Ecn_561_Wk_4_Fgi_Business_Proposal

FGI Business Proposal Economics 561 March 18, 2013 Instructor Mostafa Baladi, PhD FGI Business Proposal Thomas Money Service Incorporated is manufacturers and finance building and forestry equipment under a subsidiary Future Growth Incorporated (FGI). After over 60 years of consistent increases in profits, recent fluctuations the economy as well as flooding, massive fires and protests from animal activists attributed to a decline in last year’s profits of 30%. The organization is seeking ideas and suggestions to change their business practices to increase profits. Understanding the market that FGI participates will help to narrow the specific areas FGI can focus to efficiently and increase profitability. The organization operates in a monopolistic competitive market in which many organizations compete with products that have slightly different features and benefits, independent price actions, and perception for substitutions (McConnell, Brue, & Flynn, 2009). A business proposal has been assembled to help FGI address opportunities to increase to revenues, minimize costs, and enhance profit maximization, product differentiation, and barriers to new competitors. Profit Maximization Price is not completely elastic in a monopolistic competitor market because products have different features and benefits; therefore there are no perfect substitutes. McConnell, Brue, and Flynn (2009) state, “When price changes, total revenue will change in the opposite direction if demand is price-elastic” (p. 122). Because of the type of market FGI participates, if FGI increases prices there is little change to the market however demand for FGI’s products would decrease. Therefore, FGI must determine the level of output, not necessarily price, in which FGI minimizes losses and maximizes profit by producing an output level in which marginal revenue equals marginal cost (McConnell, Brue, & Flynn, 2009). According to the output quantities, listed in Appendix A, marginal revenues at the 12th unit is $400 whereas the marginal costs are $174 or MR>MC. If the assumption is marginal revenues and marginal costs from unit 12 to 13 are equal to the same as from unit 11 to unit 12, marginal revenue would decrease by $200 and marginal costs by $29. Output of unit 13 marginal revenue ($200) is less than marginal costs ($203). Therefore, optimal level of output in which FGI can maximize profits is 12 units. Because of the type of market, competitors enter and leave the market depending on the profitability and demand of the market. In long run equilibrium, FGI can expect to earn normal or break-even profits. When demand is high, FGI and competitors can charge a higher price, thus increasing production to meet demand. During this time additional firm will enter the market taking market share and lowering prices. When demand declines, FGI must charge a price lower than the average total costs and minimize costs by producing fewer units. Although there are losses in short run equilibrium, there is good news. Firms will begin to exit the industry during this time and price will return equal or above average total cost and output will readjust to the level marginal revenue equals marginal cost. The question arises, how can FGI expect only normal profits, if they previously experienced growth over 60 years' FGI’s goal is to return to profitability. The answer is product differentiation. Product Differentiation Organizations in a monopolistic competitive market must strive to separate their products from the others. There are several areas FGI can improve their product differentiation as well as increase revenue; these include advertising, research and development (R&D), product differentiation, and market niche. Today, the organization’s advertising consists of one commercial during the Super Bowl and other sporting events. A 30-second advertisement during the Super Bowl averages between $3.5-$4 million dollars (Neil, 2013). If one assumes an additional $1 million dollars are currently spent on advertising at other sporting events, FGI is spending approximately $5 million dollars per year on advertising. The organization should split the current advertising budget to R&D and advertising to target methods that appeal to builders and contractors who specialize in nursing home and hospital construction. Because hospital and nursing home development has not shown a decline during the economic downturn, there is a product differentiation opportunity for FGI to capture a niche market. Advertising should highlight several features that distinguish FGI from their competitors. Examples may include number of years in business, ability to finance equipment, availability of new and used replacement parts, and their specialization in equipment for commercial builders and forestry organizations. Advertising does not prevent new companies from entering the market however it lends to prevention of any new companies that do enter the market eroding profits during short run periods. It is important to “marry” advertising campaigns with investment in new products and technology. The more product differentiation FGI can make with the new products and technology, the more the organization will appeal to a wider audience. An area FGI may want to develop new technology is their forestry equipment division because causes for profit losses over the last year were attributed to flooding, massive fires, and protest from animal activists. If FGI could invest in technology that would minimize damages to the economic landscape as well as bridge a gap with the animal activists they could improve perception of their products as well as the organization’s image. Another area FGI could focus their R&D includes production processes. Streamlining production processes to minimize waste or with more efficiently can lend to reducing variable costs in areas such as transportation and labor. These ultimately reduce product costs. McConnell, Brue, and Flynn (2009) reinforce this ideology by stating, “Although product differentiation and advertising will add to the firm’s costs, they can also increase the demand for its product. If demand increases by more than enough to compensate for the added costs, the firm will have improved its profit position” (p. 228-229). For FGI, they are not increasing costs; they have the luxury of using existing funds in a more efficient manner to increase revenue or profits. Conclusion FGI’s is in a position to strengthen their position in the construction and forestry equipment industry. This proposal provides information to FGI on quantities of output to monitor to profit maximization as well as increase profits and minimize costs, by strengthening their product differentiation through advertising and research and development. In the end these processes will help FGI decrease the impact of short run fluctuations and the entry of new competitors in the market. FGI’s will return to long run equilibrium and a profitable organization. Appendix A Thomas Money Service Inc. Scenario Data References McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin. Neil, R. (2013) Despite $4 million price tag, marketers clamor for Super Bowl ads. NBC News. Retrieved from: http://www.nbcnews.com/business/despite-4-million-price-tag-marketers-clamor-super-bowl-ads-1C7100946 You developed sound pricing and nonpricing strategies to increase revenue for the organization. The pricing and nonpricing strategies you suggested are also consistent with market structure. You might also consider including the total revenue test as described in the textbook to further strengthen your argument. Your introduction nicely provided the context for your proposal and helped set the stage for what you would discuss. Your thoughts were logically ordered, well supported, and appropriate for your target audience. Keep up the good work in this area. Content60 Percent | Points Available5 | Points EarnedX/5 | Additional Comments: |  Provides recommendation on ideal production levels  Determines how fixed/variable costs should be adjusted to maximize profits  Provides methods to reduce costs  Describes the process undertaken to make recommendations  Includes any assumptions regarding the chosen organization and its values  Major points are stated clearly and are supported by specific details, examples, or analysis.  Shows how the profit-maximizing quantity is determined.  Presents suggestions on the mix of pricing and nonpricing strategies'  Explains how to create or increase barriers to entry'  Explains how to increase product differentiation | | 5 | Please see my comments in the paper. | Organization / Development20 Percent | Points Available1.5 | Points EarnedX/1.5 | Additional Comments: |  The paper is no more than 1400 words in length.  Paragraph transitions are present, logical, and maintain the flow throughout the paper.  The tone is appropriate to the content and assignment.  Sentences are complete, clear, and concise. | | 1.5 | See my comments above. | Mechanics 20 Percent | Points Available1.5 | Points EarnedX/1.5 | Additional Comments: |  Formatting or Layout and graphics are pleasing to the eye (font, colors, spacing)  Rules of grammar, usage, and punctuation are followed, and spelling is correct  Proper Business Proposal Format (APA format for reference page) | | 1.5 | | | Total Available | Total Earned | | | 8 | 8 | |