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International trade theory explains the pattern of international trade and the distribution of the gains from trade. Strategic advantage one business entity has over its rival entities within its competitive industry is called competitive advantage. Achieving competitive advantage strengthens and positions a business better within the business environment.
In this report, Logitech as a case study of international trade and competitive advantage fully discussed in form of answering study questions.
Logitech is a world leader in personal peripherals, driving innovation in PC navigation, Internet communications, digital music, home-entertainment control, gaming and wireless devices."
Key product lines
mice, trackballs, and keyboards
webcams, speakers, headsets, and headphones
interactive gaming devices
network music systems
advanced universal remote controls
1981 - established in Switzerland, opens Palo Alto office the following year
1982 - introduces its first computer mouse, the P4
1984 - secures first major OEM contract with HP
1985 - introduces the C7, which sells for under $100 and does not require a separate power supply
1986 - opens manufacturing center in Hsinchu, Taiwan, still a key center for worldwide operations and engineering
1987 - reaches an OEM agreement to manufacture mice for Macintosh computers sold in Europe
1988 - opens OEM sales, manufacturing and distribution hub in Cork, Ireland
1989 - wins OEM contract for IBM; introduces the Series 9 mouse, the first mouse designed to fit the natural curve of the human hand
1991-92 - introduces first cordless mouse, first digital still camera, and first mic/speaker combo
1994 - opens first fully-owned manufacturing facility in Suzhou, China, which now employs 4,000 people
1995 - introduces trackball technology; unveils first web camera and gaming joystick
1997 - listed on Nasdaq; unveils first USB mouse
2000 - introduces the first mouse with optical sensor to track movement
2001 - acquires Labtec, expanding its audio business; unveils first cordless optical mouse
2003 - surpasses $1 billion in annual revenue; ships its 500 millionth mouse
2005 - opens new facility in Suzhou, China
2006 - 130 new products introduced; 143 million products shipped worldwide
California - marketing, finance, and logistics (some R&D)
Switzerland - research and development (programming)
Ireland - design, mechanical engineering, sales support
Netherlands - European distribution
Taiwan - worldwide operations
Suzhou, China - manufacturing
more than 9000 employees
distribution in more than 100 countries
projected sales, $2.4 billion (11% OEM; 89% retail)
International Trade Theory
Brown (2005) defines comparative advantage means the comparison of relative price differences between nations to explain the pattern of trade. For example, compare the relative price of wheat in terms of cheese at home to the same relative price in the foreign economy in a hypothetical equilibrium with no trade (autarky) or with restricted trade. The country with the lower relative price of wheat is said to have a comparative advantage in wheat while the other country has, symmetrically, a comparative advantage in cheese. Buy low, sell high logic predicts that a country will export the good in which it has a comparative advantage.
Theory of Comparative Advantage
Free trade between international countries concept was structured and built by David Ricardo an economist. He stated that countries goes for trading with other countries would highly benefit from this trade as specialization as there in these countries.
In free trade there are no any tariffs or taxes on incoming or outgoing goods and services. Typically, countries tax incoming goods in an attempt to keep domestic producers competitive.
According this theory all trading partners even less efficient producers will benefit from specialization and free trade.
Porter's Diamond and Competitive Advantage
Due to globalization, most of organizations strategies were changed towards being international wise. Even if an organization does not plan to import or to export directly, management has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend.
Michael Porter introduced a model that allows analyzing why some nations are more competitive than others are, and why some industries within nations are more competitivethan others are, in his book The
Figure.1: Porter's Diamond model
Competitive Advantage of Nations. This model of determining factors of national advantage has become known as Porters Diamond. It suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale. This home base provides basic factors, which support or hinder organizations from building advantages in global competition. Porter distinguishes four determinants:
Firm strategy, structure and rivalry
Related and supporting industries
The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries. These factors can be grouped into human resources (qualification level, cost of labor, commitment etc.), material resources (natural resources, vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities, deregulation of labor markets, or liquidity of national stock markets.
These national factors often provide initial advantages, which are subsequently built upon. Each country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal.
