Wal-Mart, one of the largest food retailers in the United States, is known for its inexpensive food due to its incredible network of global suppliers. Traditionally Wal-Mart has been successful at finding the cheapest products anywhere in the world and importing them to its stores nationwide using various modes of transportation while taking advantage of inexpensive oil prices. Now, with the price of oil and transportation skyrocketing, Wal-Mart is being forced to rethink its food supply chain, and is beginning to purchase locally grown products instead (Philpott, 2008).
Because ease and affordability of transportation have been major contributing factors to globalization, the financial strain of keeping those established trade routes open is beginning to show. This could be very good news for many local businesses that have been threatened in the past by foreign sourcing competition as well as large chain stores. In the case of Wal-Mart, small farmers that can not compete are joining the giant in order to remain profitable. Linking with larger corporations is a well established method of protecting a company’s domestic niche (Bartlett et al., 2004, 215). It seems many local farmers are taking advantage of this opportunity. Since 2006 Wal-Mart has expanded its local sourcing by 50% so that at least one-fifth of all produce in their stores is grown and sold within the state. And aside from the support local communities are getting because of this shift, Wal-Mart has cut its costs by million of dollars. For example, by locally sourcing peaches alone Wal-Mart saves $1.4 million every year and uses 112,000 gallons less of diesel (Maestri, 2008). Sourcing locally seems to be beneficial to everyone involved - Wal-Mart, local farmers, and the environment. The only remaining question is whether or not Wal-Mart will actually be able to maintain its trademark low prices by cutting down its oil/transportation costs, but at least they are trying.
References:
Bartlett, Christopher A. Ghoshal, Sumantra. Birkinshaw, Julian. (2004). Transnational Management. Fourth Edition. McGrawHill Irwin. USA.
Maestri, Nicole. (July 1, 2008). “Wal-Mart to Source More Fruits and Veggies Locally.” Reuters UK. Reference URL: http://uk.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUKN2730901520080701?sp=true
Philpott, Tom. (July 11, 2008). “Wal-Mart Comes to the Farmer’s Market.” Grist - Environmental News and Commentary. Reference URL: http://www.grist.org/comments/food/2008/07/11/index.html
Showing posts with label profit maximization. Show all posts
Showing posts with label profit maximization. Show all posts
Saturday, August 16, 2008
Wednesday, July 4, 2007
How Does Culture Influence Your Company's Strategic Planning?
When it comes to strategic planning and implementation, culture can play a large role in many aspects of the planning process. In particular, mission/vision statements, time horizons, and marketing are key areas that can be greatly influenced by culture.
A company’s mission statement is supposed to reflect the overall goals of the company, and should clearly state what the company is trying to achieve. These large objectives can be heavily influenced by the culture in which the company is a part. For example, if an oil company is part of a culture that values environmentalism, its mission statement will likely reflect the oil company’s commitment to preserving, rather than destroying, the environment while at the same time providing its customers with the oil they need. However, if this oil company is situated within a culture that cares more about progress and price than the environment, the company’s mission statement may not mention the environment at all, but instead emphasize its commitment to providing customers with the cheapest oil possible.
During the process of goal setting, time horizons can vary greatly depending upon the overall culture’s perception of time. For example, one company may define a “short term” goal as 6 months, whereas another culture may say “short term” and mean five years. How a culture perceives time, and what the cultural expectations of “timeliness” are will undoubtedly have an influence on how business goals are made and implemented. Time perceptions vary so much that in Belgium, for example, it is acceptable to say that something will be ready in a “little hour,” but in the US this expression would not make sense. This expression illustrates that in Belgium an “hour” is a rather flexible notion, whereas in the US an “hour” is a very exact idea.
Marketing is perhaps the aspect of business that is most heavily influenced by culture since it deals directly with the public and is trying to appeal to their particular cultural sensibilities. There are countless examples of products doing well in one country and failing in another simply because the packaging colors symbolize different things in different cultures (Ball et al., 2006, 485). When ever a company decides to enter a market, even domestically, it is paramount that market research be conducted to assess the cultural mores of the targeted market.
Companies also need to realize that “culture” is not static, and it does not apply to everyone within a certain country or demographic. In order for one’s marketing efforts to be successful the sub-culture of a particular market must also be assessed if it is to those that the product or service is geared to. A very well known example of this would be marketing to the new “tween-agers,” those in pre-adolescence, who have their own sub-culture that is different from both the larger adult and teenage cultures.
It is impossible for culture not to impact domestic business operations since every country has its own culture and every company is situated within a country. Because we are so immersed in our own cultures as individuals, it is easy to forget that how we conduct business and make plans is just as culturally bound as how others conduct business in their own countries. Our domestic culture dictates how our domestic companies operate, so it would be absolutely impossible to separate out culture from business. The question should therefore ask “how does domestic culture impact domestic business operations” rather than “could culture impact domestic business operations.”
Source:
Ball, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 382-399, 484-486.
Technorati tags:
advertising, business, domestic, domestic market, foreign investment, generation y, globalization, management, market entry
A company’s mission statement is supposed to reflect the overall goals of the company, and should clearly state what the company is trying to achieve. These large objectives can be heavily influenced by the culture in which the company is a part. For example, if an oil company is part of a culture that values environmentalism, its mission statement will likely reflect the oil company’s commitment to preserving, rather than destroying, the environment while at the same time providing its customers with the oil they need. However, if this oil company is situated within a culture that cares more about progress and price than the environment, the company’s mission statement may not mention the environment at all, but instead emphasize its commitment to providing customers with the cheapest oil possible.
