According to an article published in the April 11th edition of Business Week Online, there is a general pessimism among U.S. consumers concerning the future of the economy despite moderate growth trends that imply economic stability for the remainder of 2007. Although unemployment is currently at 4.4% nationwide, a low since 2001, and 180,000 new jobs were created in March alone, the public still feels shaky about what the coming months will bring. Some obvious reasons for their uncertainty is the Iraq war and the continually changing price of oil. Just how pessimistic one is seems to be related to one’s annual income, namely the wealthy are the least pessimistic of all, while the poor hold the most doubts. (Coy, 2007)
The discrepancy between analytic forecasts and general public opinion should not be taken lightly. Consumer pessimism has the potential to become a self-fulfilling prophecy. Greater pessimism leads to less consumption because people are worried about what the future might bring so decide to save more, which lowers aggregate demand for goods and services. In turn, less demand means less revenue for firms, which will eventually lead to less job creation, and an overall downturn in the economy. In essence, what the public expects to happen, will indeed happen. Their expectations will become their reality due to the self-protective actions (ie less consumption) they take today. In fact, less consumption could cause a significant fall in GDP, as consumers make up roughly 70% of all U.S. GDP. (Coy, 2007) So despite a rather optimistic outlook among forecasters for 2007, public uncertainty and fears for the future may sway the economy downward in very real terms.
Source: Coy, Peter. “The Economy: Why So Gloomy?” Business Week Online. April 11, 2007. Reference URL: http://www.businessweek.com/investor/content/apr2007/pi20070411_639834.htm?
chan=top+news_top+news+index_businessweek+exclusives
Friday, March 30, 2007
Thursday, March 22, 2007
Go Ahead, Have a Cig Kiddo
Why should cigarette manufacturers be permitted complete freedom to target developing countries?
Like any other business, cigarette manufacturers should be able to pursue the objective of profit maximization as long as they fulfill their social obligations and are within the confines of the law (Robbins, 2005). Faced with tightening regulations in developed countries, it makes financial sense for cigarette companies to target their products to foreign consumers whose countries have less restrictive laws. It is the responsibility of national governments, not private enterprises, to concern themselves with the well-being of citizens. If a government decides that smoking has more negative effects on the nation than is tolerable, it will enact laws that will force cigarette companies to conduct business accordingly. Similarly, if consumers do not want to incur the health costs of smoking, they will not buy cigarettes, thereby limiting the profitability of cigarette companies and restricting their expansion. Both governments and consumers have the power to control the operations of cigarette companies, so regardless of which country is targeted, the amount of expansion into that country is always the responsibility of the country itself.
Like any other business, cigarette manufacturers should be able to pursue the objective of profit maximization as long as they fulfill their social obligations and are within the confines of the law (Robbins, 2005). Faced with tightening regulations in developed countries, it makes financial sense for cigarette companies to target their products to foreign consumers whose countries have less restrictive laws. It is the responsibility of national governments, not private enterprises, to concern themselves with the well-being of citizens. If a government decides that smoking has more negative effects on the nation than is tolerable, it will enact laws that will force cigarette companies to conduct business accordingly. Similarly, if consumers do not want to incur the health costs of smoking, they will not buy cigarettes, thereby limiting the profitability of cigarette companies and restricting their expansion. Both governments and consumers have the power to control the operations of cigarette companies, so regardless of which country is targeted, the amount of expansion into that country is always the responsibility of the country itself.
Thursday, March 15, 2007
Efficiency Wages Not So Efficient Anymore
The March 28th online edition of Business Week reports that electronics retailer Circuit City is planning to lower employee wages across the board as a way to reduce costs and boost profits. Faced with fierce competition from long-time rivals such as Best Buy, Circuit City is hoping the wage cuts, along with other structural changes, will allow them to stay ahead of other electronics retailers. (Business Week, 2007)
Previously employees at Circuit City were paid above market, or efficiency, wages. Voluntarily paying higher than average wages has its benefits. First, higher wages attract a better pool of employee candidates. Second, it reduces employee turnover because less people leave for other equitable-position jobs at competing companies. Less turnover leads to a well-trained and experienced sales staff, and eventually more sales. Finally, higher wages gives employees the impression that the company cares about them, which fosters company loyalty and a greater willingness to perform to the best of their abilities while on the job.
