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IBT – International Business and Trade

Lesson Summary:
3.1
 Competitive advantage refers to 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.
 Cost advantage + Quality advantage = Competitive advantage
 Michael Porter of Harvard Business School introduced a new model in his book, The Competitive
Advantage of Nations, known as Porter’s diamond. Porter’s theory stated that a nation’s
competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
 Michael Porter identified four stages of development in the evolution of a country:
a. Development based on factors (production)
b. Development based on investments (capital)
c. Development based on innovation (creativity)
d. Development based on prosperity (economic growth and development)
 To explain his theory, Porter identified four determinants that he linked together to form Porter’s
diamond:
a. Local market resource and capabilities;
b. Local market demand conditions;
c. Local suppliers and complementary industries; and
d. Local firm characteristics.
 Porter added to these basic production factors (land, labor, and capital) a new list of advanced
factors:
a. Human resources, including skilled labor
b. Material resources, including natural resources, vegetation, space and the like
c. Investments in education, including knowledge and research on universities
d. Technology
e. Infrastructure
 Porter’s competitive advantage chain value shows how a company attains competitive advantage
through its main activities that provide cost advantage and the support activities that will provide
the firm quality advantage.

3.2
 Traditional trade theories speak of differences in resources and demands or supply conditions as
a necessary condition for trade between countries. In contrast, the country similarity theory is
built upon similarities or identical features of nations for them to trade with each other.
 The country similarity theory was developed by Swedish economist Steffan Linder in 1961, as he
tried to explain the concept of intra-industry trade. Simply, this theory describes the idea that
countries with comparable qualities are mainly likely to trade with each other. These qualities
might include the stage of development, per capita income, savings rates, natural resources,
cultural milieu, geographical features, political and economic interests, and the like.
 Two types of trades are the inter-industry trade, trade between and among different industries,
and the intra-industry trade, trade between and among the same industry.
 To determine the similarity of countries, the Geert-Hofstede model is a tool that was developed
to compare countries. This model uses six dimensions to compare countries:
a. Power distance – the extent to which individuals or groups within a society or organization
accept and expect differences in power and authority.
b. Degree of interdependence (Individualism vs Collectivism) – Individualism is a cultural
orientation that places a strong emphasis on the rights, independence, and individual goals
of each person while collectivism is a cultural orientation that places a strong emphasis on
the collective well-being and the needs of the group over individual desires and interests.
c. Cultural and societal roles (Masculinity/Femininity) – Masculinity refers to qualities and
behaviors that are associated with males including traits like assertiveness, independence,
rationality and competitiveness while femininity refers to qualities and behaviors that are
associated with females including traits like nurturing, empathy, sensitivity and cooperation.
d. Uncertainty avoidance – the extent to which individuals within a society or organization feel
uncomfortable with ambiguity, unpredictability, and uncertainty.
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e. Long-term orientation – often used to describe a society's or organization's time orientation,

