Sunday, May 2, 2010

Case Study – Australia: The Riches and Challenges of Commodities

The case study discussed Australia’s history of the economy especially commodities. It showed that Australia was traditionally a protectionism economy, with large tariffs compared to other OECD countries. Australia only changed its protectionism policies in the last quarter of the 20th century. Since then it can be seen very easily that economic growth has sky-rocketed especially once The Howard government signed free-trade agreements with many nations. It makes sense for Australia to be open to free trade, as it has large mineral deposits, Australia should be focused on generating the largest benefit from those deposits, and import goods and services it cannot produce cheaply. The case study describe Australia “as the richest country on the planet,” however, Australia really only have recently started to take advantage of this in a major way.

Australia did not have a bustling economy in the late 70’s to 80’s, several governments, along with the central bank of Australia tried to control inflation. However, with a decrease in inflation increased the amount of unemployment and inhibited economic growth.

Yes Australia has had a large current account balance, for many years. However this is not a significantly bad thing. The negative current account balance has created a large amount of investment in Australia, in which Australia has benefited greatly from in recent times. This investment overall would likely be one of the major causes of why Australia has a relatively high average income. It is likely that the investment has raised income greater than any effects it has had on raising taxes.

Now China is investing into Australia in a significant way. Chinalco (a Chinese company) are have looked at investing $19.5 billion into Rio Tinto, which they would gain control of some of Australia’s iron ore mines. Along with many other investments from Chinese companies.

However, the issue is they are investing into the mines which would be great for the mines total production, however the case study did not mention whether if the investments from Chinese countries would improve the current bottle necks of Australia’s mineral exports which are train lines and ports. If Australia wants to increase their quantity of outputs of minerals, these bottle necks would have to be improved before production at mines goes up. If Australia can get the Chinese investors to invest into the transportation side of the infrastructure, there should be no reason why the Chinese cannot invest more into Australia, as it would likely help increase net exports, the average wage of Australians, create jobs lowering unemployment.

As Australia has a lot of mineral wealth the revenue the Chinese will take back to China will be a very small portion of the total mineral wealth. The more Australia can extract now the better, as there is a very high chance that sometime in the medium to long term future the new technologies will be invented making some of Australia’s minerals worthless. For example, it is quite possible in the future, new efficient, clean and cheap forms of energy will be produced which will eliminate the demand for Australia’s coal reserves, which could drastically slash Australia’s mineral returns.

Unit 12 – Five Debates over Macroeconomic Policies

Many countries especially OCED countries use monetary and fiscal policies to stablise their own economies. Yes it can be argued that policymakers have often got is wrong the past and exacerbated the magnitude of economic fluctuations. And yes this will happen in the future again, however there have also been many times where policymakers have reduced the magnitude of fluctuations. When policymakers have managed to mitigate the effects of a recession, it is generally not recognized, for two reasons;

1. Often when there is a recession people will blame policy for not working even because they are in recession or economic downtown even though the downturn may not of been as bad as it could have been without any polices. I.e. people will always look at the negative of the situation rather than the positive and if people do recognize the country got out of the recession lightly they often do not give the credit to policymakers, rather find another reason. For example, the 2008 GFC it is more accepted amongst the public that Australia was not hit hard by the recession due to its large demand for mining from China, which could be true. However, the general public give little credit to the Rudd government for its fiscal stimulous package or the Reserve Bank of Australia (RBA) for its handling of monetary policy.

2. Due to the lag time in most polices, a lot of people in the public have difficulties linking polices with the effects of the polices. Therefore, people will not recognize the fiscal and monetary polices is working during downtimes as the polices may have been put in place 6 months or more before the downturn.

In New Zealand the Reserve Bank of New Zealand (RBNZ) has a certain policy that it must abide to (set by the New Zealand government), which is that it must keep inflation between 1% and 3%. Yes this limit abuses of power and political influence from the RBNZ via monetary policy. The government role in setting the RBNZ objective does give it more grounding in peoples believe that the RBNZ will try to keep inflation between that target.

