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Economic Analysis of Amazon and Boeing's Management Decisions

Info: 5386 words (22 pages) Essay
Published: 8th Feb 2020 in Business

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I. Amazon

Amazon has taken a new idea and brought it to the doorstep of small business owners. The business idea was created to allow small business dreamers to get a chance to grow their business through a larger company. The Amazon Delivery Service Partner Program was launched in 2018 with plans to assist small business owners across the globe (Bishop, 2018). “Launched with its help, Amazon hopes these businesses will ultimately employ tens of thousands of delivery drivers in Prime-branded blue vans and uniforms” (Bishop, 2018).

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Due to the program launch, a few pros and cons had risen. The pros of the program are the lower rates Amazon offers to make the program accessible to entrepreneurs, the Amazon promise to remove potential hurdles connected to starting and operating a small business, and businesses that participate in the program benefit from the massive negotiating power Amazon has (Bishop, 2018). The cons associated with the Amazon delivery program center around low profit potential compared to other delivery businesses, blue Amazon branded vans only being used to deliver Amazon packages, and limitations on fleet size (Bishop, 2018).

 A real business issue managers may face is package protection. It is critical customers feel comfortable using Amazon’s services to receive products they purchase without any hiccups. A possible solution to the issue is delivery wherever you are. Knowing that the small business owner is willing to meet the needs of the customers wherever they are could bring a sense of peace to the customer. Another issue that may arise for managers is service cost and low profit margins. Being that Amazon is only offering transit for Amazon packages, it may bring a worry to the manager of the small business. The manager would have to find a way to leverage a partnership with another transit service to get packages delivered for customers. This issue brings a burden to management as well as the business because it hinders the full potential of the company by narrowing the buying power of the customers. A smoother way to solve the issue can be to offer a more broad delivery service through Amazon. Amazon has the ability to leverage partnerships with companies to expand their delivery service. This not only makes it easier for business owners to grow, but also brings in more revenue for Amazon as a whole.

Imagine delivering over one billion packages in one year! Now imagine paying somebody else to do this job for you. This is what is happening at Amazon, they deliver over a billion packages worldwide and pays companies such as USPS, FedEx, DHS, and UPS to deliver these package to the doorstep of the consumers. Furthermore, USPS is increasing their fees and this will increase the shipping cost for Amazon. “The proposed uptick in shipping and mailing fees at the U.S. Postal Service could cost Amazon more than $1 billion in 2019”(Franck, 2018). The solution the management came up with was to the hired drivers to deliver these packages.

“Macroeconomics is a branch of economics that studies how the aggregate economy behaves. In macroeconomics, economy-wide phenomena are examined such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.”(Chappelow, 2019). By employing all these drivers, Amazon lowered the unemployment rate which attributed to the study of macroeconomics according to the definition above. The solution would save the company a lot of money and also contribute to the country economy by lowering the unemployment rate. The problem is the method has caused controversy with the labor practice that is used. The drivers are hired as contractors, with zero benefits from the company. The drivers used their cars, pay for gas and insurance out of their own pockets.  The entire process is very Uber-esque, meaning drivers chose when they can work by blocking off times on an application that would also be used to confirm delivery and tracks drivers’ movement. After blocking off the schedule work time, they have to go to the warehouse and get all the packages and deliver them to the customers. After going through all that process, the majority of the drivers only get single digits in pay per hour.

Mind you the minimum pay for drivers is $18 and could be spiked to $25 (Using price surge). After calculating the mileage cost after delivering packages, gas cost and meals—the hour wages would most times falls below $10 an hour. Sometimes if the driver delivers during a price surge (mainly stem from a hazardous driving condition which would increase the demand for more drivers) the base pay might get a boost to $13-$15 an hour.

Although there may be many solutions to this problem, we will dive into the two. One of the steps to the solution is already been used by Amazon, which is to give the current non-drivers employee a $10, 000 stipend to quit their jobs and work as a delivery driver (Novet, 2019). This, in turn, does not solve the macroeconomics issue but instead the micro, since it does not affect the unemployment rate. Another solution that would contribute to the decrease in the unemployment rate, and similar to the above is to give a monthly stipend to new and current drivers. This stipend would be a gas stipend to reimburse the driver for their usage while delivering. Some other stipends that the company could give are to pay a portion of the driver insurance up to a certain amount and a stipend for the depreciation value to those drivers who drive their own vehicle.

Amazon has an impact on the American economy, both macro and micro. Their “…enormous workforce and economic influence means it has the power to squeeze wages and even warp the political process…”(Story by Lydia DePillis, CNN Business Video by Jon Sarlin, CNN Business, 2018).

