Current Event Post - Plane Makers Under Pressure to Cut Costs as Competition Looms

While consumers have considered Boeing and Airbus the only rivals in creating large innovative aircrafts, the market may have overlooked a rising dragon in the East,  China’s state owned Comac is creating a C919 and C929 that will rival the Boeing and Airbus airplanes (Cameron 2012). Comac’s C929 has been labeled a “game changer” in the industry providing a 10% reduction in cost compared to Boeing and Airbus ³(Cameron 2012). The plane will carry 165-180 passengers and will benefit from China’s growing need to replace retiring airplanes (Cameron 2012). An important point advantage China has over Boeing and Airbus is supply of low cost labor in the country. Although the article explains that this advantage is minimized when looking at the bigger picture because most of the parts are from the west it still will be a long term advantage over the United States and European labor unions that increase labor costs (Cameron 2012). Also, it does not take a country like China to build the know how to create these parts reducing the competitive advantage of Boeing and Airbus in the long run. Increased competition in the industry pushes downward pressures on prices decreasing margins giving China’s labor cost and important strategic advantage. Comac has had success and traction with their current C919 selling over 380 orders². The company is expecting to sell anywhere from 4,000- 20,000 airplanes over the next 20 years³.

            China’s state owned enterprises low labor costs creating increased competition in the global market place is important for every industry in the world. The country has a strategic competitive advantage in low labor costs that pushes downward pressure on price and increases competition globally. Also, it is important that we recognize there is a new Asian tiger in the aircraft market providing competition for the traditional Airbus and Boeing.

            Implications of China becoming competitive in the aircraft market means decreased margins for the top 2 aircraft companies. Downward pressure on prices will require that western companies tighten supply chain and reduce the cost of materials or add value that allows price competition to cease to exist. Managers should keep an eye out for state owned enterprises that provide increased competition through low labor costs.

  

¹Cameron, D. (2012, Nov 09). Plane makers under pressure to cut costs as competition looms. Wall Street Journal (Online). Retrieved from http://search.proquest.com/docview/1143674269?accountid=7108

²http://www.reuters.com/article/2012/11/13/us-china-airshow-idUSBRE8AC03B20121113

³http://www.globaltimes.cn/content/744184.shtml

Quantitative Article- Market Diversion and Market Power: California Eggs

    

The journal article Market Diversification and Market Power: California Eggs investigates accusations of price fixing of United States egg producers and the potential effects that is has on competition in the United States by exporting excess capacity abroad to keep prices high domestically and increase market power of the egg producers. This article was written in response to numerous anti trust lawsuits were filed in 2008 claiming market power and competition were being corrupted by the exportation of excess egg production that increased egg prices (Allender 2010). The hypothesis was tested in the Visalia, California that had an Albertson’s, Food Co and Von’s and a Wal-Mart that did not sell grocery items eliminating them from the study(Allender 2010).

            This article is important because it examines how exporting goods can affect the competitiveness among retailers and producers of products, which has the potential to harm consumer interests. This anti competitive strategy can transfer to many different industries of perishable and non-perishable items. The article explains that eggs are a great case study for a violation of the Capper-Volstead Act which is an act allowing producers to form associations for agricultural products¹. To give some background of the egg industry it is a recently consolidated market that is vertically integrated with only a small portion of the eggs exported because of the perishability of the product (Allender 2010). United Egg Producers Association (UEP) in which 90% of the egg market is a part of and is protected by the Capper-Colstead Act (Allender 2010). The (UEP) cooperates to have handling and quality control standards but the UEP also supervises the output and if output is too high they are able to take measures to decrease the supply of eggs in the market (Allender 2010).

            The article is a hypothesis-testing article that tests if egg producers export excess supply of eggs to decrease the domestic supply which increase the price for retailers and consumers. A model of the California egg industry was used to account for the choices a consumer concerning the store the consumer purchases the eggs, the selection of eggs at the store and the brand the consumer purchases, the promotional activities affecting the sale of eggs. The supply of eggs is measures market power by using the Bertrand Nash model and standard deviation were a signal of increased market power due to the exportation of eggs. Retail prices were measured as well as the producers’ size and cartons, marginal costs, and differentiation among the eggs and input prices. The results found that producer margins are positively correlated to egg exports but this power is declining over time. The losses amounted to $399,111 a year in Visalia where the hypothesis was tested but in terms of the welfare in United States it could amount to $1.19 billion a year(Allender 2010). This huge loss in the United States would warrant a Department of Justice or Federal Trade Commission investigations because of the large impacts the exportation of the excess supply of eggs has on the country and consumer welfare (Allender 2010)..

