Presentation on theme: "Business Strategy Instructor: Michael Cooke"— Presentation transcript:
1Business Strategy 050 322 Instructor: Michael Cooke Address:Office: IC room 817Class hours: Tuesday 09:00-12:00Class Location: IC room 822
2Quiz: (1)With revenue and unit volume increasing in the mature phase of the PLC, why would firms experience margin compression? (2) Why would HP be concerned about staff turnover at computer factories in China?
3Implementing Strategies Marketing Segmentation is dividing a market into identifiable subsets (segments) of customers to predict needs or buying habits.Marketing programs are tailored to segments (potential buyers will have similar responses)For example, one shoe company will market to runners. Another shoe company will market to construction workers . Runners and construction workers and will respond to different advertisementsIn general segments will have the following characteristics1) Common needs within segment 2) Distinct (unique from other groups) 3) Similar responses to marketingSegmentation is essential for matching supply with demand.Matching supply and demand is essential for production efficiency and inventory control.Factories produce appropriate levelsAvoid inappropriate product inventoryProduce sufficient amount of each product, without overtime or contractingEnables service businesses to have the right capacity (hotel rooms, airline seats)Internet has facilitated segmentation (some of it customer self segmentation)
4SegmentationVariation in customer needs is the primary motive for market segmentation.Most companies will identify and target the most attractive market segments that they can effectively serve.In global marketing, market segmentation becomes especially critical because of wide divergence in cross-border consumer needs and lifestyles.Once management has chosen its target segments, management needs to determine a competitive positioning strategy for its products.
5Reasons for International Market Segmentation Country Screening (consideration of a market is based on initial screening criteria)Global Market ResearchCluster countries across relevant characteristicsFocus research efforts on a representative sampleMarket Entry DecisionsProduct launches based on shared relevant characteristics across countriesCountry differences on other dimensions can hinder successPositioning Strategy (influencing customer perception of the product relative to competitors)Where will marketing efforts have greatest impact?Target market segments might change due to consumer preferences or population changesHow the products or service is positioned will follow the opportunityResource AllocationMarket share clusters (increase penetration)Consumption clusters (developing the market)Marketing Mix PolicyCountries in same segment might have similar mix strategy (design, pricing, promotion, distribution)Similarities on one dimension might be offset by differences on another (such as price sensitivity)
6Requirements for International Segments IdentifiableShould be easy to define and measureValues or lifestyles may be difficult to measureSufficient SizeSegments should be large enough to be worth pursuingSmall segments aggregated across countries might workAccessibleSegments should be easy to reachInfrastructure differences across regions or countriesStability of target market behavior and compositionResponsive – segments have unique responsesAble to implement – the required marketing mix is consistent with the company goals and competencies
7International Market Segmentation Approaches Country-as-segments or aggregate segmentation(Exhibits 7-2)Geographic single dimension or several dimensionsMarketing irrelevance of many country boundariesDifficulty of determining which variables to use for geo segmentsDisaggregate international consumer segmentationConsumer segments defined by similarities along chosen characteristicsConsumer bases might be geographically disbursed – logistical issuesTwo-stage international segmentationFirst aggregate countries (macro level) screens out countriesSecond segment consumers within the country cluster (micro)Market oriented and accessibleCopyright (c) 2009 John Wiley & Sons, Inc.
8Exhibit 7-2: Nestlé’s Geographic Segmentation of the Americas Chapter 7Copyright (c) 2009 John Wiley & Sons, Inc.
