Case let 1 The war on drugs is an expensive battle, as a great deal of resources go into catching those who buy

or sell illegal drugs on the black market, prosecuting them in court, and housing them in jail. These costs seem particularly exorbitant when dealing with the drug marijuana, as it is widely used, and is likely no more harmful than currently legal drugs such as tobacco and alcohol. There's another cost to the war on drugs, however, which is the revenue lost by governments who cannot collect taxes on illegal drugs. In a recent study for the Fraser Institute, Canada, Economist Stephen T. Easton attempted to calculate how much tax revenue the government of the country could gain by legalizing marijuana. The study estimates that the average price of 0.5 grams (a unit) of marijuana sold for $8.60 on the street, while its cost of production was only $1.70. In a free market, a $6.90 profit for a unit of marijuana would not last for long. Entrepreneurs noticing the great profits to be made in the marijuana market would start their own grow operations, increasing the supply of marijuana on the street, which would cause the street price of the drug to fall to a level much closer to the cost of production. Of course, this doesn't happen because the product is illegal; the prospect of jail time deters many entrepreneurs and the occasional drug bust ensures that the supply stays relatively low. We can consider much of this $6.90 per unit of marijuana profit a risk -premium for participating in the underground economy. Unfortunately, this risk premium is making a lot of criminals, many of whom have ties to organized crime, very wealthy. Stephen T. Easton argues that if marijuana was legalized, we could transfer these excess profits caused by the risk premium from these grow operations to the government: If we substitute a tax on marijuana cigarettes equal to the difference between the local production cost and the street price people currently pay ± that is, transfer the re venue from the current producers and marketers (many of whom work with organized crime) to the government, leaving all other marketing and transportation issues aside we would have revenue of (say) $7 per [unit]. If you could collect on every cigarette and ignore the transportation, marketing, and advertising costs, this comes to over $2 billion on Canadian sales and substantially more from an export tax, and you forego the costs of enforcement and deploy your policing assets elsewhere. One interesting thing to note from such a scheme is that the street price of marijuana stays exactly the same, so the quantity demanded should remain the same as the price is unchanged. However, it's quite likely that the demand for marijuana would change from legalization. We saw that there was a risk in selling marijuana, but since drug laws often target both the buyer and the seller, there is also a risk (albeit smaller) to the consumer interested in buying marijuana. Legalization would eliminate this risk, causing the demand to rise. This is a mixed bag from a public policy standpoint: Increased marijuana use can have ill effects on the health of the population but the increased sales bring in more revenue for the government. However, if legalized, governments can control how much marijuana is consumed by increasing or decreasing the taxes on the product. There is a limit to this, however, as setting taxes too high will cause marijuana growers to sell on the black market to avoid excessive taxation. When considering legalizing marijuana, there are many economic, health, and soci l a issues we must analyze. One economic study will not be the basis of Canada's public policy decisions, but Easton's research does conclusively show that there are economic benefits in the legalization of marijuana. With governments scrambling to find new sources of revenue to pay for important social objectives such as health care and education expect to see the idea raised in Parliament sooner rather than later.

IIBM Institute of Business Management

Plot the demand schedule and draw the demand curve for the data given for Marijuana in the case above. largely by exploiting new opportunities in emerging markets. which has focused on productivity rather than on growth. What people may not be equally familiar with is the relentless focus on cost reduction and productivity growth that pervades the company. It has continuously pushed down its cost for energy and utilities to 3 per cent of revenues. Everyone knows about the staggering ambition of the Ambanis. Reliance's employee cost is 4 per cent of revenues. They suffer from a profound bias for growth. is about a third of global standards. Sustaining profitability in the face of such expansion is an extremely challenging task. ABB and Canon. as Reliance has shown. against 15-20 per cent of its competitors. For now. On the basis of the analysis of the case above. what is your opinion about legalizing marijuana in Canada? Case let 2 Companies that attend to productivity and growth simultaneously manage cost reductions very differently from companies that focus on cost cutting alone and they drive growth very differently from companies that are obsessed with growth alone. The cement industry. this is a challenge Indian InfoTech companies seem to be losing. worldwide.Examination Paper Semester I: Managerial Economics Questions 1. grew at around 7 per cent. Nirma. Similarly. at 3 per cent of revenues. they are unwilling to face the sour of productivity improvement. ABB has doubled its revenues from $17 billion to $35 billion. Unfortunately. NIIT and HCL achieve rates of growth of over 50 per cent which compares favorably with the world's best companies that grew at around 30 per cent between 1994-95. In the slow growth electro-technical business. has done very well in this dimension when compared to their global IIBM Institute of Business Management . it has built up a 46. Its sales and distribution cost. The problem is most look more like Essar than Reliance. NIIT. It is the ability to cook sweet and sour that under grids the remarkable performance of companies likes Intel. At the same time IBM Microsoft and SAP managed to improve this ratio by 17 per cent. almost from scratch. The ROCE for three Indian majors fell by 7 per cent annually over 1994-96. its capital cost is 25-30 per cent lower than its international peers due to its legendary speed in plant commissioning and its relentless focus on reducing the weighted average cost of capital (WACC) that. The story is very similar in the information technology sector where Infosys.000 employee organization in the Asia Pacific region. There are some exceptions. also grew at over 25 per cent per annum in revenues but maintained its labour productivity relatively stable. There is nothing wrong with this bias. In contrast. Its focus on growth has helped it double revenues every two years. for example. however. GE. A Bias for Growth Comparing major Indian companies in key industries with their global competitors shows that Indian companies are running a major risk. largely through 100 per cent captive power generation that costs the company 4. improved its labour productivity by 20 per cent and its return on capital employed by 6. Its strongest competitor. For example. well below Indian utility costs. and about 30 per cent lower than the global average. 2. is the lowest of any major Indian firm. While they love the sweet of growth. Reliance has built its spectacular rise on a similar ability to cook sweet and sour.000 people.5 cents per kilowatt-hour. Nowhere is this more amply borne out than in the consumer goods industry where the Indian giant Hindustan Lever has consolidated to grow at over 50 per cent while its labour productivity declined by around 6 per cent per annum in the same period. its return on capital employed (ROCE) suffered by over 17 per cent. at 13 per cent.7 per cent. But it has also reduced employment in North America and Western Europe by 54. strongly believes that growth is an impetus in itself. however. It is the hard squeeze in the north and the west that generated the resources to support ABB's massive investments in the east and the south. which has fuelled Reliance's evolution into the largest private company in India. Coca Cola.

