Advanced countries, which have the capability to innovate, as well as high-income levels and mass consumption, will sell the item first to its domestic market, then will become initial exporters of goods to other technically advance countries. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. The advanced country loses their exports initially to developing countries (who will import and later manufacture these goods) and subsequently to less developed countries.
Eventually, the original advanced country (original innovator) will become importers of these goods because they will have begun producing other new products. The duration of each stage of the cycle varies with the product and the type of management supporting it. Understanding the product life-cycle stages allows a company to fully take advantage of market opportunities by either establishing or protecting a competitive advantage through a long-lasting market presence. The main usiness reason for extending the product life-cycle would be to increase sales through longer existence in the marketplace. Certain consumers will embrace a product at different stages of the product life cycle so by extending each stage of the cycle, there is a better chance of exposure to the targeted consumer group. A commonly used example of this is the invention, growth and production of the personal computer. Stage one is considered the new product stage and this is where domestic production essentially begins.
After a period of research and development, a new product is introduced to meet local (or national) needs. The product is created, produced and consumed in the domestic market and virtually no trade takes place. During the introduction phase, the innovating company does not know the extent to which a profitable market exists. For instance in the late 1970’s and into the early 1980’s, during the early stages of the personal computer, IBM and Apple pc’s were produced in the US and aimed for office and small business use.
Personal computer use spread quickly throughout the domestic market as more and more households made purchases for increased personal productivity and gaming purposes. In stage two, the maturing product stage, domestic production peaks as the demand for the product significantly increases since the consumer base begins to acknowledge the product value. This stage is signified by a period of growth as sales and a rise in profits as mass-production techniques are developed and foreign demand expands (developed countries).
At this stage the product is now exported to other developed countries and both domestic and foreign competitors emerge. A copy product is produced elsewhere and introduced in the home country (and elsewhere) to capture growth in the home market. Based on production costs, manufacturing moves to other countries. As was the case with Apple PC’s, production in this stage moved out of the original facility and into manufacturing plants in California and Texas as well as distribution warehouses in both the US and the Netherlands.
Stage three is the standardized product stage. This is when the market for the product stabilizes and domestic production declines. The product becomes more of a article of trade and companies are compelled to reduce manufacturing costs which is the main reason for moving production sites to countries with lower labor costs. As production moves to developing countries, in turn, they begin to export the product to developed countries. A product saturation phase is experienced as sales level off and the first signs of decline occur.
In the personal computer industry, the US market low-priced brand-name imports from producers such as South Korea’s Hyundai and Samsung. Several Taiwanese manufacturers exported millions of personal computers both to the US and other countries, a large portion which are produced for foreign distributors. To contest this, Apple condensed their product line, expanded use of industry standard parts, outsourced component manufacturing and streamlined warehousing operations. There is a final stage of decline in which poorer countries constitute the only markets for the product and import competition is very strong.
At this point, almost all declining products are produced in less developed countries. The PC is not necessarily a good example of decline, for one because there is a weak demand for computers in less developed countries, but rather an example of technology that is ever improving which would make earlier versions of computers and related software obsolete. Normally, a product may finally disappear from the market at this point, however, PC technology continue to improve. There is no threat of the PC disappearing, but certain versions will eventually become dinosaurs. . Explain Porter’s Diamond in terms of Nokia’s development as an international mobile telecom powerhouse. Michael Porter’s “theory of national competitive advantage” framework was the product of a study of patterns of comparative advantage among industrialized nations and looked at sources of competitive advantage from a national context. The diamond-shaped theory can be used to evaluate both a firms’ ability to function in a national market as well as a national markets’ ability to compete internationally.
Porter’s theory of international trade comes from the interaction of four country- and firm-specific elements: 1. Factor conditions – this is a country’s legacy of production factors that affect its ability to compete on an international level such as human resources, physical resources, knowledge resources, etc. Porter looks beyond the most basic factors of land, labor and capital to include the educational level of the workforce and the quality of the country’s infrastructure. 2. Demand conditions – demand in the home market helps the company to establish a competitive advantage.
