International Business: Lecture 2
Professor Simon J. Evenett
www.evenett.com
Plan for this afternoon’s session.
Non market strategies: Baron's Integrated Strategy.
Main lessons learnt from Topic 1.
Topic 2: Public Policies and Firms—Insights from
Competitive Markets..
Topic 3: Does Nationality Matter? Firms in
industrialised countries.
2
Adapting Porter’s Five Forces to
take account of governments,
courts, and NGOs
Why Porter’s approach must be
adapted
4
Porter urges us to analyse the
causes of the five forces yet
emphasises a limited set of
actors (principally firms, their
actual or potential rivals,
customers, and suppliers.)
Incomplete characterisation of
relevant fora.
International dimension is not
well developed—are we to take
on trust that this approach to
strategy works in all capitalist
countries?
Baron extended Porter’s
framework to include the nonmarket environment and socalled Integrated Strategies—but
at some cost in terms of
prescriptive power.
Businesses operate in two
environments simultaneously (Baron).
4 I’s
Non-market
environment
Issues: threats to
Regulations, proposed
profits or opportunities. laws, court judgments.
Porter’s 5 forces.
Institutions: relevant
decision-maker and
their processes.
Regulators, legislatures,
courts, etc. Collective or
non-unanimous
decisions.
Arms length market
transactions.
Voluntary decisionmaking.
Interests: identity and
goals of those with a
stake in the issue.
Goals can include
“fairness”, “harmony”,
and inclusion.
Firms seek to maximize
profits.
Information: beliefs,
Prejudices, rumor, state
knowledge of actors,
reports, press coverage,
and what is persuasive. etc.
5
Market environment
Market research,
reputation, advertizing.
Baron on non-market strategies
Lets think more systematically about the implications for strategic
analysis and firm strategies.
• Analysis: “Nonmarket forces and the institutional arenas in which
they are manifested are sufficiently different from market forces that
they require a nonmarket strategy system for effectively managing
interactions with the nonmarket environment.”
• Strategy formation: “A nonmarket strategy...is the concerted action
of an interested party directed at a non-market issues that is a
subject of competition in the cognizant institutions where
information typically plays an important role.”
6
Examples of non-market strategies.
Two main objectives: creating and exploiting opportunities
and countering threats.
1. Create opportunities for self—opening foreign markets.
2. Alter rival’s current opportunities—raising rivals costs through
impact of differential regulation.
3. Block rival’s opportunities altogether—opposing rival’s M&A
plans.
4. Reducing threats from rivals—blocking entry by imports, patents.
5. Reducing threats from the state—self regulation in financial
services.
6. Mitigating threats—state bail outs and insurance.
7. Creating threats and uncertainty—threatening legal action.
7
Important characteristics of traderelated non-market strategies.
•
Appropriability: Are the gains from pursuing non-market strategy only
appropriated by those firms pursuing such strategies? If not, what are the
implications for the desirability of a non-market strategy?
– Collective versus individual action: Would collective action be
preferable to individual approaches?
8
•
Credibility and Reversibility: Does precedent matter? Can a particular
strategy be reversed? If not, does it matter?
•
Sustainability and Retaliation. What are the sources of distinctive—that is,
hard to copy yet effective—non-market strategy? Can the strategy be
copied abroad, leading to possible retaliation? Can non-market strategy be
a source of long term competitive advantage?
A multi-step approach to creating
Integrated Strategies
Need not involve a change in the objectives of the
firm.
Effective strategy formation involves:
• Identifying the relevant 4I’s and 5 forces.
• Identifying a set of strategic options which may have market and
non-market components.
• Anticipating strategies of actors in market and non-market
environment.
• Given 1-4, evaluating strategic options: decision, implementation
needs, and coherence in both spheres.
• Mitigation of risks associated with chosen strategy.
• Implementation.
• Evaluation of prior decision. Start of feedback loop.
9
Case Study: Taking The Cake.
Should Peter tell CEO Ed Malanga that Southland
needs to recast its product lines?
Working through the case study.
What are the 4 I’s here?
Which of the Five Forces threatens Southland’s profits the most?
What are the critical pieces of information you need to formulate and evaluate
strategic options?
What are the options available to this firm?
What is your evaluation of these options?
At present, how effective do you think this firm would be in implementing your
recommendations? How could the firm do better in this respect?
In what way would you conduct an ex-post review of your decision?
11
Evaluating the expert advice.
12
McClain:
Unnevehr:
Martaugh:
Berman:
Main lessons.
Integrated Strategy is about systematic, informed, decision-making
using multiple-steps to analyze the global business situation
confronting a manager.
This approach can be usefully applied to non-market as well as market
environments, both of which affect the performance of the firm.
