Continuous Expansion of its Economy - Assignment Example

Assignment A. In a town centre there are two businesses, Hiphop and Gerries selling music CDs. If the price of CDs in both outlets is 10, the town's monthly sales are 2000. If the price is 11, sales are 1800. The wholesale price is 6. Charging the same price they share the market equally. However, if one charges 10, whilst the other charges 11, the lower priced outlet sells 1600 per month and higher priced outlet sells only 360. Hiphop Gerries 10 price of CD 11 price of CD 10 price of CD 2000 2000 360 1600 11 price of CD 1600 300 1800 1800 There is dominant strategy in this situation. Gerries sells CDs at 10 regardless of how much Gerries sells CDs. If Hiphop sells CDs at 11, Gerries sells it at 10 and the latter gets 1800 monthly sales. If Hiphop sells at 10, still Gerries gets 1800. A low price of 10 is the dominant strategy because Gerries gets it no matter how much the price Hiphop sells the CDs. The retailers have the option to sell the CDs at 10 or 11, and they can have a pre-commitment to meet the competition. If both sell at 10, they get 2000 each monthly sales, and if they sell at 11, they get 1800 each monthly sales. This is the dominant price. They can collude successfully, meaning they agree to sell this at this price. But each has the option to manipulate or to retaliate. Gerries can outsmart Hiphop or Hiphop can outsmart Gerries, making the 360 - 1600 sales for the 10 - 11 sell off. They both have the ability to retaliate because the difference is only 1. And what is 1 But what is 1 if you multiply it with the number of CDs sold in a month The figure is enticing to the mind of a retailer/businessman because it would seem big: 1 x nos. of CDs in a month would seem big. But if we follow our matrix, the picture is clear that if one sells at 11 and the other 10, the one who sells high will only get 360 and the other 1600. Two fast food restaurant chains, BurgerBinge and McDennys, are considering outlets within the same small shopping mall. If they both begin operations they will each lose 100,000 pa. If only one sets up it will earn 250,000 pa. profits. Draw up the pay off matrix. Use the matrix to define and explain the notion of "first mover advantage". In the first-mover advantage, a game is in equilibrium when neither player has an incentive to alter their choice. This means that both players have decided to set up their outlets. If they withdraw or do not set up, the game is not in equilibrium. In the matrix, if BurgerBinge sets up the outlet alone, he gets 250,000 profits pa, but if McDennys sets up too, they will both lose 100,000 each. When both do not set up, they won't have profits, and the game is not in equilibrium. Part B PORTER'S FIVE FACTORS Porter's five forces are the determinant factors in any industry's profitability. These five forces are: 1. The threat of entry 2. The threat of substitution 3. The power of the buyers 4. The power of the suppliers 5. Competitive rivalry within the industry These five forces are the only factors that determine the profitability of any industry according to Porter. Let us examine one industry which affects people's needs - department store retailing. Industry: Department Store Retailing (Mintel Report) The industry covers department stores, non-food discount stores and other retailers who do not specialize in any one particular non-food product area. In UK this includes retail businesses like Boots, Woolworths and Wilkinsons, but there are many others which will be enumerated as we go along. There is no clear definition in the Mintel Report for department store retailing. Department store occupies an area of at least 1000m2. Department stores usually sell apparel, lingerie, fashion accessories, footwear beauty products, and some home related items. The key product markets in which department stores trade (clothing, footwear, electrical goods, all home goods excluding DIY, and personal care products and services) were worth 122 billion (incl. VAT) in 2005 and grew by just under 24% between 2001 and 2005. Sector size Sales through mixed goods retailers amounted to 18.2 billion (excl. VAT) in 2005 and have grown by just 6% since 2001. Meanwhile estimated department store sales reached 14.3 billion (excl. VAT) in 2005, up 7% on 2001. Both sectors have therefore underperformed relative to the product markets in which they trade. Competition has been fierce from specialist retailers, grocers, discounters and Internet specialists. Department stores are widely popular. The GfK NOP research for Mintel shows that two thirds of people had bought from department stores in the previous six months with women (72%) being slightly more enthusiastic shoppers than men (60%). Department stores are a good social hub for women. They can browse easily, buy things for themselves and their families and have a chat over a coffee or lunch. Close Competition Rivalry is intense among competitors. Department stores are trying to get the attention of other rivals' customers. Prices Prices in department stores are unstable. Prices are under pressure for clothing and electrical goods. Then, there were consolidations. Bentalls' four stores were acquired by Fenwick in 2001. Beatties was bought by HoF, and Allders was sold off on a piecemeal basis in 2005. Benhams purchased eight of the Allders stores. An increasingly affluent population is seen over the last five years, and this