The Thomas Money Service, Inc. is a consumer finance company that has been granting loans and financing since 1940. Within the first five years the company expanded its business when it began “issuing business loans, business acquisition financing, and commercial real estate loans” (University of Phoenix, 2011, p. 1). By 1946 the company expanded to include equipment financing by creating a subsidiary named Future Growth Inc. (FGI). Due to increased demand in forestry and construction equipment in 1951 FGI purchased a manufacturing company so that the company was able to offer financing as well as their own brand of construction equipment. Over the past 67 years, FGI has held a monopoly on financing and manufacturing construction equipment and has seen only increased profits year after year. FGI has also never had to lay off any of its employees.
“This track record has allowed their stock to grow from $5.00 to $85.60 with stock splits from 1975 to 1998. FGI has never issued bonds, and the present stock value is $35” (University of Phoenix, 2011, p. 1). Unfortunately, with the current economic downturns, natural disasters, and a decline in new-home sales, profits for FGI began to decline by 30% from the previous year. Due to the decline in production, the company was forced to layoff a third of their employees. Even with the current drop in new-home sales, there is still the opportunity for demand to increase as the economy becomes healthy again. Below the author will discuss how to increase revenue. Increase revenue
FGI has many opportunities to increase revenue. Increasing revenue is not only dependent on the sales price of the product but also on what the companies expenses include. The company will need to re-evaluate the way it spends money and determine how to reduce outgoing costs. The first step FGI should take is to review its vendor list and communicate with the vendor to determine the best way to reduce costs while saving the vendor money as well. FGI could request that all parts and supplies be purchased in bulk to cut down on freight charges as well as reach out to other businesses in the area to purchase supplies from the same vendor together. They would share the cost of freight, which would reduce the expense for both companies. Advertising is another expense that FGI needs to focus on. Currently FGI has cut back on its advertising efforts and has decided to only advertise during sporting events. This might not be a productive advertising strategy. It would be more lucrative to advertise in several venues such as direct mail, newspapers, and telephone books. This strategy will get the company name and services to a broader area of customers.
Another expense is employee hours, schedules, and benefits that could use an overhaul. Currently FGI was forced to layoff a third of its workforce. The company needs to determine the best way to keep its employees while still saving money for the company. Department heads will need to review and re-evaluate employee schedules and hours to ensure that they are using the employee hours effectively. By re-scheduling and reducing employee hours, FGI will be able to save even more revenue. Benefits are also an expense that is offered by the company, but the company is not required to offer them to its employees. FGI should review and determine if it can continue to offer all of the benefits it currently does. If necessary, FGI could reduce 401k matching, reduce or stop employee bonuses and parties, and finally re-negotiate with insurance companies to find a more cost effective insurance package for the employees. Finally, the most effective way to ensure an increase in revenue is to cut the sales price of the equipment. The chart below shows that the lower the price, the higher the demand. If FGI were to decrease its prices they would increase sales.
Communicating with vendors, upping advertising, re-structuring employee hours and benefits, and cutting prices are all successful ways to increase revenue. Another aspect of increasing revenue that FGI needs to consider is the spending power of its customers. The economy of the United States is currently on the down turn again, heading back into a recession. The credit market conditions are not very strong; the current unemployment rate is unchanged at 9.1% according to the U.S. Bureau of Labor Statistics. The fact that the unemployment rate has had no change means that the economy has not changed. There are no new jobs, which affect the construction industry. People cannot afford to build homes and they cannot apply for loans because their credit history is not strong enough.
There is a silver lining for construction companies and equipment companies such as FGI. In 2009, the government created the 2009 Stimulus Package, which included “$131 billion allocated for construction-related spending” (The McGraw-Hill Companies, Inc., 2011, para 1). This stimulus allows for construction companies to bid for upcoming transportation construction jobs. Construction companies will need to upgrade their equipment to newer more efficient equipment that can handle the new workload and conditions. FGI will need to take advantage of the influx in construction equipment purchases by advertising and offering discounts and rebates to all new and current customers. Maximize Profit
The concept of marginal cost and marginal revenue is used to determine how much it will cost to produce one more piece of equipment. “Companies typically look to reach a production equilibrium where marginal cost and marginal revenue are equal. At this point, the company will maximize its profit” (Vitez, 2003-2011). If an imbalance were to occur on either marginal costs or marginal revenue there will be inefficiencies with production. There is a possibility that it could cost the company more to produce the extra piece of equipment than it would profit from. According to Huter “The quantity that maximizes profit is where marginal profit shifts from positive to negative” (1999-2011). To determine the profit-maximizing quantity it is necessary to know the price, variable costs, marginal revenue, and quantity ordered. Looking at the chart above it is clear that the company is making money off of the maximum of 12 orders. If the order demand were to go from 12 to 13, there is the possibility that it would cost the company more to produce that many than they are able to charge for all 13. With that in mind, the profit-maximizing quantity would be 13. Suggested Mix of Pricing and Non-Pricing Strategies
FGI is no longer the only equipment manufacturing company for customers to choose from. In order for FGI to stay competitive, the company must include a mix of pricing and non-pricing strategies. Non-pricing strategies would include advertising the company as well as any discounts, financing, and warranties the company has to offer. Pricing strategies could include low-interest financing, longer payment terms, warranties, and product bundling. Product bundling could simply state that if a customer not only orders the equipment through FGI but also finances the purchase than they will receive a discount on the total price.