9Psychological Basis Information filtering (sensory filtering) Occurs among even lowest organisms (react to heat, light. Other aspects of environment ignored by primitive senses)Highest life forms still limited in gathering and processing information from environmentWe learn to filter information irrelevant to a situationOften the most highly educated among us filter mostWe fail to see/hear or recall much of what is available to usUnder the right conditions (context) we might recall what we otherwise would notOur filtering and recall changes through life and with circumstancesMarketers try to determine which audiences might be receptive to the product message, and how to enable recallDistances between high SES among countries might be less than between SESs within a country (life circumstances and education factors)
10International Segmentation Scenarios Universal or global segments (go beyond boundaries)Customers belonging to universal segments have common needsCould be a universal niche (example: global elite, business travelers)Common customer needs higher in some product categories (high-tech or travel related)Regional segmentsDifferentiated versus undifferentiated strategies apply to global segments as wellDifferentiated strategy tailors marketing to local market conditionsAn undifferentiated strategy is often followed by some high-tech companies – uniform worldwide marketing, scale economiesUnique (diverse) segmentsSubstantial differences in cross country customer preferencesLocalized marketing mix programsFood products may have country specific segmentsDegrees of segmentation often follow degrees of market development (emerging markets usually have a simple consumer market structure – high price or low price only)Regions within a country can be targeted, given differences in consumer tastes, demographics, and income across regions in Thailand, the USA, or China.
11Demographics Segmentation Easy to measureFairly accurate and easy to obtainThe elderly are an often overlooked segmentUnique needsSelf perceptions (active, not old)Global middle class family is highly soughtDefinition is trickyHH income figures ignore purchasing power differencesVast differences between countries in how income is spentChinese spend less than 5% on rent, transport, healthUS consumers spend 50%Income distinctions ignore education and values
12Economic Forces Income inequality – Gini index Demographic variables are a factor in country wealthWorking age population relative to non-workingChina and Thailand will soon have shrinking % working ageOften overlooked implications of large % population = elderlySocioeconomic VariablesPer Capita incomeIssues in using per capita income as an indicator:Transactions are valued in an international currency (monetization of transactions)Official exchange rates seldom reveal true buying power within a countryServices are provided in-country using local currencyGoods not traded across borders (housing, etc)Use Purchasing Power Parity to estimate buying powerGray and Black Market sectors of the economy (cash or barter)Income inequality – Gini indexLower number means more income equalityScandinavian countries have least inequalityThailand, China, USA relatively unequal (higher index)
13Customer as Active Partner Such as: Patients in control of medical issues, access to information and other customers via internet (rather than passive targets)Encourage Active Dialogue of EqualsMobilize Customer Communities, perhaps via internetManage Customer Diversity (of sophistication) with most sophisticated as most active partnersCo-creating Personalized ExperiencesBeware of information overload
14Determining Unmet Needs Ethnographic Research Directly observes customers in varying contextsWhat and why customers do thingsDeeper level of understanding of needs and motivationsGood at identifying breakthrough innovationsTypically customers think of current offeringsHenry Ford’s faster horsesObservations can lead to insightsParticularly useful in going beyond cultural boundariesCan be used to improve existing productsBusiness insiders often can’t see past the existing structure (HP executives said PCs were a commodity)
15Cross Border PricingMultinational companies will often price the same good differently in different countriesDifferences might because of different levels of competition or tariffsDifferent consumer tastes and perceptions also enable price differenceA BMW X5 costs $53K in the USA, and $153K in ChinaArbitragers can buy the vehicle in the USA and resell in China for a profitAt least 35,000 luxury vehicles are shipped out of the USA each year for this purposeAccording to BMW “It’s a sophisticated and brazen business with brokers training individuals on how to buy for illegal export”The Chinese government is unhappy with companies that charge more for goods and services in China than in other countriesAutomakers respond that they have a right to set prices differently in different marketsUS auto dealers ask customers to agree not to export cars for a periodWhen these cars are exported are exported in violation of the agreement the US government may charge them with fraudExporters might have assets seized by the US government even if they are not convicted of fraudAn attorney representing a Chinese couple involved in exporting 2,000 cars to China says “If there is an arbitrage opportunity, someone will always try to make a buck, and there is nothing wrong with that.”“BMW” from Wall Street Journal 4 December 2013
16Strategy Implementation - Finance Focus onMargin compression (or expansion)Leverage implicationsP/E ratioValue of a firm and intangible assetsSince this course has no prerequisites, students will not be required to understand financial statementsLeverage is the use of borrowed money for an investment (ratio of debt to equity is one measure)Equity is owner capitalDebt is often a fixed commitment (interest must be paid)Equity is a cushion (firm is under no obligation to repay)Margin compression arises from increasing costs, decreasing prices, or bothP/E ratio is a firm’s share price divided by earning per shareThe value of a firm will often include ‘intangibles’ such as brand equity
17As Volume Increases Will Apple have Margin Compression?