During the process of goal setting, time horizons can vary greatly depending upon the overall culture’s perception of time. For example, one company may define a “short term” goal as 6 months, whereas another culture may say “short term” and mean five years. How a culture perceives time, and what the cultural expectations of “timeliness” are will undoubtedly have an influence on how business goals are made and implemented. Time perceptions vary so much that in Belgium, for example, it is acceptable to say that something will be ready in a “little hour,” but in the US this expression would not make sense. This expression illustrates that in Belgium an “hour” is a rather flexible notion, whereas in the US an “hour” is a very exact idea.
Marketing is perhaps the aspect of business that is most heavily influenced by culture since it deals directly with the public and is trying to appeal to their particular cultural sensibilities. There are countless examples of products doing well in one country and failing in another simply because the packaging colors symbolize different things in different cultures (Ball et al., 2006, 485). When ever a company decides to enter a market, even domestically, it is paramount that market research be conducted to assess the cultural mores of the targeted market.
Companies also need to realize that “culture” is not static, and it does not apply to everyone within a certain country or demographic. In order for one’s marketing efforts to be successful the sub-culture of a particular market must also be assessed if it is to those that the product or service is geared to. A very well known example of this would be marketing to the new “tween-agers,” those in pre-adolescence, who have their own sub-culture that is different from both the larger adult and teenage cultures.
It is impossible for culture not to impact domestic business operations since every country has its own culture and every company is situated within a country. Because we are so immersed in our own cultures as individuals, it is easy to forget that how we conduct business and make plans is just as culturally bound as how others conduct business in their own countries. Our domestic culture dictates how our domestic companies operate, so it would be absolutely impossible to separate out culture from business. The question should therefore ask “how does domestic culture impact domestic business operations” rather than “could culture impact domestic business operations.”
Source:
Ball, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 382-399, 484-486.
Technorati tags:
advertising, business, domestic, domestic market, foreign investment, generation y, globalization, management, market entry
Saturday, June 16, 2007
What's the Best Way to Enter a Foreign Market?
Scenario: Your US company has come up with a way to produce a computer that is just as good as your competitors but can be manufactured at half the cost. Now you would like to sell these computers in the EU. What should you do?
Option A: Export computers to the EU from the US.
This mode of entry falls under the category of international trade.
Pro: The greatest benefit of exporting is that it does not require a lot of additional investments and it is the least risky of all given options. Because the manufacturing stays within the US, it is not necessary for the company to have foreign employees or to directly invest in any foreign country. The company must decide whether it will choose to export directly, via a separate foreign sales company or a foreign sales division within the existing company, or to export indirectly via manufacturing export agents, export commission agents, export merchants, or international firms. Indirect exporting requires less investment than does direct exporting, and is often the initial mode of exportation (Ball et al., 2006, 431). Exporting also allows for a relatively inexpensive trial run to see how well the computers sell in the EU.
Con: The main drawbacks of exportation are that it requires a lot of paperwork, knowledge of trading laws and restrictions, and the payment of taxes and fees associated with goods leaving and entering various countries. However there are many well known shipping companies that are able to handle these requirements for the company for a fee.
Option B: License a EU firm to manufacture and market the computers in the EU.
This mode of entry falls under the category of transfers.
Pro: Like exporting, licensing requires very little investment capital. The company can grant an already existing firm in the EU the rights to manufacture, market, and sell the computers in exchange for an initial licensing fee and between 2-5% royalties for every computer sold in the EU for the duration of the contract (Ball et al., 2006, 433). This method is inexpensive, profitable, and does not require the company to exert a lot of effort or spend a lot of time on the project once a suitable EU firm has been found and is under contract.
Con: The main drawback to licensing these rights to another firm has to do with the intellectual and financial risks involved, both during the duration of the contract as well as after its expiration. Under this agreement the company will have to divulge its computer manufacturing techniques to the EU firm and must trust that the EU firm will pay the correct amount in royalties to the company. There is always the possibility that the EU firm will not uphold the terms of the contract, making it necessary for the company to sue the EU firm for any unpaid royalties and patent/copyright infringements. This process can be expensive and time consuming. After the contract has expired there is also the possibility that the EU firm will continue to use the knowledge gained from the company to produce competitive computers, and could possibly take over any market share that the company may have gained during the duration of the contract. Furthermore the EU firm may begin to export the competitive computers to the US, where it will have the opportunity to gain market share from the company in its own domestic market (Ball et al., 2006, 433). Lastly, by licensing these rights to an EU firm the company is giving up its control over almost all aspects of the computers, from manufacturing to marketing to distribution. Disputes over any of these processes may arise and the company will have little sway in determining how any of these aspects are handled in the EU.
Option C: Set up a wholly owned subsidiary in the EU.
This mode of entry falls under the category of foreign direct investment.
