International Business Professor Simon J. Evenett

International Business

Professor Simon J. Evenettwww.evenett.com

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Plan for this afternoon’s session.

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Objectives of this course.

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Course content: Seven Topics

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Course assessment.

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The 1st Individual Analytical Assignment

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The 1st Individual Analytical Assignment

Specific changes in legislation and regulations

Change in options and trade-offs available to a firm

Change in a firm’s performance

The key challenge is to identify the relevant causal links:

We seek explanations not assertions!

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How to succeed in the written work for this course.

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How to succeed in the written work for this course (2)

Understanding Corporate Strategy

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What is corporate strategy?

• It is the study of...

1. how firms should make critical decisions.

2. how firms do make critical decisions.• Notice these are very different matters—and there is, of

course, disagreements about what decisions are critical or not.

• We focus on 1. (above). Strategy as a deliberate, systematic, and enduring phenomenon.– Do remember that there are other ways of thinking

about strategy—see the readings for topic 1.

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What do we want from a good strategy tool?

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Porter on Strategy.

• What is the logic underlying Porter’s 5 forces?1.Competition is the threat to industry profitability.2.Competitive threats have systematic underlying causes—

it is not a coincidence, bad luck, or necessarily inevitable.3.Five forces shape those competitive threats.4.The strongest of those forces determine the profitability

of an industry—an example of “O-ring” thinking.5.Recommendation: “the corporate strategist’s goal is to

find a position in the industry where his or her company can best defend itself against these forces or can influence them its favor”.– Note the second “or” in the above statement.

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Porter on Strategy (2).• What advice follows from this perspective?• Knowledge of the underlying causes of competitive

threats is necessary for strategy making. “The strategist...must learn what makes that environment tick.”

• Firm strategy is about conscious decisions to develop distinctive means to attaining the chosen goals/ends.

• Plans of action draw on three types of strategic decision:

1. “Positioning the company.”2. “Influencing the balance” of competitive threats.3. “Exploiting industry change.”

• Strategy making is a multi-step process.

Adapting Porter’s Five Forces to take account of

governments, courts, and NGOs

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Why Porter’s approach must be adapted

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Businesses operate in two environments simultaneously (Baron).

4 I’s Non-market environment

Market environment

Issues: threats to profits or opportunities.

Regulations, proposed 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 decision-making.

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, knowledge of actors,

and what is persuasive.

Prejudices, rumor, state reports, press coverage, etc.

Market research, reputation, advertizing.

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Baron on non-market strategies

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Examples of non-market strategies.

Two main objectives: creating and exploiting opportunities Two main objectives: creating and exploiting opportunities and countering threats.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.

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Important characteristics of trade-related 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?

• 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?

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A multi-step approach to creating Integrated Strategies

Case Study: Taking The Cake.

Should Peter tell CEO Ed Malanga that Southland needs to recast its product lines?

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Working through the case study.

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Evaluating the expert advice.

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Main lessons.

Public Policies and Firms: Insights from Competitive Markets

Simon J. Evenett

www.evenett.com

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Purpose of this presentation

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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.

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What is a competitive market?

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Determining sales and revenues in the short run

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Q

MS

MD

P1

Q1

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Producer surplus is directly related to profits in the short run.

P

Q

MS

MD

P1

Q1

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What happens to the industry if production costs fall?

P

Q

MS

MD

P1

Q1

P2

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Some of the producer surplus increase is lost due to the price fall

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Q

MS

MD

P1

Q1

P2

Now for some counterintuitive findings…

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The farmers’ dilemma: does productivity growth always pay?

P

Q

MS

MD

P1

Q1

P2

Q2

-

+

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The farmers’ dilemma: does productivity growth always pay?

P

Q

MS

MD

P1

Q1

P2

Q2

-

+

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Does the polluter always pay for pollution taxes?

P

Q

MS

MD

P2

Q2

P1

Q1

P1+t

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Turning fixed costs into variable costs—outsourcing, relaxing employment laws etc

P

Q

MS: low variable costs

MD

P2

Q1

P1

Q2

MS: high variable costs

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Turning fixed costs into variable costs—the effects of liberalising rigid employment laws

P

Q

MC: low variable costs

MD

P1

Q1

MC: high variable costs

Old MS

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Turning fixed costs into variable costs—the effects of liberalising rigid employment laws

P

Q

MC: low variable costs

MD

P1

Q1

P2

Q2

MC: high variable costs

Old MS

New MS

The Ultimate Application: Rationalising

Porter’s Five Forces Approach

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Porter’s Five Forces Model

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Threat of new entrants: Before…and After

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Q

MS

MD

P1

Q1

P2

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New entrants erode incumbents producer surplus.

P

Q

MS

MD

P1

Q1

P2

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What about the other four forces? Let’s discuss each in turn

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.

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Summary: Understanding a lot out from a straightforward framework.

Remember that supply-and-demand analysis tells you have a Remember that supply-and-demand analysis tells you have a competitive industry would respond, not how an individual firm would competitive industry would respond, not how an individual firm would

respond to new circumstances.respond to new circumstances.