3.3
 Life cycle is the series of stages through which a living thing passes from the beginning of its life
until its death.
 The term product life cycle refers to the length of time a product is introduced in the market until
it is removed from the shelves.
 The product life cycle theory is a marketing strategy developed by Raymond Vernon in 1966 to
help companies plan out the progress of their new products and explain the pattern of
international trade and foreign direct investment, which allows the product life cycle.
 Vernon explained that from the invention of a product to its demise due to lack of demand, a
product goes through four stages: introduction, growth, maturity and decline. The length of each
stage can vary from product to product. Many factors go into determining how quickly a product
goes through the four stages, including how the product is marketed, the demand for the product,
and the product itself.
 Product life cycle management (PLM) is the process of managing a product’s life cycle from
inception, through design and manufacturing, to sales, service, and eventually, retirement.
 Prior to a product being introduced to the market, companies conduct research on which product
is in demand, how to produce the product, and conduct market tests to see if the product will sell.
If the results of these researches and tests are positive, that is the time the company will begin
production and the product will be introduced to the market.
 At the introduction stage, the need is to create awareness, not profits, and the underlying goal is
to gain widespread product and brand recognition as consumers try the product. Big money is
spent on distribution and promotion. At this stage, companies can expect the sales to be low, but
will gradually increase, and profitability to be negative. Businesses can also expect to have no
direct competition during this phase since competitors also do not have knowledge about the
product.
 There are two price-setting strategies at this stage:
a. Price skimming – charging an initially high price and gradually reducing “skimming” the price
as the market grows.
b. Price penetration – charging a low price to penetrate the market and capture market share,
before increasing prices in relation to market growth.
 At the growth stage, demand for the product begins to increase and sales usually grows
exponentially from the takeoff point. At this stage, profitability reaches the highest level.
Economies of scale are now in order as sales revenue increases faster than costs and production
reaches capacity.
 At the maturity stage, sales increase continues in a decreasing pattern, but the sales curve tends
to decrease after the top selling point is reached. There is intense competition and product
differentiation and generating brand awareness becomes a must. Retaining customer brand
loyalty is the key. The biggest challenge is maintaining profitability and preventing sales from
further decline.
 A product enters a decline stage when no amount of marketing or promotion can keep the sales
figures from declining. Other innovative or substitute products that satisfy customer needs better
have entered the market. Sales likely to continue until the cost to produce the product rises higher
than the profits generated from it.
 Some of the strategies that can be employed in the decline stage are:
a. Milking or harvesting, which means reducing marketing efforts and attempt to maximized the
life of the product for as long as possible;
b. Slowly reducing distribution channels and pulling the product from underperforming
geographic areas allowing the company to pull the product out and attempt to introduce a
replacement product; and
c. Selling a product to a niche operator or subcontractor to allow the company to dispose of a
low-profit product, while retaining loyal customers.
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3.4
 Competitive advantage is a way that a firm can obtain a sustainable edge over competitors and
break down the barriers to entry in a particular industry.
 Global strategic rivalry theory is a theory forwarded in 1980 by economists Paul Krugman and
Kevin Lancaster that focused on multinational corporations (MNCs) and how they get a
competitive advantage by taking advantage of the barriers to entry for a particular industry.
 Barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry
or a new market.
 The barriers to entry are the following:
a. Research and development;
b. Ownership of intellectual property rights;
c. Economies of scale;
d. Unique business processes or methods;
e. Extensive experience in the industry or exploiting the experience curve; and
f. Control of resources or favorable access to raw materials.
 Research and development (R&D) are activities engaged in by companies for the invention of new
products or services to remain competitive. R&D is an important driver of economic growth.
Companies have their own R&D departments to be able to actually gain competitive advantage.
 An intellectual property refers to creations of the mind, a work or invention that is the result of
creativity, such as a manuscript (a 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 patent may be used for licensing.
 A trademark/brand name is a word, group of words, sign, symbol, or a logo that distinguishes your
business’ goods or services from those of other trades. Brand names and trademarks are used for
franchising.
 Copyright is the exclusive legal right to reproduce, publish, sell, or distribute the matter and form
of something (such as literary, musical, or artistic work.)
 Economies of scale means a proportionate saving in costs (cost advantage) gained by an increased
volume of production. The cost advantage is a result of spreading the total fixed overhead cost
among a greater number of units produced, which, therefore, reduces the unit fixed cost for the
product. This also results in a lower average variable cost for the product. Overall, operational
efficiencies and synergies are attained. There are two economies of scale:
a. Internal economies of scale – refers to economies that are unique to a firm. For instance, a
firm may hold a patent over a mass production machine, which allows it to lower its average
cost of production more than other firms in the industry.
b. External economies of scale – refers to economies of scale enjoyed by an entire industry. If
studies indicate that cotton production will 1,000 workers to be able to enter a trade with a
foreign country, all those engaged in cotton production will try their best to employ 1,000
workers to become competitively advantaged.
 Experience produce competitive advantage over those without experience in any endeavor.
Therefore, experience will also count in engaging in international trade as those with experience
become conversant with what is going on in the global trade arena. Employing experienced
employees is equally advantageous for firms.