Pro: The advantages to setting up a wholly owned subsidiary are great in terms of keeping control over the entire production and distribution process. Because the company would own the subsidiary completely, it would be able to oversee all aspects of the business and be able to run the company much like it runs the one in the US. The only necessary changes would be those needed to uphold the laws of the host country. There are also three different ways to set up a wholly owned subsidiary, each of which has its own benefits and drawbacks. For the scope of this post, however, I will simply list the various options; build a new plant from scratch, buy a plant that already exists, or purchase a distributor that already has an established distribution system and market (Ball et al., 2006, 434).
Con: The main disadvantages to this method are that it is very costly regardless of which option is chosen, it is time intensive, and it requires a large investment in human capital abroad such as employees. It is also very risky since a foreign market must be established, without the benefit of a ‘trial run‘ that is possible via the method of simple exportation.
Suggested Course of Action:
Because I do not have any information about the computer company in question, such as its financial status, marketing history, etc., I do not believe it is possible to make an educated suggestion on which option the company should choose to sell computers in the EU. Therefore my decision would be to choose the method that is the least expensive, least risky, and least time consuming - simple exportation to the EU from the US. This way the company would be able to quickly stop selling its computers in the EU if they were not selling well, increase the amount of computers exported if sales are high, and have the ability to move further into the foreign market later on if conditions prove favorable in the EU.
Sources:
Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 431-34.
Stumble It!
Technorati tags:
advice, business, computers, domestic market, export, foreign direct investment, foreign investment, generation y, globalization, licensing, management, manufacturing, market entry
Option A: Export computers to the EU from the US.
This mode of entry falls under the category of international trade.
Pro: The greatest benefit of exporting is that it does not require a lot of additional investments and it is the least risky of all given options. Because the manufacturing stays within the US, it is not necessary for the company to have foreign employees or to directly invest in any foreign country. The company must decide whether it will choose to export directly, via a separate foreign sales company or a foreign sales division within the existing company, or to export indirectly via manufacturing export agents, export commission agents, export merchants, or international firms. Indirect exporting requires less investment than does direct exporting, and is often the initial mode of exportation (Ball et al., 2006, 431). Exporting also allows for a relatively inexpensive trial run to see how well the computers sell in the EU.
Con: The main drawbacks of exportation are that it requires a lot of paperwork, knowledge of trading laws and restrictions, and the payment of taxes and fees associated with goods leaving and entering various countries. However there are many well known shipping companies that are able to handle these requirements for the company for a fee.
Option B: License a EU firm to manufacture and market the computers in the EU.
This mode of entry falls under the category of transfers.
Pro: Like exporting, licensing requires very little investment capital. The company can grant an already existing firm in the EU the rights to manufacture, market, and sell the computers in exchange for an initial licensing fee and between 2-5% royalties for every computer sold in the EU for the duration of the contract (Ball et al., 2006, 433). This method is inexpensive, profitable, and does not require the company to exert a lot of effort or spend a lot of time on the project once a suitable EU firm has been found and is under contract.
Con: The main drawback to licensing these rights to another firm has to do with the intellectual and financial risks involved, both during the duration of the contract as well as after its expiration. Under this agreement the company will have to divulge its computer manufacturing techniques to the EU firm and must trust that the EU firm will pay the correct amount in royalties to the company. There is always the possibility that the EU firm will not uphold the terms of the contract, making it necessary for the company to sue the EU firm for any unpaid royalties and patent/copyright infringements. This process can be expensive and time consuming. After the contract has expired there is also the possibility that the EU firm will continue to use the knowledge gained from the company to produce competitive computers, and could possibly take over any market share that the company may have gained during the duration of the contract. Furthermore the EU firm may begin to export the competitive computers to the US, where it will have the opportunity to gain market share from the company in its own domestic market (Ball et al., 2006, 433). Lastly, by licensing these rights to an EU firm the company is giving up its control over almost all aspects of the computers, from manufacturing to marketing to distribution. Disputes over any of these processes may arise and the company will have little sway in determining how any of these aspects are handled in the EU.
Option C: Set up a wholly owned subsidiary in the EU.
This mode of entry falls under the category of foreign direct investment.
Pro: The advantages to setting up a wholly owned subsidiary are great in terms of keeping control over the entire production and distribution process. Because the company would own the subsidiary completely, it would be able to oversee all aspects of the business and be able to run the company much like it runs the one in the US. The only necessary changes would be those needed to uphold the laws of the host country. There are also three different ways to set up a wholly owned subsidiary, each of which has its own benefits and drawbacks. For the scope of this post, however, I will simply list the various options; build a new plant from scratch, buy a plant that already exists, or purchase a distributor that already has an established distribution system and market (Ball et al., 2006, 434).
Con: The main disadvantages to this method are that it is very costly regardless of which option is chosen, it is time intensive, and it requires a large investment in human capital abroad such as employees. It is also very risky since a foreign market must be established, without the benefit of a ‘trial run‘ that is possible via the method of simple exportation.
Suggested Course of Action:
Because I do not have any information about the computer company in question, such as its financial status, marketing history, etc., I do not believe it is possible to make an educated suggestion on which option the company should choose to sell computers in the EU. Therefore my decision would be to choose the method that is the least expensive, least risky, and least time consuming - simple exportation to the EU from the US. This way the company would be able to quickly stop selling its computers in the EU if they were not selling well, increase the amount of computers exported if sales are high, and have the ability to move further into the foreign market later on if conditions prove favorable in the EU.
Sources:
Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 431-34.
