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Today Information Technology (IT) means that the high cost of traditional direct marketing or mailshots is reduced substantially. In fact if you recall your first direct online dialogue with a company, you will probably recall that e-mail was the first social interaction which you had via the Internet. So e-mail marketing is one of the cornerstones of social media marketing as we know it today.
E-mail is still a powerful medium of online communication. It is simple, straightforward and your visitors and clients are familiar with e-mail, where they may not be so familiar with Facebook or LinkedIn and other popular social media solutions. However you want your e-mail communications to be focused and targeted, and ultimately to retain customers and keep them buying from you. You don’t want your communication to be a piece of on opened e-mail in someone’s inbox, or worse labelled as junk mail or spam (which Is mass, unsolicited e-mails). To your loyal customers your communication has value, and so does e-mail marketing. It’s important that your e-mail is something that your respondent wants to open. So you don’t even need to have anything major to offer since you could just be telling them about a small change in the law, or you could summarise key events from your particular market from the previous week’s news.
E-mail marketing is a foundation of Customer Relationship Management (CRM) and there is plenty of material on the Marketing Teacher website about CRM. A popular definition of CRM is the establishment, development, maintenance and optimisation of long-term mutually valuable relationships between consumers and organisations. CRM is designed to recruit and retain customers, and to extend products and services to them over their lifetime. E-mail marketing is a fundamental approach for this.
The Boston Matrix is a well known tool for the marketing manager. It was developed by the large US consulting group and is an approach to product portfolio planning. It has two controlling aspect namely relative market share (meaning relative to your competition) and market growth.
You would look at each individual product in your range (or portfolio) and place it onto the matrix. You would do this for every product in the range. You can then plot the products of your rivals to give relative market share.
Dogs: These are products with a low share of a low growth market. These are the canine version of ‘real turkeys!’. They do not generate cash for the company, they tend to absorb it. Get rid of these products.
Cash Cows: These are products with a high share of a slow growth market. Cash Cows generate much more than is invested in them. So keep them in your portfolio of products for the time being.
Problem Children: These are products with a low share of a high growth market. They consume resources and generate little in return. They absorb most money as you attempt to increase market share.
Stars: These are products that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income. Keep and build your stars.
Look for some kind of balance within your portfolio. Try not to have any Dogs. Cash Cows, Problem Children and Stars need to be kept in a kind of equilibrium. The funds generated by your Cash Cows is used to turn problem children into Stars, which may eventually become Cash Cows. Some of the Problem Children will become Dogs, and this means that you will need a larger contribution from the successful products to compensate for the failures.
The Pareto Principle
The Pareto principle is also known as the 80/20 rule. From your own experience you may have come across it, for example 80% of our business comes from 20% of our customers. The principle itself states that 80% of the effects come from 20% of the causes. Let’s look at this in a little more detail.
Cause and effect tend to be strongly related. If I throw a stone at a window (i.e. the cause) and the stone travels through the air, and hits the window then the window breaks. The broken window is the effect. There are many other examples in business such as 80% of profit comes from 20% of our products or services. From sport 80% of our goals come from 20% of our players. Try to think of some examples from your own experience.
The reason that the Pareto principle is used together with the marketing relationship, is that the bulk of your profits and long-term relationships will probably arises from 20% of your customers. Therefore you need to know as much about your customers as possible, and the customer database helps us with this. In fact technology today is ideal for retaining customers, as well as recording new information. As a marketer, you will of course put more of your efforts into your more profitable customers, whilst attempting to move the 80% towards becoming more loyal customers. We are now moving towards customer loyalty, so let’s have a look at a tool that will help us with that.
Going, going, gone. Holding an auction can be an extremely efficient way for a seller to set the price of its products, especially if it does not have much information about how much people may be willing to pay for them. Auctions fascinate economists, especially those who specialise in game theory. They have long been a feature of the sale of art and antiques in the rooms of firms such as Sotheby’s and Christie’s. But in recent years they have played a growing role in other parts of the economy, ranging from the allocation of government-controlled broadcasting bandwidth to the awarding of work to subcontractors by governments and big firms using competitive tendering, and even more recently the sale of goods over the Internet.
