Chapter 2

1. Chapter 2 Business Competitive Environment

2. Costco • Founded in Seattle in 1983. • Merged with Price Company which had pioneered the • membership warehouse concept in 1976. • Operates a chain of membership warehouses that sell • high quality, nationally advertised brands and selected • private label merchandise. • This business is based on achieving high sales volumes • and rapid inventory turnover. • 32.8 million cardholders worldwide.

3. Costco Net Sales $31.6 Billion Membership Fees $543 Million Net Income $446 Million Profit Margin 1.4% Average Sales per Warehouse $101 Million Don Burdick, Senior Vice President, Information Systems

4. Costco Operates 349 warehouses in 32 states (251 locations). Nine Canadian provinces (59 locations). 19 warehouses in Mexico through a joint venture. The United Kingdom (11 locations). Korea (4 locations). Taiwan (3 locations) Japan (2 locations)

5. Chapter 2 Business Competitive Environment

6. Position Some Important Factors: 1. The definition of competitiveness. 2. The key elements of competitive advantage. 3. The role of the nation relative to companies that compete successfully on a global basis. 4. The role of government within a nation. While contemplating the idea that information technology might make a difference.

7. May you live in interesting times! Confucius

8. The future sure isn’t what it used to be! Pogo

9. Competitiveness is the Pivotal Issue in the 21st Century

10. Business Environment The global market will come to you, if you don’t go to it.

11. An Essential Roadmap How nations, companies and individuals can and must build wealth in a knowledge-based global economy. Breakthrough technologies in microelectronics, biotechnology, new materials, telecommunications, robotics, and computers have fundamentally changed the game of creating wealth. Relatively new industries are growing explosively and existing industries are being transformed.

12. The US is Back! • In the 1990s the US was the run away leading performer in the industrial world. • The US claimed nine of the ten largest companies in the world by 1998 compared to only two in 1990. • Nine of the fifteen most profitable banks are in the US compared to none in 1990. • The wealthiest man in the world is an American. • American billionaires measure in the hundreds. • US stock markets have reached new record heights. • Unemployment is at historical lows. • Inflation has been a non-issue.

13. Some Important Questions • Is the current, fairly unique US prosperity sustainable? • Is global integration a boon or a threat to this prosperity? • Will the forces that sparked the Asian meltdown provoke an • era of stagnation or worse? • Should global integration be slowed? • What rules should be applied to the creation and protection • of new ideas. • How can nations create a social system in which entrepreneurial • spirit can flourish without also creating income and wealth • inequities that threaten the system? • What skills are needed to succeed in this new economy?

14. Some More Questions! Are you personally ready? Do you really understand the significance of what is happening, the opportunities that it represents and how to evaluate the implications?

15. Global (International) Trade The US has truly become a global economy. 1950 - Global trade represented 10% of the US economy. 2000 - Global trade is nearly 25% of a much bigger economy.

16. Foreign Direct Investment Since 1985 foreign direct investment in the US has increased five-fold. Five percent of the total labor force works for companies that are wholly or partially foreign owned. Employees of companies that work for companies that export earn more than those that do not. Forty percent of productivity improvements are in exporting companies.

17. What Countries “Own”: • Finland • UK • Germany • France, Spain, UK, Germany • Italy • US • Netherlands • Nokia • Burger King • Chrysler • Airbus • Benetton • Gillette • Shell

18. A Complex Political Environment Three of five American registered voters approve of free trade. Most agree that imports give them a larger selection of goods to choose from and that foreign competition forces US companies to be more competitive. They also feel that imports help lower income families afford a higher standard of living by lowering prices. Concerns regarding the environment, human rights, jobs, taxes, societal problems and sovereignty.

19. Trade Issue Attitudes Attitudes lie along income, education, age and gender divides. Free trade proponents tend to be those that see themselves benefiting from globalization: men, those that are better educated, richer and live in cities. Those who question globalization include women, the elderly, those who are less well educated or poorer and those that live in rural areas.