Like any other business, Amazon aims to increase their profits. In 2017, even though their net sales were $178 billion, their annual profit was only $3 billion. This reflects a 1.7% profit margin. In an attempt to cut costs, and at the same time assist small business owners, they introduced The Amazon Delivery Service Partner Program. (Bishop, 2018). This solution would have a positive effect on the unemployment rate, by creating more potential jobs, as well as be a long-term business solution to help increase their profits.

The delivery service program would help individuals interested in starting their own delivery business by offering lower rates, as well as alleviating some of the burdens faced with start-up and operations. They even offered to pay their own employees $10,000 to quit and start up their own delivery business. (Novet, 2019). Their offer comes with stipulations, though. These newly established businesses would only be able to deliver Amazon packages and only be allowed a limited fleet size. (Bishop, 2018). Though this business strategy could benefit Amazon, it could hamper the newly established business owner’s ability to grow and be profitable themselves.

II. Boeing

In early March 2019 a decision made by the FAA to ground all Boeing 737 MAX airplanes was made. This decision was imposed after an investigation of recent plane crashes showed that these crashes may have been a result of faulty software installed the aircrafts.   The impacts of this decision have had and continue to have significant economic impacts at a micro-level.   “With its fastest-selling plane grounded in the U.S. and around the world, Boeing faces potential hits to its bottom line as well as to its reputation. A lengthy delay could cut Boeing’s revenues by billions, some analysts say.” (Domonoske C., 2019).  

With approximately 370 aircraft grounded there are a number of other economic issues arising that are impacting, not only Boeing, but its primary and secondary customers on a micro level.  Between rebooking flights, refunding tickets to passengers who can no longer fly, paying to park the aircraft long term and paying flight crews that are unable to work, airlines are incurring a significant amount of expenses. “”This is costing millions of dollars per day,” says Phil Seymour, who runs an aviation consultancy called IBA.” (Domonske, 2019).  As a result, major airlines such as Norwegian Airlines are seeking compensation directly from Boeing.

In addition to the monetary costs, Boeing’s reputation has also been tarnished and it will likely take quite a bit of convincing to put the company back into the good graces of its customers. “A poll conducted by Business Insider a week after the Ethiopian Airlines crash showed that 53% of American adults would not want to fly on a Boeing 737 Max even after the FAA clears the aircraft for service.” (Zhang, 2019).

To solution the problem, Boeing has put a significant amount of time, effort, and money into addressing the aircraft issues and concerns of its customers.  Frequent press releases confirming that the company is actively developing a software update, slated to be released later this year, have been published.  While it is encouraging to see the efforts Boeing is putting forth to correct the issues, they will likely need to adjust their business model in order to thrive again.  They have consistently operated under a business-to-business model which has worked well for them.  However, since this situation has been felt downstream on many levels, they will likely need to adjust their strategy and move towards a business-to-consumer model in order to win their customers (and their customers) back.

The main goals of the economy are overall health and sustained growth.  These goals are typically demonstrated through steadily increasing GDP (especially per capita GDP, a more accurate indicator of quality of life), low unemployment and keeping inflation in check. Expectations about the market drive the economy either up, down or cause it to remain flat. Business decisions of whether to make capital investments or not, expand or contract production, hire or lay off workers are a direct response to both the current economic state and predictions about its future direction. Changes in savings, interest rates, wage rates, inflation, trade balance, overall supply and demand and other factors are the results of the business decisions within the market. Attempts to facilitate desired directional economy shifts are also accomplished by governmental intervention through fiscal and monetary policy implementation.

 The grounding of Boeing’s 737 Max planes following two closely timed airplane crashes, with no survivors, has sent shockwaves throughout the airline industry and created ripples in the U.S. Economy.  Boeing management has a number of issues to consider as the macroeconomic impacts caused by this situation have far reaching implications. The primary macroeconomic implications currently in play resulting from this problem are 1) negative impact on GDP, 2) negative pressure on U.S. trade balance, specifically reduction in exports and 3) market supply shortage of airline flight availability. (Kearns, 2019)

