Economics: Business Proposal Revision
lken82
my_business_proposal.docRunning Head: SMARTPHONE BUSINESS PROPOSAL 1
SMARTPHONE BUSINESS PROPOSAL 10
Smart Phone Business Proposal
ECO 561
Lawrence Kern
August 4th, 2014
Wawa Ngenge
Business Proposal of a new Foldable Smart Phone for the Technology Industry
Market structure
The technology industry can be seen to be an olipolistic nature whereby we have a handful of players in the market which compete against each other. The companies in question include Samsung, Apple and Black berry in the United States. With Black berry having a market share of 33.7% and Samsung following closely with 33.6%, as per 2013. Stiff competition has been experienced in the recent past due to emergence of superior technology, extensive research and developments, creativity and innovations in the designs of the products, with LG following closely at 8.6% of the market share.
Interesting statistic on the market size can be illustrated by data obtained on the shipment of smartphones and mobile phones as of 30th April 2014, whereby the shipment of mobile phones in the world market was up by 3.9% totaling to 448.6 million units whereas the smartphones were up by 28.6% making up a total of 281.5%.
Thus the growth of demand in the smartphone industry is exponential and this creates a gap where my new product, a foldable smartphone, is going to fit. The huge market share and ever growing demand of the technological devices is what makes the participation of the industry lucrative. This fact is brought about by the growing economies in the third world countries where the purchasing power and economic ability of individuals has increased thus, creating a huge market which is not fully tapped.
Comparing the two leading Smartphone developers (Samsung and Apple) we can establish the continental market share as follows; China 27%,Europe 17%, Emerging Asia 14%, Latin America 14%, North America 13%, Rich Asia 9%, Middle East 3% and Africa 2%.
Target Market
The target market of my new foldable smartphone is China and Europe; this is because the demand in these region are high. It should be noted that the demand on smartphones is basically based on the brand and brand functionality. The customers based brand and functionality account for roughly 36% so concentrating my target market will be directed there.
My choice of China and European market is because of the comparatively higher purchasing power of the individuals in these markets. Their consumer price index is relatively attractive with United States having 76.97, Hong Kong having 75.86 and China having 52.67. Categorically, these markets have a hunger for new technology and advancements so the foldable smartphone device will enable ease of handling and create a substitute for tablets in the market, which are relatively large in size.
Elasticity of the Foldable Smartphone
Elasticity of Demand
Considering the following hypothetical data on the demand of the foldable Smartphone and the price
|
% change in Quantity of Smartphone demanded |
% change in price changes |
|
8.5% |
8% |
|
14% |
10% |
|
8.0% |
7% |
|
18% |
14% |
|
Average 12.125% |
Average 9.75% |
The elasticity of demand is:
% change in quantity demanded
% change in price
= 12.125/9.75
=1.2435
This means that there would be a small change in the demanded quantity that results from a price change. This is because the demand on smartphones is brought about by brand functionality rather than price wars. However; upon the entrance of other competitors , a probable scenario in future would have various companies offering foldable smartphones at their disposal. These will result to price wars and the elasticity of demand would proportionately increase to illustrate the same.
Elasticity of Supply
Similarly we will have the elasticity of supply as a function of the quantity supplied versus the price change.
= % change in quantity supplied
% change in price
=15%/10%
1.5
The price elasticity of supply would be 1.5, this is considerably higher since a positive increase in the price would result to an increase in profit margin and therefore; the firm would maximize the supplies. However due to the fact that the brand switching in the smart phone industry is high, a little caution will be exercised in order to prevent a scenario whereby we overstock our products and therefore; we will need to review our prices downwards.
Product pricing
The pricing of the Foldable Smartphone is going to be based on the costs incurred and margin. The average cost price of the foldable smartphone would be $ 270. I would recommend the use of price skimming as my pricing strategy within the first two years of business. The reason is that the price elasticity of demand of the product is slightly above 1 and hence we can comfortably dictate the pricing; this will mark the first phase of business.
