UNIT 3. Modern Firm-Based Theories of 2.
Development based on
International Trade investments (capital)
3. Development based on
Lesson 3.1 Porter’s National innovation (creativity)
Competitive Advantage Theory 4. Development based on
prosperity (economic growth
Absolute Advantage - the advantage a and development)
country has if it can produce the greatest
quantity of a particular good at a lesser Porter identified four determinants that he
marginal cost with better quality. linked together to form Porter's Diamond.
1. Local market resources and
Comparative Advantage - producing a capabilities
particular good at lower marginal cost and 2. Local market demand conditions
lower opportunity cost. 3. Local suppliers and
complementary industries
Competitive Advantage - any benefit or 4. Local firm characteristics
advantage that one country or company
has over others due to lower cost of
material, lower cost of labor, or easy
access to raw materials resulting in the
ability of the country or company to offer
greater value to customers, either by
means of lower prices, or offering more
benefits and services at the same price.
Figuratively speaking, Absolute
Advantage + Competitive Advantage =
Competitive Advantage.
Michael Porter (Harvard Business
Hecksher and Ohlin - Porter recognized
School)
the value of the factor proportions theory
- developed a new model to explain
or the H-O theory, which considers a
national competitive advantage in
nation's resources as key factors in
1990.
determining what products a country will
- He did this in his book The
export or import.
Competitive Advantage of
Nations which introduced a model
Local Market Resources and
called Porter's Diamond that allows
Capabilities
analysis of why some nations are
Porter perceived these advanced factors
more competitive than others and
as providing a country with a sustainable
why some industries within nations
competitive advantage.
are more competitive than others
a. Human resources, including skilled
in the home front.
labor
b. Material resources, including
Michael Porter identified four stages of
natural resources, vegetation,
development in the evolution of a country.
space, and the like
1. Development based on
(production) factors
c. Investments in education, including
knowledge and research in
universities
d. Technology
e. Infrastructure
Local Market Demand Conditions
Porter believed that a creative domestic
market is critical to ensuring ongoing
innovation, thereby creating a sustainable
competitive advantage. If the demand for
a product is more in the domestic market,
it can influence the demand of customers
in the foreign market.
Local Suppliers and Complementary
Industries
To be competitive, firms must have an
efficient and strong support network. The Cost Advantage + Quality Advantage =
growth and development of a buyer Competitive Advantage
industry would also enhance the growth
opportunities of the corresponding LESSON 3.2. COUNTRY SIMILARITY
supplier industry. Besides consumers and THEORY
suppliers, related industries are of
importance. Differences between Traditional Trade
Theory and Country Similarity Theory
Local Firm Characteristics
Local firm characteristics include firm Traditional Trade Theory focuses on
strategy, industry structure, and industry differences in resources and demand or
rivalry. The strategies help in setting new supply conditions for trade between
goals, the structure helps in managing countries.
operations, and rivalry helps in Country Similarity Theory focuses on
generating innovation. the similarities in consumer preferences
between countries.
Porter also noted that government and
chance play a part in the national Country Similarity Theory, developed by
competitiveness of industries. economist Steffan Linder, states that
Governments can, by their actions and countries with similar levels of economic
policies, increase the competitiveness of development and consumer preferences
firms and occasionally entire industries. are more likely to engage in trade with
And of course, there is chance. If a each other.
country or a company takes opportunities
of chances open to them, they become The theory suggests that intra-industry
more competitive. trade takes place between countries with
similar levels of development.
Porter's Competitive Advantage Chain
Value
According with this theory, the companies Life cycle is the series of stages through
that develop new products for the which a living thing passes from beginning
domestic market, export the products to of its life until its death.
those countries that are at similar level of
development after meeting the needs of Product life cycle refers to the length of
the domestic market. time a product is introduced in the market
until it is removed from the shelves.
Two Types of Trade
Product life cycle management (PLM) is
Inter-industry trade is the exchange of the process of managing a product's life
goods produced in different industries cycle from inception, through design and
among countries. The exchange could be manufacturing, to sales, service, and
by one industry in each country eventually, to retirement.
Intra-industry Trade is the exchange of The product life cycle theory is a
goods produced in the same industry. marketing strategy developed by
Raymond Vernon in 1966 to help
GEERT-HOFSTEDE MODEL Is a tool
companies plan out the progress of their
developed to compare countries.
new products. The theory was developed
to explain the pattern of international trade
and foreign direct investment, which
Six Dimensions of Geert-Hofstede follows the product life cycle.