An English auction is the most familiar. Bidders compete to offer higher prices and drop out until only one remains. In a Dutch auction, the auctioneer calls out a high price then keeps lowering it until there is a buyer. There are various forms of sealed bid auctions. In a first price sealed bid, each buyer submits a price in a sealed envelope and all bids are opened simultaneously, with the highest offer winning. In a second (or third, fourth, and so on) price sealed bid, the highest bidder wins but pays only the second (third, fourth) highest price bid.
An English or Dutch auction will work well for a seller if there is more than one serious bidder, as competition will ensure that the price is set at the level at which it is not worth more to any other bidder but the winner. Indeed, in a competitive auction the successful bidder may end up offering more than what is being auctioned is actually worth. This is known as the winner’s curse.
Which method will generate the best price for the seller depends on how many bidders take part and how well informed they are. Unfortunately for the seller, this information is not always available before the auction takes place.
A branch of economics that concentrates on explaining the economic decisions people make in practice, especially when these conflict with what conventional economic theory predicts they will do. Behaviourists try to augment or replace traditional ideas of economic rationality (homo economicus) with decision-making models borrowed from psychology. According to psychologists, people are disproportionately influenced by a fear of feeling regret and will often forgo benefits even to avoid only a small risk of feeling they have failed. They are also prone to cognitive dissonance, often holding on to a belief plainly at odds with new evidence, usually because the belief has been held and cherished for a long time. Then there is anchoring: people are often overly influenced by outside suggestion. People apparently also suffer from status quo bias: they are willing to take bigger gambles to maintain the status quo than they would be to acquire it in the first place.
Traditional utility theory assumes that people make individual decisions in the context of the big picture. But psychologists have found that they generally compartmentalise, often on superficial grounds. They then make choices about things in one particular mental compartment without taking account of the implications for things in other compartments.
There is lots of evidence that people are persistently and irrationally overconfident. They are also vulnerable to hindsight bias: once something happens they overestimate the extent to which they could have predicted it. Many of these traits are captured in prospect theory, which is at the heart of much of behavioural economics.
Boom and bust. The long-run pattern of economic growth and recession. According to the Centre for International Business Cycle Research at Columbia University, between 1854 and 1945 the average expansion lasted 29 months and the average contraction 21 months. Since the second world war, however, expansions have lasted almost twice as long, an average of 50 months, and contractions have shortened to an average of only 11 months. Over the years, economists have produced numerous theories of why economic activity fluctuates so much, none of them particularly convincing. A Kitchin cycle supposedly lasted 39 months and was due to fluctuations in companies’ inventories. The Juglar cycle would last 8-9 years as a result of changes in investment in plant and machinery. Then there was the 20-year Kuznets cycle, allegedly driven by house-building, and, perhaps the best-known theory of them all, the 50-year kondratieff wave. hayek tangled with keynes over what caused the business cycle, and won the nobel prize for economics for his theory that variations in an economy’s output depended on the sort of capital it had. Taking a quite different tack, in the late 1960s Arthur Okun, an economic adviser to presidents Kennedy and Johnson, proclaimed that the business cycle was «obsolete». A year later, the American economy was in recession. Again, in the late 1990s, some economists claimed that technological innovation and globalisation meant that the business cycle was a thing of the past. Alas, they were soon proved wrong.
The more competition there is, the more likely are FIRMS to be efficient and PRICES to be low. Economists have identified several different sorts of competition. PERFECT COMPETITION is the most competitive market imaginable in which everybody is a price taker. Firms earn only normal profits, the bare minimum PROFIT necessary to keep them in business. If firms earn more than this (excess profits) other firms will enter the market and drive the price level down until there are only normal profits to be made.
Most markets exhibit some form of imperfect or MONOPOLISTIC COMPETITION. There are fewer firms than in a perfectly competitive market and each can to some degree create BARRIERS TO ENTRY. Thus firms can earn some excess profits without a new entrant being able to compete to bring prices down.