18Why would Apple’s Share Price Fall with Higher Sales? Apple reports its earnings after the markets close on Wednesday Jan. 23.Unit sales projected to increase about 48% from year priorShare prices have been falling (30% last four months)P/E 11 (below industry norms, and far below norms for a growth company)Analysts say they will pay attention to the average selling price of iPhones to determine whether the iPhone 5 is still the hot seller or whether cheaper models are making up a majority of sales.The trend might help determine whether Apple will introduce a new lower-end iPhone.“The people buying their first smartphones now are lower-income households,” an analyst said. “They don’t have enough money to have $650 to pay for a smartphone.” (New York Times )Recall from our work with gross margins that profit falls if revenue falls and fixed costs are a large portion of total costCost of a basic iPhone 4 or 5 is $200 (iSupply estimate) with selling price $650.Gross margin is $450/$650= 69%Suppose selling price drops 30% ($200) and unit cost is constantTo sustain total gross profit from the iPhone, volume must increase 80%Samsung has higher volume than Apple and lower market cap (lower gross margins)In general, margin compression can come fromCompetition forcing lower pricesWhen additional sales (and profit) can only be achieved by appealing to value segmentsCost of labor or material rise and prices can not be increased enough to offset cost increasesInternal production problems or delays ariseWhen research or selling, general and administrative expense (SG&A) costs go up without gross profit increase
19Use of Leverage In banking In manufacturing From the Financial Times: “In the run-up to the global financial crisis a lot of banks did more and more lending without raising any extra equity. They were able to "game" the system, as the Basel Committee says, either by using off-balance-sheet vehicles or through other ruses. In future, there will be global limits on banks' leverage.”High leverage magnified bank profit in good times ( )Losses were amplified when margins were compressed by rising interest rates and increasing defaults inIn manufacturingReuters ( ): “Dell in talks to go private, shares surge”Dell Inc is in talks with private equity firms on a potential buyout. The Wall Street Journal said TPG and Silver Lake could team up on an offer, possibly with other investors such as pension funds and JPMorgan Chase & Co.The first source told Reuters any potential deal could be structured as a management-led buyout with Michael Dell at the helm (Dell owns 14% of the company million shares)The company has lost 40 percent of its value since last year's peak, and is trying to reinvent itself as a seller of higher-margin services to corporations - an internal overhaul that might be conducted away from public scrutiny.Note that when management buys out a company’s shareholders, they have incentive to ‘talk down’ company prospects (so share purchase comes cheap)"The market value of Dell has come down so much that a buyout is plausible. They have about $5 billion in net cash and also free cash flow generation that could sustain payments on debt from a leveraged buyout," said an analyst at S&P Capital IQDell’s bonds (current debt) also came under pressure over fears of a significant hike in leverage.In general, leverage amplifies both gains and losses.In a Leveraged Buyout the cost of servicing debt can become a burden when asset sales do not succeed as planned or operations do not improve as assumed.Firms that violate loan covenants may default. Debt payments are usually an obligation. Equity is a cushion.