The non-market environment differs across countries and is likely to be
even more significant in markets with lots of government intervention
and important non-firm actors.
The characteristics of many non-market strategies are different from
market strategies.
Implementation and evaluation of non-market strategies often requires
different resources and approaches than market strategies.
13
Public Policies and Firms: Insights
from Competitive Markets
Simon J. Evenett
www.evenett.com
Purpose of this presentation
15
To show how
straightforward
economics tools can
be used to provide
useful rules of thumb
when analysing the
impact of certain
government policies.
These tools also
provide insights into
why some firms
pursue certain nonmarket strategies.
To show how these
tools underlie some
of the fundamental
ideas in corporate
strategy.
This is not meant to
be a review of
microeconomics—
here we will use the
tools for very
different purposes.
Supplemental reading
•
If you need to review any of this material, take a look
at Pindyck and Rubinfeld’s textbook Microeconomics
(especially Chapters 2-4, 6-9.)
•
This accessible book has plenty of good examples
to illustrate the key points.
16
What is a competitive market?
It is an institution where
a large number of
potential purchasers and
a large number of
suppliers buy and sell a
given good.
No one coordinates
the trade between
buyers and sellers.
17
Each agent is said
to have their own
individual
objectives, not
collective goals.
Determining sales and revenues in
the short run
P
MS
P1
MD
Q1
18
Q
Producer surplus is directly related
to profits in the short run.
P
MS
P1
MD
Q1
19
Q
What happens to the industry if
production costs fall?
P
MS
P1
P2
MD
Q1
20
Q
Some of the producer surplus
increase is lost due to the price fall
P
MS
P1
P2
MD
Q1
21
Q
Now for some counterintuitive
findings…
The farmers’ dilemma: does
productivity growth always pay?
MS
P
P1
P2
+
Q1 Q2
23
MD
Q
The farmers’ dilemma: does
productivity growth always pay?
MS
P
P1
P2
-
+
Q1 Q2
24
MD
Q
Does the polluter always pay for
pollution taxes?
P
MS
P1+t
P2
P1
MD
Q2 Q1
25
Q
Turning fixed costs into variable costs—
outsourcing, relaxing employment laws etc
MS: high variable costs
P
P2
MS: low variable costs
P1
MD
Q1
26
Q2
Q
Turning fixed costs into variable costs—the
effects of liberalising rigid employment laws
MC: high variable costs
P
MC: low variable costs
Old
MS
P1
MD
Q1
27
Q
Turning fixed costs into variable costs—the
effects of liberalising rigid employment laws
MC: high variable costs
P
New
MS
MC: low variable costs
P2
Old
MS
P1
MD
Q1
28
Q2
Q
The Ultimate Application:
Rationalising
Porter’s Five Forces Approach
Porter’s Five Forces Model
30
Did you ever wonder
where Porter got the
conceptual ideas for
his Five Forces
Model?
The simple answer is
that the supply-anddemand framework
that you have been
using can rationalise
Porter’s approach.
You just have to make
one change: don’t
think of the factors
that determine
equilibrium price—
think instead of the
factors that determine
the producer surplus
in an industry.
Porter’s five forces all
reduce the producer
surplus in an
industry—let’s take
one example.
Threat of new entrants:
Before…and After
P
MS
P1
P2
MD
Q1
31
Q
New entrants erode incumbents
producer surplus.
P
MS
P1
P2
MD
Q1
32
Q
What about the other four forces?
Let’s discuss each in turn
33
Bargaining
power of
suppliers.
Bargaining
power of
customers.
Threat of
substitute
products or
services.
Rivalry
among
current
producers.
The straightforward supply-and-demand framework, when used to explain
producer surplus, shows why four of the five forces are indeed threats to
industry profitability.
Summary: Understanding a lot out
from a straightforward framework.
The own price
elasticity of
demand is a critical
determinant of how
industry sales
respond to most
changes.
34
This analysis can
be used to analyse
the impact of
government
policies and
reforms—essential
for understanding a
firm’s interests and
incentive to
engage in nonmarket strategies.
This analysis also
helps rationalise
much of Porter’s
approach to
industry
performance and
strategy.
Remember that supply-and-demand analysis tells you have a
competitive industry would respond, not how an individual firm would
respond to new circumstances.
Topic 3:
Does Nationality Affect Firm
Performance?
Simon J. Evenett
www.evenett.com
A motivating example:
Not every exporter "prices to
market"
Studies have found
that, in response to
exchange rate
changes, US and UK
firms tend adjust
their export prices in
the near term.
German firms, in
contrast, do not
engage in such
“pricing to market.”
36
Why does the
nationality of the
firm matter for
pricing decisions?
Should this factor
be taken into
account when
formulating firm
strategy?