Even though the RBNZ is effectively controlled by the government’s policy, the RBNZ does still allow some flexibility in their decision of money supply. The can change their monetary policy during or prior to any large external economic effect. Also they often do not change the official cash rate (OCR) in the lead up to an election (often the whole election year) to mitigate any theories of political influence RBNZ may have. However, this does cause some risks as RBNZ often changes the OCR level a significant portion before the election year, so they reduce the need to change the OCR during the election year. As mentioned above economic forecasting is highly imprecise so the RBNZ could change the OCR which may actually exacerbate the amount of inflation during the election year. Also the RBNZ may also not change the OCR to reduce the effect the have on the economy during an election year, when there is a need to alter the OCR. This means that there may be an negative effect later, sometime often after the election on the economy.

Should governments have a balance budget or not is often a question often debated in the economic world. Personally I think the answer to this question can often be answered with the following questions: “If the government is running a deficit for the year, why has it running this deficit, if the deficit is occurring because the government is investing in resources/infrastructure, will the benefit/cost ratio be an adequate figure to justify the risk of the borrowing?” For example, Sydney borrowed money off the British Government to build the Harbour Bridge. I am under the understanding that Sydney is still paying the government for this borrowings. Without looking at any figures, I would imagine Sydney has benefit from this bridge many times over for what it cost them in borrowing this money. I would imagine Sydney would of not developed as fast as it did or be as prosperous as it has become if the bridge was not constructed. The bridge I would imagine right from when it was constructed increase productivity of Sydney’s economy, by cutting down travelling time from North Sydney to the City. And in recent times I believe the bridge would have hold a major part of the responsibility of making Sydney a tourist hub of Australia, making the Australian economy billions of dollars. The bridge I would imagine increase the citizens incomes more substantially than the increase tax for the interest on the loan from the British Government. Therefore, it depends on what the government borrowing is for whether it is good for an economy or not. Also another thing a government should consider before borrow money is the size of their current deficit, to make sure they can pay back debt easily.

Unit 8 – Major issues in Macroeconomics

Unit 8 introduced many terms of Macroeconomics. It explained the basics of nominal and real GDP. GDP can be calculated via three means which are expenditure, income and production. Theoretically they should all give the same value, however with measuring errors there can be slight difference. The most common GDP expenditure equation is GDP, Y = Consumption + Investment +Government Spending + Net Exports.

Having a look at figure 1 it shows New Zealand’s GDP had a high amount of increase from 200…. To 200…. Now figure 2 shows a large increase in the value of housing stock, yes some of this was due to house prices increasing, however a lot of this was due to investment in new houses and also consumption on existing houses. The housing market in New Zealand is large and it can been seen that there is an effect on NZ’s GDP. There seems to be a bit of a large from changes in GDP and the value of housing stock, I would imagine this is because that there is a lag from the investment/consumption on houses to when they are valued.

Figure 1 – Real Gross Domestic Product, Annual Change %

Figure 2 – New Zealand’s House prices and value of housing stock

Investment on housing stock an oil are not the only things that have a major affect on NZ’s GDP, New Zealand’s two largest industries are large dairy and tourism industries. Both of these industries had huge growth in the early to mid 2000’s. Many farms were being turned from sheep and cattle farms into the productive dairy farms. That along with the increase in milk prices, peaking in 2006, helped increase NZ’s GDP, evident in figure 1. Tourist numbers visiting New Zealand has been growing steadily since 2000, and the amount an average tourist has also been increasing greater than inflation. Therefore both of these effects have been increasing New Zealand’s GDP.

Gross national product is all goods and services produced by permanent residents of a nation within a given period. Figure 3 and 4 shows the difference between GDP and GNI. GNI seems to grow at a steady rate while GDP is a lot more volatile. I would imagine this is because income of New Zealand residents does not fluctuate much whereas expenditure by foreign in New Zealand can fluctuated a lot. I would imagine when New Zealand is attractive to foreigners to invest or buy exports the quickly rush in, and whereas when New Zealand is less attractive to foreigners to invest they quickly rush their money out of New Zealand.