20P/E RatioPrice refers to share price, earnings to total earnings divided by the number of shares (EPS)A company with $42BB earning and .94BB shares has $44 earnings per shareIf share price is $500 the P/E is $500/$42=11.9A forward P/E uses expected earningsThe earnings part of current P/E can be distorted by one time gains or lossesCompanies thought to have earnings growth prospects have higher P/E ratiosAverage P/E varies by industryComputer peripherals average current P/E = 31.5Apple’s P/E is 11.5Lower than the average for their industry, implies investor doubt about earningsAuto parts have P/E = 14 *P/E ratios compete with interest rates (money seeks highest risk adjusted return)Think of the inverse of P/E as the alternative to interestCurrent average P/E in the USA is about 15, implying 6.7% returnWould an investor prefer risky 6.7% equity return or a lower interest rate?P/E ratios tend to be higher in periods of low interest ratesSustained short term interest rate increases can have devastating effects on share prices (and business activity in general)*
21Intangible Assets An intangible asset is not physical Intellectual property such as patentsBrand equityBusiness methodsWhen a firm buys another, it will often pay more than the underlying physical assets are worthThe difference between purchase price and net assets (excluding intangibles) is goodwillFor some industries the ‘goodwill’ portion of purchase price can be high (internet = 70%)Goodwill should not be viewed as a bad thingUnder some circumstances goodwill must be written off, resulting in loss to the firm (impairment charge) which affects EPSPurchasers might assume synergies that do not happenAdverse changes in the business environmentChange in strategic directionAccording to Baruch Lev of NYU, overpriced shares used for stock-financed acquisitions may lead to substantial goodwill write-offsNote that physical assets such as inventory or factories can be written-off
22Use of Debt Versus Equity “Our main contribution to the accounting literature is to trace goodwill write-offs, a frequent and growing phenomenon, all the way back to their root cause: the incentives of managers of overvalued firms to acquire businesses, whether to exploit the overpricing for shareholders’ benefit or to justify and prolong the overpricing by maintaining the façade of growth.” (1)Value of a firm is to some extent subjective. A buyer can assume synergies that will not exist or will be far less than imagined. The value of a brand or a sales force is likewise difficult to objectively measure. A buyer with ‘easy money’ might lack motivation to look at possible negatives.Firms can fund investments with debt or equity or a combination of both. Whether a firm uses debt or equity depends on the relative cost of each and certain creditor imposed constraints on the use of leverage. When share prices have high P/E, firms have incentive to fund investment with shares as currency.(1)
23Contingency Planning Plan for unexpected events Enables quick and appropriate response to eventsFocus on high priority aspects of the businessFirms plan for disasterRedundant IT (and off-site backup of data)Value in having multiple sourcesAnother type of contingency planning involves scenario testing.What if the environment changes?Value in granularity when planningAble to isolate deviations from plan quicklyCorrective actions appropriate to the situationContingency plans involve both positive and negative eventsHow to meet increased demand?What if a key distributor decides to drop my product? (Pepsi)
24Contingency Planning – Pepsi Thailand ThaiBev acquired Thai bottler Serm Suk PCL for US$513 million in Sep 2011Serm Suk was established in It had been exclusive distributor of Pepsi brands in Thailand. Contracts between the two terminated in April 2011 after they failed to agree on terms of a new contract.Serm Suk launched its own cola beverage, est in Nov and set a target of making the brand the leader of Thailand's Bt30-billion cola segment within three years.The company’s bottling and distribution contract with Pepsi-Cola expired in November 2012Serm Suk expects est to achieve Bt8 billion in sales in the first 12 months."Our strong point is our distribution system," said the marketing/sales operation directorSerm Suk has five bottling plants and 48 branch offices throughout Thailand.The company has 1,200 sales trucks and 150,000 coolers.In October 2012 US based PepsiCo announced investment of US$600 million (Bt18.4 billion) in the Thai market over the next three yearsThe $600-million investment includes a $170-million bottling plant in Rayong, bought from San Miguel in February 2012The company appointed the global logistics firm DHL as logistics and warehousing partner for Thailand.As part of the huge investment, PepsiCo will make significant marketing investments in Thailand. This will include new marketing and consumer-engagement campaigns related to music and sport platforms.Pepsi will end its conventional system of returnable glass bottles,There is a declining market trend for returnable bottles,These will be replaced with non-returnable bottles and cans, which are growth packaging categories.Full production of Pepsi-Cola non-returnable bottles and cans will be achieved by June next year.