20. How Trade Works General Agreement on Tariffs and Trade (GATT) A loose agreement that had a restricted scope and limited powers based on an agreement that was originally signed in the late 1940s. World Trade Organization (WTO) Created in 1995 the WTO has the job of administering trade agreements, resolving trade disputes and conducting future trade negotiations.

21. WTO WTO members must abide by the group’s rulings. The most important of which is to give every member the same set of low tariffs and other favorable trade rules.

22. Michael Porter Efforts/Contributions • 1985 - Presidential Commission and • Competitiveness Definition • 1987 - Competitive Model and Value Chain • 1990 - Competitiveness of Nations Study

23. Presidential Commission Letter to President Reagan Mr. President, it has been a great honor to serve you and the Nation. The competitive challenge calls for the leadership only you can provide. We thank you for your vision, interest and initiatives in making competitiveness a priority on our national agenda. John A. Young Chairman President’s Commission on Industrial Competitiveness

24. Competitiveness Definition The degree to which a nation can, under free and fair market conditions, produce goods and services that will meet the test of international markets while simultaneously maintaining or expanding the real income of its citizens. Source: President’s Commission on Industrial Competitiveness

25. Competitiveness: A Link to National Goals Decreased Budget Deficit Stronger National Security Human Resources Trade Policy Improved Domestic Performance Increased World Market Competitiveness More and Better Jobs Capital Reduced Trade Deficit Increased Standard of Living New Competition Technology Figure 2-1

26. Presidential Commission Recommendations: 1. Create, apply and protect technology. 2. Spur new industries and revive old ones. 3. Pursue productivity gains through technology. 4. Reduce the cost of capital to American industry. Increase the supply of capital available for investment, reduce its cost and improve its ability to flow freely to its most productive uses.

27. Who is going to make it happen? 1. Government cannot legislate competitive success.2. Government should highlight the importance of competitiveness.3. Everyone must recognize the competitive challenge and its significance.

28. How Does a Company Compete? If the bottom line to a business is profit, then the top line is value to customer.

29. The Best Alternative Strategy? To produce quality products and services through effective leadership of skilled employees using advanced methods through the innovative use of technology.

30. A Good Competitor: 1. Knows its products and services.2. Knows its customers.3. Knows its competitors.

31. Competitiveness of Nations The striking internationalization of competition in the decades after World War II has been accompanied by major shifts in the economic fortunes of nations and their firms. 1. How did this happen? 2. What can one learn from this? 3. What can companies and countries do about it?

32. Competitiveness of Nations Why (how) are companies in a particular nation able to gain a dominant competitive position in a specific industry against the world’s best competitors?

33. Competitiveness of Nations The point of all of this: • Helps to anticipate from what country future competition is likely to come from? • Helps to understand as least in basic terms what types of companies will be primary competitors? • Could help to anticipate what could be their primary competitive strategies?

34. Organizations Compete Within Industries What is the role of the nation? • How Measure Success? • Basis of Analysis?

35. Previous Basis of Competitive Analysis • Porter Companies and Industries • Economists Unit Cost of Labor Adjusted • for Inflation • Politicians Balance of Payment • Companies The Right Strategies to • Compete in Global Markets

36. To Understand Competition • The industry was the basic unit of • analysis. • Industries are organizations that • directly compete with each other. • Some industries are well-defined, • while others are not.

37. A Major Message The role of the nation has increased as competition has shifted more to the creation and assimilation of knowledge.

