Application of Managerial Economics - Research Paper Example

? Application of Managerial Economics The study discusses the decision-making of the management of a design company that plans to create new design packages to offer to its current and prospective clients. The new packages will allow the company to receive higher profit. Once the company begins to receive more profit, it plans to expand its business in other niches like business process outsourcing to assist other companies in business operations. The present dilemma is the economic costs that the company might experience, as it focuses on the plans for the promotion of the new packages. Designers split their focus in making the current designs for their clients while having time to produce designs for the upcoming promotional activities for the new packages. It was found out that the current plan of making new design packages may push the company to many opportunity costs. Alternatives may be needed, such as getting talented workers from developing countries through freelance sites to finish the project while continuing the planned release of new packages. Application of Managerial Economics Executive Summary The company named Graphic Design Works specializes in graphic design as a product for other companies like small businesses and startup companies. The management comes to a point where it needs to decide to add new packages that may increase the profits of the company. In addition, the decision-making body plans to expand the ventures of the company towards software development, networking and business process outsourcing. It means the company may hire new workers when it expands its business operations. For the company to expand, it requires huge amount of capital; the profits from the new packages may help in this if ever the launching and sales will be successful. The expansion may commence once the target profit is hit through the campaigns and promotions to popularize the new design packages for the clients to enjoy. The packages include various custom designs for merchandise, emails, webpage, logo and stationery with corresponding number of designs. Campaigns will be implemented through postings in the official website of Graphic Design Works, massive email advertising, article postings on web magazines, free ad postings, producing television commercials and radio announcements, post mail advertising, visiting corporate offices and phoning the potential customers. The company thinks of continuing the new packages to be offered to their past and present clients and even expand their market via promotions using traditional media with some touch of online advertising. Traditional media like newspapers, radio and television have already solid set of viewers that the company may tap to produce sales for their new packages. On the other hand, the internet allows any business to save while reaching global audience but with less developed tactics and strategies as of the moment. The potential of the internet shows that more people can start their business with low capital and target a wider market. In addition, companies can hire employees from overseas entirely online which saves them from spending too much on manpower. Graphic Design Works looks at the conditions as opportunities since more startup businesses mean more potential clients to convince which may lead to more sales and profit for the company. Other than that, the company also plans to target ordinary people without businesses by offering them design packages for parties or personal messages. Traditional media also become big opportunities for the company as more people are acquainted to view them since they are already part of the culture unlike the internet which still experiences many developments to cope up with the traditional media. When it comes to production decision, Graphic Design Works does not worry about the needed materials and equipment to create the packages. Computers, software and professional graphic designers are the ones needed for the job. Since computers become cheaper than before as many companies have been manufacturing them, Graphic Design Works does not need to invest too much in computers. The same applies for investment in graphic design software since that software is not expensive. In terms of manpower, design professionals can be hired for a lower salary rate if they come from developing nations; that is why Graphic Design Works have offices in other nations. The company has also identified custom designs as profitable business since they are needed in advertising. In turn, all businesses perform promotional activities to boost their sales ultimately, and attractive designs can help them with their promotions. Also, gatherings need designs as they can boost the overall appearance of the places and, at the same time, professionalism is projected together with the appropriate designs. Graphic Design Works management must also decide on the quantity to produce based on the company’s capacity. It must know the capacity of each of its 50 graphic designers and it must also have the idea of the average number of clients that the company will have based on the performances of the phone staffs. After all, sales are made through the efforts of the phone staffs to call other businesses and promote the packages of the company. In addition, copywriters also play the role of selling the packages using their writing skills and sending emails to their prospects. The company looks deep into the risks, production, pricing and capital as they are all important steps to determine the wisest choice for the company to go to where it will experience growth financially for itself and its members or employees. With all the considerations checked, it is feasible for Graphic Design Works to go on with its new design packages that cater most of the advertising needs of corporate clients worldwide. It may even give huge profits for the company that will allow it to invest and branch out to other niches and industries. Definition The main consideration of Graphic Design Works in the paper pertains to the new packages it plans to launch if the management finds more benefits than risks in proceeding with the launching of the new design offerings to their clients. The new packages may bring huge amount of profit for the company when it succeeds to market them. In contrast, there would be a certain amount of loss for the company when the market does not