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Marketing Policies
y
Also called as the strategiesy Purposely served to
evaluate cost and profitstructure
y Mainly to understandeconomic behavior
y To fit in current situation
so that lost in profit will
not incurred
y Grow market share,internally or by acquisition
y Grow revenue at targetedrates
y Maximize return oninvestment
Sales
Marketing Strategies
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Level of Competition for Each Modeof Transportation
Monopoly
1 competitor
ImperfectCompetition
(Oligopoly)
Few, Largecompetitors
ImperfectCompetition
(Monopolistic)
DifferentiatedServices
PureCompetition
An increase in P,D=0
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Mode 1: Motor Carriers
y Cost Structure:
Primarily a variable cost carrier. The majority of thecost of motor carriage is made up of items that are
considered to be variable costs (Labor, Fuel,Maintenance)
y Why a variable cost carrier?
Primarily because they dont have to construct their ownright-of-way. The U.S. Govt. picks up the cost ofconstructing the highways. Carriers simply pay a userfee for use of the road.
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y Since they are primarily variable cost carriers, it is difficult
for motor carriers to spread FC to reduce cost per unit
because there is not much FC to spread=
y Few economies of scale
U.S. Motor Carrier Industry
y About 86% of freight bills
y A
bout 25% of weight shippedy Why?
They cant efficiently carry heavy, bulk, low-value
products (coal, grain) as well as rail and water carriers
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y Cost Structure:
Considered to be primarily a fixed-cost carrier because theyhave to construct their own right-of-way. They must build
their own rail line if they wish to expand service to a newlocation. (As a result, volume is the name of the game)
y Operating environment:
Monopoly within lanes or referred to as a natural monopoly
y Recent mergers reduced the number of players
Mode 2: Rail
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y Cost structure:
The initial up-front cost of the plane is substantial,
however, over the long run, air transportation is
primarily a variable cost industry. Over the life of theplane, the majority of the cost of operation is variablecost (labor, fuel, maintenance)
y Operating environment:
Oligopoly
Mode 3: Air
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Cost Analysis in Transportation
y Many different types of costs
y Many different ways to view a cost
y For example:
Accounting cost:
Depreciation:A non-cash expense that systematicallyallocates the cost of an asset over its useful life.
Accounting also has fixed costs, variable costs etc.
The Role of Costs in Pricing DecisionsThe Role of Costs in Pricing Decisions
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Other Types of CostsOther Types of Costs
y Economic cost:
Opportunity cost is the cost of a lost opportunity.
If I didnt invest in a new manufacturing machine I couldhave invested in a new computer system or purchased acommon stock
y Social cost:
The cost of pollution on the environment.
Each cost has different impacts on an entity, the economy,and society as a whole and each cost acts differently.
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Othertypes of
costs
Semi-variablecosts: Have both afixed and a variable
component. (eg:Phone service has a
basic fee and thencharges additionalfor heavy use)
Direct variablecosts:VC directly
traceable to theproduct or service
(eg: hourly wage fora worker)
Fixed costs: arefixed in total but
vary by unit
Variable costs:varyin total but are fairly
fixed per unit.
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Why Estimate Costs?
y The goal is to understand costs so that we can use pastinformation as a good predictor of future costs.
yThis is important for strategic planning and budgetingpurposes.
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Pricing
Costs Relevant to Establishing a Transportation Price
Commodity cost
Loading/unloadingcharacteristics
Susceptibility to loss and/ordamage
Volume and regularity oftraffic
Types of equipment required
Route cost
Operatingconditions
Trafficdensity
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Demand Considerations Relevant to Establishing
a Transportation Price
Commoditydemand
Economic conditions in the userindustry
Rates of competing commodities
Rates of competing modes
Route demand
Competitionwith other
carriers
Production-
pointcompetition
Traffic density
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Pricing Policies:
Environmental Conditions ofCompetition
Monopoly
1 competitor
ImperfectCompetition
(Oligopoly)
Few, Largecompetitors
ImperfectCompetition
(Monopolistic)
DifferentiatedServices
PureCompetition
An increase in P,D=0
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y Grow market share-price services at market level rates or
below to become dominant player in that industry,
aggressively make acquisitions
y Grow revenue and earnings at targeted rates-price at or
near fully allocated costs, some acquisitions if known
value
y Return on investment-growth secondary, conservation
of capital primary, always price above fully allocated
costs
Marketing Strategies and its Influence on
Pricing
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Pricing Strategies
Cost of service pricing
Charge enough to cover just variable costs
Pure competition
Fully allocated pricing
Charge enough to cover fixed and variable costs
Oligopolyor Monopolistic competition
Value of service pricing
Charge what the market will allow
MonopolyorOligopoly
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Value of Service Pricing
y This refers to charging whatever the market will allow
(whatever someone is willing to pay for the service).
y
This method maximizes revenue regardless of the costsinvolved in proving the service.
y This method is often followed when competition levels
for a given traffic lane, (e.g. specialized type of
transportation etc. are extremely low)
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Fully-Allocated Pricing
y This type of pricing policy covers all variable costs and
the portion of fixed costs attributable to that particular
move.
y Basically this method tries to cover total costs of each
shipment.
y Followed strictly this method will result in a break-even
proposition.
