Japan’s luxury shoppers move on

Japan’s luxury market is worth as much as $20 billion—second only to the United States. Yet Japanese consumers’ seemingly insatiable appetite for luxury goods has declined, with the current economic crisis not only reducing discretionary spending but accelerating fundamental shifts in their attitudes and behavior. While these changes are likely not temporary, the market will remain very large and attractive. If luxury players want to succeed in such an environment, they must adjust their strategies.

Cannibalisation

If a firm introduces a new product or service into a market where there is little scope for further growth, that product or service will either eat into the share of the market’s existing products, or swiftly disappear from sight. If some of the existing products are manufactured by the firm that is introducing the new product, the newcomers will cannibalise the old ones; that is, they will eat into the market share of their own kind. For example, it has been estimated that two-thirds of the sales of Gillette’s Sensor razor came from consumers who would otherwise have been customers for the company’s other razors. Each new blade is cut-throat competition for its predecessors.

There are sound reasons for firms to do such a seemingly stupid thing. In the first place, they may need to keep ahead of the competition. In the chocolate-bar market in Britain, for instance, the decline in Kit Kat’s share was arrested by the launch of a new, more chunky bar, which undoubtedly cannibalised the market for the original. Its appeal was to all those people who buy chocolate bars, which includes those who bought the old Kit Kat.

Firms may also choose to cannibalise their own products by producing marginally improved products. The idea is to persuade existing customers to purchase an upgraded version. This is common in the PC market, for example, where Intel’s newest, most powerful processor cannibalises the last generation of Intel processors, but in the interests of arresting decline in the total market.

Economists sometimes distinguish between planned and unplanned cannibalisation. Planned cannibalisation is an anticipated loss in sales of an existing product as a result of the introduction of a new product in the same line. In the unplanned version, the loss of sales is unexpected.

China and its Trade Surplus

A rebalanced global economy requires America to consume less and save more. That means the world’s three big surplus economies—China, Germany and Japan—will have to save less and spend more. None is under more scrutiny than China, whose vast current-account surplus has been fingered by some as the ultimate cause of the financial crisis. The case against China is exaggerated but a surplus of more than $400 billion in 2008, or 10% of GDP, was clearly too big. Can China right its trade imbalances, and if so, how will it achieve rapid growth in future?

The good news is that the surplus is already shrinking. The strong rebound in China’s economy in the second quarter—pushing GDP 7.9% higher than a year ago—came entirely from domestic demand. This sucked in more imports, while exports continued to slump. Another way to look at the huge swing in China’s trade is that net exports (exports minus imports) contributed 2.6 percentage points of the country’s GDP growth in 2007, but shaved almost three points off its growth in the first half of this year.
(From Economist)

Is global recession coming to an end???

The global slump has reached its low point in the business cycle. Asia’s economies are looking rosier and brighter, buoyed by a spectacular rebound in China, where output grew at an annualised rate of some 16% between April and June. This is obvious good but the picture is still not clear. The boost from restocking will be temporary. And a big source of demand—government stimulus—is unsustainable. Across the globe governments have, rightly, stepped in to counter the economic slump. In America an increase of 12 percentage points in the budget deficit has cushioned the slump in private spending. Around 75% of China’s growth this year will be state-directed, either through public spending or officially induced lending. Governments can prop up economies temporarily, but rising budget deficits are not a route to sustainable growth. Eventually burgeoning debt will limit the room for fiscal manoeuvre. A solid global recovery demands healthy and balanced growth in private demand. Unfortunately, that still seems far off.

Global Economic Storm to Massive Public Debt

The worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. An interesting article published in 'Economist.com'. Find the synopsis of the article.

Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens.

Open-Book Management Principle

This is the unconventional idea carried in 'The Economist' that firms are most effective if their accounts are left open for all their employees to see as and when they wish, at the same time as the employees are taught to understand better the full financial picture. Traditionally, only a handful of senior executives are made to feel responsible for whether a business makes money or not. Open-book management attempts to extend this feeling of responsibility to everybody in the organisation.

It is described by John Case, the man who claims to have invented the expression, as the idea “that companies do better when employees care not just about quality, efficiency or any other single performance variable, but about the same thing that senior managers are supposed to care about: the success of the business”. It spread the burden of P&L responsibility—the responsibility for the profit and loss account of a business unit that is generally given as a reward to rising managers—to everyone in the organisation. With open-book management, the idea is that everyone has a certain amount of P&L responsibility.

What natural and economic disasters have in common?

The title seems to be very interesting....isn't it?

The parallels between financial crises and natural disasters—such as earthquakes or forest fires—suggest that the economy, just like complex natural systems, is inherently unstable and prone to occasional huge failures that are very hard or impossible to foresee. Scientists and other proponents of this school of thinking are bringing new ideas grounded in complexity theory to economic forecasting, strategic planning, and risk management. This trend may have profound implications for policy makers, economists, and corporate strategists alike. Please read this article published recently in Mckinsey quarterly.