I was discussing pay cuts and lay-offs with some family members and friends recently. One stated that her dad's company fired the senior employees and kept the newer employees because they could pay them less for their work. The company seems to have the right idea that in crucial times, they need to cut their costs. However, when they fire their senior, most experienced and probably some of their best workers, they could be harming their sales. People could get a bad impression of their company. Loyal customers that have been seeing the senior employee for years, will be more likely to remain loyal to the employee rather than the company. Also, work quality could slip when there are fewer experienced employees and more new employees. I do not understand why a company would ruin relations with a senior employee who has been working with them for a long time.
I think there are better ways to handle the crisis than firing employees. Sure, the companies can hire newer employees, such as ones just hired for a new project that will not be completed due to lack of funds. For example, a project could be to design a new product, but is best for a time of economic growth. The project could be delayed and the budget for that project cut.
In order to prevent drastic paycuts and lay-offs, especially of senior, experienced workers, the company could cut everyone's pay a little to absorb the budget cuts and losses. Giving everyone a paycut instead of firing some and keeping others, could allow everyone to keep their jobs. I know people do not like to see their money cut in a time of crisis, but a little salary is better than nothing. I would hope that this could be explained to the employees through meetings, emails, or formal letters.
After discussing pay cuts and lay-offs with my dad, he pointed out that the cuts cause hightened stress in the workplace. He said that his managers are receiving cuts and are getting fired, so they are constantly worried about who is next. Their stress is directly reflected in their harsh attitudes and impatience with their employees. These managers could be harming relations with customers as well as loyal employees and could cause even more trouble for the company. If the executives would simply discuss options with the workers, and allow everyone in the company to share the financial burden, attitudes and stress levels could be improved and lowered.
I cannot help but wonder if cutting everyone's pay is possible. It seems to me, if it was possible, companies would be adopting this strategy in order to keep its employees and improve their financial situation. But, maybe the companies cannot make universal pay cuts because of unions or contracts. I found that some salaries cannot be changed without contracts. I think that this strategy should be allowed and implemented, so the unemployment rate will improve. With AIG, the executives received paycuts and were only receiving salaries of $1, but were promised future bonuses to make up for this through contracts. Salaries of $1 are a little extreme, but using AIG as an example, other companies could make smaller pay cuts and promise future bonuses to be paid when times improve.
Sources and Further Discussion:
-Salary Cuts Across the Board or Just Execs
-"Rather than put more people on the street, Hewlett-Packard CEO Mark Hurd is cutting salaries by 5 percent or more across the board." Innovation Pay Cuts
-Job Cuts vs. Pay Cuts
Friday, April 17, 2009
Universal Currency
When I decided to respond to the blog about Universal Currency, I was responding to Gustav's bllog about currency. However, I went back and read Unique's blog and decided to pull some of her points, which I agreed with as opposed to Gustav's points. I do not agree with most of the points of Gustav's blog on Universal Currency. He states that a universal currency is not a good idea and would have a negative impact. He states in his blog that we are a barbaric society that should revert back to our ancestry's way of dealing with currency, and even if we wanted to change, we don't have someone powerful enough.
Yes, the world can be barbaric at times. For example, we have seen a lot of war, piracy, cruelty, invisible children fighting in Uganda, people ignoring other's rights, etc. But if we let that stop us from thinking we can make advancements, we wouldn't have gotten anywhere. For example, we wouldn't have made it past the crusades, the dark ages, or either of the World Wars, just to name a few. Sometimes after the crisis and during the clean-up is when most technological advances are made. For example, the industrial revolution occurred after the Civil War and Reconstruction. Sometimes, the barbaric actions can be a way out of crisis and lead to improvement: World War II got the United States out of the Great Depression because more jobs were available making weapons and preparing for war. -Wars and improvement in the US Also, the NY Times article Gustav sites is from 1858, which is outdated to even know about the improvements to come. The article does not know how much the world has changed.