In fact, these benefits were taken into account during Circuit City’s decision making process. The retailer realized that the general composition of its sales force would change due to the pay cuts. One major drawback is that the competency of its sales staff will decrease as its best employees leave for higher paying jobs. Also, the time and effort needed to train new employees will undoubtedly have a negative impact on sales in the near future. Because of these changes, “Circuit City is expecting to have consolidated net sales growth of 8% during fiscal 2007, down from the 9% to 10% originally forecast.” (Business Week, 2007) This means that the estimated effect of efficiency wages is between 1-2% of Circuit City’s net sales.
Interestingly, Circuit City does not intend to hire more employees at lesser wages. Instead they will be rehiring the same amount of workers as before. Normally companies that pay above market wages hire fewer employees to keep costs at reasonable levels, leading to less demand but greater supply in the labor force since more people want the higher-paying jobs. Now that Circuit City is lowering its wages to the market equilibrium but keeping the number of employees constant, the demand is not changing, but the supply should decrease because less people will want to work at Circuit City under the new wage structure.
Source:
“Circuit City Cuts Wages to Juice Profits.” Business Week Online. March 28, 2007.
Reference URL: http://www.businessweek.com/investor/content/mar2007/pi20070328_712708.htm?
chan=top+news_top+news+index_investing
Previously employees at Circuit City were paid above market, or efficiency, wages. Voluntarily paying higher than average wages has its benefits. First, higher wages attract a better pool of employee candidates. Second, it reduces employee turnover because less people leave for other equitable-position jobs at competing companies. Less turnover leads to a well-trained and experienced sales staff, and eventually more sales. Finally, higher wages gives employees the impression that the company cares about them, which fosters company loyalty and a greater willingness to perform to the best of their abilities while on the job.
In fact, these benefits were taken into account during Circuit City’s decision making process. The retailer realized that the general composition of its sales force would change due to the pay cuts. One major drawback is that the competency of its sales staff will decrease as its best employees leave for higher paying jobs. Also, the time and effort needed to train new employees will undoubtedly have a negative impact on sales in the near future. Because of these changes, “Circuit City is expecting to have consolidated net sales growth of 8% during fiscal 2007, down from the 9% to 10% originally forecast.” (Business Week, 2007) This means that the estimated effect of efficiency wages is between 1-2% of Circuit City’s net sales.
Interestingly, Circuit City does not intend to hire more employees at lesser wages. Instead they will be rehiring the same amount of workers as before. Normally companies that pay above market wages hire fewer employees to keep costs at reasonable levels, leading to less demand but greater supply in the labor force since more people want the higher-paying jobs. Now that Circuit City is lowering its wages to the market equilibrium but keeping the number of employees constant, the demand is not changing, but the supply should decrease because less people will want to work at Circuit City under the new wage structure.
Source:
“Circuit City Cuts Wages to Juice Profits.” Business Week Online. March 28, 2007.
Reference URL: http://www.businessweek.com/investor/content/mar2007/pi20070328_712708.htm?
chan=top+news_top+news+index_investing
Saturday, March 10, 2007
Redressing Old Drugs for Profit
Drug patents are making headlines in the online version of CNN Money this week. Apparently major pharmaceutical companies are facing big losses this year due to the expiration of some of their leading drug patents, decreasing their monopolistic holds on the drugs and making room in the market for increased competition. As the cheaper generic versions of these drugs hit the shelves prices will undoubtedly fall, which means better deals for consumers, but large blows for major pharmaceuticals. In fact, the industry is projected to lose a total of $16 billion in revenue due to the increased competition caused by the loss of these patents. (Smith, 2007)
In an attempt to curb their losses, many companies are tweaking their drugs slightly, such as making time-released formulas, in the hopes of retaining some exclusive patent rights. (Smith, 2007) Now although this type of patent manipulation makes sense in terms of company revenue, what of the larger pharmaceutical goal of helping people live healthier lives? Privatizing pharmaceutical companies and making them for-profit inherently creates a tension between the societal benefits of medicine and the individual company desire to maximize gains. In this case the introduction of generic versions is something that everyone should ideally support. After all, lower prices means more of the drugs will get to more of the people who need them. On the other hand, no one can expect an industry to give up $16 billion without a fight.
