GBGM 603 : INTERNATIONAL BUSINESS

MANAGEMENT

LECTURE IV: ANALYSIS OF THE

COMPETITIVE ENVIRONMENT AND THE
EXTERNAL MACRO-ENVIRONMENT
Lecturer: Prof. Adelaide Kastner
Prof. Adelaid
Digital Signer:Prof. Adelaide N.A. K
astner, PhD
DN:[email protected], O

e N.A. Kastne ="Central University, Ghana", OU=

Central Business School, CN="Prof.
Adelaide N.A. Kastner, PhD"
r, PhD Date:2021.02.27 18:58:32 +00:00

2/27/2021 Lecture Notes of Prof. Adelaide Kastner 1

 ANALYSIS OF THE COMPETITIVE
ENVIRONMENT: MAIN ISSUES
• INTRODUCTION
• DISTINGUISHING FEATURES OF INDUSTRIES AND
MARKETS
• INDUSTRY ANALYSIS: PORTER’S FIVE FORCES
FRAMEWORK
• MARKET ANALYSIS
• ANALYSIS OF EXTERNAL MACRO-ENVIRONMENT
• CONCLUSION

2/27/2021 Lecture Notes of Prof. Adelaide Kastner 2

DISTINGUISHING FEATURES OF INDUSTRIES
AND MARKETS
Basically the features that distinguish a
given industry are:
• Skills and competences
• Technology
• Processes and value adding activities
• Materials (i.e. inputs)
• Supplier channels
• Distribution channels
• Products
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 Characteristics that define the concept of
market are seen as shared:

• Products (or goods and services)

• Customers
• Customer requirements
• Distribution channels
• Competitors

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 INDUSTRY ANALYSIS: PORTER’S FIVE
FORCES FRAMEWORK
The five competitive forces are:
• The threat of new entrants;
• the threat of substitute products or services;
• the bargaining power of suppliers;
• the bargaining power of buyers; and
• the rivalry among the existing competitors.

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 Figure 1: Forces Driving Industry Competition
(Michael Porter)

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 The Threat of New Entrants
• Porter’s argument here is that new
entrants bring new capacity and seek
market share, which usually results in
increased competition and
consequently lower margins.
• Magnitude of threat depends on the
barriers present and the expected
reaction from existing competitors.
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Major barriers to entry into an industry

(1) economies of scale, (2)

product differentiation, (3) capital
requirements, (4) cost
advantages independent of
size/scale, (5) access to
distribution channels, and (6)
government policy.
2/27/2021 Lecture Notes of Prof. Adelaide Kastner 8
 Threat of Substitute Products

• Through research and development

(R&D) competitors can generate close
substitute products and thereby limit
the price the firm could charge for the
authentic product.
• The effect is reduced competitiveness
and reduced profitability both in
normal times and in boom times.
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 Factors that influence degree of
competition from substitutes
• How effectively the substitute
products meet customer needs.
• Their relative price and performance.
• Cost of switching (from the authentic
product to the substitute) for buyers.
• Willingness of buyers to substitute.

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 Bargaining Power of Buyers
• Porter argues that powerful buyers bargain away
the profits for themselves, thereby eroding the
profit and competitive base of the firm.
• Buyers may include manufacturers, services
businesses, wholesalers and retailers, and
ultimate consumers.
• Some of the issues over which bargaining arise
are price, product features and availability.

2/27/2021 Lecture Notes of Prof. Adelaide Kastner 11

 Factors that determine degree
of buyers’ bargaining power
• Number of large and powerful customers
there are for a given product.
• Ease with which buyers can switch to
substitute products.
• Potential ability of customer to take over any
of the firms supplying the given product (i.e.
acquisition) through backward integration.
• Price negotiating skills of the buyers.
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 The Bargaining Power of Suppliers
Determinants of their power are:
• The power and size of individual suppliers
relative to those of the firms within the
industry.
• The importance of suppliers’ products to the
businesses in the industry.
• The costs for the firms in the industry of
switching to alternative suppliers.
• The importance of the buyers in the industry as
customers to the suppliers.
• The threat of forward integration by the
suppliers.
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 The Rivalry among the Existing
Competitors
• Finally, Porter asserts that fierce
competitive rivalry erodes profits
by dramatically increasing costs
of competing.

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Attributes of industry that intensify rivalry
• Large number of competing firms.
• Competing firms are the same size and have the
same influence/power.
• Slow industry growth, thereby precipitating
fights for market share.
• Lack of product differentiation: Forces firms to
compete only on the basis of price.
• Fixed costs are high or the product is perishable,
creating strong temptation to cut prices.
• Low brand loyalty among consumers.
• High exit costs, forcing competitors to remain in
the industry and “fight”.
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 MARKET ANALYSIS