Stumble It!Technorati tags:
advice, business, computers, domestic market, export, foreign direct investment, foreign investment, generation y, globalization, licensing, management, manufacturing, market entry
Thursday, June 7, 2007
How Investing Overseas Can Help Your Domestic Market
Investing overseas can help a firm protect its domestic market in three different ways. The first is to establish foreign operations in countries where the firm has major clients (Ball et al., 61, 2006). For example, if a U.S. firm has many customers in France, establishing subsidiaries in France to service those customers will prevent competition by similar firms in France from acquiring those customers. This strengthens the U.S. firm because they now have the opportunity to prove that they can service customers in France as well. This strategy is not very risky because the domestic firm already has customers in the foreign country. Rather than attacking the foreign market, the domestic firm is just defending itself from foreign competitors.
The second way a firm can protect its domestic market by investing overseas is to attack the foreign market in the hopes that the foreign firm will be so focused on defending its local market that it will lessen its efforts to gain customers in the domestic firm's market (Dell et al., 61, 2006). For example, if Domestic Firm A sells a similar product or service as Foreign Firm B, DFA can begin operations in FFB's country in the hopes of taking away some of FFB's customers, and causing FFB to focus on keeping its own share of its domestic market. While FFB is being attacked in its own country, DFA can work on gaining more of its own domestic market away from FFB. This technique is really one of deceptive distraction and is much riskier than the previous example because in this scenario the domestic firm must spend some resources "distracting" the foreign firm, and some resources on gaining a larger portion of its domestic market. Both of these tactics must be done at once if the plan is to succeed.
The final reason that investing overseas can strengthen a firm's domestic market has to do with costs of production. If a foreign firm can produce the same product at a lower cost than a domestic firm, and sell that product at a lower price (by exporting it) in the domestic country, then the domestic firm is at a disadvantage. One way to become more competitive is to outsource part or all of a firm's production to the "cheaper" foreign country and continue to resell the product in the domestic firm's country (Ball et al., 61, 2006). Outsourcing allows the domestic firm to utilize the lower production costs in the foreign country while remaining competitive in its domestic market. This strategy is also not very risky because it is lowering the firm's costs while defending its domestic market against foreign competition. Rather than spending more of its resources, the aim of this technique is to reduce costs and gain resources.
Although considered controversial, outsourcing continues to be a necessary part of staying competitive in today's globalized world. Two leading countries in the market for less expensive, quality labor are China and India. However, less expensive labor is not the only characteristic firms are looking for when deciding where to outsource services or production. "Deep technical and language skills, mature vendors and supportive government policies" (BusinessWeek Online, March 20, 2007) are also key factors, all of which can be found in India. For countries like the United States, where wages are high, utilizing the people and skills found in other countries and expanding to become an international firm is quickly becoming a requirement rather than a choice.
Sources:
Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 61.
China, India Seen Dominating Outsourcing. (March 20, 2007). BusinessWeek Online. Reference URL: http://www.businessweek.com/globalbiz/content/mar2007/
gb20070320_778394.htm?chan=search
Technorati tags:
advice, business, domestic, domestic market, ethics, foreign investment, globalization, India, management, manipulation, opinion, products, protection, techniques, value chain
The second way a firm can protect its domestic market by investing overseas is to attack the foreign market in the hopes that the foreign firm will be so focused on defending its local market that it will lessen its efforts to gain customers in the domestic firm's market (Dell et al., 61, 2006). For example, if Domestic Firm A sells a similar product or service as Foreign Firm B, DFA can begin operations in FFB's country in the hopes of taking away some of FFB's customers, and causing FFB to focus on keeping its own share of its domestic market. While FFB is being attacked in its own country, DFA can work on gaining more of its own domestic market away from FFB. This technique is really one of deceptive distraction and is much riskier than the previous example because in this scenario the domestic firm must spend some resources "distracting" the foreign firm, and some resources on gaining a larger portion of its domestic market. Both of these tactics must be done at once if the plan is to succeed.
The final reason that investing overseas can strengthen a firm's domestic market has to do with costs of production. If a foreign firm can produce the same product at a lower cost than a domestic firm, and sell that product at a lower price (by exporting it) in the domestic country, then the domestic firm is at a disadvantage. One way to become more competitive is to outsource part or all of a firm's production to the "cheaper" foreign country and continue to resell the product in the domestic firm's country (Ball et al., 61, 2006). Outsourcing allows the domestic firm to utilize the lower production costs in the foreign country while remaining competitive in its domestic market. This strategy is also not very risky because it is lowering the firm's costs while defending its domestic market against foreign competition. Rather than spending more of its resources, the aim of this technique is to reduce costs and gain resources.
Although considered controversial, outsourcing continues to be a necessary part of staying competitive in today's globalized world. Two leading countries in the market for less expensive, quality labor are China and India. However, less expensive labor is not the only characteristic firms are looking for when deciding where to outsource services or production. "Deep technical and language skills, mature vendors and supportive government policies" (BusinessWeek Online, March 20, 2007) are also key factors, all of which can be found in India. For countries like the United States, where wages are high, utilizing the people and skills found in other countries and expanding to become an international firm is quickly becoming a requirement rather than a choice.
Sources:
Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 61.
