Every company should do its analysis of competency in international environment whether it is indulged into international business or not because it helps to identify new trends in global context. Even if the company is operating from home but it is influenced by other organizations which are operating globally. The study attempts to lighten few important models used by companies to get competitive advantage in international business environment like International Product Life Cycle, Porter’s Diamond Model and concept of first Mover Advantage Theory proposed by Paul Krugman. It explores strengths and weaknesses of these models and theories to give better understanding of the same.
International product life cycle concept is significant concept in international business environment. It includes social, political, economical, legal, technological and other aspects of different sovereign countries. A model of international pattern of organizations was published in 1966 which also conceptualized International Product Life Cycle Model (IPLC) to advance the existing trade theory (Belussi and Sedita, 2009).
New product: When a company introduces new and innovative product belonging to developed country to exploit technological breakthrough, it starts its International Product Life Cycle. Reason for introducing the product in home country first is to experience more benefits because of high income and living standards of customers in developed country are high. Companies look to develop new products and sell them in their home countries first to minimize risk and uncertainty (Doh, 2005). For example Sony Corporation will launch its new high tech phone in its home country first because it will have sufficient knowledge of the market and legal and political situation in particular country. Moreover, people in developed country appreciate innovation and can spend more. At the end of life cycle, Sony can introduce and produce it in other countries too. It can start exporting mobile phones to other industrial countries to increase revenue.
Maturing product: Once the export orders are received, company will receive extra benefits of going global. Political situations of importing countries forces Sony to go for FDI (Foreign Direct Investment) which will help to set up production plant of the company in other advanced countries for having high income level (Meckl and Schramm, 2005). Companies will witness further expansion in other countries and low cost of product because of availability of cheap labor. Thus competition in local market will turn to global level. Here, Sony will get higher profits because of offshore production facilities and once the product gets successful in other countries, the company will start getting orders from under developed countries that have lower income.
Standardized product: This product comes under stage of standardized product when inventing country faces change in technology and entry of competitors. In the home country, Sony will adopt the strategy of standardizing process of production to achieve low operating cost rather than introducing new features in the product. Companies standardize process by replacing labor resources with capital. As an MNC company will internally maximize offshore production to low wage countries. And slowly the sales of the product start diminishing at the end of this stage because the original supplier no longer produces competitively as new competitors come into the market and imitate the idea and product of innovator (Chen, 2008).
Here, in this above figure impact of international product life cycle is stated on production and consumption on innovator and on other advanced and less developed countries. International marketing theory explains the dynamics between production and consumption between countries over IPLC’s three stages. The Norwegian framed salmon can be taken as an example to understand its impact. Firstly Norway started its production in home countries and in some other advanced countries of Europe. When consumption of salmon was successfully penetrated in these markets, it targeted few other advanced markets such as Japan, US, Canada etc. With the expansion, it lost its business in these markets and managed to penetrate some low income Asian countries. The example explains the production and consumption differences in these stages and states advantages of low labor rates and production cost while operating globally (Intarakumnerd and et. al., 2011).
This theory helps those companies who want to expand their business at global level by providing insights of concept of International Product Life Cycle so that they can better plan and manage the product at various stages. It also explores the impacts of competitive playground at international level but major weakness of this theory was that, it assumed integrated firm who were producing in one nation but now situations have changed, firms are operating in more than one country which makes organizational structure highly complex.
New product is not the matter of chance. Company identifies markets and develops products according to the demand. It gives clear idea about product development especially to developed countries with high income level. Underdeveloped and undeveloped countries, who are having lower per capita income, will continue with existing products. However late studies in 1970 have shown that income level also varies for a particular country over a period of time; thus the definition of country's income changes according to economic conditions. For example- Europe’s income level after recent recession has significantly declined and conditions may get worse in future too (Belussi and Sedita, 2009).
IPLC theory is widely adopted by entrepreneurs operating in more than one country. Because theorists were able to justify use of terminologies such as advanced and high income level countries. They also revealed logic behind using these terminologies (Keller and et. al., 2011). Additionally theory stated the idea of replacement of labor with capital which proved illusionary assumption later on because of further discussions on labor intensity and standardization of unit cost.
It was also validated and supported by empirical evidences which suggested its wider acceptability and applicability that could satisfy universal needs, although model could not justify and evident sequential order of International Product Life Cycle (Doh, 2005). Raymond Vernon in his study inferred the pros and corns of International Product Life Cycle Model presented by him and he stated that this theory is based on income level of the countries but in contemporary situation income is not whole and sole criteria of global business as various basis of segmentation have been identified (Chen, 2008).