So why doesn’t the government step in to right this potentially life-threatening market failure? Because if companies had no monetary (monopolistic patent) incentive to create new drugs, theoretically none would be created, and society would generally be worse off. Patents are designed to expire so that the full benefits to society of new drugs eventually prevail via generic versions and market competition. This allows for companies to profit substantially at the expense of society for a limited amount of time. In essence the patent system is a compromise between creative incentive and social welfare. However, as is evidenced by recent drug tweaking and patent law circumvention, this system may not work as well as intended.
Source:
Smith, Aaron. “Big Pharma teaches old drugs new tricks: Drugmakers hunt for new patents on old blockbusters to try and postpone the inevitable: generic competition.” CNN Money Online. March 21, 2007. Reference URL:
http://money.cnn.com/2007/03/21/news/companies/drug_patents/index.htm?postversion=
2007032115
In an attempt to curb their losses, many companies are tweaking their drugs slightly, such as making time-released formulas, in the hopes of retaining some exclusive patent rights. (Smith, 2007) Now although this type of patent manipulation makes sense in terms of company revenue, what of the larger pharmaceutical goal of helping people live healthier lives? Privatizing pharmaceutical companies and making them for-profit inherently creates a tension between the societal benefits of medicine and the individual company desire to maximize gains. In this case the introduction of generic versions is something that everyone should ideally support. After all, lower prices means more of the drugs will get to more of the people who need them. On the other hand, no one can expect an industry to give up $16 billion without a fight.
So why doesn’t the government step in to right this potentially life-threatening market failure? Because if companies had no monetary (monopolistic patent) incentive to create new drugs, theoretically none would be created, and society would generally be worse off. Patents are designed to expire so that the full benefits to society of new drugs eventually prevail via generic versions and market competition. This allows for companies to profit substantially at the expense of society for a limited amount of time. In essence the patent system is a compromise between creative incentive and social welfare. However, as is evidenced by recent drug tweaking and patent law circumvention, this system may not work as well as intended.
Source:
Smith, Aaron. “Big Pharma teaches old drugs new tricks: Drugmakers hunt for new patents on old blockbusters to try and postpone the inevitable: generic competition.” CNN Money Online. March 21, 2007. Reference URL:
http://money.cnn.com/2007/03/21/news/companies/drug_patents/index.htm?postversion=
2007032115
Thursday, March 1, 2007
Euro-Disney Culture Shock
The differences between American and European, particularly French, cultures and spending habits were two of the largest contributing factors to the initial failure of Euro-Disney. With its grand opening during a 1992 economic recession, Euro-Disney failed to garner expected revenues despite achieving its projected amount of yearly visitors. For example, Americans spent money on Disney supplied lunches while the French brought their own. Americans accepted and appreciated the no-alcohol policy of the theme parks, but the French were appalled at having that freedom restricted. Not taking into account these types of behavioral differences during the planning phase of Euro-Disney proved to be a costly and time-consuming mistake that took roughly two years to correct (Hartley, 2005).
Perhaps the best method to use in terms of understanding and being able to compensate for cultural differences would have been to use a questionnaire prior to making decisions about food, expected revenues other than park admission, and the like. The questionnaire could have been given to potential employees of the park during their interviews before the park opened. This would have tapped into a fairly large pool of potential visitors without much effort. Asking open-ended questions such as "Would you buy souvenirs during your visit? How much would you anticipate spending on them?", "How long do you think you would spend visiting the park?" or "What types of foods and drinks would you like to see offered at the park?" might have helped bring certain problems to light during the final planning stages.
Source:
Hartley, Robert F. 2005. Management Mistakes and Successes. Eighth edition. John Wiley & Sons, Inc.
Perhaps the best method to use in terms of understanding and being able to compensate for cultural differences would have been to use a questionnaire prior to making decisions about food, expected revenues other than park admission, and the like. The questionnaire could have been given to potential employees of the park during their interviews before the park opened. This would have tapped into a fairly large pool of potential visitors without much effort. Asking open-ended questions such as "Would you buy souvenirs during your visit? How much would you anticipate spending on them?", "How long do you think you would spend visiting the park?" or "What types of foods and drinks would you like to see offered at the park?" might have helped bring certain problems to light during the final planning stages.
Source:
Hartley, Robert F. 2005. Management Mistakes and Successes. Eighth edition. John Wiley & Sons, Inc.
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