On the topic of change, this year we elected a new president, President Barack Obama. His platform is bringing about change. He is the first African-American President, which came about even before the first woman president. He is knowledgeable of other cultures, so he relates to the rest of the world well. People think that he could improve relations with other countries, since they can see first-hand how the United States is becoming more diversified and open to change. Many leaders of other countries are willing to cooperate with Obama for these reasons; therefore, to me he could be the leader to implement this universal currency. -Obama and Change
A universal currency would be great to cut transaction costs and eliminate exchange rate risks when companies go international. -Favorable Factors of Universal Currency As we have discussed in many of our cases, such as Aspen Technology, when these companies try to expand their sales to other countries, they expose themselves to currency risk. They become long in some currencies and short in others. If they sell some software to China and don't collect all the money upfront, when the customer is paying incremental payments in Yen, over time, the exchange rate may change. The exchange rate change could mean a loss of money for the company. With all the risks that companies have to worry about hedging, it would be nice if their was one risk that could be eliminated for them and for all of international business. -Exchange Rate Risk
For these above reasons, a universal currency is possible and could be beneficial. However, I do have to agree with the point in Unique's blog that this creates universal interest rates and a universal bank, which could cause problems. As Unique states, no two countries are ever in the same economic state, which could hurt one or the other. Also, a universal bank gives a lot of power to a few people, which is scary. Using Europe as an example for adopting the Euro, I think that we need to weigh the benefits and costs of a universal currency. It seems to be working well for Europe. -Euro Success We will see what happens.
Yes, the world can be barbaric at times. For example, we have seen a lot of war, piracy, cruelty, invisible children fighting in Uganda, people ignoring other's rights, etc. But if we let that stop us from thinking we can make advancements, we wouldn't have gotten anywhere. For example, we wouldn't have made it past the crusades, the dark ages, or either of the World Wars, just to name a few. Sometimes after the crisis and during the clean-up is when most technological advances are made. For example, the industrial revolution occurred after the Civil War and Reconstruction. Sometimes, the barbaric actions can be a way out of crisis and lead to improvement: World War II got the United States out of the Great Depression because more jobs were available making weapons and preparing for war. -Wars and improvement in the US Also, the NY Times article Gustav sites is from 1858, which is outdated to even know about the improvements to come. The article does not know how much the world has changed.
On the topic of change, this year we elected a new president, President Barack Obama. His platform is bringing about change. He is the first African-American President, which came about even before the first woman president. He is knowledgeable of other cultures, so he relates to the rest of the world well. People think that he could improve relations with other countries, since they can see first-hand how the United States is becoming more diversified and open to change. Many leaders of other countries are willing to cooperate with Obama for these reasons; therefore, to me he could be the leader to implement this universal currency. -Obama and Change
A universal currency would be great to cut transaction costs and eliminate exchange rate risks when companies go international. -Favorable Factors of Universal Currency As we have discussed in many of our cases, such as Aspen Technology, when these companies try to expand their sales to other countries, they expose themselves to currency risk. They become long in some currencies and short in others. If they sell some software to China and don't collect all the money upfront, when the customer is paying incremental payments in Yen, over time, the exchange rate may change. The exchange rate change could mean a loss of money for the company. With all the risks that companies have to worry about hedging, it would be nice if their was one risk that could be eliminated for them and for all of international business. -Exchange Rate Risk
For these above reasons, a universal currency is possible and could be beneficial. However, I do have to agree with the point in Unique's blog that this creates universal interest rates and a universal bank, which could cause problems. As Unique states, no two countries are ever in the same economic state, which could hurt one or the other. Also, a universal bank gives a lot of power to a few people, which is scary. Using Europe as an example for adopting the Euro, I think that we need to weigh the benefits and costs of a universal currency. It seems to be working well for Europe. -Euro Success We will see what happens.
Monday, April 13, 2009
Having a Successful Business in the Crisis
According to Brian's post, there are three actions the firm should take in the economic crisis, and those are promoting employees, recruiting new employees, and preparing for an economic boom. I, however, disagree with these three statements. They may be ideal, but I don't think they are possible.