A highly developed domestic market will pressure a firm to innovate faster and to create more advanced products than those of competitors. When the domestic market for a particular product is larger locally than in foreign markets, the “home” firm will devote more attention to that product which leads to a competitive advantage when exporting begins. 3. Related and supporting industries – these related and supporting industries provide cost-effective inputs and participate in the process of upgrading which serves to stimulate other companies in the chain to innovate.
When local supporting industries are competitive, the “home” firm experiences more cost-effectiveness and innovation. This effect is reinforced when the supporting industries (suppliers) are strong competitors as well. 4. Firm strategy, structure and rivalry – the way in which companies are created and managed are important for success. The presence of rivalry in the domestic market is important because it creates pressure to continually innovate in order to promote competitiveness.
Other conditions that affect the diamond theory are: – Government – obviously the government can influence the supply conditions of key productions factors, the demand conditions in the domestic market and the competition between domestic firms. The government can also intervene on several different levels (local, regional, national, international). -Chance – clearly, chance events will occur that are outside the control of the domestic firm. Chance is important because it can create or disrupt competitive positions.
Porter’s Diamond in terms of Nokia Factor conditions: -Finland is one of the world’s most homogenous and stable societies as well as having very sophisticated consumers; -As a country, Finland has invested money into a strong educational system which gives them an excellent educational system with which to provide the necessary work force; -Finland has a uniform, market-oriented government; Nokia, with close ties to national government, has helped propel technology, legal issues and export opportunities.
Finland as a whole has a national competitive strategy; -Substantial public investment in telecommunications-related R&D which focuses on wireless technology; -Finland has a tradition of innovative engineering and telecom industry -Due to harsh physical and natural conditions, options for a land-based wired system was a very expensive option, making wireless digital systems a relative bargain for the same price; -Most of the population speaks English; -Finland was an early adopters of the internet and other wireless activities.
Demand conditions: – As mentioned in the Factor Conditions, a sparsely populated area supports adoption of wireless devices; -The weather and physical supports mobile phone over face-to-face conversations; -Nationally, a heavy usage of texting and other wireless message services; -Finland a test market for wireless applications; -Nordic Mobile Telephone created the world’s largest single mobile market. Related and Supporting industries: – Huge R&D spending by government and companies; Finland, as a whole, offers strong venture capital, and a strong manufacturer network; -Due to the nature and need of wireless communication, there is a high number of specialized companies due to fragmented market; -There are approximately 3,000 Finnish firms in telecom and IT related products and services; -There is a large local supply allowing for highly customized contributions Firm strategy, structure and rivalry: – Significant historic reasons for highly competitive landscape within Finland; -A very strong export-centered commerce experience; Sturdy network and links between companies, banks and governments; -The Regional Development Agencies Act favors intense rivalry; -History of competition in telecommunications services throughout the 20th century; -Finland was early to deregulate in telecom-related industries; -A high number of telecom firms create an active local rivalry in wireless communications; -There is no monopoly on any of the value chain parts of telecom and a very healthy competition between companies; -European consumer demand (roaming, etc. ; Finland has been a part of the European Common Market since 1995. Other conditions that affect the Diamond Theory: – Government oVery stable with a long-term view (low turn-over with 6-year terms); oStrong initiatives to improve national innovative capacity; oAssurance of technological neutrality; oOpen socialist economy; -Chance oConditions in Finland provided a unique medium for Nokia’s success. Creating, maintaining and updating land-based wired communication networks can be very slow and very expensive which made wireless digital systems seem a virtual bargain. . What is Absolute Advantage and how does Intel’s global position in mircoprocessors reflect this? Adam Smith developed the theory of absolute advantage which asserts that one party (a nation, a firm, etc. ) benefits from manufacturing more output than others since it is possess a unique resource or commodity. This particular resource or commodity can be a certain method, a distinct knowledge or manufacturing process that increases production efficiency, and thus reduces the relative need for additional resources.
The theory holds that different countries (or firms) produce some goods more efficiently than others based on those particular resources or commodities. Limitations to the theory exist if there multiple unique resources or commodities – once the hypothesis expands to include multiple unique resources, the absolute would turn to a comparative advantage. Generally, in international trade, countries export goods/services when they have an absolute advantage in that product area and will import goods/services when another country (or firm) has the absolute advantage.