• Market Segmentation
Analysis
• Customer Motivations
• Unmet Needs

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 ANALYSIS OF THE EXTERNAL MACRO-
ENVIRONMENT: MAIN ISSUES
• Introdction
• The Relevance of National Conditions in International
Business Strategy
• Analysis of National Macro-Environment: Porter’s
“Diamond”
• Some Implications for Ghanaian International
Businesses
• Critique
• The Eight-Faceted Diamond (Kastner, 2003)
• Conclusion
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 Introduction
• Analysis of the external macro-
environment involves analysis of both the
global macro-environment and national
macro-environment.
• The global macro-environmental analysis
identifies movements in culture and
society, demography, politics, international
law, economics and technology etc.
• The national macro-environment is
analysed in terms of social, cultural,
demographic, political, legal, technological,
economic and financial factors.
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Kastner
 The Relevance of National Conditions
in International Business Strategy
• One significant reason for macro-
environmental analysis is to identify both
similarities and differences that exist
between countries.
• The ability to exploit both national
similarities and differences is central to
international competitive advantage, and
consequently, international business
management.
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 Analysis of National Macro-
Environment: Porter’s “Diamond”
• Porter’s “Diamond” depicts: (1)
factor conditions (2) demand
conditions (3) related industries,
(4) firm strategy, structure and
rivalry, (5) chance and (6)
government.
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 Figure 3: The “Diamond” (Porter)
FIRM STRATEGY,
Chance STRUCTURE, AND
RIVALRY

FACTOR DEMAND
CONDITIONS CONDITIONS

RELATED AND
Govern-
SUPPORTING
Lecture Notes of Prof. ment
2/27/2021 INDUSTRIES 21
Adelaide Kastner
 1. Factor Conditions
• Factors include labour, land (and other natural
resources), capital, and infrastructure.
• Porter argues that factors that engender
national competitiveness are not inherited but
are created within a nation, through processes
that differ widely across nations and among
industries.
• He adds that the stock of factors at any
particular time is less important than the rate at
which they are created, upgraded, and made
more specialised to particular industries
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 2. Demand Conditions
• The composition of home demand (in terms of
quality and quantity for an industry’s
products), shapes how firms perceive,
interpret, and respond to buyer needs.
• Thus, sophisticated and demanding buyers
for the product or service can prod local firms
to meet high standards in terms of product
quality, features, and service. These can
translate into international competitive
advantages.

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 3. Related and Supporting Industries
• Competitive advantages in some supplier
industries confer potential advantages on a
nation’s firms in other industries, because
they produce inputs that are widely used and
important to innovation or to
internationalisation.
• Related industries are those in which firms
can co-ordinate or share activities in the value
chain when competing; or those, which
involve products that are complementary.
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 Firm Strategy, Structure, and Rivalry
• The conditions in the nation governing how
firms are created, organised and managed,
and the nature of domestic rivalry also impact
national competitive advantage in specific
industries.
• Firstly, as regards strategy and structure of
domestic firms, factors like motivations
(fostered by prestige and national priority),
commitment to goals, attitudes to risk-taking
are crucial in determining competitive
advantages.
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 Firm Strategy, Structure, and Rivalry

• Secondly, vigorous domestic

rivalry (whether price or non-
price) produces companies,
which are better equipped to
compete in the international
marketplace than those in
nations where rivalry sluggish.
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 The Role of Chance
• Porter explains chance events as occurrences
that have little to do with circumstances in a
nation and are often largely outside the power
of firms (and often the national government) to
influence.
• Examples include pure invention, major
technological discontinuities, surges of world
or regional demand, and wars. All these can
create or destroy national competitive
advantage.
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 The Role of Government
• Government’s real role here is to
influence (or be influenced by) the
four main above-mentioned
determinants to engender national
competitive advantage.
• The way the role of government is
played could either promote or impede
national competitive advantage.
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 Some Implications for Ghanaian
International Businesses
Prestige and national priority:
• Annual Export Performance Awards is one of
the prestigious attractions.
• National priority has also manifested in
financial support (though woefully
inadequate) through programmes like Export
Development and Investment Fund (EDIF) for
export
Question: What could be the implications?
2/27/2021 Lecture Notes of Prof. Adelaide Kastner 29
 Critique
It would indeed be academically erroneous to
assume the universal applicability of Porter’s
models. For e.g.:
• Substantial modifications were required to
explain Canada’s foreign-owned firms and
institutional arrangements, such as the
Canada-U.S. Free Trade Agreement.
• A “double diamond” framework had much
greater explanatory power in a New Zealand
context than Porter’s home country diamond
model (Rugman and D’Cruz).
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 Critique (Contd)
• Porter’s six-factor model was extended
into a nine-factor model to explain
Japanese foreign direct investment (FDI)
in Korea (Rugman and D’Cruz).
• Kastner (2003), has also modified
Porter’s six- faceted diamond into an
“eight-faceted diamond” to analyse the
Ghanaian macro-environment (Figure 4).

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Figure 4: The Eight-Faceted Diamond (Kastner, 2003)
FIRM STRATEGY,
Chance STRUCTURE, AND Culture
RIVALRY

FACTOR DEMAND
CONDITIONS CONDITIONS

Contract RELATED AND

enforcement Govern-
SUPPORTING
climate
2/27/2021 Lecture Notes of Prof. ment 32
INDUSTRIES Adelaide Kastner
 CONCLUSION

Environmental analysis can never

remove risk from business activities,
but it provides a means for
understanding the nature and extent
of the risks involved. Thus, imperative
to international business strategy-
making.
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