When the company is in financial crisis, it is difficult promote their employees well. They could possibly give them additional projects requesting their help and input on how to save money in the company. They could sign contracts promising them bonuses, such as those promised to the AIG executives. With those bonuses, however, the employees had to receive pay cuts. Their salaries were reduced to about $1 per year because the bonuses were supposed to make up for it. Then the company could end up in trouble like AIG and having to pay back the bonuses from government bailout and bankruptcy charges. Now the employees have been driven out of their jobs completely. Reports say the families and executives have been harassed by the public and have decided to resign. Promoting their employees certainly backfired. -AIG backlash
The second point of the blog states that it would be beneficial to hire new employees. When a company has been laying off workers and making pay cuts, how are they supposed to have enough money to pay new salaries and benefits to new recruits? A financial crisis is a difficult time in which to find a job. -Who's Hiring These Days Most jobs are seeing pay cuts or job losses. The only jobs I see that could be available are those in advising risk management strategies, those helping to cut costs for companies, and those of the FDIC, who takes over when banks fail. And banks have been failing a lot lately.
The third point states that the company should prepare for an economic boom. I desagree. The company should be trying to manage their risks and minimize their costs to ensure their economic situation does not get worse. The executives need to be studying the financial crisis in order to prevent another one from happening. Also, abcnews.com reports the crisis is far from over. -Crisis I think that preparing for an economic boom is completely ignoring the financial distress. Also, if the company is successful in an economic crisis, I'm sure they will have no problem being successful in a boom. In addition, the companies have worked in economic booms before, so they can simply revert to the previous methods of work before the crisis, but remembering to keep the risk management that has been implemented. This way, they can be successful, but also prevent future crisis.
When the company is in financial crisis, it is difficult promote their employees well. They could possibly give them additional projects requesting their help and input on how to save money in the company. They could sign contracts promising them bonuses, such as those promised to the AIG executives. With those bonuses, however, the employees had to receive pay cuts. Their salaries were reduced to about $1 per year because the bonuses were supposed to make up for it. Then the company could end up in trouble like AIG and having to pay back the bonuses from government bailout and bankruptcy charges. Now the employees have been driven out of their jobs completely. Reports say the families and executives have been harassed by the public and have decided to resign. Promoting their employees certainly backfired. -AIG backlash
The second point of the blog states that it would be beneficial to hire new employees. When a company has been laying off workers and making pay cuts, how are they supposed to have enough money to pay new salaries and benefits to new recruits? A financial crisis is a difficult time in which to find a job. -Who's Hiring These Days Most jobs are seeing pay cuts or job losses. The only jobs I see that could be available are those in advising risk management strategies, those helping to cut costs for companies, and those of the FDIC, who takes over when banks fail. And banks have been failing a lot lately.
The third point states that the company should prepare for an economic boom. I desagree. The company should be trying to manage their risks and minimize their costs to ensure their economic situation does not get worse. The executives need to be studying the financial crisis in order to prevent another one from happening. Also, abcnews.com reports the crisis is far from over. -Crisis I think that preparing for an economic boom is completely ignoring the financial distress. Also, if the company is successful in an economic crisis, I'm sure they will have no problem being successful in a boom. In addition, the companies have worked in economic booms before, so they can simply revert to the previous methods of work before the crisis, but remembering to keep the risk management that has been implemented. This way, they can be successful, but also prevent future crisis.
Bailout Tab
I found an article discussing exactly how much money has been given away in the bailout. The figures are impossible to calculate because money just keeps getting given away. More recently, due to the AIG bonuses "issue", the government will hopefully take more care in investigating the bailout payouts, even though there were no rules against paying bonuses. But, where does all this money to bailout companies come from? The government apparently has a multiple trillion dollar budget, but where do they get this money. According to the article on the Bailout tab, the approximate amount of money spent so far is around $7.2 trillion. That is way more than the couple trillion budget. The country is in debt, makes taxes, but also has a lot of projects to cover. It seems unrealistic that there is money for them to spend. The money being created could potentially make the crisis worse. The government is creating money and adding more and more to the country's deficit.