According to the Wall Street Journal, “the Labor Department’s snapshot of the August jobs landscape, cuts in the public sector entirely offset the private sector’s gain of 17,000 positions. Figures from earlier months were lowered, due largely to deeper cuts by government. The unemployment rate remained at 9.1% but is likely to move higher in coming months amid the lackluster pace of job creation”’ (Reddy, 2011, para 4). Due to the possible economic downturn, FGI must consider a radical change in policy to stay competitive and on top of the market for construction manufacturing equipment. This radical change would be to offer customers the opportunity to rent or lease the construction equipment instead of purchasing it out right. Leasing construction equipment will allow construction companies to save money and will allow FGI to earn income and stand out among its competition.
Create or Increase Barriers to Entry
It can be difficult to create or increase barriers to entry when there is already competition in place. A few things that FGI could do to increase barriers to entry is to offer customers something that is totally different from the competition. Making the customers want to only purchase from FGI. Those differences would include the ability of the customer to rent the construction equipment for the duration of their contract and increase customer service. Increasing customer service would include offering the customers more options to contact FGI. FGI will need to utilize technology such as the Internet, Websites, email communication, and QR codes, which allows customers to access company information and discounts. Increase Product Differentiation
Product differentiation includes pricing and non-pricing strategies as well as increasing barriers to entry. FGI will need to make their construction equipment stand out from its competitors. In order to stand out, FGI will need to make changes to how it advertises its product, increase offers customers who purchase the equipment, and make the customers experience with FGI unique. Customers want to be excited about spending money, FGI should make their shopping experience exciting and rewarding. Customers who are happy about their purchases will spread the word to other potential customers who will then decide to purchase from FGI over other construction equipment companies. Other Ways to Minimize Costs
A few ways to minimize costs for the product includes reducing the amount of employees, which FGI recently did. One way to minimize costs is for FGI to lease their manufacturing centers and financial offices instead of purchasing the buildings. Leasing will reduce costs to FGI because the owner of the buildings will need to pay for the upkeep and maintenance of the building and grounds. Reducing spending on supplies and manufacturing equipment is another way to minimize costs. The issue with reducing spending on supplies and is that the supplies could potentially be inferior products which would then make the products that FGI sells inferior. FGI will need to determine if the quality of their product is worth risking so that the company can reduce the cost of producing the equipment. International Trade
International trade is beneficial to both the United States and foreign countries because it is the exchange of goods between both countries. “Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries” (Heakal, 2003, para 4). International trade can affect and is affected by each nations political issues. A current example is the Greek economic bail out. The Greek economy is currently in need of another debt bailout to hopefully turn its economy around. The affect that the European bailout of Greece could have on the United States is that Europe will have less money to spend on American goods, which will then cause trade to decrease.
“If a full default occurred, other troubled countries, notably Spain and Portugal, could also follow suit, leading to a wave of defaults that would severely affect the European zone and could send shockwaves all the way to Wall Street” (Katrandjian, 2011, para 13). As the Global Economy stands now, international trade has not been affected significantly. There is the possibility of international trade being affected if the European economy doesn’t stabilize. With that in mind FGI must consider how the international economy will affect the overhaul of FGI’s current marketing structure. FGI will need to make its products more lucrative for foreign companies to purchase. FGI would need to create a special package offer to foreign companies that includes special incentives such as discounts, extended warranties, and shorter lead times. Conclusion
FGI has been a successful company since 1940. With the recent economic hardships and additional competition, FGI has determined that they need to re-evaluate their current marketing and product strategies. To increase profit and market value, FGI will need to revamp their spending, marketing, employee hours and benefits, and reduce the cost of their product. Another aspect of business that FGI needs to focus on is the marginal costs and marginal revenue to maximize profits so that they are not producing too much product that will end up costing them more than it is sold for. FGI has the opportunity to re-strategies their pricing and incentives to draw in more customers as well as increase blocking more companies from entering the construction equipment manufacturing industry. With the current credit markets being at an all time low, FGI will need to adjust their production and extended forecast to meet the potential decrease in sales. The 2009 Stimulus Package offers hope to FGI that sales will increase due to the government projected construction improvements on all Freeways and Highways throughout the country.
Katrandjian, O., (2011) Greek Debt Bailout Could Affect the U.S. Economy.
Retrieved September 5, 2011 from http://abcnews.go.com/Business/greek-debt-bailout-affect-us-economy/story?id=13879426 Heakal, R., (2003) What is International Trade? Retrieved September 5, 2011 from http://www.investopedia.com/articles/03/112503.asp#ixzz1X6dCaTuv Huter, S., (1999-2011) How to Calculate the Profit Maximizing Quantity. Retrieved August 20, 2011 from http://www.ehow.com/how_6713701_calculate-profit_maximizing-quantity.html Reddy, S., (2011) Job Growth Grinds to a Halt. Retrieved September 4, 2011 from http://online.wsj.com/article/SB10001424053111904583204576546220157206548.html The McGraw-Hill Companies (2011) Construction Stimulus Special Section. Retrieved September 4, 2011 from http://construction.com/stimulus/market_sectors/ University of Phoenix, (2011). Thomas Money Service Inc. Scenario [Computer Software]. Retrieved from University of Phoenix, Simulation, ECO561 website. U.S. Bureau of Labor Statistics (2011) Employment Situation Summary. Retrieved September 4, 2011 from http://www.bls.gov/news.release/empsit.nr0.htm Vitez, O., (2003-2011) What Is the Relationship Between Marginal Cost and Marginal Revenue? Retrieved August 21, 2011 from http://www.wisegeek.com/what-is-the-relationship-between-marginal-cost-and-marginal-revenue.htm