The least competitive market is a MONOPOLY, dominated by a single firm that can earn substantial excess profits by controlling either the amount of OUTPUT in the market or the price (but not both). In this sense it is a price setter. When there are few firms in a market (OLIGOPOLY) they have the opportunity to behave as a monopolist through some form of collusion (see CARTEL). A market dominated by a single firm does not necessarily have monopoly power if it is a CONTESTABLE MARKET. In such a market, a single firm can dominate only if it produces as efficiently as possible and does not earn excess profits. If it becomes inefficient or earns excess profits, another more efficient or less profitable firm will enter the market and dominate it instead.
Being corrupt is not just bad for the soul, it also harms the economy. Research has found that in countries with a lot of corruption, less of their GDP goes into INVESTMENT and they have lower GROWTH rates. Corrupt countries invest less in education, a sector of the economy that pays big economic dividends but small bribes, than do clean countries, thereby reducing their HUMAN CAPITAL. They also attract less FOREIGN DIRECT INVESTMENT.
There is no such thing as good corruption, but some sorts of corruption are less bad than others. Some economists point to similarities between bribery and paying taxes or buying a licence to operate. Where it is predictable — where the briber knows what to pay and can be sure of getting what it pays for—corruption harms the economy far less than where it is capricious.
The absence of corruption has huge economic benefits, however, by allowing the development of institutions that enable a market economy to function efficiently. In many of the world’s more corrupt countries, the distinction between private interest and public duty is still unfamiliar. Countries that have made graft the exception rather than the rule in the conduct of public affairs have been helped to grow by the emergence of institutions such as an independent judiciary, a free press, a well-paid civil service and, perhaps crucially, an economy in which FIRMS have to compete for customers and CAPITAL.
Since 1930 it has been the norm in most developed countries for AVERAGE PRICES to rise year after year. However, before 1930 deflation (falling prices) was as likely as INFLATION. On the eve of the first world war, for example, prices in the UK, overall, were almost exactly the same as they had been at the time of the great fire of London in 1666.
Deflation is a persistent fall in the general price level of goods and SERVICES. It is not to be confused with a decline in prices in one economic sector or with a fall in the INFLATION rate (which is known as DISINFLATION).
Sometimes deflation can be harmless, perhaps even a good thing, if lower prices lift realINCOME and hence spending power. In the last 30 years of the 19th century, for example, consumer prices fell by almost half in the United States, as the expansion of railways and advances in industrial technology brought cheaper ways to make everything. Yet annual realGDP GROWTH over the period averaged more than 4%.
Deflation is dangerous, however, more so even than inflation, when it reflects a sharp slump in DEMAND, excess CAPACITY and a shrinking MONEY SUPPLY, as in the GreatDEPRESSION of the early 1930s. In the four years to 1933, American consumer prices fell by 25% and real GDP by 30%. Runaway deflation of this sort can be much more damaging than runaway inflation, because it creates a vicious spiral that is hard to escape. The expectation that prices will be lower tomorrow may encourage consumers to delay purchases, depressing demand and forcing FIRMS to cut prices by even more. Falling prices also inflate the real burden of DEBT (that is, increase real INTEREST rates) causingBANKRUPTCY and BANK failure. This makes deflation particularly dangerous for economies that have large amounts of corporate debt. Most serious of all, deflation can make MONETARY POLICY ineffective: nominal interest rates cannot be negative, so real rates can get stuck too high.
Economic and monetary union
In January 1999, 11 of the 15 countries in the EUROPEAN UNION merged their national currencies into a single European currency, the EURO. This decision was motivated partly by politics and partly by hoped-for economic benefits from the creation of a single, integrated European economy. These benefits included currency stability and low INFLATION, underwritten by an independent EUROPEAN CENTRAL BANK (a particular boon for countries with poor inflation records, such as Italy and Spain, but less so for traditionally low-inflation Germany). Furthermore, European businesses and individuals stood to save from handling one currency rather than many. Comparing PRICES and WAGES across the euro zone became easier, increasing COMPETITION by making it easier for companies to sell throughout the euro-zone and for consumers to shop around.