China, India Seen Dominating Outsourcing. (March 20, 2007). BusinessWeek Online. Reference URL: http://www.businessweek.com/globalbiz/content/mar2007/
gb20070320_778394.htm?chan=search
Technorati tags:
advice, business, domestic, domestic market, ethics, foreign investment, globalization, India, management, manipulation, opinion, products, protection, techniques, value chain
Tuesday, May 22, 2007
The Growing Obsession with Customization
The very foundation of value chain management is giving customers exactly what they want when they want it. With this end in mind, keeping up with the perpetually fluctuating whims and expectations of consumers can pose quite a challenge to the production side of both large and small companies. One of the most difficult trends to keep pace with is consumer's increasing expectation of product customization. "Most engineers are seeing requests for customized products increase year after year. And it's clear that increase is having an adverse impact on time available for product design changes, new product development, and innovation" (Market Wire, May 21, 2007).
From colors to functions to software, more and more people are approaching products with the expectation of being able to make it suit their particular needs. Rather than being pleasantly surprised with products that do offer customizable features, consumers are angrily surprised when confronted with products that don't.
Many companies, however, are jumping at the opportunity to fill niches that personalize everything including cookie tins with corporate logos, made-to-order bras, and high-end wrapping paper with specific names or slogans emblazoned on water-resistant paper (BusinessWeek Online, Spring 2007)! If a company does find a way to make their products quickly, efficiently, and fully customized they will undoubtedly reap the rewards in today's highly, and perhaps overly, personalized climate.
An example of true production innovation combined with complete customization is the Build-A-Bear company that has gained much popularity in the last five years. Instead of having customers instruct the company on exactly what kind of stuffed animal to make via an online form or the like, the Build-A-Bear company has made making the customized bear itself an integral part of the shopping experience. In malls all across the United States, Build-A-Bear stores entice shoppers in to physically make the stuffed animal of their choice. Customers proceed along a pre-arranged "assembly-line" that starts with the selection of a plain stuffed animal and ends at the check-out counter with a fully personalized product, including clothes, shoes, accessories, and a name. Customers not only end up with exactly what they want, but the activity of putting the product together is an enjoyable and memorable experience. Of course this particular production model can only work with a very specific product type (obviously it would not work with anything that requires technical skills), but the Build-A-Bear company does illustrate the advantage of "thinking outside the box" and can be used as an inspiration when necessary.
Sources:
Breaking the Mold. Spring, 2007. Business Week Online. Reference URL: http://www.businessweek.com/magazine/content/07_17/b4031445.htm?chan=
innovation_innovation+%2B+design_innovation+strategy
Current State of Build-to-Order Practices Hinder Product Development and Innovation. May 21, 2007. Market Wire Online. Reference URL: http://www.marketwire.com/mw/release_html_b1?release_id=255119
Build-A-Bear Official Website: http://www.buildabear.com/
Technorati tags:
build-a-bear, business, customization, generation y, management, Needs, opinion, techniques, value , value chain
From colors to functions to software, more and more people are approaching products with the expectation of being able to make it suit their particular needs. Rather than being pleasantly surprised with products that do offer customizable features, consumers are angrily surprised when confronted with products that don't.
Many companies, however, are jumping at the opportunity to fill niches that personalize everything including cookie tins with corporate logos, made-to-order bras, and high-end wrapping paper with specific names or slogans emblazoned on water-resistant paper (BusinessWeek Online, Spring 2007)! If a company does find a way to make their products quickly, efficiently, and fully customized they will undoubtedly reap the rewards in today's highly, and perhaps overly, personalized climate.
An example of true production innovation combined with complete customization is the Build-A-Bear company that has gained much popularity in the last five years. Instead of having customers instruct the company on exactly what kind of stuffed animal to make via an online form or the like, the Build-A-Bear company has made making the customized bear itself an integral part of the shopping experience. In malls all across the United States, Build-A-Bear stores entice shoppers in to physically make the stuffed animal of their choice. Customers proceed along a pre-arranged "assembly-line" that starts with the selection of a plain stuffed animal and ends at the check-out counter with a fully personalized product, including clothes, shoes, accessories, and a name. Customers not only end up with exactly what they want, but the activity of putting the product together is an enjoyable and memorable experience. Of course this particular production model can only work with a very specific product type (obviously it would not work with anything that requires technical skills), but the Build-A-Bear company does illustrate the advantage of "thinking outside the box" and can be used as an inspiration when necessary.
Sources:
Breaking the Mold. Spring, 2007. Business Week Online. Reference URL: http://www.businessweek.com/magazine/content/07_17/b4031445.htm?chan=
innovation_innovation+%2B+design_innovation+strategy
Current State of Build-to-Order Practices Hinder Product Development and Innovation. May 21, 2007. Market Wire Online. Reference URL: http://www.marketwire.com/mw/release_html_b1?release_id=255119
Build-A-Bear Official Website: http://www.buildabear.com/
Technorati tags:
build-a-bear, business, customization, generation y, management, Needs, opinion, techniques, value , value chain
Thursday, May 17, 2007
The Farmer in the Dell, The Farmer in the Dell, All Praise the Farmer in the Dell!