25Pulling Together Some Threads Excerpts from http://www. nytimes The prefix ‘hyper’ means excessive.According to Thomas Friedman - In the last decade the world went from connected to hyper-connected in a way that impacts every job, industry and school.In a world connected by digital technologies, people can compete, connect and collaborate from anywhere (The “World is Flat” was published in 2004)Virtually everyone everywhere has access to a hand-held computer, connected via the cloud to infinite applications and storage, so they can work, invent, entertain, collaborate and learn for less money than ever before.Every boss now also has cheap, easy, and fast access to software, automation, robotics, labor and brains anywhere in the world (he or she also has access to social networks).When the world gets this hyper-connected, the speed of change for every job and industry becomes hyper-mode.In the past, we could assume that an educational foundation would last your whole lifetime. Now people have to learn throughout life.Not surprisingly, incomes around the world converge, as bright people in poor countries get access to the same information as educated people in the developed world.We discussed the book “Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy”With the digital revolution people with more education start to earn much more than those without itThose with the capital to buy and use machines earn much more than those who can only offer their laborSuperstars reach global markets and earn much more than those with slightly less talentWhich languages do people use to enter the globally connected world?
26Amazon’s Warehouse in Germany Michael Dalder/Reuters
27Amazon and Apple againAfter Amazon released quarterly results, the shares immediately jumped nearly 10 percent in after-hours trading, about the same amount that Apple fell after releasing its results a few days before.What caught the eye of investors was that operating margins as a percent of consolidated sales rose to 3.2 percent, from 2.7 percent a year ago.“The carrot for Amazon investors is improvements to margin over time,” an analyst said.Apple, on the other hand, would need to build a cheap iPhone to keep growing as fast as it has been, which would slice into its margins.
30Global Challenges Gain and maintain exports to other nations Defend domestic markets against imported goodsEven if a firm does no business overseas it can be vulnerable to exchange rate changesForeign competitors gain price advantage when their currency fallsProtectionism - Countries imposing tariffs, taxes, and regulations on firms outside the country to favor their own companies and peopleFCPA prevents companies from making bribes to government officialsPrivate party transactions are ok (CP paid a private group in USA to not lodge a trade complaint)Material facilitation fees to local officials are not ok (See Wal-Mart-Mexico)India has laws against lobbying (viewed as a form of bribery)Money laundering – even the suspicion can result in asset sieazure
31Wal-Mart’s FCPA Problem Last November Wal-Mart said that its investigation into violations of a federal anti-bribery included Mexico , China, India and Brazil, among their most important international markets.More than half of Wal-Mart’s 10,524 stores are international. Mexico has 2,230 stores. Brazil has 534, China, 384.Wal-Mart found evidence of potential violations of the Foreign Corrupt Practices Act, beginning with bribery involving the opening of stores in MexicoWal-Mart sees the degree to which corruption may have infected its international operations, and shows growing alarm within the company about the problem.In 2005, a former lawyer for Wal-Mart in Mexico spent hours telling company investigators how Wal-Mart de Mexico’s leadership had managed a bribery campaign to speed expansion. The lawyer said hundreds of bribes were paid for construction permits and other licenses needed to open new stores.Wal-Mart is changing as a result of investigations. Lawyers for each country now report to the general counsel of Wal-Mart International . Before they reported to the chief executives of that country — which could create conflicts of interest if the chief executive was involved in corruption.According to a lawyer, in these situations a company will report to government agencies with “very detailed presentations about the results of the internal investigation” in the hope of receiving lesser punishment from the agencies.