Intel and Dell had a unique relationship in this regard – Intel had set the industry bar in terms of microprocessors and Dell, using Intel exclusively, became one of the strongest PC manufacturers in the world based on their distinctive marketing tool of “custom-made” computers. Both firms benefited from this relationship as they both had an absolute advantage on the items they produced. Further, according to the theory, if a country (or firm) has no absolute advantage in any product or service, no trade will occur.
For instance, if both Intel and Dell manufactured microprocessors and PC hardware, no trade would exist between them – they would be direct competitors since no benefit would exist to either of them. A competitive advantage occurs when a firm acquires or develops a product or feature that allows it to outperform its competitors. To gain competitive advantage, the firm strategy is to manipulate that unique resource or commodity over which it has a direct advantage which gives them the ability to generate a competitive advantage.
Superior performance outcomes and superiority in production resources reflects competitive advantage, and in doing so, gives a firm absolute advantage over an industry (or product). In the case of Intel’s global position in microprocessors, their strategy has been to continually introduce cutting-edge technology which ultimately means that consumers pay for the research and development of the speeds of new chips. It is a cyclical process, which demands more research and development of even faster, smaller products. The company does this to constantly renew consumer need which helps keep margins high.
This business model of Intel’s can be compared to the auto industry’s “planned obsolescence. ” The introduction of new models means the previous model is not as good, or new, anymore. As such, consumers feel compelled to purchase the newest, latest, greatest product. The trends are pushed by more powerful applications, which in turn create the need for new stronger, faster microprocessors and other new generations of computer products. Here are some of the contributing factors in Intel’s absolute advantage in the microprocessing industry: 1.
Distinct ability to draw a prevailing share of the market’s attention – Intel benefited from a very exclusive and significant relationship with Dell (“Intel Inside”) until May 2006. With Dell being a major player in the computer hardware market, they offered “custom-made” computers with an exclusive agreement to offer only Intel processors inside. 2. Capability to impose innovative obstacles which created more labor for any competition – Not only did competitors already struggled to meet specs for the industry standards, they also experience issues keeping up with Intel’s production speed and product features. 3.
Drive costs down and keep profits up – Intel was able to make its partners (and consumers) pay for this with an average selling price of over $150 a unit. PC makers had to accept this because at the time, Intel was only choice. 4. Strong reputation as the “reliable” standard – PC makers and consumers had not reason to look for alternative processors based on Intel’s innovation combined with the lack of reliable parts produced by competitors. 5. Economy of scale – Because the per unit cost of manufacturing depends on the size of the firm’s output, the larger the firm, the greater the scale of manufacturing benefits.
Due to Intel’s economy of scale in the microprocessing industry, they could potentially monopolize the industry. Based on Intel’s strengths mentioned above as industry leaders (#2) as well as their ability to drive costs down while keeping profits up, Intel was untouchable and could manage to win any price war brought on by the competition. The Intel quality was also so high that the unreliable chips made by the competition almost, until recently, didn’t even create much of a price war since there wasn’t another game in town. 4. Explain Comparative Advantage?
Then describe the development of India’s software industry and how it reflects one theory of competitive advantage. Comparative advantage theory is an international trade theory attributed to David Ricardo that indicates that firms or nations trade because they have superior productivity in a particular industry and can produce that particular good or service at lower marginal and opportunity costs than another party. In simple terms, this theory explains how trade can create value for two parties even if one party can produce all goods with fewer resources than the other.
The thought being that each country can gain by specializing in the goods/services where it experiences this cost/efficiency advantage and trade that good/service for another where they do not posses the same advantage. Governments may attempt to counter comparative advantage by raising trade barriers, imposing high tariffs, and allowing newer and relatively uncompetitive industries ample time to become established. Comparative advantage is an appropriate theory to explain why particular countries export more services that support the global supply chain of both multinational enterprises and domestic firms.