Typically, the business fortunes of one company have little measurable effect on the U.S. Economy, on a whole, but in the case of Boeing, the largest component of the Dow Jones Industrial Average, that is not necessarily the case.  Boeing is a giant with annual sales in excess of $100B employing over 140,000 people.  One the trade side of the equation, it is largest manufacturing exporter in the U.S. (Gelles, 2019).  Estimates predict the potential national productivity impact if 737 production is halted would be to shave approximately 0.15% – 0.20% off GDP for the affected quarter, or an annualized reduction of between 0.6% and 0.8%.  The most immediate impact on GDP has yet to result in a reduction as production at Boeing continues, however we have experienced a shift in its composition. (Kearns, 2019).  We have seen a decline in overall U.S. business investment and gross exports, however these declines have been offset by inventory increases resulting from stockpiling of the 737 planes already produced. (Gelles, 2019). The fleet supply shortage resulting from every airline in the industry taking their 737’s offline had immediate impacts on consumers with flight delays and cancelations following. Another potential macro impact could be an uptick in the unemployment rate.  If the grounding is prolonged the mounting costs Boeing is already incurring could lead to implementation of cost cutting measures up to and including employee layoffs.  Based on Boeing’s size, this could quite possibly, negatively impact national unemployment figures. From a macroeconomic perspective, as it relates to impact on GDP, in the most recent published statistics from the Commerce Department, we see the first signs of potential hits on national productivity.  Orders for durable goods increased 2.7% in March driven in part by strong demand for commercial aircraft. The Commerce Department reported that orders for civilian aircraft increased 31%.  Actual shipments, however, of commercial planes dipped by 0.4% during March. This coincided with the timeframe in which Boeing ceased deliveries of the 737 Max planes.  Boeing has also scaled back production of the Max jets indefinitely.  It is working on finding a fix to the possible culprit, the anti-stall system, implicated in the crashes.  Boeing management has also recently announced that it is slowing the monthly production of the 737 Max planes. (Horsley, 2019) The prolonged grounding of these planes could have a noticeable impact on the supply of available planes to meet the demand for flights leading to further delays and/or cancelations. This can be demonstrated by the supply and demand curve below:                                                                                                                                                                                                                           

Under normal conditions, the shift in supply would result in fewer available flights with a corresponding increase in market price.  This situation would be further exacerbated during peak travel seasons with family vacations and holidays approaching producing an increase in demand at the same time supply is being reduced. This situation can be depicted in the diagram below where demand shifting from D2 to D1 could approximate what might happen during the summer months while supply moves from S1 to S2 due to the 737 Max jets remaining off line with insufficient airline inventory to make up the difference.

                                                     

Since Boeing’s management has decided to scale back production, one solution to lesson both the sting on its revenue and orders for durable goods is to continue to sell through its existing orders which should take care of the inventory backlog (Gelles, 2019), In the meantime, they should continue to work feverishly to remediate all real or perceived safety concerns to the satisfaction of the FAA and other national and international regulating bodies.  Finally, a concerted effort to regain public trust in this aircraft will go a long way in balancing out economic impact into the future.  To mitigate some of the shortage issues with the airlines, Boeing must foot the bill for concessions that airlines will need to make in mitigating those shortages such as shifting customers to other under capacity aircraft and leasing other planes to fill gaps among other things. Given the current state of the market for commercial aircraft, there should be little long-term risk  to the company and therefore the macroeconomic factors mentioned above. Since Boeing only has one real competitor in the manufacturing of commercial aircraft space, the 737 Max remains one of only two midsize fuel-efficient passenger jets on the market.  Airbus’ A320neo being the other (Gelles, 2019).  Since this is a supply-constrained industry the risk of losing substantial future business is minimal.                                                                                                                                     

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 In summary, the actual impact on GDP, trade balance, and unemployment should be minimized as a result of the sell through of existing 737 Max jet inventory and future orders likely to pick back up in the long run which will mitigate potential trade balance issues. The short term market shortages will also be minimized, albeit at increased cost to the company, however Boeing’s financial position is substantial enough to absorb the impact in the long run.

III. Business Problems

Boeing’s largest competitor is Airbus, and in 2010 Airbus was looking to update one of their planes, the Airbus A320, by upgrading the engine, thus creating the Airbus A320neo (Yglesias, 2019). This engine would be larger while also being 15% more fuel efficient, meaning airlines could carry more people/cargo while saving money on fuel. This caused Boeing’s management to react extremely quickly, because if Boeing did not offer a similar airplane, Airbus could dig into Boeing’s market share, costing them millions of dollars. This resulted in Boeing updating one of their planes with a new, more fuel-efficient engine, the 737 now became the 737 Max (Yglesias, 2019).

A feature of the Airbus plane was that it was essentially the same plane as its predecessor, requiring little to no additional training. Not to be outdone, Boeing announced that their plane was also essentially the same as its predecessor, but that was not an accurate representation of the 737 Max (Yglesias, 2019). Because of the way Boeing’s new engine was mounted, the plane required additional software to help maintain course in times of max thrust, like during takeoff, which meant the planes did not operate the same (Kitroeff, Gellas, Nicas, Kaplan, & Haberman, 2019). For training, Boeing offered a 2-hour iPad course, instead of a simulator, and the new system was not mentioned (Kitroeff, Gellas, Nicas, Kaplan, & Haberman, 2019).

