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John Stuart Mill on Limitations to Individual Freedom

John Stuart Mill, English political philosopher and economist

The English political philosopher and economist John Stuart Mill stated that individual freedoms should only be limited to prevent harm to others. Mill wrote, “Over one’s mind and over one’s body the individual is sovereign.”

Philosopher and statesman John Stuart Mill (1806-73) published On Liberty in 1859 as part of his theory of utilitarianism. While Mill’s later Utilitarianism (1861-63) states that the right thing to do is what promotes the greatest good for the greatest number of people, On Liberty delineates the appropriate limitations of a government in enforcing this principle. Mill argues that politics is necessarily a struggle between liberty (maximizing personal freedom) and authority (maximizing safety). Too much emphasis upon the former produces anarchy, while too much of the latter results in tyranny. The balance between these two extremes is struck by following the harm principle: liberty to pursue one’s own happiness is a fundamental good for all human beings and can only be infringed upon if the exercise of one’s liberty harms other persons.

'On Liberty' by John Stuart Mill (ISBN 0486421309) A state is not justified in making paternalistic laws that restrict citizens’ freedoms for their own good. For example, while the state can ban drink driving because it harms others, it should not outlaw alcohol simply because the drug might harm its user. If the state is to err, it should do so on the side of liberty rather than authority. Mill argues that three types of liberty should always be protected by a just state:

  1. freedom of consciousness, including beliefs and speech
  2. freedom of tastes and pursuits
  3. the freedom to unite for any noninjurious purpose.

On Liberty is one of the most important treatises in the history of political philosophy. The harm principle is a cornerstone of liberal democracy and continues to be used by both lawmakers and political theorists.

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Posted in Philosophy and Wisdom

Costco’s Winning Business Model Strategy

Costco Logo: Costco's Winning Business Model Strategy

Costco has built a devoted foundation of customers with low prices and workers with high wages. The discount warehouse services industry is highly competitive. There are several warehouse operators across the United States and Canada that offer similar merchandise quality, selection, and price.

At the end of financial year 2015, Costco managed 480 membership warehouse clubs in the United States, 89 in Canada, 36 in Mexico, 27 in the United Kingdom, 23 in Japan, 11 in Taiwan, 12 in Korea, 7 in Australia, and one in Spain. Base and executive memberships cost $55 and $110 per year, respectively. The company operates 557 warehouse stores, 406 of which are situated in 40 U.S. States and Puerto Rico. The rest are in Canada, Mexico, Japan, Taiwan, Korea, and the United Kingdom.

The internet has made it immeasurably easier for shoppers to chase for the latest deal—and a lot more demanding for brick-and- mortar retailers to command customer loyalty. However, Costco has managed to resist the tendency—with only 3% of its retail sales occurring from e-commerce. In reality, it outclasses other retailers when it comes to dependably increasing sales from its millions of loyal shoppers.

At the warehouse stores, forklifts relocate pallets into racks such that the first time an item is actually touched is when the consumer contacts into the shelf to collect the item and places it into their shopping cart.

Costco's Sustainable Competitive Advantage

Costco’s Sustainable Competitive Advantage

Costco’s objective has been to increase sales while cutting long-term costs (by trimming freight expenses, scaling its merchandise, negotiating prices with vendors, and reducing packaging) with the intention that it can pass those savings down to members. Costco has said that its “rule of thumb is to give 80% to 90% back to the customer.” Those efforts have paid off, with memberships reaching an all-time peak of 81 million members in 2015.

Shiny steel caskets exhibited amongst the stacks of snow tires and pallets of heavy applesauce, rose-scented toilet tissue, mentholated shaving cream, and mild-flavored salsa. However, in time, people may grow familiarized to the sight. By including these special deal items to the cart, the total spend at the cash register expands. This behavior diverges severely with the type of consumer who has the self-control to fill up on everyday consumables at everyday low prices. The latter type of consumer does win in the end even if the cost of the membership is factored into the equation. As one (rather demonstrative) instance, when reviewing the 1999 Kroger-Fred Meyer merger, the FTC vindicated this definition by asserting,

Supermarkets compete primarily with other supermarkets that provide one-stop shopping for food and grocery products. Supermarkets primarily base their food and grocery prices on the prices of food and grocery products sold at nearby supermarkets. Supermarkets do not regularly price-check food and grocery products sold at other types of stores and do not significantly change their food and grocery prices in response to prices at other types of stores. Most consumers shopping for food and grocery products at supermarkets are not likely to shop elsewhere in response to a small price increase by supermarkets.