            Practicing managers selling goods or commodities should be made aware of this article because the concept can apply to many industries that produce goods that have an ability to be exported. Retailing managers should understand the value chain relationship in their industry and what is done with excess capacity.  The excess capacity in this case circumvented the laws of supply and demand and used exportation to keep prices high for the retailers creating low profit margins.

Allender, W., & Richards, T. (2010). Market Diversion and Market Power:

California Eggs. Review Of Industrial Organization, 36(1), 37-58.

doi:10.1007/s11151-009-9235-y

¹http://www.uwcc.wisc.edu/info/capper.html

http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=48111335&si

te=ehost-live

The Future of the U.S. Business Model and the Rise of Competitors by Peter Cappelli

This article explains how the United States has influenced the organization of business activities around the world and predicts the impact of competition on the future of business models as the global economy changes.  One of the purposes of the article is to give an overview of how the United States business models and practices have influenced the last 50 years of global business. This article is important because it tracks the past influence the United States business model had in the global market place and explains the future competition the United States model will have going forward. As the global competitive landscape changes it will be important to understand how other countries business models affect the firm’s competition in a global marketplace.

After World War II, the United States became a powerhouse of industrial ideas sharing ideas to the global community of a corporate model of ownership and organization, large scale production, open markets, formal organizational structures and workplace organization based on collective bargaining which at the time was the only model for a growing economy (Capelli 2009). In the 1970’s, the rise of Japanese management practices influenced the international business community (Capelli 2009). Deregulation in the 1970’s influenced the global thought of what it takes to be a successful economy. The United States was a great example of how economies could benefit from a decreased role of government and pursued an increased emphasis on the benefits of private ownership. During this time, the idea of a market economy and a democratic government spread like wild fire. “The proportion of countries with democratic governments doubled from 1980 to 2000 to 60%” (Simmons, Dobbin, & Garret) indicating that this business model was gaining increased acceptance around the world. A development in the United States business model that is currently applicable to the competitive environment is the focus on financial goals and shareholder value (Capelli 2009). Financialization also gave rise to the executive performance based compensation in an effort to maximize shareholder wealth which evidence showed led to increased firm performance (Capelli 2009). Repercussions of executive based compensation occurred in the 1990’s when scandals filled the headlines with executives influencing stock prices by manipulating financial data. The Sarbanes-Oxley Act of 2002 was in reaction to the scandals requiring United States companies to increase transparency of financial information ( Capelli 2009). During this time, the “Asian Tigers” (South Korea, Singapore, Hong Kong, and Taiwan) had rapid growing economies despite the fact that they did not follow the market capitalism model. These governments were the opposite of the United States economy that did have full democracies, controlled trade practices, and government subsidies that allowed these industries to develop (Capelli 2009). China and India also showed fast growing economies in the early 2000’s with a communist political system and heavy government regulation. The BRIC nations all have higher government regulation than the United States and are experiencing growth suggesting that the United States business model may not the only solution for economies to grow. Evidence to support this shows that from 1950-1990 the United States accounted for 27% of the world gross domestic product in 2008 the number dropped 20% (Capelli 2009). Also, in 1980 2 of the largest 10 corporations were based outside the United States. In 2008, 6 out of 10 were based outside the US suggesting that the world economy is changing and the United States is becoming less influential in the global marketplace. To further support that global competition is changing  the National Intelligence Council of the U.S. argues that the “fastest growing economies in the near future will likely follow a “state capitalism” approach that sees a powerful role for government in shaping and controlling business (Capelli 2009).

This article is important for practicing managers as the global competitive environment changes and there will be increased competition from foreign firms that have industries that are heavily subsidized and regulated making competition more difficult for domestic companies. Practicing managers will also need to consider that the market economy may not be the only way economies are able to grow. Companies should also consider that as economies for heavily regulated industries thrive the United States government might increase regulation in an effort to emulate the successful growing economies.

Cappelli, P. (2009). The Future of the U.S. Business Model and the Rise of Competitors. Academy Of Management Perspectives, 23(2), 5-10. doi:10.5465/AMP.2009.39985536

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