increased affluence is good news for retailers simply because consumers have more money to spend. They won't spend it all in shops. Retailing is competing for a declining share of private consumption. But since department stores are biased to the higher socio-economic groups, there'll be higher spending on this particular group. Deflation has been a major factor in the clothing and consumer electronics market. Apparel is a key product category for department stores, so department stores have to keep their sales volumes up to maintain margins. Retail spending can be highly sensitive to the weather, the current fashion trend and even whether there is something to distract consumers from shopping - anything from a war to a World Cup. Spending in household goods is closely allied to house purchasing activity. Retailing is more demanding and more competitive, and the rewards for success and the costs of failure become greater as well. Customers of M&S are older, aged 55-64 years, it needs to attract customers from 35-54 age bracket, and these customers are from Debenhams and House of Fraser. Expansion John Lewis' massive expansion, in 2006 it had 26 stores, then 11 new ones and another 10 planned stores. Debenhams has 24 new outlets and 4 new. M&S has a chain of over 300 mainstream stores but only 72 of these are described as 'major' city centre or out-of-town stores, with a further 13 retail park stores. These stocks are full or close to full assortment and thus qualify as departmental style stores. However, it does not disclose separate sales for these outlets. Threat of Substitution Home Shopping The Internet is not only a competitor but a threat of substitution, as defined in Porter's Five Factors. The internet is here and already a part of many people's lives and businesses. There is no doubt that this is going to affect many businesses including the retail business. E-commerce is a threat. John Lewis and Debenhams are utilizing their websites. Others should work to expand to ecommerce. What will happen in the future with many of the consumers resorting to ordering their household needs, clothing and other personal needs through the internet is a big question. Two competitors in the beauty market, Boots and Superdrug, have both recently announced major investment designed to encourage more women to shop via the Internet. Department stores cannot afford to get left behind. E-commerce must be complementary to the store proposition. Browsing the website or catalogue allows shoppers to get an idea of what's available, it is convenient and enhances the overall shopping experience. According to the consumer research commissioned for this report, 9% of adults have bought from a department store catalogue and 12% from a department store website. Supermarkets and the leading fashion chains have a vested interest in their online offer not becoming too popular, but the situation is rather different for department stores. Most town centres and shopping malls can only support one or two such stores, so the major players don't always compete within the same catchment area and it is hard to get a national presence in physical terms. So, rather than undermining the viability of their physical store network, staking a claim in the e-commerce market can only be a good thing for the more valued department store retailers. The Power of the Buyers Buyers dominate this industry, and there is no other way department stores can do except succumb to the caprices of their buyers. They entice their customers through discounts, sales and low prices. Furthermore, there has been a consumer boom for the last ten years or more. But the trend is thatit is over. Consumer confidence has weakened and shoppers are becoming more cautious. Demand for fashion furniture and consumer electronics has been strong, but it is expected to slow. The boom saw major changes in the consumer market. Shoppers were more demanding, selective and expected more for their money. Consumers wanted an offer that said something to them. Department stores responded quite well to this by reinforcing their own particular credentials. Consumers also wanted more design-led merchandise for their homes. Consumers wanted change in designs, and if not met, they'd go to other suppliers. In summary this, the threat of the buyers works to the industry's disadvantage. Barriers to entry The department store sector has high barriers to entry as capital costs are great, and the return on investment slow compared to a standard shop unit. Densities on sales are typically much lower. This is because of slow stock turn on high ticket goods like furniture and carpets. As the out-of-town sector developed in DIY, electrical and furniture retailing during the 1980s, many department stores struggled to compete on price and range. So there was a move towards a more streamlined offer focusing primarily on fashion and on only the faster moving homewares. Many modern department stores trade from just two or three floors and are smaller and more efficient than the department stores of old. There is also a lot of restructuring of older stores going on at present, in a bid to maximise the potential of each property. But they will never match the efficiencies of modern outlets. Again, this works to the industry's disadvantage. Power of Suppliers Power of suppliers in the department store retailing is partly negligible. Supplies are abundant in many parts and can not