What Makes Costco Successful

What Makes Costco Successful

Renewals of Costco’s $55 annual memberships stand at a remarkable 91%—a record high. On the word of financial analysts, the low price of memberships and a stable return of loyal members is what sets Costco apart from big box and department store retailers which persist to fight for market-share gains in a altering landscape of increased competition from online retailers led by Amazon. Costco’s ability to dependably drive increases in traffic is a key differentiator.

Everything at Costco is continually being evaluated for productivity. Costco manages a mix of distribution facilities to accomplish the overall objective of operating with an efficient supply chain. The company lately substituted the form of their milk cartons to get rid of the empty space at the top. They can fill thinner jugs all the way to the top, so they can get more gallons onto the same amount of space on a freight truck. The loss-leader abilities of Costco’s business model ought to endure to drive market share advances over the long term. However, it is possible that incumbent grocers could react to Costco, Sam’s Club, or Walmart Supercenter entry along one or more of these non-price dimensions, in which case their prices could continue unaffected or rise.

Costco’s philosophy is to provide its members with quality goods at the most competitive prices. It does not concentrate its efforts on maximizing prices in the short term, but instead focuses to maintain a perception among its members of “pricing authority,” or constantly providing the most competitive prices. This question is actually quite complex in that it has multiple answers that boil down to individual consumer behavior. The reality is that Costco has perfected a purchasing strategy known as the “treasure hunt” which means that there are always new items and tempting deals that extemporaneously come and go. The consumer who walks every aisle knows what I mean by this because they are subconsciously on the treasure hunt.

During the next 10 years, warehouse openings should move the number of primary cardholders to 65 million–75 million, up from 45 million in the most current fiscal year. In spite of having warehouses that spanned three acres, and piles of merchandise stacked to the ceiling, Costco carried only 4,000 carefully chosen products at a time. Three-quarters of the items were such “basic” products as batteries, laundry detergent, and instant noodles. Then there were the “high-end” name-brand products, which might be stocked at Costco one day and then gone the next.

Costco Employees Happier with Wages and Benefits

Costco Employees Happier with Wages and Benefits

While Walmart and Target just recently began increasing take-home pay for their employees, Costco has been an industry trendsetter for years. With starting hourly pay at about $11.50 and a company average of $22 per hour, Costco’s compensation costs beat the competition. Costco has asserted that paying employees well can be more advantageous eventually by keeping turnover low and capitalizing on employee efficiency. Actually, turnover stands at about 10% compared with the industry average of 55%. For employees who have been there more than one year turnover drops to just 6%. Employees rarely leave: The company turnover rate is 5% among employees who have been there over a year, and less than 1% among the executive ranks. Costco management has asserted that loyal employees bring about better customer service.

Costco purchases the majority of their merchandise promptly from manufacturers and routes it through a network of cross-docking facilities, which act as merchant consolidation points to move goods in full truckload volumes to the stores. Sam’s Club carries about 4900 items and Costco around 4000; by comparison, the normal grocery store carries approximately 50,000 and the average Walmart about 100,000. Furthermore, the shopping experience at warehouse clubs is unusual—members pay a fee for access to goods stacked high and sold in wholesale quantities in low-amenity environments. Warehouse clubs are very spartan in their accommodations. They do not bag consumers’ purchases, and a club employee checks all shoppers’ carts and receipts on exit.

Secret to Costco's Success Lies in Supply Chain Efficiency

The Secret to Costco’s Success Lies in Supply Chain Efficiency

Big-box retailers Costco, Sam’s Club, BJ’s Wholesale, and Walmart, along with full-service and fast food restaurants, are significant contributors to the nation’s obesity outbreak. Costco continues to productively increase its businesses, on account of its low prices and robust customer loyalty. Its ability to provide quality products, at a reasonable price, should appeal to most consumers in North America and around the world. While competition in the market remains ferocious, Costco’s leadership is taking the right steps to guide the company into the future. Over the years, Costco added departments, growing further than the traditional discount warehouse offerings. A large majority of the stores featured a drugstore, an optical-dispensing center, one-hour photo services, a food court, and the ever admired and low-priced hot-dog stands. More than half-offered hearing-aid centers and a handful were equipped with print shops and copy centers. More generally, not all big-box chains are created equal. The big-box retail literature has fixated almost exclusively on Walmart, examining its effects on a wide range of outcomes, including prices, labor market consequences, small business activity, time use, obesity, and social and cultural pointers.

