Thesis: Managerial Economics - Should I Start

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MANAGERIAL ECONOMICS - Should I Start a New Business?

In today's world, more and more employees become emancipated and are granted more rights and responsibilities. However, at the end of the day, they still have to answer to their hierarchical superior. Several forces of the micro and macroenvironments have motivated the employee to become his own boss. This materialized in the opening of numerous small enterprises, activating in a variety of fields. Their stories of success have in turn stimulated other individuals to consider opening their own business, expanding their already existent ventures or opening new businesses in other sectors.

The question posed and attempted to be answered in this paper refers to whether or not I myself should open a new business. I am currently employed within a multinational and my position is that of a managerial assistant. This would help me in my venture, but there are also a new set of elements which must be considered. The idea for the new business is that of opening a small speciality wine store.

In deciding in favour or against this idea, one has to consider numerous forces in the environment. Ten such forces will be presented - seven are relevant to the matter discussed and three are not. The relevant ones include the demand for the specialty wines, the supply, the implied opportunity cost, the expected return on investment, the established retail price and the adjacent pricing strategies, the break-even analysis and finally, the industry features. The irrelevant forces are the competition, the funding opportunities and the inflation rates. After a detailed study of these forces, I come to the conclusion that, at least at this point in time, it may not be in my best interest to open a new business.

2. Definition

Before moving forward with the report, the posed question should be analized from the standpoint of defining concepts. The first step is that of identifying the managerial reasoning for the question. Should I Start a New Business? is a complex question, which cannot be simply answered by Yes or No. More data has to be gathered in order to make the best informed decision in terms of expected rate of return, chances of success or micro and macro forces which might impact the new venture.

Also, attention must be offered to the definition of the forces which are likely to impact the success and outcome of the specialty wine store. These include the following:

Competition: in a most simplistic formulation, competition can be defined as a rivalry between two or more players, which share similar interest and follow similar goals.

Demand: "An economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa" (Investopedia, 2008)

Supply: the supply refers to the totality of products or services which are available in a market and can be sold to the customer

Opportunity Cost: "What the firms owners give up to use resources to produce goods and services" (Thomas and Maurice, 2008, p.6)

Funding: the money required to finance an investment and the possible means of gathering this money

Return on Investment: the time it takes for the venture to amortise all costs and start retrieving a profit

Price: the amount of money the customer has to pay for the purchased good or service; the cost incurred by the client

Break-Even Analysis: a financial analysis which tells the investor the amount of items he must sell in order to break even (cover the expenses and start earning profits)

Industry Features: variety of forces of influence which are seen in the industry, mostly revealed by competition, customers or regulatory institutions

Inflation: "the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling" (Investopedia, 2008)

3. Factors or Costs

Numerous elements could impact the outcome of the wine speciality store. They come from micro and macroenvironments and the most important ten ones are succinctly presented below:

Competition: The new store would not encounter direct competition from any other speciality stores, but would face competition from regular stores which sell wines. A most important player would be Wal-Mart, which has a supermarket on the same street. They have a long isle of wines and they also offer them at reduced prices. The choice of opening a store however would be based on the belief that wine drinkers would prefer speciality products, rather than product line wines, meaning as such that this force is rather irrelevant.

Demand: Throughout the past recent years, with the economic growth and the sustainable increased living standards of the population, materialized in more wealthy individuals, the demand for speciality wines has increased. This can be explained through the fact that people strive to belong to an elitist group, which consumes the best wines from across the globe.

Supply: The supply of specialty wines would be rather reduced, in the meaning that it would be limited. It would come from numerous global destinations, such as Chile or France. The limited label would be used as both a strategy to attract customers (the limited product lines make the clients want to buy something that is almost unique and allows them to be the owners of something special), as well as a means of reducing risk.

Opportunity Cost: The primary opportunity cost of launching the new venture is that of having to renounce my current job, which is stable and offers a guaranteed pay check. Otherwise put, the opportunity costs is the reliable income. Then, it also implies the time I would have to work extra to get the business running, missing out as such on leisure activities.

Funding: Along the years I have managed to save some money, which I could now use to finance part of my investment. Given that I did not have sufficient funds, I could have contracted a bank loan or could have considered the issuing of stocks. However this is not the case, meaning that the factor is an irrelevant one to my current matter.

Return on Investment: I would expect that the speciality wine store registers an efficient return on investment in the meaning that it starts running on profits after the first year of operations.

Price: The retail prices of the wines would be significantly increased as compared to product line wines, but this would not represent a matter of concern as the wines would address a niche market, which would emphasize on quality rather than price.

Break-Even Analysis: The store would break even after it sells 8 units of speciality wines. This considers a cost per unit of $50, fixed costs of $400,000 (purchasing the facility, logistics costs, human resources and so on) a number of 150 units expected to be sold and an average retail price of $100 a bottle.

Industry Features: Globalization and market liberalization allowed the industry to expand internationally. Regulatory organizations however pose difficulties through the wide series of norms imposed. Retailers generally responded well to the challenges as the demand continued to increase. Presently however, the industry is feeling the consequences of the generalized economic instability.

Inflation: U.S.'s inflation was among the most stable and controlled ones on earth; more recently however, it has been increasing and generating concern. However it can be considered a relevant problem at a national level, in the case of my speciality wine store, it would not generate massive effects. This can be explained by the fact that inflation will impact in the same direction all players in the industry, making as such the issue rather irrelevant to my matters.

4. Measurement

The identification of the forces is however insufficient in making an informed decision. This must be based on the measurement and valuation of the most relevant forces. This process can be succinctly presented as follows:

Demand: The concept of demand is relevant in this context as it can easily impact the operations and profits of the wine speciality store. To better understand, as a rule of economics, an increased demand is likely to generate an increase in retail prices and therefore increased organizational profits. For instance, if the demand for a French wine increases by 2%, I could implement a price increase of $5.

Supply: The measurement of supply is somewhat similar to that of the demand, with the difference that the relationship between price and supply is an indirect one. This means that an increase in supply would materialize in a decrease in retail price. Say for instance that the supply of Chilean wine increases by 10%; I would have to reduce the retail price in order to sell the entire stock.

Opportunity Cost: The opportunity cost is the $50,000 I currently receive as pay check from my job. The leisure time is unquantifiable.

Return on Investment: However expected to occur starting with the second year of operations, I must… [END OF PREVIEW]

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