32Thai Companies Invest Abroad Thai companies are going where the money is. They're going to countries with large natural resources and markets (A).PTT Exploration & Production (PTT) has been expanding abroad aggressively.In November 2010 it purchased 40 per cent of Statoil ASA's oil sands project in Canada for $2.28 billion.In August 2012, PTT made a $959-million offer to buy out a Singaporean coal miner Sakari ResourcesJuly 2012 PTT purchased UK-listed Cove Energy for $1.9 billion, with assets in Africa.PTT has invested more than $6BB in Myanmar.Charoen Pokphand Group in December purchased a 15.5-per-cent stake in China's second largest insurance company from HSBC for $9.39 billionWith a market cap of about US$13.79 billion and over $864 million in profits Siam Cement Group has been very actively investing in Indonesia. (A)Thai Beverage, makers of Chang Beer made an $11BB bid for the Singapore based Fraser and Neave Ltd.ThaiBev said the deal brings exposure to high-growth Southeast Asian markets with attractive demographics and consumer-spending trends. (WSJ)Fraser & Neave has a portfolio of soft-drink brands and properties in the region.Central Retail Corp. spent €260 million, or about US$320 million, to acquire the entire stake in La Rinascente in Milan in May last year. (WSJ)(A) Karim Raslan The Star Kuala Lumpur January 4, 2013WSJ.com
34Slowing Expansion of US Retail Space Wall Street Journal 17 January 2014
35The Effect of Better Information A change in foot traffic at brick-and-mortar stores is among the reasons retailers have reduced new store openings and are shifting that investment toward online operations.Sears, Gap Inc. and others have closed hundreds of stores over the past couple of years.J.C. Penney said it will close 33 underperforming stores and eliminate 2,000 positions to focus on locations that generate the strongest profits.Store closings could increase because retail leases usually last between 10 and 25 years, and many were negotiated before e-commerce really took off (recall reasons for Starbucks’ short term leasing strategy)Internet sales were only 5.9% of all retail sales in the third quarter, but the internet has a huge impact on how shoppers use stores and what they will payConsumers seem to be figuring out what they want online then making targeted trips to get what they have selected from retailers that offer the best priceShoppers now browse less in physical storesShoppers visited an average five stores per mall trip in 2007, and only visit three per trip in 2013Store retailers get fewer chances to stimulate impulse purchases when consumers use the internet to browse or research itemsOnline stores make prices easy to compare, so some shoppers go into the stores only when they can get discounts (in the past, price comparison involved physically going into stores and some wandering)Major retail operations such as Macy’s and Best Buy have responded to the changes in consumer shopping habits by providing online sales in the physical storesBest Buy said that expanding its online presence will be a top priority in In the 16 January 2014 earnings conference call CFO Sharon McCollam said the company will invest more in online marketing and customer databases this year to catch up with its competitors. *"We were out-competed from an online marketing standpoint," she said. ** Wall Street Journal 17 January 2014
36A Few Labor Cost-Saving Tactics Labor markets, labor agreements, government policy directly affect use of these.Salary FreezeHiring FreezeSalary ReductionsIncumbent versus new hire wage structureAcross the board versus selected positionsReduce Employee BenefitsTime off (vacations, sick leave, etc.)Health careRetirementReduce paid hoursLayoffsTemporaryVoluntaryMandatoryHire contractors or tempsEarly retirement, voluntary buyoutsReduce bonuses
37Labor Tactics – Using Contractors Boeing Company moved some production of the new 787 Dreamliner out of Seattle to a new plant in South Carolina in 2011Part of the motivation was access to cheaper labor (another part was state financial incentives)Boeing must cut costs to meet profitability targets for the new aircraftAs production in SC doubled in 2013, sections of the aircraft were being shipped incompleteBoeing struggles to attract experienced contractorsCurrent wages for contractors are higher than for employees but lower than in 2009 (contractors typically get no benefits)The current shortage of skilled labor follows release of several hundred contract and employee workers in Feb 2013Contractors released in 2013 had been with the operation for several yearsAnalysts expect Boeing’s Everett plant will stay busy to meet targetsBoeing is shifting staff from other parts of the country to assist the 7,000 workers already in SCBased on a Wall Street Journal article 24 Jan 2014 and Seattle Times December 31st, 2013