dictate prices. Consumers themselves dictate the prices. Threat is negligible. Department store sector drivers Economic growth and rising consumer affluence Falling prices in apparel and consumer electronics (but rising costs) Ongoing physical development by the majors Reconfiguration and refurbishment of space to make stores easier and better places to shop, and more efficient for retailers to run Greater choice of home shopping and home delivery options Wider selection of price points Improving range of facilities and services Loyalty programmes becoming more important Wider customer audience - appealing more to the young Growing demand for pampering and personal grooming products and services Appeal of designer brands and luxury goods Re-introduction of food halls. Conclusion Most of the forces are working to the industry's disadvantage, except the power of suppliers. References Mintel Report on Industries, Department Store Retailing, can be found on line at: http://academic.mintel.com/sinatra/academic//display/&id=173695retrieved 2007-04-30. Perman, R. Business Economics, can be found online at: http://personal.strath.ac.uk/r.perman/beintroexp.htm Perman R and Scouller J (1999) Business Economics Oxford Porter's Five Forces, can be found online at: http://www.quickmba.com/strategy/porter.shtml Assignment No 2 1. "The USA is enjoying today the longest continuous expansion of its economy since modern records began." Discuss with an examination of the data to be found at http://www.bea.gov. The United States is described as a "capitalist" economy. This term was coined by Karl Marx, a social theorist, to describe a system in which a small group of people who control large amount of money make the most important decisions. This term is not anymore used popularly on the United States; it can now better be described as a "mixed" economy. The government is now playing an important role, together with the private enterprise. Start of modern records, as stated above, is 1929. From that year we can already examine Annual and Quarterly Reports of Gross Domestic Product (GDP) expressed in current dollars and chained 2000 dollars. As of 2006, according to estimates released by the Bureau of Economic Analysis, the USA Real Gross Domestic Product increased at an annual rate of 2.5 percent in the fourth quarter 2006. Real Gross Domestic Product is the output of goods and services produced by labor and property located in the United States. Since 1929, GDP in billions of current dollars is 103.6, and GDP in billions of chained 2000 dollars. The quarterly report (or seasonally adjusted annual rates), which started in 1947q1, we have 237.2 GDP in billions of current dollars, and the GDP in billions of chained 2000 dollars is 1,570.5. This is supposed to be the start of the available records for USA. After 1929, and the start of the second quarter 1947, there is sudden decline in GDP in billions of current dollars and chained dollars, and this continues up to 1939, and in this year the annual rate in GDP in billions of chained 2000 dollars is 1,646.7. In 1940, there is an increase in the GDP, from 92.2 for the previous year to 101.4 and GDP in billions of chained 2000 dollars is 1,034.1 There is a rising trend from 1929 up, a ladder of increases can be seen. In 1941, there's a GDP of 126.7 and 1,211 in chained 2000 dollars. There seems to be a pattern in the increase of GDP of current dollars and chained 2000 dollars, year to year, except that in 1945 and 1946, the increase in billions of current dollars is a minimal .8. And to think that this was the end of the war. But that is explainable because the USA may have earned during the war. In 1941 to 1942 the increase is a staggering 35.2 and 224.3 in billions of chained 2000 dollars, and to think that this is only the start of the war. From those years onward, onto the fifties and sixties, and even the seventies, the trend continues: an increase in the GDP in billions of current dollars and GDP in billions of chained 2000 dollars. Shifting our focus on the nineties, we can see a different trend - the increase in GDP in billions of current dollars by the hundreds. From 1991 to 1999, we have an increase of 192.8, 341.8, 319.7, 414.8, 325.5, 419.2, 487.4, 442.7 and then 521.4 in 1999. These increases are staggering. The expansion of the US economy is continuous from that time of 1929 where records are available. Then with another war in the middle east, in Iraq particularly, USA experiences another boom. At the turn of the century and up to year 2006, a wide expansion is experienced in the US. Last year alone, the increase is 790.8 in billions of current dollars, and 366.7 in billions of chained 2000 dollars. This trend in the continuous expansion of the US economy will go on and on, because we don't see any further negative factors that might slow down the US economy. 