The source of a nation’s comparative advantage evolves from the mixture of its own factors of production such as availability of workforce, labor skills, access to capital, land and technology. For example, India is an excellent example of a country that has developed a highly efficient and low-cost software industry. This industry supplies not only the creation of custom software, but also call centers for customer support and other information technology services.
The Indian software industry is composed of many subsidiaries of multinational corporations as well as independent companies. This question focuses on the rise of the software industry in India. As a relatively poor country, India in the past has not normally been thought of as a nation that is capable of building a major presence in a high-technology industry (e. g. , software). However, over the last decade or so, the Indian software industry has become an important force in the global software market.
Among others, the main factors that have boosted India into this position are their large number of well-educated, English-speaking work force, a strong national work ethic coupled with technical experts who are paid only a fraction of the salary (including overhead) earned by U. S. counterparts. Additionally, the low cost of international telecommunication networks further enhances the comparative advantage of an Indian location for outsourcing. India has a comparative advantage in those services that are tradeable such as business process outsourcing and programming services.
In looking at IBM’s outsourcing and how it utilizes both a US workforce and an outsourced Indian workforce, it is important to identify the relative strengths of each. For the mainly technical aspects of the job, IBM realizes cost savings by using the Indian workforce. Since programming wages are low in India and the average productivity of Indian programmers is somewhat comparable to the productivity of US programmers, then India can potentially enjoy a comparative advantage in programming. For those aspects of the job specializing in knowledge of a clients’ business, the US workforce is well-matched to do the job.
The complementary nature of these two separate workforces rose out of the need of IBM to compete in more than just one area in order to succeed. Utilizing the Indian workforces allows IBM to realize a cost savings that can be used in other areas of their business. India, on the other hand, benefits from the trade with IBM by realizing large employment in the country as well as a boost to the economy that will only help to continue developing the country. 5. Explain briefly the common patters of successful Japanese entry into global markets once dominated by US firms such as RCA, Xerox and GM.
In the business world, an initial direct attack of a competitor is usually most advantageous to the defending company since the attacking company usually ends up spending an exorbitant amount of resources without ever actually reaching its goals. This is a prime description of certain large companies such as General Electric, Xerox and RCA back to the 1970’s when all of them waged war against IBM in the computer market. All suffered very heavy monetary losses and as a result, did not engage further in the computer industry.
The gamble cost these companies devastating sums upward in the millions. A company’s objective is to make use of its resources in such a way that allows them to maximize the market share. Direct attacks don’t necessarily serve that purpose, but rather the indirect attack seems to be more successful. The successful market penetration by Japanese companies was facilitated by an indirect approach. As one example, Xerox was an established leader in the photocopier field and by the 70s ruled the copier market, controlling the majority of the market’s share.
However, within a decade, Japanese companies outwitted Xerox, and proceeded to follow suit in other industries (such as the auto industry) by launching indirect attacks on the smaller portion of the consumer base, and eventually swallowing up the entire market. The Japanese discovered that Xerox was marketing and supplying large copiers mainly to only large companies. That left millions of smaller companies using more local and less known supplies to meet their copying needs. These smaller companies couldn’t afford by purchase on the large scale of Xerox, nor did they have the physical space to store the industrial-size equipment.
Enter the Japanese market with companies focusing on this weakness and entering the market focusing on the needs of the smaller organizations. Because there was no immediate effect on sales, Xerox took no notice of the market competition. As soon as the Japanese companies gained traction in this market, by focusing on the need of smaller products, lower prices, simplified technology, and distribution through office-supply dealers, tactics began to change as the Japanese continued to build upon their consumer base. The product ranges broadened with superior technology and more product choices.
Towards the mid 80’s, the Japanese had made a considerable difference in the size of the market share, leaving Xerox behind and struggling. The Japanese business culture has seen significant success with a strategy of focusing in on an a smaller, overlooked, neglected, or emerging market segment and targeting in on the weaknesses of the competitor thereby gaining an advantage that affords a company the grip it needs to make gains in the market segment. Once that grip is found, the Japanese company consolidates their product’s position by mobilizing all resources and expanding into the rest of the market.