Model Vernon explained that from the invention
of a product to its demise due to lack of
1) Power Distance is the extent to demand, a product goes through four
which less powerful members of a stages: introduction, growth, maturity,
society defer to more powerful and decline.
ones.
2) Individualism vs. Collectivism is 1. Introduction Stage
the degree to which individuals are Characteristics:
integrated into groups. ● Low sales volume as the product is
3) Masculinity vs. Femininity is the newly launched.
distribution of roles between ● High acquisition costs due to
genders. marketing, product development,
4) Uncertainty Avoidance is a and promotional activities.
society's tolerance for uncertainty ● Minimal or no competitors in the
and ambiguity. market since the product is new.
5) Long Term vs. Short Term ● Financial losses are common
Orientation focuses on whether because of the high costs and low
people value future oriented goals sales.
or tradition present needs.
6) Indulgence vs. Restraint is the The Take-off phase is the point at which
extent to which a society allows sales begin to rise as the product gains
free gratification of basic human initial market acceptance.
drives.
There are two price-setting strategies at
LESSON 3.3. PRODUCT LIFE CYCLE this stage:
THEORY
a. Price skimming - means charging an from as the marketplace becomes
initially high price and gradually reducing saturated. Companies can also increase
("skimming") the price as the market customer service options to continue to
grows. attract customers. Another challenge is
b. Price penetration means charging a customers wanting to replace their product
low price to "penetrate" the market and with something new.
capture market share, before increasing
prices in relation to market growth.
4. Decline Stage
Characteristics:
2. Growth Stage ● Sales volume, customers, and
Characteristics: profits begin to decline.
● Increasing sales volume as more ● Customer interest drops, possibly
customers become aware and start due to newer alternatives or
purchasing the product. changing preferences.
● Profitability begins to improve as ● Competition declines as some
sales rise and economies of scale firms exit the market.
are achieved.
● Greater competition enters the The following are some of the strategies
market as the product proves that can be employed in the decline stage:
successful. a. Milking Or Harvesting, which
means reducing marketing efforts
The Shake-out is when weaker and attempt to maximize the life of
competitors are forced out due to the product for as long as possible;
increased competition, leaving stronger b. Slowly reducing distribution
players. channels and pulling the product
from underperforming geographic
3. Maturity Stage areas; allowing the company to pull
Characteristics: the product out and attempt to
● Sales volume reaches its introduce a replacement product;
maximum due to widespread and
market acceptance. c. Selling the product to a niche
● Profits are high because the costs operator or subcontractor to allow
of acquiring new customers the company to dispose of a
decrease. low-profit product, while retaining
● Competition stabilizes; market loyal customers
becomes saturated.
● Marketing efforts focus on Lesson 3.4 GLOBAL STRATEGIC
differentiation and maintaining RIVALRY THEORY
customer loyalty. Competitive advantage is a way that a
firm can obtain a sustainable edge over
Saturation is a challenge in the maturity competitors and break down the barriers
stage. Market saturation happens when a to entry in a particular industry.
specific market no longer demands a Global strategic rivalry theory is a
product or service (microeconomic) or theory forwarded in 1980 by economists
when the entire market has no new Paul Krugman and Kelvin Lancaster
demand (macroeconomic). Consumers that focused on multinational corporations
now have several competitors to choose (MNCs) and how they get a competitive
advantage over other firms in their
industry.
Barriers to entry refer to the obstacles a
new firm may face when trying to enter
into an industry or a new market and these
barriers to entry are the exact means by
which companies can gain competitive
advantage.
● Research and development
(R&D) are activities engaged in by
companies for the invention of new
products or services to remain
competitive.
● An intellectual property is a
creation of the mind, a work or
invention that is the result of
creativity, such as a manuscript
(book) or a design, to which one
has rights and for which one may
apply for a patent, copyright,
trademark, brand name, and the
like.
A patent is an exclusive right granted for a
new, inventive, and useful product,
process, or technical improvement to an
existing invention.
A trademark/brand name is a word, a
group of words, sign, symbol, or a logo
that distinguishes your business' goods or
services from those of other traders.
Copyright is the exclusive legal right to
reproduce, publish, sell, or distribute the
matter and form of something (such as a
literary, musical, or artistic work).
● Economies of scale means a
proportionate saving in costs (cost
advantage) gained by an increased
volume of production.
Internal economies of scale - refers to
economies that are unique to a firm.
External economies of scale - refers to
economies of scale enjoyed by an entire
industry.
● Experience produces
competitive advantage over
those without experience in
any endeavor.