Business Economics

Business Economics

Table of Contents

2Date First Article: Whitehaven says metallurgical coal prices will keep falling

4Second Article: Holes in Crocs’ operating model: THE WALL STREET JOURNAL; JULY 22, 2014

6WESFARMERS FLYING WITH EYE ON TARGET;Third Article:

8References

Date First Article: Whitehaven says metallurgical coal prices will keep falling

This article by Amanda Saunders reports that Whitehaven has made an announcement that metallurgical coal prices will continually fall this quarter. It expresses optimism, however, in the long term view later this year with what it terms as a “modest recovery”.

The economic problem here is oversupply. The coal markets are experiencing a fall in demand at the current prices. In order to bring about equilibrium in the market, the prices must fall so that more quantities will be demanded so as to clear the market (Burkhard, Kroll, Nedkov & Müller 2012, p27). One of the reasons for this oversupply in Australia is the increase in exports from major thermal coal exporters. In addition, there has been an increased production rate like in the production of thermal coal. Partly, the production cuts have contributed to this amounting to about 19 million tonnes per annum from the US, Canada, Australia and Mozambique. The anticipation of continuous cuts in production means that the supply rate will still remain high. Further fall in coal prices may result to closure of more mines if the prices persistently remain below profitable levels.

In order to control the problem of rising stockpiles, the problem of price weakness which is even extended to the companies’ shares prices must be addressed. One way is to have regulation of the imports as well as strategically raising the export volumes. In addition, there will need to be a deliberate measure to ensure that the production of coal is measured against the demand. This will ensure that prices don’t drop below the profitability margin. This will enable the operations to cater for the production costs and enhance sustainability in the coal industry. The market forces of demand and supply also are in action to bring about equilibrium in the market as revealed by the closing of various mines like in the United States and also in the Pacific Basin.

Whitehaven has a competitive advantage due to the economies of scale it has in the production of thermal coal.This will also be fortified after the completion of the Maules Creek mine which is the largest under construction Australia. The ability of the company to strategically predict the market behaviour and to take the necessary actions will enable it to get over the oversupply crisis and enhance its sustainability.

Second Article: Holes in Crocs’ operating model: THE WALL STREET JOURNAL; JULY 22, 2014

This article by Suzanne Kapner reports that the operation model of Crocs is having a poor market performance as indicated by the continuous decline in the sales that are made. In addition, it reports the efforts to shrink the company’s operations and coverage.

The economic concept that is addressed here is that of change in the consumer’s tastes and preferences. This is one of the major factors that affect demand of a product or service. Assuming that the rationality of a consumer holds, a decline in tastes and preference for a particular commodity decreases the demand and vice versa, ceteris paribus (Rutsaert, Demont & Verbeke, 2013, p294). Huge economic losses may result if the negative consumer sentiments are not corrected. Appropriate adaptation to the changes in the tastes and preferences of the customers is required so as to maintain the customer’s loyalty and also to secure profitability. The entrepreneurs and companies need to be aware of the possibilities of changes in the preferences and tastes so that production is regulated even when the current demand is high. Croc’s stock rose highly to $ US74.75 by October 2007 following the popularity and the expanded market share thatthe company had. In addition, outlets were expanded with around 600 stores globally. This has been a challenge especially after the decline in the tastes and preference of its brands.

The company seeks to have layoffs, exit leases on stores, drop some categories and also cut back a number of its styles in an effort to maintain profitability. In addition, measures like converting some stores to be operated on a third-party basis are being undertaken. Croc’s president says that the strategy of the company is to stay small in an effort to have improved profit margins. The tastes and preference is shown, in this case, to be a very significant determinant of demand. This calls for companies and entrepreneurs to make their decisions on marketing and production based on this determining factor. The brands should be made flexible enough depending on the customer tastes so as to secure sustainable sales that will ensure there is consistent profitability. If this is not so, the consumers will order other alternatives that give them their desired utility.

Third Article: WESFARMERS FLYING WITH EYE ON TARGET;

This article by Jane Harper mainly focuses on the Target performance which still has been lagging behind thus affecting the overall performance of Wesfarmers.

The economic concept being addressed here is turnaround strategy. Itfocuses on efforts that seek to transform a company that is distressed or underperforming. It is a restructuring strategy reversing positions of instability to stability and increase in sales from a point of sales decline (Beeri 2012, p159). Acceptable levels of cash flow, liquidity, solvency and profitability are sought. This is done by seeking to solve the root issues that bring about the failures in loss-making company. The applied measures involve fixing, funding, stabilising and managing a company that underperforms. A lot of support has been given to Target by Wesfarmers. The objectives of this turnaround strategy include: overcoming characteristics of the industry that are unfavourable; overcoming internal constraints; regaining the support of the stakeholders; achievement of a rapid financial performance improvement; resolving financial crisis; and reversing the causes of distress. Richard Goyder, the Wesfarmers managing director, has shown confidence in the turnaround strategy and diversification efforts in bringing about success to Target.

Wesfarmers has also held to the concept of diversification. The strategies of diversification entail the widening of the scope of the organisation across different market sectors and/or different products (Yeh, Chen & Hu 2012, p946). It owns Target, Coles, Bunnings, Kmart and Officeworks. Higher risks are associated with diversification due to the requirement to have the organisation to expand further beyond the existing products and/or markets. Conversely, opportunity to do an exploration of new business avenues is provided. Target has underperformed but Wesfarmers is still sustainable since the risks have been spread to the other branches. This can be advantageous where risks are spread enabling movement to areas of operations that are more profitable. During economic downturns of a certain business activity, a business will still stand if it has diversified its operation into another kind of business activity that is not negatively affected. This will be a growth strategy since the losses will be offset thus keeping the business operational. Wesfarmers reported a net profit of $2.69 billion to June but Target only had earnings of $86 before tax and interest. However, with the ability to spread risk, Welfare still supports Target remaining optimistic that it will soon recover.

References

Beeri, I 2012 Turnaround management strategies in public systems: the impact on group-level organizational citizenship behavior International Review of Administrative Sciences781, 158-179.

Burkhard, B, Kroll, F, Nedkov, S, & Müller, F 2012 Mapping ecosystem service supply, demand and budgets Ecological Indicators21, 17-29.

Rutsaert, P, Demont, M, & Verbeke, W 2013 23 Consumer Preferences for Rice in Africa Realizing Africa’s rice promise, 294.

Yeh, C Y, Chen, C M, & Hu, J L 2012 Business diversification in the hotel industry: a comparative advantage analysis Tourism Economics185, 941-952.