This explains the existence of so-called low cost-countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the United States (well developed venture capital market). Porter points out that these factors are not necessarily nature-made or inherited. They may develop and change. Political initiatives, technological progress or socio-cultural changes, for instance, may shape national factor conditions. A good example is the discussion on the ethics of genetic engineering and cloning that will influence knowledge capital in this field in North America and Europe.
Home Demand Conditions
Describes the state of home demand for products and services produced in a country. Home demand conditions influence the shaping of particular factor conditions. They have impact on the pace and direction of innovation and product development. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets.
Porter states that a country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Normally, home markets have a much higher influence on an organization's ability to recognize customers' needs than foreign markets do.
Related and Supporting Industries
The existence or non-existence of internationally competitive supplying industries and supporting industries. One internationally successful industry may lead to advantages in other related or supporting industries. Competitive supplying industries will reinforce innovation and internationalization in industries at later stages in the value system. Besides suppliers, related industries are of importance. These are industries that can use and coordinate particular activities in the value chain together, or that are concerned with complementary products (e.g. hardware and software). A typical example is the shoe and leather industry in Italy. Italy is not only successful with shoes and leather, but with related products and services such as leather working machinery, design, etc.
Firm Strategy, Structure, and Rivalry
The conditions in a country that determine how companies are established are organized and are managed, and that determine the characteristics of domestic competition. Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently.
This will provide advantages and disadvantages for particular industries. Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and control. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies.
Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale.
Porters Diamond has been used in various ways. Organizations may use the model to identify the extent to which they can build on home-based advantages to create competitive advantage in relation to others on a global front.
On national level, governments can (and should) consider the policies that they should follow to establish national advantages, which enable industries in their country to develop a strong competitive position globally. According to Porter, governments can foster such advantages by ensuring high expectations of product performance, safety or environmental standards, or encouraging vertical co-operation between suppliers and buyers on a domestic level etc.
In a world without trade, what would happen to the costs that American consumers would have to pay for Logitech's products?
Explain how trade lowers the costs of making computer peripherals such as mice and keyboards.
Use the theory of comparative advantage to explain the way in which Logitech has configured its global operations. Why does the company manufacture in China and Taiwan, undertake basic R&D in California and Switzerland, design products in Ireland, and coordinate marketing and operations from California?
Who creates more value for Logitech, the 650 people it employs in Fremont and Switzerland, or the 4,000 employees at its Chinese factory? What are the implications of this observation for the argument that free trade is beneficial?
Why do you think the company decided to shift its corporate headquarters from Switzerland to Fremont?
To what extent can Porter's diamond help explain the choice of Taiwan as a major manufacturing site for Logitech?
Why do you think China is now a favored location for so much high technology manufacturing activity? How will China's increasing involvement in global trade help that country? How will it help the world's developed economies? What potential problems are associated with moving work to China?
The costs American consumers would have to pay for Logitech products would increase significantly in a world without trade. Â This is due to the face that production, assembly, resources, and sale of their products would all have to be conducted in the US. Â Logitech would no longer be able to rely on China for cheap labor and assembly, or Taiwan for efficient and cheap manufacturing. Â Therefore these increased expenses would require a rise in retail price for the consumer.
Trade helps in reduction of product prices due the following:
Components are procured from any part of the world where they can be produced or manufactured at the best cost. (Motorola plant in Malaysia makes the mouse's chip; Agilent Technologies supplies optical sensor).
The actual assembling/manufacturing is done at the place where is cab done most cost effectively. (Assembling is done in Taiwan and China)
The product reach the customers the most efficient way are taking the services of the most efficient logistics company. (Marketing from Fremont)
Comparative advantage, as proposed by Ricard, says that it is beneficial for nations to involve in trade even when there is absolute advantage for them to produce all the goods. So nations will invest a major portion of their resources to produce what they can produce with advantage. This theory is being applied to the case as follow:
China: It is cost effective to manufacture in China. China has a large population of semi-literate people who lives in semi-urban areas. It is important for the Chinese government to provide avenues for its people to earn their livelihood. Mass manufacturing is a good way of employing many people. Since there is abundance of semi-literature human resources in China it can manufacture products which need semi-skilled labor most efficiently. Thus Logitech uses China to manufacture mice.