Also, the government is depending on the loans being repaid, which is a stretch. The crisis was caused by people not being able to pay back loans. For example, the mortgage crisis is because people can't pay their mortgages. Every problem stems from a lack of money to pay people. The individuals who are taking out loans to pay are taking out many loans, which are even harder to repay. If the government actually receives repayments, it will be in a very long time. But the interest payments on all the loans people are taking out are going to overtake their income change which results from the loan help, and so the help and loan requirements will either end up cancelling out and not helping the person at all or the person will be stuck paying the loans back forever.
http://www.msnbc.msn.com/id/30115091/
Also, the government is depending on the loans being repaid, which is a stretch. The crisis was caused by people not being able to pay back loans. For example, the mortgage crisis is because people can't pay their mortgages. Every problem stems from a lack of money to pay people. The individuals who are taking out loans to pay are taking out many loans, which are even harder to repay. If the government actually receives repayments, it will be in a very long time. But the interest payments on all the loans people are taking out are going to overtake their income change which results from the loan help, and so the help and loan requirements will either end up cancelling out and not helping the person at all or the person will be stuck paying the loans back forever.
http://www.msnbc.msn.com/id/30115091/
Sunday, April 5, 2009
Are people making the crisis a bigger deal than it is?
It is a strange thought to have, but is this economic crisis as bad as we think? A FOX News report states that we are in the midst of the deepest recession since World War II and are in the aftermath of a meltdown that has left Wall Street gun-shy. But I was having a discussion with a salon worker on Friday and she disagreed with this assessment. She said that she has not seen a drop in her income from clients. She said people have continued to come in for treatments now that the weather is turning toward summer just as they usually would. She even said she waited in a long line at Starbucks as usual, when people could be saving money if they really needed to instead of buying $5 coffees.
Some people are still buying their luxury items, which is good actually to keep those industries in business. We don't want all business to fail and make the economic situation worse than it already is. Yes, car purchases and cell phone purchases are slowing, as I have stated in previous blogs. But, the items the salon worker was talking about were comforting to those people. A pedicure or manicure can make a woman feel better, for example in Legally Blonde. I know its a silly reference, but maybe in a time where the stress level is high, comforts such as manicures and getting your hair done make you feel better about yourself.
It is hard to argue that we are not in an economic crisis when you read facts such as a loss of 663,000 payroll jobs in March. March is the 15th consecutive month-to-month decline in payroll jobs, the fifth straight month in which payrolls have dropped by 600,000-plus jobs. Also, the unemployment rate increased to 8.5% -Job Report Sources estimate that things will only get worse, since cutting hours and wages are just the beginning to companies trying to improve their financial situation before cutting workers altogether, which we have also seen happening. The cutting of wages reduces income, which then reduces consumption, which also hurts the economy.
Its good that people aren't cutting out too much of their spending, so consumption doesn't fall too much further to hurt the economy more. But its also important that people are smart with their money and use it to pay their mortgages and bills. Because the ones hurting the most in the crisis are the banks trying to help people with loans because of their poor spending decisions. If these continue, the banks will be worse off as well. Many people have money tied up in banks, which could also cause more panic.
Some people are still buying their luxury items, which is good actually to keep those industries in business. We don't want all business to fail and make the economic situation worse than it already is. Yes, car purchases and cell phone purchases are slowing, as I have stated in previous blogs. But, the items the salon worker was talking about were comforting to those people. A pedicure or manicure can make a woman feel better, for example in Legally Blonde. I know its a silly reference, but maybe in a time where the stress level is high, comforts such as manicures and getting your hair done make you feel better about yourself.