patronize the new design packages. The company needs to consider how to promote its new design packages by holding promos, commercials on traditional media, tapping the online world and even mouth-to-mouth advertising. Referrals may also help as the approach is personal and may entice significant number of customers. Direct advertising may also be considered to support the sales leads of the company. In the planned release of new design packages, the company may need to hire additional employees to maneuver the performance and direction of the company. In-house workers may be hired to do the job. It is expected to bring more profit to the company than ever before. They must promote or get extra leaders to supervise the additional departments while continuously improving the main business of the company which is the design packages that they offer to their clients. If ever the promotions of the new design packages do not work well, the company may not be able to expand its business. In addition, the rising costs of materials and operations may slowly affect the company negatively, so it may come to a decision to lay-off some employees which may lead to a reduction of the quantity of clients. As an alternative, Graphic Design Works may opt not to lay-off its employees, but they must work remotely using their own computers at home with internet connection to minimize the overhead expenses. In addition, the same tactic may be implemented to assist in the plan of making and releasing the new design packages. The company may also cut its advertising expenses by slowly withdrawing from the traditional media and focus more on developing the online advertising. Traditional media may cost millions for the company, unlike the use of social media and the internet, which may cost little to no expense at all. Companies have been slowly using the social media like Youtube, Twitter and Facebook to promote their businesses as they can reach wider audience for free (Keillor, 2011, p. 303). Another alternative is to revise the packages and launch them entirely online. They can hire additional quality designers for a lower cost via freelance sites like Odesk, Freelancer, Elance, Vworker and many more. They may even outsource their minute tasks through Amazon Mechanical Turk, Minute Workers and other similar sites (Rickman, 2012, p. 170). For promotions, the company can take advantage of Google Adwords, free article directories, blogs, forums, message boards and social media to gain more audience (Rickman, 2012, p. 257). The audience will later on be converted to successful sales once the advertising strategies fully convince them. Factors or Costs Economic costs are needed to be studied in the decision-making for Graphic Design Works. It is the total cost that the entrepreneur receives when he or she foregoes a possible gain by indulging in another activity. It is synonymous to opportunity cost (Kesavan et al., 2005, p. 7.6). Economic cost is composed of implicit and explicit costs. Implicit cost does not involve any direct monetary effect but it may pertain to the assets supposedly used to gain profit. On the other hand, explicit cost shows the direct monetary effect of actions (Carbaugh, 2010, p. 91). In short, explicit cost requires the entrepreneur or the company to pay for it directly. The implicit costs for Graphic Designs Works involve working longer hours for the management as they prepare plans for the new packages and the future of the company. On the other hand, explicit costs include taxes, operating expenses, wages, traditional media advertisements, purchase of equipment like computers, and the renting of office spaces for business operations instead of each employee operating remotely at the comforts of their home. When both the four implicit and six explicit costs are added, the economic cost of Graphic Design Works is determined. It can be used as a basis for the decision-making of the management of the aforementioned company. Measurement Using quantifiable entities can further specify the advantages and disadvantages of certain decisions that a company must make. In the case of Graphic Design Works, it will use the law of comparative advantage to better understand its situation and make a better decision. The law states that there is a difference in production costs before the trade occurs, so it is necessary to be used in decision-making to know what to give up to produce another material or product for that certain quantity (Baumol & Blinder, 2011, p. 743). Current Situation Possible Future Situation Implicit Cost Management Working Hours 8 12 Design Team Working Hours 8 13 Shifting Attention 10 8 Planning the new packages vs. Current Marketing Improvement 100 leads/day 100 leads/day Explicit Tax 25% 34% Wages $50000.00 $100000.00 Operating Expenses $50000.00 $100000.00 Traditional Media Ad $100000.00 $200000.00 Purchase of Equipment $30000.00 $60000.00 Rental Space $5000.00 $15000.00 Table 1. Implicit and Explicit Costs at Present and the Possible Future Conditions. Current Situation Possible Future Situation Implicit Cost Management Working Hours 12/8 = 1.5 8/12 = 0.67 Design Team Working Hours 13/8 = 1.63 8/13 = 0.62 Shifting Attention 8/10 = 0.8 10/8 = 1.25 Planning the new packages vs. Current Marketing Improvement 100/100 leads/day = 1 100/100 leads/day = 1 Explicit Tax 34%/25% 25%/34% = 0.74 Wages $100000/$50000.00 $50000/$100000.00 = 0.5 Operating Expenses $100000/$50000.00 $50000/$100000.00 = 0.5 Traditional Media Ad $200000/$100000.00 $100000/$200000.00 = 0.5 Purchase of Equipment $60000/$30000.00 $30000/$60000.00 = 0.5 Rental Space $15000/$5000.00 $5000/$15000.00 = 0.33 Table 2. Implicit and Explicit Costs with the Application of Law of Comparable Advantage. Legend: A-Management Working Hours B-Design Team Working Hours C-Shifting Attention D-Planning for the Future vs. Current Marketing Improvement E-Taxes F-Wages G-Operating Expenses H-Traditional Media Ads Expenses I-Purchase of Equipment J-Rental Space Figure 1. Graph of the Results of Law of Comparative Advantage on the Current and Possible Future Status of the Company. In the case of the implicit costs, the longer working hours can produce new packages while sacrificing the time supposedly used to promote the existing products and gain profit immediately. If the new packages can obtain 10 percent more profit for the company than the current ones, then it would be worth the sacrifice. The designers may work on the new packages