38. Competitiveness of Nations Study • Denmark: Copenhagen School of Economics • Germany: Deutsche Bank • Italy: Ambrosetti Group (transportation company) • Japan: MITI, Hitotsubashi University and Industrial Bank of Japan • Korea: Seoul National University • Singapore: Economic Development Board • Sweden: Institute of International Business, Stockholm School of Economics • Switzerland: University of Basel, University of St. Gallen, Union Bank of Switzerland • United Kingdom: The Economist • United States: Harvard Business School

39. Industry Case Studies Denmark Agriculture Machinery Building Maintenance Services Consultancy Engineering Dairy Products Food Additives Furniture Pharmaceuticals Specialty Electronics Telecommunications Equipment Waste Treatment Equipment Germany Automobiles Chemicals Cutlery Eyeglass Frames Harvesting/Threshing Combines Optical Instruments Packaging, Bottling Equipment Pens and Pencils Printing Presses Rubber, Plastic Working Machinery X-ray Equipment Italy Ceramic Tiles Dance Club and Theater Equipment Domestic Appliances Engineering/Construction Factory Automation Equipment Footwear Packaging and Filling Equipment Ski Boots Wool Fabrics Japan Air Conditioning Machinery Home Audio Equipment Car Audio Equipment Carbon Fibers Continuous Synthetic Weaves Facsimile Equipment Forklift Trucks Microwave and Satellite Communications Equip. Musical Instruments Optical Elements and Instruments Robotics Semiconductors Sewing Machines Shipbuilding Tires for Trucks and Buses Trucks Typewriters Videocassette Recorders Watches Korea Apparel Automobiles Construction Footwear Pianos Semiconductors Shipbuilding Steel Travel Goods Video and Audio Recording Tape Wigs Singapore Airlines Apparel Beverages Ship Repair Trading Sweden Car Carriers Communication Products Environment Control Equipment Heavy Trucks Mining Equipment Newsprint Refrigerated Shipping Rock Drills Semihard Wood Flooring Teller-operated Cash Dispensers Switzerland Banking Chocolate Confectionery Dyestuffs Fire Protection Equipment Freight Forwarding Hearing Aids Heating Controls Insurance Marine Engineers Paper Product Mfg. Equipment Pharmaceuticals Surveying Equipment Textile Machinery Trading Watches United States Advertising Agricultural Chemicals Commercial Aircraft Commercial Refrigeration and Air-Conditioning Computer Software Construction Equipment Detergents Engineering and Construction Motion Pictures Patient Monitoring Equipment Syringes Waste Management Services

40. The ways that firms achieve and sustain competitive advantage in global industries provide the necessary foundation for understanding the role of the home nation in the process.

41. Diamond of National Advantage Firm Strategy, Structure and Rivalry Chance Factor Conditions Demand Conditions Related and Supporting Industries Government

42. Competitive Success Is Not Determined By: • Natural Resources • Labor Pool • Interest Rates and Currency Value • Economies of Scale . . . Traditional Economic Thinking

43. Factor Conditions The nation’s position in factors of production that are prerequisites to compete in a specific industry. • Infrastructure • People Skills and Training • Factors Unique to a Specific Industry A nation does not inherit but creates the most important factors.

44. Factor Conditions • Physical Resources: • Abundance, quality, accessibility and cost of land, water, minerals, timber, hydroelectric power, etc. • Climatic conditions. • Location and geographic size. • Time zone re: global communication.

45. Factor Conditions • Infrastructure: Type, quality, and user cost. • Transportation • Communication • Mail/freight Delivery • Health Care • Schools • Housing Stock . . .Quality of life--to live and to work.

46. Factor Conditions Capital Resources: (Amount and cost of money) • Secured Debt • Unsecured Debt • Equity and Venture Capital • Savings Rate • Tax Incentives • Fiscal and Monetary Policies

47. Factor Conditions Knowledge Resources: Scientific, technical and market knowledge that pertains to goods and services. • Universities • Government Research Facilities • Private Research Facilities • Business and Scientific Literature • Market Research Databases • Trade Associations

48. Factor Conditions Human, knowledge and capital factors are mobile. Other elements of the diamond are more important to explain international success.

49. Factor Conditions The availability of factors is not enough to explain competitive success.

50. Factor Conditions Competitive advantage from factors depends on how effectively and efficiently they are mobilized by a company and deployed in the economy.