It is hard to argue that we are not in an economic crisis when you read facts such as a loss of 663,000 payroll jobs in March. March is the 15th consecutive month-to-month decline in payroll jobs, the fifth straight month in which payrolls have dropped by 600,000-plus jobs. Also, the unemployment rate increased to 8.5% -Job Report Sources estimate that things will only get worse, since cutting hours and wages are just the beginning to companies trying to improve their financial situation before cutting workers altogether, which we have also seen happening. The cutting of wages reduces income, which then reduces consumption, which also hurts the economy.
Its good that people aren't cutting out too much of their spending, so consumption doesn't fall too much further to hurt the economy more. But its also important that people are smart with their money and use it to pay their mortgages and bills. Because the ones hurting the most in the crisis are the banks trying to help people with loans because of their poor spending decisions. If these continue, the banks will be worse off as well. Many people have money tied up in banks, which could also cause more panic.
Blockbuster/Virgin Megastore
This blog: http://kpatel53.blogspot.com/2009/03/blockbustervirgin-megastore.html discusses the business prospects of Blockbuster and the Virgin Megastore. The blog states that both of these companies are failing due to the fact that they did not adapt quickly enough to technological advances. These companies have outdated business models. The internet has added a new dimension into buying or renting media products. People are finding it convenient to buy products online with a cheaper price.
When I first read the blog, I did agree that purchasing music and downloading movies online had become so much easier with technology. I did not see how Blockbuster or Virgin could avoid bankruptcy for much longer, especially now with people spending less money on luxuries or outside entertainment due to the current financial crisis. However, I do not agree that Blockbuster has an outdated business model.
They have tried to keep up-to-date with the current technology. First, when NetFlix launched its online rentals up to 8 for as long as you want, Blockbuster had to retaliate. They adopted a "no late fees" strategy at its retail stores and offered a very similar online rental service starting in August 2004. -Reviews
I also found a chart comparing Blockbuster vs. Netflix side-by-side at this site. One advantage I found was that you can mail the movies back in or you can return the movie to your closest local store, if you happen to be in that direction. An online blockbuster member can also rent movies from the local stores for free. However, if you do this, once again you are subject to late fees.
Another perk I found that Blockbuster has tried to implement to combat Netflix and other online movie rentals, is that you get coupons each month for being a member. BlockBuster offers you two free in-store movie or game rentals every month. You're provided two printable coupons every month. You also receive other coupons, such as one for buying two previously viewed DVDs for just $15. -Perks
BlockBuster has a lot of competition and could one day go bankrupt if people become completely dependent on technology. But, I don't see that happening, at least not anytime in the near future. Families like to go to the movie store and send their kids in to pick a movie to watch. Sometimes you aren't planning on needing movies right then, or you get a sudden urge to watch a certain movie. If they don't have it available on OnDemand or Starz, what do you do? You drive to the movie rental store and find it, instead of ordering it online and waiting 5-7 business days. Overall, BlockBuster has tried to update to the current market situation and remain competitive in the business.
Virgin has a larger risk, in my opinion. Music is easily accessible online. Also, the fact that stereos and CD players have decreased in demand does not help either. Buying movies on Virginmega.com does not make sense either because they are just as expensive as they are in stores, and then you have to pay shipping and handling as well. -VirginMega I would buy the movie on Amazon.com because then at least you would get a deal. All of my opinions were proven correct when I found that the company will close its remaining stores in Denver, Orlando (Fla.), and Los Angeles over the next few months, and the assets of Virgin Entertainment Group North America (VEGNA) will be liquidated this summer. -Mega No More
I understand after reading statements from Virgin's chairman why they went under. They did not understand the current market situation. All of his opinions stated that kids weren't buying music because they were spending their money on cell phones, clothes, and electronics. He didn't say anything about online music access, such as iTunes. About 1500 music retailers have shut down because of iTunes and Napster, not including mass merchants or chain electronic stores. -Real Reason
Even in trying to liquidate and sell all remaining merchandise in a close-out sale, the company has not learned how to competitively price their merchandise to sell against online companies. One article states, "In terms of bargains, well … I didn't see many, at least not yet. Getting 30 percent off a $14.99 CD that's available for $9.99 on iTunes isn't much of a deal, and same goes for the overpriced $29.95 Blu-ray movies." -Closing Down
It is sad that people don't collect CDs or use CD players or stereos as much these days. But, iPods and MP3 players are taking over. There are even adapters to hook your iPod to your car stereo so you only need your iPod and may possibly use the radio. You can easily purchase music to be put straight onto your iPod with no need for CDs. And it is much cheaper to do so. While it may be sad to see Virgin Megastores go out of business, they just weren't keeping up with the times and did not adapt to the current competitive market situation.