Evaluating the "national business
climate"—Porter’s Diamond
What determines the business
environment?
Context for firm strategy.
Factor input
conditions.
Demand
conditions.
Related and
supporting
conditions.
38
Factor-driven
economy.
Investmentdriven economy.
Innovationdriven
economy.
Digging deeper…
Factor (input)
conditions.
Context for firm
strategy and rivalry.
Demand
conditions.
Related and
supporting
industries.
Presence of high
Local rules and
quality and
context to
specialised inputs. encourage
investment and
upgrading.
Sophisticated
and demanding
local
consumers.
Presence of local
suppliers in
related fields.
Not just factors,
but also various
infrastructures.
Local
specialised
demand
segments.
Presence of
clusters.
Meritocratic
incentive systems.
Open and vigorous
competition among
locally based rivals.
39
Porter’s main conclusions
A nation’s level of economic
development—rather than
nationality per se—dictates
the national business climate
and shapes firm strategy.
Export prowess is stimulated
by intense competition at
home.
Meritocratic incentive
systems spur performance.
Very demanding customers
should be cherished.
The benefits of co-location
(clusters) should not be
overlooked.
When governments care about more than competitiveness and growth—such as stability, solidarity, and
burden-sharing—then Varieties of Capitalism emerge. Understanding what that means for managers is next.
40
Why the role of managers differs
across rich economies—
Varieties of Capitalism
Rich economies differ markedly
in the following four ways
Financing of firms and corporate governance.
Employee relations.
Degree of acceptable inter-firm cooperation:
• With competitors.
• With suppliers.
• Across sectors.
•All four are
legacy items—
inherited from
the past.
•Learn to live
with them.
Perceived legitimate and actual role of the state
(leader, regulator, arbitrator, cajoler, and rescuer.)
42
How did managers succeed with these constraints?
Different ways to solve four key
challenges facing firms
Managerial
challenge.
Financing the
company.
Incenting
employees.
Encouraging
employees to make
RS investments.
Encouraging
suppliers to make
43RS investments.
Alternative 1.
(Anglo Saxon)
Alternative 2.
(Coordinated
economies)
Borrowing from capital
market, frequent
reporting, and
evaluation.
Borrowing from banks
who have
representatives on
boards.
Huge rewards.
Wage compression.
Avoid if possible.
Longer term contracts.
If can’t be avoided,
vertical integration.
Long term relationship
(different forms).
Preconditions for Alternative 2 to work.
Alternative 2.
Preconditions.
Bank representatives
on corporate boards.
Banks under less pressure to maximise short term
performance. Limited competition for depositors—
steady source of capital.
Wage compression.
Requires monitoring—feasibility and acceptability.
Longer term contracts.
Employees must believe in future and accept slow
moves through hierarchy.
Longer term
relationships with
suppliers.
Supplier must believe in future. Geographical
proximity often needed to foster cooperation.
44
The timing of incentives is a critical
difference
Incentives can be supplied immediately or over time.
Supplying necessary incentives now requires an
acceptance of risk and tolerance of substantial changes in
the pecking order—yet preserves options for the future.
Supplying incentives over time requires credible
commitment—and limits some types of flexibility.
Preferences of firms and societies shape these choices.
Do not underestimate firms or others interest in the
pecking order. Relative performance is as important for
many as absolute performance in understanding the
choices made.
45
Importance of Corporate
Governance Regimes (Edwards).
Shows how restructuring of European firms depends on national corporate
governance and industrial relations systems.
Distinguishes between insider versus outside corporate governance regimes.
VW—defensive reaction to shareholder pressure; worker relations go beyond
German legal requirements and have stayed there; adjustment different in
subsidiaries outside Germany.
Vivendi—made to adopt US financial standard when it took over Universal;
restructured within French labour relations system.
Corus—shifting burden of restructuring to the UK.
46
Key points to take away
47
Nationality matters:
State policies
condition the
business
environment, and
this in turn affects
how managers
solve four related
incentive problems.
Supplying
incentives over time
requires
commitments and
stability and this is
incompatible with
some Anglo-Saxon
practices.
Flexibility has a
price—it narrows
the set of incentive
schemes available
to firms.
How societies and
governments view
relative
performance versus
absolute
performance has a
lot to do with
acceptable
managerial
choices.
Recap: Key questions to ask about
any economy.
What metrics are
used to gauge
performance in
an economy?
• What premium is
placed on
absolute
performance
versus relative
performance (the
pecking order)?
48
In what ways are
incentives
supplied—and
what does this
imply for
cooperation
across issues,
between firms,
and over time?
In what ways, if at
all, is the capacity
to adjust to new
circumstances
constrained by
these choices?
What are the
mechanisms for
saying “no” in an
economy?