Taiwan: Taiwan has invested in creating industrial parks. It is giving land in these parks at very nominal rates. It had developed a strong supply base for computer parts, it has well qualified people. Its local computer industry is also expanding. Taiwan has done all these with an objective of being a major player in the electronics components manufacturing. Logitech is taking advantage of the facilities developed.
California: California is located strategically due the Silicon Valley. Having an office in California provides an opportunity for any company to interact with the other companies. It also gives insights into the emerging technologies. These advantages make Logitech choose California as a center for R&D. Since California also houses many large corporation, it makes perfect business sense for Logitech to have their marketing operations here.
Switzerland: It is known for precision industry. The right talent is available here for developing the software for mice. Hence, Logitech is developing primary software in Switzerland.
Ireland: The design firm in Ireland is used by Logitech for ergonomics design. The Ergonomics Society of Ireland is very active in promoting the discovery and exchange of knowledge concerning the characteristics of human beings that are applicable to the design of systems and devices of all kinds.
Logitech make $8 for every mouse being sold. Let us assume that $3 of this is spent on R&D and software programming. The earning per employee writing the software are code is (3*100)/650 = 0.47 cent. The value added per employee in China is (3*100)/4000 = 0.075 cents. Hence, the value added by R&D people is greater.
Free trade is beneficial because, it is the free trade which is allowing Logitech to take advantage of the low cost manpower available in China. If free trade were not available, Logitech would be forced to manufacture its mice in US at much higher cost.
It helps Logitech to stay close to its customers. It can respond to the demands of the customers more promptly. Fremont is also the place where a lot of technological innovations are happening. Logitech being in the high-tech industry, continuous innovation is a key success factor for its business. Fremont is also an important in terms of managerial talent. All these reasons make it convenient for Logitech to move to Fremont.
Porter's diamond considers four important attributes which will create an environment helps the domestic industry. The four attributes can be applied to Taiwan becoming a manufacturing hub for electronics goods as shown below:
Pool of resources: Taiwan has well qualified people for manufacturing electronic goods. It has good infrastructure and transportation facility.
Demand conditions: There is demand throughout the world for electronic products produced in Taiwan. All major global companies source their electronic components from Taiwan.
Relating and supporting industries: Taiwan has a well-developed supply base for parts and rapidly expanding local computer industry.
Firm Strategy, structure and rivalry: there is competition and rivalry among local companies which help in better efficiency.
In addition, government role: The government has created Science-based industrial parks through which they encourage companies to invest in Taiwan. Land is given at very subsidize rates in these parks.
All the factors, in Porter's diamond are at play in China very efficiently. It has huge human resources, land, water and other natural resources. It has good infrastructure for transportation, ports, and communication. It has created special zones for promoting exports, thus ensuring a good demand for the goods they manufacture. The rivalry among the domestic firms is also very strong. Government supports export oriented firms through funds. The cost of labor is very low. Technical human skills are available. These factors make China a favored location for high-technology manufacturing.
China's increase in global trade will ensure that investment flows into China for manufacturing. Its balance of payment position will become very strong. It can use the trade a lever for political mileage. As more investment happens it will help China to reap the advantages of economics of scale. It can provide better living conditions for its citizen. It will also generate funds for planned investment.
The world's developed economics will be able to take advantage of the low cost manufacturing available in China. The global companies can improve the efficiency of their supply chain be manufacturing in China.
The following are the potential problems associated with moving to work in China:
The political changes, when they happen, can lead to disruption of work.
Decision making at the government level is opaque, which can cause problems if unfavorable decisions are taken.
When there is trouble in the political relationship between the home country and China; the companies may lose an opportunity to develop an alternate to China as a manufacturing hub.
It is obviously clear to any one that Logitech has strongly satisfied Porters' diamond attributes by ensuring resources (China and Taiwan), go with Demand (Taiwan), Firm Strategy, structure and rivalry (California, Swaziland and Fremont) and keep involve in what is up-to-date (Taiwan, Switzerland, California and Fremont). By achieving this, Logitech is considered one of aggressive competitors all over the world with high competitive advantage using innovation as a key tool.