1. The Environment of Global Trade
• capital movements (not trade) are driving forces of
the world economy
• production is ‘uncoupled’ from employment e.g
security guards in India using webcams
• primary products have become uncoupled from
the industrial economy e.g steel from South
America into Europe
• the world economy is in control
• 75-year contrast between capitalism and socialism
is over

2. Barriers to Trade
• Tariff barriers - direct taxes on imports
• Bahamas has 30% on all goods
• Australia and US impose on cars and agricultural
goods e.g Japanese manufacture in Australia
• Average now 5% was 25% in1945
• Non-tariff Barriers
• Increased govt. participation, US wheat subsidy
• Customs entry procedures
• Quotas (quantitative restriction) US textile imports
from China

3. Forms of Market Agreement
• Free Trade Area - remove all tariffs
amongst members
• e.g NAFTA USA/Canada Mexico
• e.g EEA (European Economic Area) EU, EFTA and
LAFTA
• Customs Unions - as above but with
common external barriers
• e.g EC prior to 1993.

4. • Common Market - as above but also the
free flow of all factors of production
• e.g EU since 1993
• Economic Union -
• common market characteristics are combined with
the harmonisation of economic policy.
• Supranational authority to design policy for a group
of nations
• objective of Maastricht Treaty in 1991. EU was
formed in 1993.Monetary Union commenced in
1999. Now political union in 2000’s? More
convergence and less national autonomy?

5. Five forces analysis
Potential
entrants
Threat of
entrants
Suppliers COMPETITIVE Buyers
RIVALRY
Bargaining Bargaining
power power
Threat of
substitutes
Substitutes
Source: Adapted from M. E. Porter, Competitive Strategy, Free Press, 1980, p. 4. Copyright by The
Free Press, a division of Macmillan Publishing Co., Inc. Reproduced with permission.

6. Competitive Rivalry
• Entry is likely
• Substitutes threaten
• Buyers or suppliers exercise control
• Competitors are in balance
• There is slow market growth
• Global customers increase competition
• There are high fixed costs in an industry
• Markets are undifferentiated
• There are high exit barriers

7. Competitive Rivalry -
motor industry

8. Buyer power
• There is a concentration of buyers
• There are many small operators in the supplying
industry
• There are alternative sources of supply
• Components or materials are a high percentage of
cost to the buyer leading to “shopping around”
• Switching costs are low
• There is a threat of backward integration

9. Bargaining power of buyers -
Wal-Mart

10. Supplier power
• There is a concentration of suppliers
• Switching costs are high
• The supplier brand is powerful
• Integration forward by the supplier is possible
• Customers are fragmented and bargaining
power low

11. Bargaining power of suppliers -
Bill Gates - Microsoft

12. Threat of substitutes
Substitutes take different forms:
• Product substitution - Bt for Orange
• Substitution of need - international not
local calls (satellites not wires)
• Generic substitution - mobiles for land
based telephones
• Doing without - no communication

13. Threat of substitutes -
KFC China

14. The threat of entry
Dependent on barriers to entry such as:
• Economies of scale
• Capital requirements of entry
• Access to distribution channels
• Cost advantages independent of size (eg the
“experience curve”)
• Expected retaliation
• Legislation or government action
• Differentiation

15. New Entrants - Citibank

16. Citibank - ‘Firstmover’
• High brand recognition
• More positive brand image
• More customer loyalty
• More distribution
• Longer market experience

17. Country- Specific Advantages (CSAs)
• E.g low cost production of Volkswagens in
Portugal
• Comparative advantage - e.g France apples,
UK lamb
• International Product Cycle (IPC) -
Raymond Vernon 1966
• USA production shifted over time to new locations
• USA begins to export goods and technology
• Countries such as Korea then become low cost
producers and export back to USA

18. Porter’s Determinants of National Advantage
(1990)
Firm strategy,
structure,
and rivalry
Factory Demand
conditions conditions
Related and
supporting
industries

19. National Competitive Advantages
• Factor conditions e.g skilled labour,
infrastructure
• Demand conditions e.g. ‘home’ demand for
the product of service
• Related and supporting industries e.g raw
materials, components
• Firm strategy, structure and rivalry