Forming the single currency also involved big risks, however. Euro members gave up both the right to set their own INTEREST rates and the option of moving exchange rates against each other. They also agreed to limit their budget deficits under a stability and growth pact. Some economists argued that this loss of flexibility could prove costly if their economies did not behave as one and could not easily adjust in other ways. How well the euro-zone functions will depend on how closely it resembles what economists call an OPTIMAL CURRENCY AREA. When the euro economies are not growing in unison, a commonMONETARY POLICY risks being too loose for some and too tight for others. If so, there may need to be large TRANSFERS of funds from regions doing well to those doing badly. But if the effects of shocks persist, fiscal transfers would merely delay the day of reckoning; ultimately, WAGES or people (or both) would have to shift.
In its first few years,the euro fell sharply against the dollar, though it recovered during late 2002. Sluggish growth in some European economies led to intense pressure for interest rate cuts, and to the stability and growth pact being breached, though not scrapped. Even so, by 2003 12 countires had adopted the euro, with the expectation of more to follow after the enlargement of the EU to 25 members in 2004.
The PRICE at which one currency can be converted into another. Over the years, economists and politicians have often changed their minds about whether it is a good idea to try to hold a country’s exchange rate steady, rather than let it be decided by MARKET FORCES. For two decades after the second world war, many of the major currencies were fixed under the BRETTON WOODS agreement. During the following two decades, the number of currencies allowed to float increased, although in the late 1990s a number of European currencies were permanently fixed under ECONOMIC AND MONETARY UNIONand some other countries established a CURRENCY BOARD.
When CAPITAL can flow easily around the world, countries cannot fix their exchange rate and at the same time maintain an independent MONETARY POLICY. They must choose between the confidence and stability provided by a fixed exchange rate and the control over INTEREST RATE policy offered by a floating exchange rate. On the face of it, in a world of capital MOBILITY a more flexible exchange rate seems the best bet. A floating currency will force FIRMS and investors to HEDGE against fluctuations, not lull them into a false sense of stability. It should make foreign BANKS more circumspect about lending. At the same time it gives policymakers the option of devising their own monetary policy. But floating exchange rates have a big drawback: when moving from one EQUILIBRIUM to another, currencies can overshoot and become highly unstable, especially if large amounts of capital flow in or out of a country. This instability has real economic costs.
To get the best of both worlds, many emerging economies have tried a hybrid approach, loosely tying their exchange rate either to a single foreign currency, such as the dollar, or to a basket of currencies. But the currency crises of the late 1990s, and the failure of Argentina’s currency board, led many economists to conclude that, if not a currency union such as the euro, the best policy may be to have a freely floating exchange rate.
The easier it is for the FACTORS OF PRODUCTION to move to where they are most valuable, the more efficient the allocation of the world’s scarce resources is likely to be and the faster GDP will grow. Apart from continental drift, LAND is immobile. CAPITAL has long been extremely mobile within countries, and, with the rise of GLOBALISATION, it is now able to move easily around the world. ENTERPRISE is mobile, although to what extent depends on the particular ENTREPRENEUR. Some members of the LABOUR market zoom around the world to work; others will not move to the next town.
CAPITAL CONTROLS are the main obstacle to capital mobility, and these have been mostly removed or reduced since 1980. The sources of labour immobility are more numerous and complex, including immigration controls, transport costs, language barriers and a reluctance to move away from family or friends. Workers are far more mobile within the United States than they are within the EUROPEAN UNION or within individual EU countries. Some economists reckon that the willingness of workers to move to where the work is helps to explain the stronger economic performance and lower UNEMPLOYMENT of the United States.
Can you sometimes have too much mobility? Certainly, some DEVELOPING COUNTRIEShave suffered from HOT MONEY rushing into and then out of their markets.
In general, the possibility that a factor of production may suddenly move elsewhere can create serious economic problems. For instance, an employer may think twice about investing in training an employee if it fears that the employee may suddenly take a job with another firm. Similarly, entrepreneurs are unlikely to take the RISK of pursuing a new idea if they fear that their capital may disappear at any moment, hence the importance of having access to long-term capital, such as by issuing BONDS and EQUITIES.