Figure 3 – Gross National Income in PPP dollars

Figure 4 – New Zealand’s Gross Domestic Product between 1960-2008

Referring to table 26.1 in Principle of Economics by Gans, King, Stone, Mankiw [4th addition] it shows that New Zealand’s real GDP per capita in the 1950’s was the second highest within the table behind USA. By the end of the period 2004, New Zealand’s growth was significantly less than many of NZ’s OCED competitors. New Zealand had a growth rate over the 50 year period of 1.49% while Australia, USA and UK had growth rates of 2.03, 2.15 and 2.20 respectively. There were a two main reasons for this, there were; the United Kingdom joining the EU in the 1970’s, who were NZ’s largest trading exporter for mainly products of wool, lamb and beef at before the 1970’s. After UK joined the EU, there were trade restrictions on importing NZ products due to the EU agreement, meaning New Zealand’s largest exporter was no longer buying New Zealand’s quantity, really cutting NZ’s GDP. Also the Muldoon era created large inflation which really restricted NZ’s GDP. Looking at Figure … you can see that New Zealand’s GDP per capita was on par with many of the other OCD countries, however after the early 80’s New Zealand and never caught up with the OCD countries.

On the Brightside for New Zealand, it has invested significant amounts into its economy, approximately 21% between 1950 and 2004. This is not as much as Australia and Germany, however significantly more than USA and UK. This means that in the future New Zealand’s productivity will likely grow faster than USA and UK as they have invested significantly into this data. However, this is an objective argument and it depends on what New Zealand has invested in compared to other countries.

Unit 7 – The boundaries of the firm

This unit talked about the reasons why firms choose to set boundaries the way they do. It discusses the advantages of expanding its boundaries and also outsourcing. The boundaries of a firm define the activities that a firm performs itself rather than purchasing from the market. The unit only really concentrated on the vertical chain of production and not talk about boundaries dealing with scope of a business. Expanding a firms boundaries can have the following advantages;

  • Reduce transaction costs of contracts from purchasing from the market.
  • Possibly help coordination of production, as it may be less costly, less uncertain and more efficient to coordinate certain activities in-house rather than outsourcing.
  • Reduce the risk of sensitive information about the firm’s product/service being leak, if the firm produces it in-house than market firms, because employees within the firm will feel a big effect if information is leaked than employees of another firm and therefore, the firms employees are less likely to leak information as will affect them more.
  • Avoid hold-ups affects that come with relationship-specific outsourcing.
  • Also tax issues might mean a firm is better off if it performs its operations in house rather than outsourcing.

I can think of a situation where a kind of hold-up happened in New Zealand. In a very large development of the South Island, the biggest crane and construction specialist company was employed to help with the construction of the project. The crane and construction specialist company, was known to be the best for this development. As the project was unique in nature the crane and construction brought a specially designed crane from approximately $1 million dollars that could only be used specifically on this development. This created a positive quasi rent number for the crane and construction company. The developer would of known this and when the GFC hit and he struggled to pay bills he knew he would get away with not paying the crane and construction company bills, as they relied on his project to pay off the specialized crane they brought. The project fell over and a settlement was eventually made between the developer and the crane and construction company, however the crane and construction company did talk a large financial cost of the failed development. The issue now is the crane and construction company are not willing to invest in relationship-specific infrastructure in other projects it is working on as it does not want to make a loss. Therefore, the developers projects are not being done using the best equipment as due to the hold-up effect.

Firms may outsource activities (i.e. narrow boundaries) for the following reasons:

  • · Reduce transaction costs such as monitoring and policing activities.
  • · Market firms may have economies of scale that in-house operations might not be able to achieve.
  • · Market firms are subject to market discipline, whereas in house operations may not be able to achieve the same discipline as market firms in the same costly manner.
  • · A function may no longer fall within the core competencies of a company and therefore may make sense to outsource the activities.