and design some promotional tools to aid the plans of the management, which may remove their focus from the current projects perhaps detrimental to the company and its current clients. The whole shift in attention may make some drawbacks in the current performance of the whole company so it would be really an opportunity cost as overall current productivity may drop. The lack of focus may also harm the marketing function of the current products that may reduce the sales volume and decline in profits made by the company. For explicit costs, taxes are really unavoidable expenses. Every business with operations in various nations comes under different tax laws and must abide by the rules. For the operating expenses, which include utility bills, rentals and others, require payments directly from the company or owner. They must be sustained for the company to carry out its business. Next, wages are also considerably explicit cost since they are given to people working for the company. They cannot function without the wages and the bad economy may give problems to the ability of the firm to provide the sufficient wages for its employees. Traditional media advertisements are also expensive and may be detrimental to the company operations unless the company gets bigger amount of profit as compared for the commercial expenses. Computers are also the equipment needed for the job of creating designs for clients, so they are considered to be part of the explicit cost. Lastly, the rental also serves as an opportunity cost to save as compared to hiring employees working at the comforts of their home. Analysis Measurements have shown that the economic costs are big, especially for the explicit costs. The company may continue with the new packages that they are going to offer if alternatives are sought. The packages to be offered will have huge discounts for bulk orders with high quality designs and unlimited revisions, and this may attract clients to have repeat orders and get new customers ordering. In addition, proper planning can prevent too much concentration on the new plans as to maintain the current state of performance of the company. The present packages must still be sold, and, at the same time, the top-of-the-line designs must be provided with customer support. Furthermore, the company may expand its operations to other countries without offices – by having remote employees working from home to save from expenses while getting more profits from the new packages. The explicit costs also may take on some alternatives. When remote employees are hired, the company will avoid paying taxes, as it does not need to register its business in the nation where it has remote workers. The same strategy can save the company from operating expenses and the need to purchase more equipment like computers. The company can also save on wages if ever the company’s remote employees come from developing countries, as the labor there is cheaper than in developed nations. Graphic Design Works may opt to shift to internet and social media alone as mode of advertising to save money instead of paying for newspapers, radio and television commercials, which may cost a lot. The risks for the company to offer additional packages would be minimal as it has remote operations in other nations, and the operational expenses are minimal. It does not need to rent or build a large office to cater all of its employees. In addition, virtual products are not capital intensive as the common investments needed are manpower, computers and internet connection, which do not cost too much. The only thing that may cost a lot is the operation of traditional spaces that include office space rentals. In production, the company is not capital intensive as the design packages can be accomplished using computers, which are not expensive anymore as they are subjected to mass production. In essence, the price goes down based on the law of supply and demand, as many firms compete for the market share in the computer industry. In addition, the software follows the same fate as the hardware because there are a lot of companies that produce the software for image editing and designing. Manpower is not a problem as the company can hire from developing countries where labor is cheap, but the employees are top-of-the-line. In terms of pricing, the packages are priced based on the number of designs and the amount of customization the customers have when they choose the design package that suits their needs. The prices must be able to produce about 20 % or more profit for the company as there are many expenses in the business operation of Graphic Design Works, though not as big as the operational expenses of purely traditional companies. In addition, the higher the number of benefits that the clients can receive from the packages, the bigger discount they can get as larger orders are considered to be bulk orders. As a result, it is expected that more clients will come to purchase packages from Graphic Design Works as they have the prevailing mentality of saving money while getting high quality designs for their own use. When it comes to capital, as the aforementioned paragraph had stated, computers, design software, maybe a small office with remote operations in other nations and manpower are the only factors that need capital. In that case, it is not capital intensive and the business can operate under minimal conditions. Summary Based on the analysis of the costs that the company may incur with the new packages, explicit costs as disadvantages are an important factor; however, profits may be made if alternatives are sought. To reduce operating expenses, purchase of equipment, and taxes, the company may hire remote workers instead of building physical offices. Freelance sites are available like Odesk, Freelancer and Elance for the company to hire new staffs, especially for its future departments for the new niches it will add to its operations. References Baumol, W., & Blinder, A. (2012). Economics: Principles and policy. USA: Cengage Learning. Carbaugh, R. (2011). Contemporary economics: An applications approach. USA: M.E. Sharpe Inc. Keillor, B. (2011). International business in the 21st century. USA: ABC-CLIO, LLC. Kesavan, R., Elanchezhian, C., & Selwyn, T. (2005). Engineering economics and financial accounting. New Delhi: Laxmi Publications. Rickman, C. (2012). The digital business startup workbook. United Kingdom: Capstone Publishing. Read More