38The Changing Workforce in China At a Pearl River area factory labor costs (wages plus benefits) per worker have been rising 30 percent or more each year. Nationwide migrant worker wages are rising is 21 percent annually. The government has mandated 13 percent annual minimum wage increases through This is about three times inflation.Wages at the factory are rising fast because it is in an area that was slower to develop. Five years ago, the factory paid $90 to $120 a month to new workers. Workers gave $13 to $40 of their monthly pay for six months to their foreman for training. Now the factory offers new employees 2,500 renminbi a month, about $395, before overtime *. Six-person dorm rooms have been replaced with two-person apartments. Workers no longer have to give part of their wages to the foreman.Foremen now get an $8 to $16 bonus for each month that a new blue-collar employee stays on the job.The factory struggles to find workers.An outcome of China’s one-child policy is that many college graduates are only children with parents and grandparents who continue to support them into adulthood. Those children do not want factory work.A factory manager said: “Their parents, their grandparents give them money; they have six people to support them. They say, Why do I need to work? I can stay home and get 2,000 renminbi a month, why should I get on a bus every day to earn 2,500 a month?”China’s vocational schools and training programs are unpopular. They are seen as dead-ends. They are also seen as schools for people from peasant backgrounds. “The more educated people are, the less they want to work in a factory.”The number getting vocational training is about half that of students taking academic courses.The combination of the one-child policy and rising rates of college education is starting to hit the core of China’s factory work force: 18- to 21-year-olds not in college. Their numbers are on track to plunge by 29 percent from 2010 to 2020 even if enrollments in higher education hold steady.“We have jobs and positions for which skilled workers cannot be found, and on the other hand, we have talented people who cannot find jobs; technical and vocational education and training is the answer,” the vice minister of education said at a conference last June.* Note that in dollar terms wages have risen even faster than in renminbi due to exchange rates.
39What Strategists are Thinking About* China’s large pool of surplus rural labor has played a key role in maintaining low inflation and supporting China’s growth model.As agriculture surplus labor is exhausted, industrial wages rise faster, industrial profits are squeezed, and investment falls.Rebalancing China’s growth pattern would produce significant positive external spillovers and potentially raise output in those countries within the supply chain (mainly emerging Asia) and commodity exporters.Demographics strongly suggest an imminent transition to a labor-shortage economy. China will have a profound demographic shift within the next decadeThe UN projects that growth of the working age (15–64) population will turn negative around 2020.This forecast potentially understates prospects of a labor shortage:Industry employees are predominantly young.The growth rate of the core subpopulation, shrank to zero in 2010 and will decline faster than the overall working age population.After a long period of “demographic dividends,” the share of dependents (those aged 0–14 and > 64 years of age) was lowest in 2010 and will rise (see next slide)Raising agricultural productivity by raising mechanization could result in a sizable release of rural workers that could partially offset labor shortfalls in urban areas.Scenario analysis shows that higher fertility through relaxation of the one-child policy will delay depletion of excess labor (slightly). Financial reform will accelerate the transition to a labor shortage economy, through wealth effects.Very low fertility rates still prevail, especially in the richest parts of the country. Shanghai reported fertility of just 0.6 in 2010—probably the lowest level anywhere in the world. According to the UN's population division, the nationwide fertility rate will continue to decline, reaching 1.51 in (http://www.economist.com/node/ )* From an IMF working paper.
40Effects of The Shrinking Labor Pool* Industry’s relocation to the interior provinces—where wages are lower and the large reserve of rural labor resides—has gathered pace since the global financial crisis.Parallel developments, such as an uptick in labor activism since the financial crisis is also consistent with strengthened bargaining power that accompanies a shrinking pool of labor.* From an IMF working paper.