The amazing success of Dell computers seems contrary to many of today's business trends. In a field where innovation is key, and being "the first" to introduce new technology into a market appears to be crucial for success, Dell managed to reign supreme by doing exactly the opposite. Instead of spending large amounts of money toward product development, Dell allocated only 10% of its revenues for research and development, while competitors such as Gateway, Compaq, HP, and Cisco budgeted between 20-45% of their revenues for research and development (Hartley, 2005). Dell patiently waited for its competitors to spend their money and time in product development, and would scoop up the "new" technology only after it entered a market. Not only was Dell able to save on R&D, but it could offer the "new" technology at lower prices. Apparently many consumers were more than willing to wait for the less expensive Dell versions to become available rather than buying the newest innovations right away.
The second important way that Dell saved money was in the production process. Dell was vigilant in continually streamlining the production process, making sure production details were communicated, and using machines and computers whenever possible, thereby reducing costs associated with employees (Hartley, 2005).
These cost saving measures on the production side, as well as being the first computer company to offer direct sales to consumers, saving greatly in the process, has kept Dell a leader in the computer sales market.
Today, Dell is still striving to provide consumers with the least expensive computers possible. Dell's latest move has been to announce that they will be offering Linux, the free open-source operating system, rather than Microsoft's Windows, as an option during the customization process (Zachary, 5/16/2007). Dell is also leading the way in the rapidly developing country of India, where it is already one of the fastest growing companies. In fact, Dell's plan is to target the Educational, Governmental, and Public Sectors (ITVar News, 5/17/2007). Dell is once again positioning itself to outdo its competition, especially now that Michael Dell has returned to the helm.
Sources:
Hartley, Robert F. 2005. Management Mistakes and Successes. Eighth edition.
Hoboken, NY. John Wiley & Sons Inc.
Dell Aims for Government Business. May 17, 2007. IT Varns News Online. Reference URL: http://www.itvarnews.net/news/journal_comments.asp?JournalID=4746&
PagePosition=1&sTitle=Dell%20aims%20for%20government%20business
Zachary, Daniel. May 16, 2007. Dell Backs Open Source Operating System.
City on a Hill Press Online. Reference URL: http://www.cityonahillpress.com/article.php?id=650
Technorati tags:
computers, Dell, generation y, India, Linux, management, michael dell, open source, opinion
The second important way that Dell saved money was in the production process. Dell was vigilant in continually streamlining the production process, making sure production details were communicated, and using machines and computers whenever possible, thereby reducing costs associated with employees (Hartley, 2005).
These cost saving measures on the production side, as well as being the first computer company to offer direct sales to consumers, saving greatly in the process, has kept Dell a leader in the computer sales market.
Today, Dell is still striving to provide consumers with the least expensive computers possible. Dell's latest move has been to announce that they will be offering Linux, the free open-source operating system, rather than Microsoft's Windows, as an option during the customization process (Zachary, 5/16/2007). Dell is also leading the way in the rapidly developing country of India, where it is already one of the fastest growing companies. In fact, Dell's plan is to target the Educational, Governmental, and Public Sectors (ITVar News, 5/17/2007). Dell is once again positioning itself to outdo its competition, especially now that Michael Dell has returned to the helm.
Sources:
Hartley, Robert F. 2005. Management Mistakes and Successes. Eighth edition.
Hoboken, NY. John Wiley & Sons Inc.
Dell Aims for Government Business. May 17, 2007. IT Varns News Online. Reference URL: http://www.itvarnews.net/news/journal_comments.asp?JournalID=4746&
PagePosition=1&sTitle=Dell%20aims%20for%20government%20business
Zachary, Daniel. May 16, 2007. Dell Backs Open Source Operating System.
City on a Hill Press Online. Reference URL: http://www.cityonahillpress.com/article.php?id=650
Technorati tags:
computers, Dell, generation y, India, Linux, management, michael dell, open source, opinion
Wednesday, May 9, 2007
Ask Yourself, What Would Machiavelli Do?
The Prince - Machiavelli, 1513
When we here the name "Machiavelli" or the term "Machiavellian" used to describe someone, it is often considered a negative attribute or characteristic. Famous for his (a)moral stance of "the ends justify the means," Machiavelli has become a symbol for unethical or shady practices, both in business and life decisions.
In his book, "The Prince," Machiavelli outlines many of the principals on which he based his seemingly ruthless approach to diplomacy and leadership. He stresses the need for appearance over quality, force over reason, and stealth over honesty.
Although these tactics are overtly frowned upon in today's business world, they are nevertheless used effectively. For instance, if a top manager projects confidence, he or she has a greater ability to garner employee trust and loyalty. This in turn could lead to higher productivity, less employee turnover, and a general state of well-being for the company...regardless of whether or not the manager is actually confident in themselves or the company.
Interestingly, as more organizations push for an open, honest, and supportive company culture, employees are becoming happier and more productive, leading to higher profits. (Robbins, 2005) It is possible then to assume that if Machiavelli were alive today, he would choose to appear "nicer" or "more supportive" to his followers or employees, as this type of "means" would produce the most effective and lucrative "ends." Therefore, being called Machiavellian might not be so bad after all.
Sources:
Crainer, Stuart. The Ultimate Business Library. Capstone Publishing Limited, March 2006.
Robbins, Stephen P., Coulter, Mary. Management, Eight Ed. Pearson Education, Inc., 2005. Ch. 3.