Apparently. for Arvind's stock price has been falling since Q4 1994 despite such excellent results and. Nike. while their ROCE fell at 15. there are warning signals for Arvind's future. The company shows a healthy excess of almost 30 per cent over WACC. has seen similar success and the share price rose by 25 per cent despite an indecisive sensex. Unfortunately. Indian companies fare a lot worse. Arvind's deteriorating financial returns over the last few years is also typical of the Indian textile industry. VF Corp and Coats Viyella showed a growth in their returns on capital employed of 6. at the end of the first quarter of 1998. while improving returns on capital employed at about 25 per cent and labour productivity at 8 per cent.4 per cent. investors also think so. not only on absolute profitability ratios. The excess over the WACC is only 1. Companies like Cummins India have always pushed for growth as is evidenced by its 27 per cent rate of growth. Despite the excellent performance in the past. Discuss capital and labour productivity in engineering context and pharmaceutical industries in India. which actually fell for most industries over 1994-96. BHEL. The only note of caution: Indian engineering companies have not been able to improve labour productivity over time.9 per cent per annum and labour productivity at 7 per cent. but not at the cost of present and future profitability. in the same period. The pharmaceuticals industry is where the problems seem to be the worst. Labour productivity. displaying great future promise. is less than Rs 70 compared to Rs 170 at the end of 1994. Compare this with some of the best pharmaceutical companies of the world ± Glaxo Wellcome.5 per cent per annum for cement. Siemens and Cummins Engines have achieved about 13. the bias for growth at the cost of labour and capital productivity is also manifest in the performance of other Indian Pharma companies. Questions 1. with growth emphasized at the cost of all other performance. Discuss whether Indian Consumer goods industry is growing at the cost of future profitability. While Mexico's Cemex has grown about three times fast as India's ACC. SmithKline Beecham and Pfizer ±who have consistently achieved growth of 15-20 per cent. Indian cement companies have consistently delivered better results. At the same time. Is textile industry in India performing better than its global competitors? . while the ROCE of Grasim and Coats Viyella (India) fell by almost 2 per cent per annum. while their competitors worldwide such as Glaxo and Pfizer earn an average ROCE of 65 per cent. the public sector giant. improving labour productivity by 20 per cent. They show a growth of 24 per cent in return on capital employed while international players show only 8. Ranbaxy is not an exception. The top three Indian companies actually showed a decline in their return ratios in contrast to the international majors. What makes this even worse is the Indian companies barely manage to cover their cost of capital. 4.Examination Paper Semester I: Managerial Economics counterparts.2 per cent. it also operated a tight ship. While Indian textile companies just about cover their WACC. it grew at an average of 30 per cent per annum to become the world's largest denim producer. They have been growing at over 22 per cent. In the Indian textile industry. Is Indian companies running a risk by not giving attention to cost cutting? 2. Like Reliance. implying it barely manages to satisfy its investor¶s expectations of return and does not really have a surplus to re-invest in the business. but also on absolute profitability growth. Arvind Mills was once the shining star. 3. has improved at 2. The engineering industry also matches up to the performance standards of the best in the world. Between 1994 and 1996.5 per cent. it had learnt to cook sweet and sour. their international rivals earn about 8 per cent in excess of their cost of capital.5 per cent growth in labour productivity. Even in absolute returns on assets or on capital employed. while international engineering companies like ABB. on an average.

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