When I first read the blog, I did agree that purchasing music and downloading movies online had become so much easier with technology. I did not see how Blockbuster or Virgin could avoid bankruptcy for much longer, especially now with people spending less money on luxuries or outside entertainment due to the current financial crisis. However, I do not agree that Blockbuster has an outdated business model.
They have tried to keep up-to-date with the current technology. First, when NetFlix launched its online rentals up to 8 for as long as you want, Blockbuster had to retaliate. They adopted a "no late fees" strategy at its retail stores and offered a very similar online rental service starting in August 2004. -Reviews
I also found a chart comparing Blockbuster vs. Netflix side-by-side at this site. One advantage I found was that you can mail the movies back in or you can return the movie to your closest local store, if you happen to be in that direction. An online blockbuster member can also rent movies from the local stores for free. However, if you do this, once again you are subject to late fees.
Another perk I found that Blockbuster has tried to implement to combat Netflix and other online movie rentals, is that you get coupons each month for being a member. BlockBuster offers you two free in-store movie or game rentals every month. You're provided two printable coupons every month. You also receive other coupons, such as one for buying two previously viewed DVDs for just $15. -Perks
BlockBuster has a lot of competition and could one day go bankrupt if people become completely dependent on technology. But, I don't see that happening, at least not anytime in the near future. Families like to go to the movie store and send their kids in to pick a movie to watch. Sometimes you aren't planning on needing movies right then, or you get a sudden urge to watch a certain movie. If they don't have it available on OnDemand or Starz, what do you do? You drive to the movie rental store and find it, instead of ordering it online and waiting 5-7 business days. Overall, BlockBuster has tried to update to the current market situation and remain competitive in the business.
Virgin has a larger risk, in my opinion. Music is easily accessible online. Also, the fact that stereos and CD players have decreased in demand does not help either. Buying movies on Virginmega.com does not make sense either because they are just as expensive as they are in stores, and then you have to pay shipping and handling as well. -VirginMega I would buy the movie on Amazon.com because then at least you would get a deal. All of my opinions were proven correct when I found that the company will close its remaining stores in Denver, Orlando (Fla.), and Los Angeles over the next few months, and the assets of Virgin Entertainment Group North America (VEGNA) will be liquidated this summer. -Mega No More
I understand after reading statements from Virgin's chairman why they went under. They did not understand the current market situation. All of his opinions stated that kids weren't buying music because they were spending their money on cell phones, clothes, and electronics. He didn't say anything about online music access, such as iTunes. About 1500 music retailers have shut down because of iTunes and Napster, not including mass merchants or chain electronic stores. -Real Reason
Even in trying to liquidate and sell all remaining merchandise in a close-out sale, the company has not learned how to competitively price their merchandise to sell against online companies. One article states, "In terms of bargains, well … I didn't see many, at least not yet. Getting 30 percent off a $14.99 CD that's available for $9.99 on iTunes isn't much of a deal, and same goes for the overpriced $29.95 Blu-ray movies." -Closing Down
It is sad that people don't collect CDs or use CD players or stereos as much these days. But, iPods and MP3 players are taking over. There are even adapters to hook your iPod to your car stereo so you only need your iPod and may possibly use the radio. You can easily purchase music to be put straight onto your iPod with no need for CDs. And it is much cheaper to do so. While it may be sad to see Virgin Megastores go out of business, they just weren't keeping up with the times and did not adapt to the current competitive market situation.
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