An common example of where firms struggle to gain the same discipline as market firms is government organizations. Often in New Zealand anyways, I have heard employees of government organizations talk about the in efficiency of the workforce. And this generally because of the environment that has aroused of a slack workforce, because responsibility and budgetary constraints are not as effectively used as Market firms. Therefore, management of these government firms often outsource some activities as it is more cost efficient due to the issues of policing and monitoring slack staff.

Unit 5 – Oligopoly and Strategic Behaviour

The unit mainly discussed game theory of oligopolies. The unit started off by explaining simultaneous games where you and the other player/s do not know each other moves before moving. This generally means that people will play towards a dominant strategy that will benefit them best as they do not know what move the other player can play.

An example of a simultaneous game is when a contractor is bidding in a one-off blind tender. They do not know their competitions move and therefore will have to figure out whether it is better for them to bid high to have a better chance of getting the job or bid low and have a less chance of not getting the job. If it is a non-cooperative game the other player will being what the best outcome is for themselves, not worrying, what might be the best shared outcome for both/all players.

Most games in the business world are repeated. For say, in the above case, there will often be a time where the contractors are bidding for another job, and knowing how they bidded in the previous round they may use this information to alter their bid, to ensure the best outcome for their company.

Whereas sequential games is when one player chooses their move before the other players, meaning that the later players have more information when making their move. Often the best way to illustrate sequential games is via a decision tree, as it can show who makes the first mover advantage. There are first and second mover (and later mover) advantages, depend on the situation. However, generally as a rule, first mover advantages occur when the game is a competitive game. For example, a James Cameron launching his Avatar 3D movie before Alana in wonder land 3D movie. James Cameron being the first has set the standard for 3D movies and as a result is selling his technology to television and production companies. Which these companies have accepted as Cameron offered his technology first to companies that. Since he set the standard and it looks like 90% of companies will take up his offer, Alice in Wonderland’s producers have come out worst off whether they chose to offer their technology or not because there is no room for it.

Whereas in non-competitor games the second mover can use the information used from the first mover’s move to work out which the best course of action for them.

When you are involved in a game theory game, the following questions you need to ask yourself to figure out what type of game it is and what the best move would be.

  • · Whether it is a simultaneous game or sequential game.
  • · Whether your competitors are willing to co-operate or whether it is every person for themselves.
  • · Is the information you have perfect or imperfect. Simultaneous games are always conducted under imperfect information.
  • · Is the game’s outcomes symmetrical or are the outcome imbalanced.
  • · Is it a repeated game or one shot game.

Case Study – Toyota Motor Corporation: Launching Prius

This was a classic game theory within the car industry. As it had a long development time of the technology, the first mover had a huge advantage in being the first on the market. It would set up the first company on the market with an imagine of being an environmentally friendly car company, which could have explicit benefits to the company into the future.

There was a lot of imperfect information within the case for Toyota to make its decision. Toyota did not know whether any of their competitor companies were going to develop the hybrid technology as well. They knew that other companies started developing the technology to meet CARB’s zero emission vehicle (ZEV) policies. However, when CARB’s said that hybrid would not qualify to meet their polices, it was suspected that most companies dropped out of researching and developing the technology.

Looking at their competition the most likely competitor who might be producing the hybrid technology is Honda, as it was the first car company in the world to meet the strict environment standards set under Muskie Law in the US. Honda was appealing to a younger market than most other cars and therefore as being environmentally friendly is more appealing to the younger generations, Honda might want to produce the hybrid to cement its market position.

Also the Japanese car markets have been traditionally more efficient in labour hours per vehicle than their American counterparts. And they also used few resources. This means that Toyota and Honda have consistently been able to make cars for lower costs, giving them a cost advantage. This may be a large advantage in developing hybrid technologies. Other companies such as GM may consider the costs too high in developing the technology and therefore may not find it financially sustainable.