In 1980 Paul Krugman propounded New Trade Theory which suggested the crucial factors while examining the international dynamics of trade these were -economies of scale and networks. He focused on increasing returns through economies of scale and creating the situation of imperfect competition by differentiating products from competitors. Trade model of Krugman emphasizes on competitive advantages by first mover advantage. Krugman suggested that companies competing in international environment can do so by trading with different countries. He noticed considerable intra-industry trade and large amount of trade in similar economies (Checkel, 2006). The main assumption of the model was that two identical economies (Home) H and (Foreign) F can be beneficial for each other in terms of technology and objectives; and consumer preferences were named as homothetic and identical across the countries. In this theory Paul Krugman suggested that countries specialize in production in some cases due to economies of scale, first mover advantage and experience in the industry reflected by learning effects.
Airbus and Boeing are two dominating commercial aerospace companies specialized their business and gained competitive advantage by creating situation of imperfect competition. Boeing spends $5 billion to manufacture its Boeing 777. If we assume fixed cost for the company is $50 million and variable cost is $80 million then it will make 500 aircrafts in $90 million. This is how it gets advantage from economies of scale (D'aveni, 2010).
First Mover Advantage (FMA) can be referred as technological leadership. The company capturing new markets first time, introducing new technological features in the market will take FMA. There are many sources of taking first mover advantage like government relations, marketing productivity, marketing resources and experience gained over the years. National and local government influences emerging markets significantly. Government can provide limited number of licenses for permit restrict MNC’s to capture/penetrate emerging markets however by maintaining good relations with government of other countries as well, they can get first entrants which would help them to get first mover advantage. The below diagram states benefits of FMA, which is helping in achieving sustainable profitability to MNCs. It presents the idea of locking up the early adopters. For example, Samsung has introduced first time android from its phones in European markets which have given competitive advantage due to technological leadership (Jain. and et. al., 2011).
Entry timing also gives firms first mover advantage therefore deciding the time of entry is crucial decision taken by the firms. The model has several advantages and disadvantages attached to it, which are critically analyzed.
Krugman’s New Trade Theory propounded concept of FMA, which can give companies above-average returns because innovator comes up with new idea. When early adopters buy the product, competitors mere see market response and Innovator Company gets higher profits, however it is also short term profit because soon rivals assess the market opportunities to give strong competition (Tuppura and et. al., 2008).
Companies can achieve customer loyalty as Harley- Davison has achieved in large motorcycle business but at the same time certain disadvantages are also affecting the applicability of theory i.e. higher risk in international markets with demand uncertainty.
First mover theory helps international companies to identify new markets and consequences of starting business first but many times the theory has failed as second movers have rectified the mistakes of first mover and have learnt to operate better. Although this strategy might witness loss of initial market share but it can help in covering early loss by improved understandings on market response.
The theory shows that every country can get competitive advantages and advanced technology that could help the companies to produce goods and services at cheap cost by maximizing production activities (Rieck, 2005). In actual situation every economy and country has different economic situation and it is not possible for every country to specialize in all processes because of scare resources whether financial or labor. Krugman got strength over old trade theories by adding competitive advantage into his model. He also assumed that companies which are identical will help each other.
By FMA theory, enterprises looking for better opportunity can identify new markets and get increased market share. Organizations collect information about new markets and target emerging markets, but most of the time no such market potentiality is found and finally they book losses. If actually such untargeted market will exist then every company will try to start operating there (Jain. and et. al., 2011).
The study by Krugman highlighted the benefits of getting competitive advantages but in actual, it is too expensive to be first. As it costs for making customer aware, convince them and teach them how to use the product in case of new product development. It was also argued by commentators that version 2 is always good than version 1 (Priem, 2007). Therefore fast followers enjoy benefits of free integrative learning that happens when first mover faces problems.
Theory also explained other benefits like control over resources. To understand this we can take example of McDonald’s who enters into the new market first by choosing best location therefore its operation provide it better control over resources by moving first. But it will also get disadvantages of locking- in happens in product platforms, branding and pricing strategies and strengths of FMA is also subject to imitations of this theory. There are many barriers of entry in international business especially for small companies thus it is hard to capture (Checkel, 2006).