Using city-level panel grocery price data matched with an exclusive data set on Walmart and warehouse club locations, customers find that Costco entry is associated with higher grocery prices at obligatory retailers and that the effect is sturdiest in cities with small populations and high grocery store densities. The competitive response need not be to reduce prices; conversely, as segmented-market models with a mix of brand-loyal and price-sensitive consumers have shown that in some cases incumbents can increase prices in response to a low-cost entrant.

The lesson to be learned from Costco for every manufacturer, distributor, or retailer, regardless of industry, is to figure out how to eliminate the fingerprints within the respective supply chain and within internal processes.

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Posted in Business and Strategy

Conspicuous Consumption

Conspicuous Consumption

Conspicuous consumption is the purchase of goods and services for the sake of publicly exhibiting wealth or status

The overt display of luxury goods and services by the ruling classes in the late nineteenth century led Thorstein Veblen to formulate his economic theory of conspicuous consumption. He wrote, “Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure.”

In his influential book The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions published in 1899, Thorstein Veblen (1857-1929) identified a distinctive feature of the newly established upper class of the late nineteenth century and the rising middle class of the twentieth century: their accumulation of luxury goods and services for the expressed purpose of displaying prestige, wealth, and social status. Veblen, a U.S. economist and social scientist, viewed this phenomenon as a negative symptom of the new rich that would inhibit social adaptation to the necessities of the industrial age.

The intention for exhibition embodied in the idea of conspicuous consumption is in contrast to the securing of goods and services for their intrinsic value or their originally established purpose. Focusing on the “conspicuous” aspect of the term, conspicuous consumption can conceivably occur among members of any socio-economic class, from the richest to the poorest. Acquiring status indicators can happen in any social setting. Focusing on the “consumption” aspect of the term, conspicuous consumption relates to the purchase and display of goods beyond what is necessary, and applies primarily to the middle and upper classes, who then set patterns of social behavior and consumption that are imitated by others. In this respect, it is closely tied to consumerism.

One ramification of Veblen’s insights into conspicuous consumption relates to the idea of a “luxury tax.” Such a tax increases costs on goods and services that primarily serve as declarations of affluence, in order to raise revenue and redistribute wealth with little loss to consumers who purchase for the sake of status and not utility. It may also gradually reduce conspicuous consumption of such “positional goods,” or “Veblen goods,” which bear the namesake because demand for them increases as price increases.

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Posted in Investing and Finance Philosophy and Wisdom

Why is Costco so Successful

Why is Costco so Successful

Costco established the warehouse club retail business model, which relies on bargaining power, a no-frills shopping atmosphere, supply-chain efficiencies, and customer-friendly typical markups on branded products. Now, Costco is transforming its no-fuss wholesale business into a global brand.

Membership Fees

Costco has become a significant shopping destination for consumers across all income levels, as well as small businesses. This is foremost because Costco derives approximately 75% of its operating profits from membership fees.

Costco derives nearly all of its profits from membership fees, allowing the firm to sell many of its products at little to no margin, and sometimes at a loss. These loss-leading capacities are reinforced by the firm’s deployment of gasoline to drive store traffic. When blended with membership renewal rates above 85%, these characteristics give Costco a defensible competitive advantage.

Succeeding Overseas

There is little room for more household penetration because Costco already has more than 70 million members; historical sales and earnings growth forecasts may not be justifiable.

In 1985, Costco opened its first warehouse outside the U.S. in Canada. Currently, Costco has 187 locations in Canada, Mexico, the U.K., Japan, Taiwan, Korea, and Australia. Overseas sales more than doubled from 2008 to 2013. While other traditional American retailers grapple to stay competitive in international markets, Costco’s no-fuss warehouse-shopping model is a new experience for international consumers. Remarkably, people in Asian markets are acclimatizing well to shopping in bulk—although it means fastening pallets of toilet paper and enormous teddy bears to the back of their motorbikes as they whizz away from the Costco parking lot.

A Good Living Wage for Employees

Costco has long been known for paying higher wages and offering more liberal benefits than its rivals have—and generating greater sales per square foot, too.

Unlike most retailers, Costco does not see raising employee salaries and growing profits as opposing objectives. While the average hourly wage for a full-time worker at Wal-Mart is $12.81, Costco pays its workers an average of nearly $21. Costco sees the return on this investment in its low employee turnover rates: Just 10% in 2013 and 7% for employees who have worked at least one year. High employee retention permits Costco to reduce considerably on training costs.