When we here the name "Machiavelli" or the term "Machiavellian" used to describe someone, it is often considered a negative attribute or characteristic. Famous for his (a)moral stance of "the ends justify the means," Machiavelli has become a symbol for unethical or shady practices, both in business and life decisions.
In his book, "The Prince," Machiavelli outlines many of the principals on which he based his seemingly ruthless approach to diplomacy and leadership. He stresses the need for appearance over quality, force over reason, and stealth over honesty.
Although these tactics are overtly frowned upon in today's business world, they are nevertheless used effectively. For instance, if a top manager projects confidence, he or she has a greater ability to garner employee trust and loyalty. This in turn could lead to higher productivity, less employee turnover, and a general state of well-being for the company...regardless of whether or not the manager is actually confident in themselves or the company.
Interestingly, as more organizations push for an open, honest, and supportive company culture, employees are becoming happier and more productive, leading to higher profits. (Robbins, 2005) It is possible then to assume that if Machiavelli were alive today, he would choose to appear "nicer" or "more supportive" to his followers or employees, as this type of "means" would produce the most effective and lucrative "ends." Therefore, being called Machiavellian might not be so bad after all.
Sources:
Crainer, Stuart. The Ultimate Business Library. Capstone Publishing Limited, March 2006.
Robbins, Stephen P., Coulter, Mary. Management, Eight Ed. Pearson Education, Inc., 2005. Ch. 3.
Tuesday, May 1, 2007
The Problem with Snapple, Part II
Do you think Snapple should have been sold for $300 million?
Yes, I think Snapple should have been sold for $300 million. By the time Quaker Oats decided to give up its rejuvenation efforts and sell Snapple, the continued losses of keeping Snapple would have been more than the immediate loss of selling Snapple for such a low price. Although Quaker Oats did not recoup much of its investment, the sale did allow the company to stop losing money, which was more important at that time.
What are the social implications related to this case? What did you learn that might be helpful in your work?
The main social implication related to the acquisition of Snapple was the overall negative effect it had on Quaker Oats’ profitability, and therefore the financial well-being of Quaker Oats’ shareholders. If the main responsibility of managers is to the owners, or shareholders, of a company, then making a large purchase, such as purchasing Snapple for $1.7 billion, without considering all of the financial ramifications of the purchase is very socially irresponsible. According to the Classical view of social responsibility, managers are supposed to maximize shareholder’s profits (Robbins, 2005). Clearly in the case of Snapple, this did not happen as profits decreased as a result of the acquisition.
By reviewing this case I learned that top level managers are just as likely to allow their egos to intervene in their decision-making as is everyone else who achieves a certain level of success. No matter what field one is in, previous successes have a tendency to overshadow the hard and clear facts of future decisions. In this example, the success of Gatorade overshadowed the practicality that was needed when reviewing the clearly declining financial situation of Snapple before its purchase.
To Sum Up...
Smithburg’s purchase of Snapple illustrates the necessity of fully evaluating any major acquisition. This includes knowing the current competitive market, understanding the production and distribution methods, and having a financially sound plan in place to make a declining company profitable, or to raise the demand for products of an already profitable company. If after the purchase has been made and the plans have been carried out, the acquisition is still not profitable, then it is also vitally important to realize that less money will be lost by selling the failing company quickly for a relatively low price than by keeping the failing company and continuing to lose money.
Bibliography
Hartley, Robert F. 2005. Management Mistakes and Successes. Eighth edition. John Wiley & Sons, Inc.
Mankiw, Gregory N. 2007. Principles of Economics. Fourth edition. Thomson South-Western.
Robbins, Stephen P., Coulter, Mary. 2005. Management. Eighth edition. Upper Saddle River, NY. Pearson Education Inc.
Yes, I think Snapple should have been sold for $300 million. By the time Quaker Oats decided to give up its rejuvenation efforts and sell Snapple, the continued losses of keeping Snapple would have been more than the immediate loss of selling Snapple for such a low price. Although Quaker Oats did not recoup much of its investment, the sale did allow the company to stop losing money, which was more important at that time.
What are the social implications related to this case? What did you learn that might be helpful in your work?
The main social implication related to the acquisition of Snapple was the overall negative effect it had on Quaker Oats’ profitability, and therefore the financial well-being of Quaker Oats’ shareholders. If the main responsibility of managers is to the owners, or shareholders, of a company, then making a large purchase, such as purchasing Snapple for $1.7 billion, without considering all of the financial ramifications of the purchase is very socially irresponsible. According to the Classical view of social responsibility, managers are supposed to maximize shareholder’s profits (Robbins, 2005). Clearly in the case of Snapple, this did not happen as profits decreased as a result of the acquisition.
By reviewing this case I learned that top level managers are just as likely to allow their egos to intervene in their decision-making as is everyone else who achieves a certain level of success. No matter what field one is in, previous successes have a tendency to overshadow the hard and clear facts of future decisions. In this example, the success of Gatorade overshadowed the practicality that was needed when reviewing the clearly declining financial situation of Snapple before its purchase.
To Sum Up...
Smithburg’s purchase of Snapple illustrates the necessity of fully evaluating any major acquisition. This includes knowing the current competitive market, understanding the production and distribution methods, and having a financially sound plan in place to make a declining company profitable, or to raise the demand for products of an already profitable company. If after the purchase has been made and the plans have been carried out, the acquisition is still not profitable, then it is also vitally important to realize that less money will be lost by selling the failing company quickly for a relatively low price than by keeping the failing company and continuing to lose money.