Control the MONEY SUPPLY, and the rest of the economy will take care of itself. A school of economic thought that developed in opposition to post-1945 KEYNESIAN policies of DEMAND management, echoing earlier debates between MERCANTILISM and CLASSICAL ECONOMICS. Monetarism is based on the belief that INFLATION has its roots in theGOVERNMENT printing too much MONEY. It is closely associated with Milton MILTON FRIEDMAN, who argued, based on the QUANTITY THEORY OF MONEY, that government should keep the MONEY SUPPLY fairly steady, expanding it slightly each year mainly to allow for the natural GROWTH of the economy. If it did this, MARKET FORCES would efficiently solve the problems of INFLATION, UNEMPLOYMENT and RECESSION. Monetarism had its heyday in the early 1980s, when economists, governments and investors pounced eagerly on every new money-supply statistic, particularly in the United States and the UK.
Many CENTRAL BANKS had set formal targets for money-supply growth, so every wiggle in the data was scrutinised for clues to the next move in the rate of INTEREST. Since then, the notion that faster money-supply growth automatically causes higher inflation has fallen out of favour. The money supply is useful as a policy target only if the relationship between money and nominal GDP, and hence inflation, is stable and predictable. The way the money supply affects PRICES and OUTPUT depends on how fast it circulates through the economy. The trouble is that its VELOCITY OF CIRCULATION can suddenly change. During the 1980s, the link between different measures of the money supply and inflation proved to be less clear than monetarist theories had suggested, and most central banks stopped setting binding monetary targets. Instead, many have adopted explicit inflation targets.
Selling state-owned businesses to private investors. This policy was associated initially with Margaret Thatcher’s government in the 1980s, which privatised numerous companies, including PUBLIC UTILITY businesses such as British Telecom, British Gas, and electricity and water companies. During the 1990s, privatisation became a favourite policy of governments all over the world.
There were several reasons for the popularity of privatisation. In some instances, the aim was to improve the performance of publicly owned companies. Often NATIONALISATIONhad failed to achieve its goals and had become increasingly associated with poor service to customers. Sometimes privatisation was part of transforming a state-owned MONOPOLYinto a competitive market, by combining ownership transfer with DEREGULATION andLIBERALISATION. Sometimes privatisation offered a way to raise new CAPITAL for the firm to invest in improving its service, MONEY that was not available in the public sector because of constraints on PUBLIC SPENDING. Indeed, perhaps the main attraction of privatisation to many politicians was that the proceeds from it could ease the pressure on the public purse. As a result, they could avoid (in the short-term) doing the more painful things necessary to improve the fiscal position, such as raising taxes or cutting public spending.
The relationship between inputs and OUTPUT, which can be applied to individual FACTORS OF PRODUCTION or collectively. LABOUR productivity is the most widely used measure and is usually calculated by dividing total output by the number of workers or the number of hours worked. Total factor productivity attempts to measure the overall productivity of the inputs used by a firm or a country.
Alas, the usefulness of productivity statistics is questionable. The quality of different inputs can change significantly over time. There can also be significant differences in the mix of inputs. Furthermore, firms and countries may use different definitions of their inputs, especially CAPITAL.
That said, much of the difference in countries’ living standards reflects differences in their productivity. Usually, the higher productivity is the better, but this is not always so. In the UK during the 1980s, labour productivity rose sharply, leading some economists to talk of a ‘productivity miracle’. Others disagreed, saying that productivity had risen because unemployment had risen — in other words, the least productive workers had been removed from the figures on which the AVERAGE was calculated.
There was a similar debate in the United States starting in the late 1990s. Initially, economists doubted that a productivity miracle was taking place. But by 2003, they conceded that during the previous five years the United States enjoyed the fastest productivity growth in any such period since the second world war. Over the whole period from 1995, labour productivity growth averaged almost 3% a year, twice the average rate over the previous two decades. That did not stop economists debating why the miracle had occurred.
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