There may be some benefit for one or more companies to release hybrid cars at similar times however the benefits are not as great as the benefit for a company if it is the only first company to release of hybrid cars. Okuda (president of Toyota Motor Corporation) realized the advantage of acting first and therefore constantly thought about launching vehicle as early as possible. Also he knew that if Toyota launches a hybrid car and another company launches a better more efficient hybrid car, Toyota’s first mover’s benefits would be limited, therefore he said that the company should use the very best technology it can use so that there is more chance it can take advantages of first mover benefits.

For Toyota there seemed to be a significant amount of advantages if it develops and releases the first hybrid car. It would capture the youth market, in which has never really captured before and also it would look like Toyota would become a significant worldwide. Europeans would warm to a environmentally friendly car. Also there is a good chance that CARB’s ZEV policy will not be meet for some time, so they probably will endorse a hybrid car policy, and therefore Toyota would be able to gain a dominant market share in California, which could lead to possible gain a larger market share throughout America.

I would imagine Toyota’s dominant strategy should be to proceed with the hybrid technology and release as early as possible. The chance of having a first movers advantage to too great for Toyota to not try to be the first car company to release a hybrid. Even if Toyota is not the first mover on the market, having the technology to be the next mover quickly after the first would also I would imagine have great benefits. Especially with Toyota using the best hybrid technology, there is a likely chance that another company hasn’t used the best technology and Toyota can extinguish some of their first mover advantages.

Case Study – Aldi in Australia

The case study suggest that Aldi is pressuring a cost leadership strategy, which is true as they have a limited product range and therefore can by the products in bulk. This creates a large buyers power, which the case study eluded to saying that Aldi has 30 to 100 times more buyer power than Walmart.

However, Aldi has also created a differential shopping experience as a side product of their cost leadership strategy. Consumers go to Aldi for the experience of Aldi shopping. The smaller stores, and the limited product range makes shopping for the consumer less difficult.

This differential shopping experience may explain why the store has fewer opening hours than it main competitors. They suggest it has smaller hours to save labour costs, however smaller hours is not necessary a good thing. It may not be a good thing because for every hour Aldi is closed, it is not generating revenue. This lost revenue may be greater than the labour costs of opening longer. The only argument that may counter not being open for longer is that Aldi is created such a differential shopping experience that its customers want to go to Aldi over other stores, so will alter than plans so they can shop at Aldi.

Aldi has got a philosophy of trying to offer “top quality at incredibly low prices.” They are doing this by cutting unnecessary operation and fixed costs down as far as possible, for example food is brought in on crates and not packed onto shelves. This saves cost of staff on not packing shelves. Aldi does many other cost saving procedures to ensure it is offering low prices. It is installed into their culture with staff being trained to have a strong focus on economic efficiency, which is accompanied by a passion for details.

Aldi has limited advertising costs and has no human resources, planning and other central functions to keep costs lean.

The article suggests that the most important decentralization was when Aldi was divided by the two brothers into Aldi North and Aldi South. It suggests that it allowed both brothers to pursue their own strategic ideas rather than trying to compromise. It suggests that the decentralization allowed the brothers to exchange experience i.e. that one operation could try a new strategy while the other waited to see how well it worked. However, I would say that the reason while they could experiment and exchange information so well was that they both had similar strategies in running the two divisions. If the divisions had extremely different strategies say one had a product range of 450 products and the other had a product range of 5000 products, the exchange of experience would be less worthwhile as one experiment might work well for one division by not the other.

Aldi is within a very competitive market within a Australia, with many large players. Currently it has advantages in differentiated shopping experience and cost leadership on many products. If Aldi remains successful in Australia, in the medium term there is a real threat of other competitors trying to copy their strategy or new players entering the market. The best strategy for Aldi is to gain as much market share as possible, especially in the market of customers who prefer the shopping experience Aldi offers. Once Aldi has got a large chuck of this market it will most likely have more economies of scales for any new entrants or competitors who try and copy Aldi’s strategy.