Tag: economy

the dominos effect.

When was the last time you flew low cost on a short haul trip? My flatmate is addicted to it and it doesn’t take a PhD in sciences to understand why. Firstly, it is 2 to 4 times cheaper than flying on a major airline. Secondly, what would you get by paying more on a major anyway? I mean what did major airlines become today? The last short haul flights I took on BA were no better than flying on EasyJet if it wasn’t for being assigned a seat, having relatively better looking stewardesses and a complimentary – yet disgusting – snack with my free soda. Yet I can remember flying on major airlines 10 years ago and it wasn’t like that. So what happened in between? Low cost airlines happened.

With a clever business model based on “no frills”, they became massively price-competitive against major airlines. One of their strengths was to target remote airports and cities that were ready to cut their costs down and to subvention the carriers on the basis that they were bringing a new flow of tourists in these areas. They’ve impacted their Industry and beyond. Firstly, they managed to open some new routes to tourists who could not have afforded it otherwise, which brought a lot of business to those targeted cities. You would therefore be right to see a positive side effect in low cost airlines but Majorca city doesn’t really see it this way, claiming that low cost travel actually brought a new type of tourists – and one from the lower economic tier of the population. Put it this way, budget airlines offered the poor the chance to fly like the rich and enjoy the same vacations, which resulted in the rich leaving to pastures new, and therefore not really benefiting these cities from that economic growth I was mentioning earlier. Another side effect is what budget travel did to major airlines, threatening their business, resulting in the latter finding ways to compete and also trending towards the no frills business model. Finally a – so-called – negative side effect of budget airlines is their impact on the environment. More flights mean more gas emissions that aren’t good for Mother Nature. “So-called” because aviation is only responsible for around 2% of all gaz emissions and that beef eaters (cows being responsible for 20% of these same emissions) should think twice before pointing to the sky.

brit holidays

These side effects, whether they are desired/ controlled or not, have a name: externalities. 

A side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved.

A good example is the LoJack as well spotted by Levitt and Dubner in Super Freakonomics. LoJack is a security device that can be hidden into a car and that will track that car – when stolen – via GPS whilst alerting the police. Very efficient but its prohibitive cost of $700 means there are only a few being used. Now, since a car thief can’t tell the difference between a car with and without a LoJack, he might think twice before stealing ANY car. This shows the very positive externality your rich neighbour had on the whole neighbourhood.

Now even though most externalities aren’t controlled, one can benefit from looking at the bigger picture when action on the market. Economist Keynes established a theory in which the government should be highly present in the economy of a country to ensure its growth. In a nutshell, he said that if the government, say, would decrease interest rates, and build good infrastructures to a city, then foreign investment would come, creating new businesses, diminishing unemployment, decreasing poverty and crime and so on. The virtuous circle. Most governments today are tackling unemployment by spending money on companies that are reluctant to hire, and job centres. Is this really the best solution? You can’t force a company to hire more people if there is no business growth to justify it. So why not spending money on that growth? Why not following Keynes’ theory? Externalities proved us that you can be more effective by looking beyond what the problem is. The dominos effect.

DOMINO-BUZZARD-2

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big freeze, big loss, big profits.

Mother nature was far from a Christmassy mood last December in Europe, impacting on our travels and our shopping sprees. Bearing in mind I’m living in London (the most dynamic hub of Europe, located in the North hence likely to be affected by bad weather), allow me to ask why this is happening for the second year in a row? Was our very own BoJo too busy launching his cycle scheme and starting a war with tube drivers? I mean is Helsinki airport closed half of the year? I hear you saying that the required equipments are costly, but aren’t they worth limiting the huge loss witnessed by our economy?

bigfreeze

We have learnt for the second time in a row that our economy – now more than ever weakened by the recession – does not like catching a cold. The impact of heavy snows around the UK almost feared some of a double dip recession, with numbers far from reassuring. Quite a logical assumption isn’t it? For starters, transport – that wasn’t at its best this year with terrorism fears, business travel restrictions, increasing oil charges and the Icelandic volcano eruptions – was a heavy loser of the Big Freeze. Construction was also badly hit, as well as high streets retailers (this happening on a key consumption period), agriculture, the entertainment sector, as well as energy (no doubt many of you worked from home all day with the heat on and a relaxing bubble bath break).

But was it really that bad for everyone? As BBC’s Anthony Reuben rightly discussed, it’s all about the point of view we stand by. For instance, UK airports surely had to hire more staff to handle the huge rush of people flooding their terminals – that’s giving temp’ jobs to those who didn’t have any at such a key period. Sales of cold weather gear also surely rose above expectations. Doctor’s appointments, garages for car repair, energy companies, salt mines, snowploughs drivers and you name it! One huge winner was the online sales sector. 25% rise year on year is just crazy, bearing in mind this sector will be winning even beyond that since it will have attracted first-time buyers who had mainly emotional barriers to purchase online (fear of data security, lack of familiarity with high technology etc…), and who now will form part of their productive databases. However it is not that simple. The fact that people were unable to move might have boosted online sales but the hard weather meant that deliveries could not be handled in time for Christmas, adding in yet another barrier to online shopping. There are also some interesting facts about the relation of consumers’ stress on price sensitivity in that “consumers experiencing higher stress levels will demonstrate a higher level of price sensitivity”, meaning marketers will have a tougher job in conveying value for their products.

Marketing is about understanding its environment to spot underlying opportunities. A problem means a solution just like a virus means an antidote – the trick is only to find it first and adapt quickly. A new situation means winners and losers. It also means losers can diversify to winners’ activities. The recession meant that people were less likely to have dinners in town, so Sainsbury and M&S started to launch appealing campaigns to show how you could make a great dinner at home with their grocery products. Again, it’s all about the point of view you stand by. After all, ask G.W. Bush what he thought of the 9.11 attacks.

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