness and a Competitive ModelModel
Competitiveness of NationsCompetitiveness of Nations
The Company AgendaThe Company Agenda
ConclusionConclusion
How Does a Company Compete?How Does a Company Compete?
Competitiveness
The degree to which a nation can , under free and fair market conditions, produce goods and services that will meet the test of international markets while simultaneously maintaining or expanding the real income of its citizens.
Competitive Model
Three primary inputs to improve domestic performance by private sector companies
1. Human resources: Education and skill levels of people.
2. Capital: Availability and cost of funds
3. Technology: Ranges from design systems to automated machine tools to IT.
HumanResources
Capital
Technology
ImprovedDomestic
Performance
More andBetter Jobs
IncreasedStandard of
Living
StrongerNational Security
DecreasedBudgetDeficit
TradePolicy
NewCompetition
Increased World Market Competitiveness
ReducedTrade Deficit
Figure 2-1
Competitiveness: A Link to National Goals
How Does a Company Compete?
If the bottom line to a business is
profit, then the top line is value to
customer.
The Best Possible Strategy
To produce quality products and
services through effective leadership
of skilled employees using advanced
methods through the innovative use
of technology.
Competitiveness of Nations
The striking globalization of competition in the decades after World War II has been accompanied by major shifts in the economic fortunes of nations and their firms.
Firm Strategy, Structure and
Rivalry
Factor
ConditionsDemand
Conditions
Related and Supporting Industries
Government
Chance
Diamond of National Advantage
Factor Conditions
Prerequisites to compete in a specific industry.
Demand Conditions
The sophistication of customer demand.
Related and Supporting Industries
Successful companies need suppliers who are:
1. Home-based.
2. Competitive on an international level.
The way in which companies are created,
managed and choose to compete
domestically.
Firm Strategy, Structure and Rivalry
The Company Agenda
Creating pressure within the company for innovation
through leadership.
Final Conclusions
• Change is expected in order to be competitive.
• Demands leadership.
• Leaders believe in change.
• Have to motivate their organization to innovate continuously.
• Have to understand that competitive advantage must be achieved and sustained.
Guest Speaker on Thursday
CEO of Plantronics
Will address the challenges of running a successful business.
First hour of the class. Rest on Chapter 4.
Please be on time!
Be prepared to ask questions.
Can be either about his career or about running a successful business.