Superior Customer Experience

  • A guarantee of quality. Their model promises fundamentally “100% satisfaction” and they mean it. Their return policy stands out among the best in many retail categories and they are exceptionally relaxed about fulfilling it. Costco will take back an empty package of any food, if you are not satisfied, and give you your money back.
  • A extraordinary selection of products that is a bit more refined than most but at a pretty good price. A typical Costco store only carries about 5,000 items, and there is a bunch of those items that rotate regularly.
  • The “treasure hunt” model. The store does have a layout, but within that layout, everything is rotated frequently to keep you looking. This would never work at Walmart or Target —because you’d get frustrated. However, at Costco, it’s part of the fun to “treasure hunt” a new find. They have a very wide selection of very different merchandise types which offers an unique convenience level as a shopper.

CEO Jim Sinegal once said, “If that stuff doesn’t really turn you on, then you’re in the wrong business.” Costco caps margins at a sacrosanct 14% on branded goods, pushes buyers to find creative ways to lower prices and add value, and gets store managers to crank up their efficiency efforts. Under Sinegal’s leadership, Costco has gained a reputation for bargain prices and surprise designer goods.

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Posted in Business and Strategy

India in the ‘Fragile Five’ Club of Emerging Nations in Turmoil

The phrase ‘Fragile Five’ was coined by a research analyst at Morgan Stanley in 2013 to classify Turkey, Brazil, India, South Africa and Indonesia as economies that have become too reliant on foreign investment to bankroll their development ambitions. These countries have one essential thing in common—high and rising current account deficits that compel them more dependent on foreign capital flows. The expression has caught on in large degree for the reason that it emphasizes the strains that befall when countries place too much emphasis on fuelling fast rates of economic growth.

The Emergence of Narendra Modi

The Emergence of Narendra Modi

India’s confused point of view was reflected in the emergent legacy of Manmohan Singh, who may be reminisced as the nation’s best finance minister and its worst prime minister. The breakthrough opening of India that Singh planned as finance minister in the 1990s has been generally outdone by growing corruption and incompetence during his ten year tenure as prime minister. As his feeble coalition government continued to dither despite slowing growth and rising inflation, surveys showed that Indian voters were looking to new faces—even a strongman—to put things right.

'India for a Billion Reasons' by Amit Dasgupta (ISBN 8183281435) Over the years, political momentum shifted to regional parties with strong leaders, and in recent months to the opposition Bharatiya Janata Party (BJP) and its prime ministerial candidate, Narendra Modi, the energetic but overbearing regional leader who positioned his state of Gujarat as the “China of India” after presiding over Gujarat as Chief Minister for twelve years.

A recipe of good luck and resolution has reawakened economists’ cheerfulness about India just as the halo besieging Narendra Modi is beginning to grow fainter. Good luck has come in the form of plummeting oil prices, which are reducing the import burden. Modi took benefit of the price cut to abolish diesel-fuel subsidies and raise regulated natural-gas prices by a third, saving India’s under-pressure budget close to 1% of gross domestic product and disentangling a key market distortion.

Propelling India Forward

'Imagining India: The Idea of a Renewed Nation' by Nandan Nilekani (ISBN 0143116673) The benchmark Sensex Index on the Bombay Stock Exchange has by now climbed 30% ever since Modi became prime minister. But, he may still not have provided enough to lift India’s stock markets higher right away. Companies traded on India’s Sensex index already boast an average price/earnings ratio of 17.4 times 2014 estimates, compared with 11.4 for Brazilian shares, 9.5 for stocks in Shanghai, and 4.7 for distressed Russia. So a good portion of reform success is already priced in.

Not like in China, which is grappling to transform from manufacturing to a more consumer-oriented economy, India’s evolution counts on strengthening uncompetitive factories, which produce just 16% of GDP, compared to more than 20% in most emerging markets.

At any rate, Modi is endeavoring to impel his country in a positive direction. That alone makes India an refuge among the BRIC markets. Brazil and Russia are rallying around leaders who are moving resolutely in the wrong direction, as far as world markets are concerned, while China sends mixed, opaque signals about its own promised reforms and seems resigned to economic slowdown.

India: A Reading List

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Posted in Global Business

What are Free Riders

Free Riders and the Free Rider Problem Free riders are commonly inadvertent recipients of a socially-provided public good for which they have made no contribution.

A public good consists of resources, goods, or services that available for public consumption. Curiously, the use of public good by any individual or group does not shrink its availability nor inhibit its consumption or use by others, e.g. radio broadcasts and street lights.

The ‘free rider problem’ is a situation where the free riders who benefit from free riding do so unreasonably and the probability of forcing the free riders to make a contribution and thus consume the public good rightfully.

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Posted in Global Business Investing and Finance