Porter’s Diamond Model is a proactive version of economic theory which explains competitive advantage of some countries because of certain situations and conditions of their standing in the world (Husted and de Jesus, 2006). It is improved model of traditional economical models and theories, as traditional theories were based on mere few determinants of gaining competitive advantages by company while operating globally such as land resources, location, and labor and population distribution of the country (Hussey, 2007). But Diamond Model has included other factors based on proactive approach. Major factors are presented in below diagram.
Porter distinguished four determinants, factor conditions, firm strategy, structure and rivalry, demand conditions and related and supporting industries. A company should consider in global context. Michael Porter proposed this model to analyze why some countries are more competitive than others. The model is useful in identifying these advantages which further is known as Porter’s Diamond Model (Edwards and et. al., 2009).
Factor condition refers the condition of factors of production of a particular country like labor resources, knowledge resources, infrastructure conditions, geographical location of the country in the world, capital efficiency of resources, material resources etc. These factors identify why some countries are cost effective and some are agriculture oriented (Huggins and Izushi, 2011). More optimal situation of country for a business would help to gain competitive advantage. He also suggested that these resources and factors of production are not necessarily natural or inherited but can be acquired and changed, even these can be developed. There are many factors that can change factor conditions of a nation like technological advancement, change in political and economical situations and cultural changes (D'Aveni and et. al., 2010).
Demand conditions explain the local demand for products and services in a country. According to Porter, home demand can be examined by three characteristics, mixture of customer needs, potential for growth and mechanism of transmitting local market preferences. A country can get advantages if its demand conditions give clear picture about trends and future scope in the industry. Briefly this determinant identifies number of customers for and industry product and level of complexity in their demands (Geva, 2008).
The third element of diamond model is quality of supporting industries. It assess quality of suppliers, as for maintaining global leadership position in world, a country should have world class suppliers to become competent in international market. Related and supportive suppliers should also available in the country to make an international image in reference to an industry or segment. The typical example of related and supportive industry is Italy which is leader in shoe and leather industry as a core product and also supportive industries like shoe making machines and designing (Albers and Brewer, 2003). Any country which has specialization in an industry and have good quality of suppliers in adhering industry too will get help to go global effectively. The country will be considered as more competent to start its business. Different countries may have different industry product specialization based on their market situations (Porter, 2008).
Company’s strategy, structure and competitive situations help to identify how nations’ businesses are created, organized and managed. Companies are shaped on the basis of management structures, strategy and working morale. Taking companies of a nation and assessing their strategies of marketing, management and operations will help to identify a general strategy and also structure of companies prevailing to a country (Geva, 2008). Porter discussed that by identifying domestic rivalry and search of competitive advantage by assessing the overall management structure will help countries to approach good strategy at global level.
This model has the factor of generalization thus organizations use this model in various ways. It provides advantages in two dimensions, first in providing the base for improving home based situations in competitions and give competitive advantage in global context. Companies seeking to expand their business internationally will use this model to understand the present situation of the country on a global scale and frame plan for segmenting global market.
The model was based on supportive theories and examples that have helped in easy understanding of implications of model. It helps in identifying strategic location and diverse ecosystems but the world is drastically changing and situations are not same all the time. Therefore it cannot lead to generalization and not applicable for all the companies (Zack and et. al., 2009).
The Porter assumed that the world is comparable. By comparing companies, industries competitive state of same can be assessed but in real scenario factors of production such as labor, capital cannot be compared (Flanagan and et. al., 2007). Even in different situations these might not measurable. Moreover, Porter also included knowledge factor as a resource in his study which can give proper understanding of factor situation of a country. However contrary to this, knowledge factor cannot be measured; thus the assumption lacks creditability.
This model is useful to countries and companies to plan international marketing strategy and it will also helps in taking decision of going global but it is based on the study of domestic factors and situation therefore international situations cannot be examined. There are various internal and external factors affect performance of companies. Porter’s model did not consider dynamic changing situations of economies of world (Hussey, 2007).
Competitive advantage can be gained by the countries by understanding their standing in world but Porter considered only few countries to be competent enough to start business in international market. But in this world of globalization the situation is changing, thus every company can make strategy to compete in global market. Liberalization and FDI policies also impacts international business environment situations (Edwards and et. al., 2009).
The present study examined applicability of Porter’s five forces model and International Product Life Cycle concept. It also identified strengths and weaknesses of First Mover Advantage theory of Krugman. It was identified that all these models and theories are useful in international business environment instead of having several limitations.