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Shiv Endra. Anonymous EmZrcQ. The technology transfers which often accompany such investments provide a "second-best" solution by creating a dynamic facet for a nation's CSAs. Eventually, shifting CSAs will tend to favor the expansion of free trade. How can the firm's continued dominance of this highly competitive industry be explained given the concept of the international product cycle?
The "best" explanation is probably offered by Porter's National "Diamond" Theory which explains competitive advantage through the dynamic interaction of factor conditions, demand conditions, related or supporting industries, and firm strategy, structure, and rivalry. Typically, an innovator achieves dominance through superiority in such factors as labor or infrastructure. Over time, vigorous competition from rivals can strengthen the innovator and encourage growth and improvement among supplier firms. Sophisticated and demanding domestic customers will further sharpen competitive skills.
Porter's theory holds that an innovating firm can maintain dominance by emphasizing that factor in which it has the greatest current advantage while continually seeking to improve in all areas. By developing new skills and reviewing competitive advantages, a firm may remain competitive even as its manufacturing costs rise. This runs counter to the IPC in that a country can remain competitive if it renews itself and develops new skills. Which of these are more applicable to the present day economies of the world? Porter's diamond is a dynamic theory, showing how over time a nation can build up and sustain its competitive advantage in an industry.
Vernon's IPC on the other hand was used to demonstrate how the manufacturing of new products in the United States shifted over time to new locations overseas and in the process affected trade patterns. Porter's diamond implies that a country can remain competitive in an industry even as its manufacturing costs rise. Thus, the diamond goes counter to the original IPC theory. While the IPC explains the "hollowing out" of a nation's industrial base, with manufacturing moving to low-wage countries, Porter's diamond suggests that competitive rivalry and capable business management can help nations develop new skills and renew their competitive advantages.
While Vernon's IPC concludes that advanced nations will trade for standardized commodities and focus on innovation and new industries "get out of televisions, and focus on computers" , Porter's diamond shows how the creation of favorable conditions can make a nation stay competitive in a given industry for a long time "automobiles is what we do best".
Actually, in most economies of the world, both tendencies are at work simultaneously. New trade theory postulates that advanced technology centers are likely to arise around strong research universities and innovative new firms, local labor tends to develop skills required by those industries, and similar companies will be attracted by these advantages.
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Krugman pointed out that such conditions favored the appearance of a variety of firms capable of producing a variety of products. Over time, experience gained from diversification would tend to lead to specialization as each producer creates firm-specific advantages from learning by doing. The deliberate attempt to elevate this process to the stages of a strategy for the continual "rebirth" of the firm is at the height of the learning organizations ability to stay competitive.
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How do these concepts relate to the traditional emphasis upon customer orientation? According to the knowledge-based concept, a firm's true strength is founded upon the know-how, skills, and experiences of the company and its employees.
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The ability of the firm to survive and prosper depends upon its ability to learn--and change. This dynamic knowledge base is the primary asset of the firm. Accordingly, a resource-based strategy defines the firm in terms of what it can offer--what it is capable of--instead of current products, services, markets, or the needs it might like to address. Simply knowing the customer is not enough--traditional market orientation is only a start.
The firm must first know what its strengths are--then seek out those markets in which those strengths can be profitably employed for the benefit of both the firm and the customer. The firm has decided to expand its firm-specific advantages into the international arena. What problems are likely to be encountered? How can the firm meet these challenges?
Marketing based firm-specific advantages are often intangible in nature--and may not be easily transferred. America-First's brands may attract foreign customers who are seeking the quality of service it stands for.
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The firm must be certain that these foreign customers will not be disappointed. Local nationals, however, may not be as dedicated to the provision of such services as the firm's domestic employees. America-First should provide careful cultural preparation for domestic managers sent to foreign countries. Local nationals must be carefully selected and trained to ensure consistency of quality. The firm may opt for a franchising strategy to achieve this goal. How can the firm "match" its skills to potential foreign markets? Briefly describe the primary modes of entry available to the firm. Why would America-First be concerned with choosing between an externalization or internalization strategy?
America-first should carefully assess its firm-specific advantages to determine which markets it can best serve and evaluate country-specific advantages to determine from which countries this should be done. The firm may choose from pure exporting, licensing, or direct foreign investment as the primary vehicles through which their expertise may be "internalized" in foreign markets. In pure exporting, the product is simply transferred to a distributor appointed in the target country.
Licensing involves the use of contractual arrangements to transfer some ownership advantages to an enterprise in a foreign country. Foreign direct investment would require the firm to spend funds to create subsidiary firms in other nations. The use of licensing in an "externalization" strategy could dissipate the firm's advantages. America-First may retain more control under the "internalization" options of exportation or direct foreign investment.
How does this theory relate to FSAs, integration, and the choice between an internalization or externalization strategy? Transaction costs, the costs incurred in completing a transaction between a buyer and seller, are at the heart of marketing activities. If these "market-making" costs are too high, trade is prohibited.
In an effort to lower transaction costs to an acceptable level, firms employ specialists in those areas in which they lack experience or expertise. Over time, some firms develop firm-specific advantages in market-making activities which allow the company to practice forward or backward integration. Vertical integration is a form of internalization strategy which allows the firm to maximize both savings and control. An externalization strategy, as expressed in the use of agents, brokers, or other external specialists, allows cost savings--at the expense of control.
An internalized strategy surfaces as pure exporting or direct foreign investment in international trade. Licensing is a form of externalization that may be taken into foreign markets. How does this concept relate to other concepts discussed in the text? Following a strategy of industrial rationalization, a firm would seek to simplify the entire flow, from raw materials to ultimate consumer. Such an effort would require the firm to recognize the reality of hypercompetition and to engage in benchmarking across the competitive spectrum.
The resulting learning organization would seek to develop FSAs that can strengthen resource-based strategies that can expand, protect, and leverage its competitive strengths in all of its markets. It will expand its competitive repertoire, initiative integrated competitive moves, and enhance its ability to rely upon internalized strength to avoid the problems associated with the international product cycle.
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