2. Using the income-expenditure model, examine the impact of the recent fall in the value of the US $ upon the Euro economy, (Refer to http://news.bbc.co.Uk/l/hi/business/3368567.stml http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm According to report by Bureau of Economic Analysis, real gross domestic product or output of goods and services produced by labor and property located in the US, increased at an annual rate of 1.3% in the 1st quarter of 2007. Signs for deceleration of real GDP in the 1st quarter: a. downturn in exports and upturn in imports b. deceleration in PCE for non-durable goods c. downturn in federal government spending that were partly offset by a smaller decrease in private inventory investment, and federal government spending d. Imports increased as subtraction in the calculation of GDP increased Explanation: a. Deceleration in real GDP growth in the first quarter primarily reflected a downturn in exports, and upturn in imports; b. Deceleration in PCE for nondurable goods and a downturn in federal government spending because of private inventory investment, an upturn in equipment and software, a smaller decrease in residential fixed investment, and an acceleration in PCE for durable goods. Table of price indices, increases and decreases for the third and fourth quarters of 2006 1st quarter 4th quarter For Gross Domestic Purchases 3.6% .2% Excluding food & energy prices 2.8% 2.4% Increase of pay for civ/mil pers .2% Real Personal Consumption 3.8% 4.2% Durable Goods 7.3% 4.4% Non-durable goods 2.9% 5.9% Services expenditures 3.7% 3.4% Non-residential fixed investment 2.0% -3.1% Non-residential structures 2.2% .8% Equipment & software 1.9% -4.8% Real residential fixed investment -17.0% -19.8% Real exports of goods & svcs. -1.2% 10.6% Real imports of goods & svcs 2.3% -2.6% Real federal gov't consumption expenditures and gross investment -3.0% 4.6% National defense -6.6 12.3 Nondefense 4.7 -9.6 Real State & local govt. Consumption expenditures & Gross investment 3.3 2.7 The real change in private Inventories -.30 -1.16% Private businesses increased Inventories $14.8 bn $55.4bn (3rd q.) $22 bn Gross domestic purchases Real final sales of domestic product (GDP less change in private inventories) 1.6 3.7 Disposition of personal income Current dollar personal income increased by 245.7 bn $126.1bn (9.2%) (4.7%) Personal current taxes 57.8 bn 24.0bn Disposable personal income 188.06 bn $!02.0 bn (18.0%) (4.3%) Real disposable income 4.5% 5.3% Personal outlays 173.3bn $86.5 (7.3%) (3.6%) Personal saving -$102.8 bn -$117.5bn (disposable income less personal outlays) Personal saving rate -1.0% -1.2% (saving as a percentage of disposable personal income) Analysis of the Findings We will base our analysis from the data above. Gross domestic purchases increased by 3.6% in the first quarter as compared to .2% in the fourth quarter. There's a rather big downturn in that increase. Gross domestic purchases covers goods bought by private and public sectors. In the real personal consumption, there was an increase from 3.8 to 4.2% in the fourth quarter. There is a decline in the percentage of growth of gross domestic product, and this can be seen all throughout from the year 2003 up to year 2007. A first, there is a gradual decline, and then a sudden decline. In the first quarter of 2007, the growth is now 1.7%. For the personal consumption expenditures, there is a gradual decrease in percentage growth for the three year period 2004 - 2005 - 2006, which is 3.9 3.5 3.2. Still, there is a decline. US consumption now is expected to decline because of the decline in the GDP. Remarkable is the net exports for goods and services. In the first quarter of 2007, it is -1.2%. There is marked decline, from 9.2, 6.8 8.9 for the three year period 2004 - 2005 - 2006, it becomes negative. With this, an observation can be made that in 2007 and the years ahead, there will be a decline in US expenditures, especially importation. For services, we have this trend: 9.7, 5.1, 5.4 for the three year period, and -2.3 in the first quarter of 2007. We can see that there is again a wider decline in the percentage growth for services. For imports, we have again this trend: 10.8, 6.1, 5.8 all in percent, and in the first quarter of 2007, the growth is only 2.3%. Imports have slowed down and may continue to slow up the year end of 2007. If this continues, importation to UK by the USA will surely fall. For goods, we again have this trend for the three year period: 10.9, 6.7, 5.9 all in percent. That means there is growth for 2004, 2005 and 2006 respectively. But in the first quarter of 2007, we have 1.9%. The trend has slowed down gradually from year 2004 until we reached this 1.9% in 2007. Observation: The fall of USA house prices will have an impact on UK Aggregate Demand. This is because the UK is an important trading partner of the USA, so the decline in American imports will mean a decline in UK exports. The relation of this UK exports and Aggregate Demand in shown in the following diagram: E=Y AD1 E AD = C + I + G + (X - M) AD2 Net Exports = X - M 45 Y1 Y2 Y (UK) The equilibrium level of national income declines from Y1 to Y2. The fall in US houses prices would impact on UK economy and also affect employment in UK. There is a decline in US importation to UK and the rest of Europe. Because of this, there is a decline in UK exports. Aggregate demand declines too, from AD1 to AD2. References: Nellis J G and Parker D (1996) The Essence of the Economy. 2nd Ed. Prentice Hall. News Release: Gross Domestic Product, can be found online at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm, and http://www.bea.gov/national/xls/gdplev.xls Office of Federal Housing Enterprise Oversight (OFHEO), House Price Appreciation Slows, can be found online at http://www.ofheo.gov/media/pdf/2q06hpi.pdf Perman, R. Business Economics, can be found online at: http://personal.strath.ac.uk/r.perman/beintroexp.htm Perman R and Scouller J (1999) Business Economics Oxford Read More