Bibliography
Hartley, Robert F. 2005. Management Mistakes and Successes. Eighth edition. John Wiley & Sons, Inc.
Mankiw, Gregory N. 2007. Principles of Economics. Fourth edition. Thomson South-Western.
Robbins, Stephen P., Coulter, Mary. 2005. Management. Eighth edition. Upper Saddle River, NY. Pearson Education Inc.
Wednesday, April 25, 2007
The Problem with Snapple, Part I
CEO William D. Smithburg of Quaker Oats purchased Snapple for $1.7 billion in 1994. In 1997 Smithburg sold Snapple to Nelson Peltz for $300 million, reported a $1.11 billion quarterly loss, and resigned from his position as CEO (Hartley, 2005). Smithburg’s decision to purchase Snapple was not based on solid financial reasoning or research, but an egotistical hunch that he could turn Snapple around as he had done with Gatorade. By acquiring the already declining Snapple, Quaker Oats was forced to spend the next few years trying to salvage what was left of a company with too much market competition and an outdated production system. In the end, Smithburg proved to be a socially irresponsible manager whose duty to uphold Quaker Oats’ profits was less important than (dis)proving his own managerial superiority.
Do you think Snapple could have been turned around?
No I do not think Snapple could have been turned around once it was purchased by Quaker Oats for two reasons, neither of which have to do with the very high price of its acquisition. First, Snapple iced tea sales were already lagging at the time of purchase. The main reason for this lag was increased market competition by firms such as Coke, Pepsi, and Lipton, who were able to manufacture and sell similar drinks for lower prices than could Snapple (Hartley, 2005). Because Quaker Oats could not eliminate this competition, and had no concrete plans of how to make Snapple drinks more appealing to consumer after the purchase of Snapple other than to pair it with Gatorade, Quaker Oats’ other popular drink, there was no reason to believe that Snapple sales would or could rise in the future. Second, the production and distribution system of Snapple was not thoroughly investigated before its purchase (Hartley, 2005). This meant that Quaker Oats had very little information regarding the costs associated with producing Snapple, making it nearly impossible to correctly gauge its profit/cost ratios, or what would be needed to streamline the production of Snapple to lower its overall production costs. Taken together, these reasons show that Quaker Oats had no idea how it would make Snapple profitable from either the demand side (by eliminating or stemming market competition) or the supply side (by lowering production costs).
Do you think the premium retail price for Snapple was a serious impediment?
Yes, I think the premium price of Snapple was a very serious problem that ultimately brought about its demise. When Snapple was first introduced into the market it was the only flavored iced tea drink of its kind, making its premium price sustainable. However, as other companies began producing similar drinks that could be substituted for Snapple, the only choice Snapple had to remain competitive would have been a reduction in price. Basic supply and demand dictates that as supply rises and demand is held constant, the equilibrium price of a good will fall, and any company continuing to sell at above market, or premium, prices will eventually be forced out of the market completely (Mankiw, 2007). Because Snapple chose to keep its prices above that of the market equilibrium (perhaps due to its high production costs), its sales decreased, and it became obvious that they could not rely on consumer brand loyalty to keep sales up and the company profitable.
Do you think Snapple could have been turned around?
No I do not think Snapple could have been turned around once it was purchased by Quaker Oats for two reasons, neither of which have to do with the very high price of its acquisition. First, Snapple iced tea sales were already lagging at the time of purchase. The main reason for this lag was increased market competition by firms such as Coke, Pepsi, and Lipton, who were able to manufacture and sell similar drinks for lower prices than could Snapple (Hartley, 2005). Because Quaker Oats could not eliminate this competition, and had no concrete plans of how to make Snapple drinks more appealing to consumer after the purchase of Snapple other than to pair it with Gatorade, Quaker Oats’ other popular drink, there was no reason to believe that Snapple sales would or could rise in the future. Second, the production and distribution system of Snapple was not thoroughly investigated before its purchase (Hartley, 2005). This meant that Quaker Oats had very little information regarding the costs associated with producing Snapple, making it nearly impossible to correctly gauge its profit/cost ratios, or what would be needed to streamline the production of Snapple to lower its overall production costs. Taken together, these reasons show that Quaker Oats had no idea how it would make Snapple profitable from either the demand side (by eliminating or stemming market competition) or the supply side (by lowering production costs).
Do you think the premium retail price for Snapple was a serious impediment?
Yes, I think the premium price of Snapple was a very serious problem that ultimately brought about its demise. When Snapple was first introduced into the market it was the only flavored iced tea drink of its kind, making its premium price sustainable. However, as other companies began producing similar drinks that could be substituted for Snapple, the only choice Snapple had to remain competitive would have been a reduction in price. Basic supply and demand dictates that as supply rises and demand is held constant, the equilibrium price of a good will fall, and any company continuing to sell at above market, or premium, prices will eventually be forced out of the market completely (Mankiw, 2007). Because Snapple chose to keep its prices above that of the market equilibrium (perhaps due to its high production costs), its sales decreased, and it became obvious that they could not rely on consumer brand loyalty to keep sales up and the company profitable.
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
Subscribe to:
Posts (Atom)