41Other Points of ViewChina’s demographic challenge may not be the disaster people are thinking about (A).China’s industries are not very automated compared to developed countries.China’s capital efficiency is poor. (Where, for example, does all that steel actually go? Think of the old Soviet Union’s steel and concrete production.)If China’s capital efficiency rose to match Japan’s, China’s growth prospects could theoretically remain high.China invests a higher percentage of GDP, but invests less efficiently than Japan, South Korea and Taiwan during their rapid expansions. (A)In 2012 the working-age population in China decreased 3.45 million. It is million according to the director of the National Bureau of Statistics. (B)The director said that China should work to boost labor productivity, as well as improve people's education and adjust types of employment to extend the dividend. (B)An economist at the China Center for International Economic Exchanges in Beijing says that the fading of China's demographic dividend has required China to increase spending on education and culture to boost the quality of the country's human resources, said (B)FT.com 6 Feb 2013B)
42Changing Dependency Ratios Graph on the Left Includes Under 16 and Over 65 right side, and
44An Article by Michael Lewis – Incentives In 2005 the investment bank Goldman Sachs changed the way it paid its employees:Before 2005 managers made assessed employees based not just on how much business you’d brought in, but also on how good you were for the organization. These two factors combined indicated your true economic value to the company.After 2005 the system has become largely mathematical: employee bonuses were a percentage of the amount of revenue the employee brought to the firm.In some years, the bonus would be 5 percent of that revenue; in better years, it would be 7 percent.“The problem with the new system was that people would do anything they could—anything—to pump up the number next to their name.”The incentives changed, the behavior followed.According to Lewis: “Goldman now rewarded its people for advancing their narrow interests at the expense of their customers, the wider society, and even the firm's own long-term interests. ““The change in incentives almost certainly can be traced back to Goldman's decision, in the late 1990s, to go public. “The firm ceased to be a partnership (with partners having unlimited personal liability) and became a public corporation.The people who ran it ceased to have a long-term interest in Goldman's reputation and ceased to have a long-term exposure to its losses.
45The Strategic Value of Integrity Antony Jenkins, the chief executive of Barclays, has warned it would take as long as a decade to restore public trust in the bankIn remarks on BBC he said “Trust is a very easy thing to lose and a very hard thing to win back. In my view it will take between five and ten years to rebuild trust in Barclays. I’m hoping that in what we do at Barclays we can also begin to rebuild trust in banking.”Jenkins was appointed chief executive in August 2012, after the Libor manipulation affair led to the departure of his predecessor, Bob DiamondThe CEO has staked his reputation on restoring Barclays’ imageThe banking industry, faces an difficult task to convince customers and other stakeholders it can be trustedBarclays Bank is the subject of several investigations, related to capital raised from Qatar in 2008, a dispute over US energy price manipulation and for manipulation of foreign exchange rates.In Qatar in 2008 Barclays Bank breached the requirement to act with integrity toward holders and potential holders of the company’s shares. The F.C.A. (British financial regulator) considers that Barclays acted recklessly. *Barclays has reserved large sums for different legal investigations, including a $450 million settlement in 2012 related to manipulation of the Libor rate.Financial Times 31 December 2013 * NY Times 16 Sep 2013
46Patent Infringement and Innovation Carnegie Mellon University said it was awarded $1.17 billion by a federal jury in Pittsburgh last December inMarvell Technology Group had used technology developed at the university without a license.The patents were developed by a professor and a former Ph.D. student in the department of electrical and computer engineering.Their work was supported by Carnegie’s Data Storage Systems Center, a university research organizationCMU said Marvell had infringed on patents relating to technology for increasing the accuracy of reading data from high-speed magnetic disks used in hard drives.The university said “Protection of the discoveries of our faculty and students is very important to us.”Apple is being sued by the University of Wisconsin for patent infringement in the design of the A7 processor (used in the iPhone 5s)