This decision by Boeing, to quickly roll out a plane that was advertised as “essentially the same” and offered miniscule training on the new software system, led to two devastating crashes. After which, governments across the world acted and grounded the entirety of the 737 Max planes. This decision has negatively affected Boeing, the U.S. economy and the world economy.

Amazon, on the other hand, thought about its problem a bit more carefully. By offering free shipping on certain orders, and with prime members receiving free two-day shipping, Amazon incurs a lot of costs on the over one billion packages sent. And with shipping rates looking to increase, Amazon needed to think of a way to save money that could be easily adopted by the company. Amazon’s management created a way save money by taking ideas of other companies and incorporating them into one. This creation was a service to deliver packages through the normal, everyday person.

IV. Conclusion

Amazon is a massive company and as a function of that new driver jobs would be available all across the country, thus lowering unemployment. However, this comes with its drawbacks, such as the costs associated with driving – fuel and maintenance, and drivers are treated as contractors instead of Amazon employees. Amazon’s management team needs to not only think about their bottom line, but to also think about the people making those deliveries.

The analysis and research conducted in this paper yields interesting results. Amazon and Boeing are very large and successful companies, $920.17 billion and $199.74 billion respectively (Macro Trends, 2019). These two large companies take very different approaches to solving managerial economic issues they face. This is true whether the issue is considered macroeconomic or microeconomic in scale.

Amazon’s managerial economic dilemmas began as an exercise to lower shipping costs. In 2017, Amazon spent $21.7 billion on shipping with all transportation partners (Garcia, 2018). Amazon evaluated many factors, Prime growth rates, shipment frequency, holiday surge volumes, carrier capacity, and associated carrier rate increases. Amazon took a purely economic and applied those concepts to the outcome. Amazon had changed consumer expectations by offering two day free shipping if they were Prime members. They also reasoned that customers did not care who delivered their shipments, as long as they arrived in two days. This substitution effect meant there was no advantage for Amazon to us any single carrier. Finally, when they examined the expected volume of shipments with the carrier capacity, they discovered a looming shortage in the short term. Amazon quickly came to the realization that the only possible outcome was to start their own transportation and package delivery business, creating more capacity in the market. The idea is not that far-fetched. The unit does not have to make a profit for Amazon, just save enough money from their transportation budget to cover the unit’s costs.

Amazon was not finished with their economic problem solving. Since they were expanding their lines of business that required transportation to customers, Amazon would need to create a pool of variable capacity. Amazon chose to implement a contractor model. This contractor model allows more people to own their own businesses, work when they want to, or to pick up additional income as they work around their primary job. However, this model is not perfect and may result in a lower wage for some contractors.

Boeing economic dilemma stems from a single issue. The Boeing 737-800 Max has been grounded by the FAA and global airline operators as a direct result of two separate incidents in which the plane suffered a software related issue that caused the new aircraft to stall, crash, kill all passengers and crew on board. Naturally, this has affected Boeing’s value and between 2/18/2019 and 5/17/2019 Boeing’s market cap has fallen by $52.21 billion dollars (Macro Trends, 2019). These serious issues have far reaching micro and macroeconomic issues.

On the micro level, Boeing cannot sell its most popular model and is losing future orders for the 737 Max. Boeing’s response has been to create a higher level of transparency, push status updates to the public, and add resources to accelerate the software fix delivery all in order to create goodwill. These microeconomic effects extend to Boeing’s reputation. The harm to their brand could be more costly than the direct costs associated with the grounding of the 737 Max. This includes expenses related to liability for loss of life, property, and the airline carrier’s costs for the loss of capacity, passenger re-booking, idle crews, idle assets, and cancelations.

Boeing is the largest manufacturing exporter in the U.S. (Gelles, 2019) and the macroeconomic impacts are far reaching. The impact to suppliers, supply chains, contract service providers, and other supporting businesses has yet to be measured. The numbers are being monitored, but expect a drop in GDP, a larger trade deficit, and with a passenger capacity shortage there will be higher costs for travelers at least in the short term. There is also a danger that existing orders could be canceled. While not perfect substitutes, Boeing’s closest competitor and European conglomerate, Airbus Industries, is gaining traction with potential customers. These aircraft are built in Europe and that economic benefit would move there and away from the U.S.

In conclusion, the analysis performed by the team reveal the reasons behind each micro or macro decision and their intent. These companies are rational, make rational decisions, and the carefully considered decisions either lead to higher profits, larger scale, deliver economic value, or create value.

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