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Cost of Service Pricing
y This form of pricing charges a rate that covers only (orat a minimum) the carriers variable costs.
y This price should be the absolute floor that a carrier will
charge.
y This pricing scheme should not be used for the long-term because it can:
Lead to cross subsidies
Lead to bankruptcy
y Pricing below VC can be determined to be illegal ifproven
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1) Density
This is the weight/space
relationship
2) Stow-ability
Cubic dimensions of aproduct affect
transportation asset usage
3) HandlingHow often the product
must be handled impactsprice
4) LiabilityAddresses the risk of
damage
Key Factors Impacting Price
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Airlines Alliances
flight schedulingflight scheduling baggage handlingbaggage handling catering catering
ground servicesground services maintenancemaintenance Flyer programsFlyer programs
airport loungesairport loungesequity holdingarrangementsequity holdingarrangements
code sharing-selling seats on
another aircarrier
code sharing-selling seats on
another aircarrier
Forms of alliances
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International Trade
TheBasics
1. Balanceof Trade
2. Foreign
ExchangeRates
3.
ComparativeAdvantages
4. TradePolicies
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Balance of trade
y The balance of trade is the difference of momentary valuebetween imports and exports, over a certain period of timefor a country.
y This gives a current account balance, which can either be
positive (surplus) or negative (shortage).y It is measured by the difference between the income that one
country earns from the rest of the world and the income thatthe rest of the world earns from that country (imports andexports of agricultural goods).
y Example: U.S. agricultural current trade account balance is insurplus; we are producing and exporting more than we areimporting and consuming.
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y Raw material imports v. manufactured exports:
To positively affect/improve our trade balance, the goal is to import
raw materials and export manufactured goods. Most agriculturalproducts are raw materials.
y A government budget deficit can cause a drop in the value of thedollar.
(e.g: If the value of the U.S. dollar is low compared to foreigncurrency, this creates an incentive for exporting and is a factor thataffects the balance of trade)
y Surpluses and deficits correspond with the business cycle. So it is
alright to have some surplus (in a good economy) and some deficits (inrecession). If we did not, we would not be able to spend our way outof a recession. Economists only want the trade to balance out in thelong run
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Foreign Exchange
y The exchange of currency from one nation to another.
Example: The U.S. dollar to the European Euro.
y Also referred to as FOREX.
y Terms to describe international trade:
Rising, falling, strengthening, weakening.
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y Strengthen -describes when the value of the currency is more
dominant when compared to two or three other currencies. A stronger currency means a consumer can buy more.
y Weakening - when the value of a currency is not as valuable as
its normal amount.
y Domestic changes
Measured using the Consumer Price Index (CPI).
The CPI measures the changes of the purchasing power ofthe dollar over time.
If the CPI increases the dollar is buying less and vise versa
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Weakening Currency (e.g: US)
y Advantages:
the US firm can sell easier to foreign markets more tourists
can buy products from the US and this increaseAmerican
markets
y Disadvantages: Consumers face higher prices on foreign
goods.
Higher price =
Higher price of living.
Hard for U.S. firms to get into foreign markets
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Comparative Advantages
Is the situation presented where someone can produce agood at a lowerlower opportunity cost than someone else.
Absolute Advantage:
Entities can produce something using a smaller number ofinputs than another party producing the same product.
Just because someone has an absolute advantage does notmean they have the comparative advantage.
Specialization of Trade:
Production means are dedicated to one product instead ofmultiple
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International Trade Policy
y Bilateral trade is trade between 2 countries
y Bilateral is known for its FreeTradeAgreements (FTA)
y Multilateral trade is trade between 3 or more countries
Bilateral & Multilateral Trade
Tariffs & Quotas
A tariff is a tax on an import or exportSpecific Tariff- a specific tax on each unit
Ad Valorem Tariff- a percentage of the goods value
Quota - the amount of product a country can import or export
A quota can either be in terms of volume or value
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Bilateral &Multilateral Trade
- Bilateral trade is trade between2 countries
- Bilateral is known for its Free
Trade Agreements (FTA)- Multilateral trade is tradebetween 3 or more countries
Tariffs & Quotas
- A tariff is a tax on an importor export
- Specific Tariff - a specifictax on each unit
-Ad Valorem Tariff - apercentage of the goods value
- Quota - the amount ofproduct a country can importor export
- A quota can either be in termsof volume or value
International Trade Policy
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Transportation Policy
y Importance of federal government role
Defined through laws, regulations, funding programs
No unified federal transport policy
y
Congress and the President
y Over 60 federal agencies involved
y 30 congressional committees
y Two independent regulatory agencies
y Department ofJustice
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WhyDo We Need a Transportation
Policy?
y Significance of transportation
y
Capital requirements
y Need for government assistance
y Public ownership sometimes necessary
y Policy: framework for allocating resources
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Declaration of National Transportation Policy
y ICCTA(Interstate Commerce Commission Termination Act) spelledout federal policy for STB(Surface Transportation Board regulationof modes (except air)
y Policy interpretations:
Recognize and preserve inherent advantages Safe, adequate, economical and efficient service
Restatement of common carrier obligations Reasonablecharges, unjust discrimination, undue preference, unfaircompetitive practice
Fair wages and working conditions
Meet needs of commerce, U.S. Postal Service, and national
defense
y Specific direction for rail and motor
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Who
establishespolicy?
Executive
Branch
Congressionalcommittees
Regulatoryagencies
Judicial system
Industry
associations
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National Transportation Policy-
Inconsistenciesy No air carrier policy
yOverlooks exempt motor and air
y No attempt to define reasonable charges, discrimination,unfair competition-defers to regulatory agencies]
y No definition of inherent advantages andinconsistencies of interpretation-changing advantages
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THANK YOU