This strategy will ensure the prices of the Foldable smartphone to be high as there would be no other competitor. The introductory price would be high and enable the maximization of profits out of it. Here we can put a profit margin of 50% where every sale shall ensure a profit realization.
I approximate a yearly production of 900,000 units, at a cost price of $270 per unit,
with an average production cost per unit of $270. The Foldable smartphone shall be priced at $ 405 using a profit margin of 50%. At this point we shall not have any comparative measure of elasticity since we will not have substitutes as the product would be new to the market.
On the second phase, which will last 12 months, I will make use of premium pricing strategy. This is because we would now have competitors joining the market, various big players would be struggling to win consumers and a price reduction to 35% of margin will do. This price will be slightly higher than the competitors’ price that will come up with penetration pricing strategy. During this phase the unit price of the Foldable smartphone would be $ 364.50. At this particular point we expect to stabilize with the current customers as there would be some form of brand loyalty established.
Substituting in the equation of elasticity of demand to obtain the new quantity demanded;
1.2435 * 10% = 12.435%
1.12435 * 900,000
=1,011,915
The changes in the demand will result to a change in the marginal cost.
The Marginal cost = 270 – 250
1011,915 – 900,000
=$ 0.0001787
The Marginal revenue that will result would be
MR = change in revenue/change in quantity sold
= (1011915*364.5 – 900,000* 405)/(1011915-900,000)
= $ 38.81
On the third phase which would be after the 12 months spell, I shall employ a lower margin rate trying to match the lower prices offered by the competitors at about 30% margin. A little creativity employed would make use of psychological pricing whereby instead of pricing it at $ 351 I would price it at $ 350.99. With the price elasticity at about 1.2, we expect the entry of more customers basically about 7.4%. This would help us break even and maximize on profits.
Substituting in the equation to obtain the demanded quantity as caused by the change in price, we have:
1.2435 * 13.33% = 16.58%
1.1658 * 900,000
= 1,049,220
The Marginal cost associated with the increased production will be;
= 270 – 245
1049220-900,000
= $ 0.00016753
The Marginal Revenue associated with the same would be
Change in total revenue/change in units sold
(1049220 * 351 – 900,000 * 405)/(1049220-900,000)
=$ 25.306
Non pricing strategies
In order to increase my dominance in the Foldable smartphone market, I will employ several non-pricing strategies such as:
· Owning a scarce resource - The development of a foldable smartphone is basically hindered with the complex design of having a foldable battery. Once I design my foldable battery to be used in the product, I will patent it and open a new line of production thus dictating the market price and hindering the entry of new players because of associated high prices.
· High Research and Development costs - Extensive research and development on the product will be key to the success of the product. Subjecting the product to various tests will help to oversee future problems and start addressing them prior to the entry of our competitors.
· A strong brand - This would ensure customer loyalty, whereby the customers would be associated with the product. It would be easier for me to liaise with Samsung which has a high number of consumers to produce the same in its line in order to easily capture the customers relating to Samsung.
Ordering Cycle
Figure 1: Ordering Cycle Diagram
When we increase the quantity demanded by lowering the selling price then our variable cost per unit will decrease. This will be brought about by the economy of automation, bulk purchasing, quantity discounts, and optimal utilization of resources and economies of scale.
The fixed costs would be reduced significantly by the optimum utilization of the resources as can be seen with the comparative reduction of the fixed cost per unit product. Research and development would enable the identification of cost effective production techniques thus resulting in the reduction of variable costs.
References
Kato, Y., Boer, G., and Chow, C., (1995). Target Costing: An Integrative Management Process, Journal of Cost Management, Spring, 39-51
The Case of Ashford (Kent).” Industry Structure, Competition and Investment. Universidad Carlos III de Madrid.
Ahlfeldt, G. M. and A. Feddersen. September 2014. “From Periphery to Core: Economic Adjustments” (working paper). The London School of Economics and Political Science and University of Hamburg.
