Free Essay

Analyzing Managerial Decision: Itunes Music Pricing

In: Business and Management

Submitted By sajt38
Words 1239
Pages 5
Analyzing Managerial Decisions: Leaving New York City for the Farmlands of Illinois by HCM-540, MBOL5, Health Care Organization
Instructor:
Saint Leo University
Distance Learning

November 17, 2013

Abstract
An investment banker has a steady job in the city of New York and is pondering making a move to the farmlands of Illinois to begin producing ethanol. The Wall Street Journal has publish a recent article about the federal government’s plan to increase the use of corn-based ethanol as a resource to fuel more plants. It is believed that new laws and regulations will be in favor of producing ethanol. Land can be bought at a fixed price with savings of $800,000. The voices of colleagues are making positive suggestions to follow the promise of fortune but without any foundational data. When considering making a entry into the market of ethanol, the banker should consider several things such as market structure and creating value. This paper examines the proposed decision of the banker to pursue entry into the ethanol industry. After reading this paper, readers will have a better understanding of what to consider when entering a new market.

Introduction

Before making a business, careful thought should be given so that risks and reward decisions can be made to minimize cost. Startup cost, opportunity, and value are some things that need to be considered. The advice of the co-workers is friendly advice but not good business advice to make a decision. It is easy just to be speculative but a good thorough analysis would provide information, including any factual data. Land costs would total $800,000 which was accumulated from save bonuses. There are a number of other things to consider. Fixed and variable costs would need to be given consideration. If no ethanol is produced, fixed cost will still be incurred. For the variable costs, they can be expected to change with the level of output (Brickley, Zimmerman, & Smith, 2009. Before leaning forward, the market structure needs to be analyzed.
Market Structure

Market structure refers to the basic characteristic of the market environment. Market structure includes characteristics such as (1) the number of and size of buyers, sellers, and potential entrants to the market; (2) the degree of product differentiation; (3) information cost about product price and quality; and (4) the circumstance for entry and exit of market. The number and size of buyers would be important to the decision making process. According to the Wall Street Journal, the projections for corn-based ethanol is projected to skyrocket as the United States (US) moves to provide a substitute for gasoline. The number of current buyers and sellers would be information that could be provided by a business bureau to see how many other new entrants have begin to make a similar entry to the ethanol market. Ethanol would likely satisfy the condition for a competitive market. In years to come, more people are expected to convert to ethanol. An influx of producers, buyers, sellers, and new entrants, will follow to capitalize on producing ethanol. Knowing these things could affect the anticipated rate of return expected on the product as the entrant in a new market. In the beginning, ethanol would be a homogenous commodity with little variance between producers. Secondly, while the market could end up with a number of new entrants, product differentiation would need to be explored in order to sustain the making of ethanol as the main product. The type of process for distilling ethanol could create differentiation. Ethanol can be produced by methods of wet milling or dry grinding. Each process can produce a derivative co-product for resale. Differentiated products would add value to the business. Information about ethanol product costs should be explored prior to entry. This would seem to be most important as a factor in calculating a rate of return. As a new entrant, price sensitivity for ethanol should be monitored so profits are not absorbed. Though the demand might grow, it may not be high enough to support cost. Circumstance for entry and exit to the market have been set according to the case study. The Wall Street Journal’s (WSJ) mentions the projected explosion of ethanol, as a fuel substitute, in the coming years. The need for corn to fuel plants is expected to grow. The laws and regulations will tend to favor market entry. A number of acreage is available now at $10,000. Land price will likely increase in comparison as time goes on. There is always free exit from the market if the ethanol business does not work out. This will occur if the ethanol market becomes flooded with entrants but create no differentiation. Differentiation should be part of the discussion as an entrant.
Capture Value

Value is not necessarily created in production. There are number of things to consider if value is to be added. Initially, if the report in Wall Street Journal is correct, the government is adding value to the market with its announcement of fueling new plants with ethanol. Career bankers are not expected to know a lot about the production of ethanol. It would be a great value to hire an experience manager to guide the start up of any move into the ethanol market. The announcement sparks interest from potential entrants which will create competitive pricing. Another value added creation would involve the type of process used to produce ethanol. As stated earlier, there are two processes for producing ethanol; wet milling or dry grinding. I would attempt to capture value by finding out what by-products can be created if this business pursued. Ethanol production is a showcase for efficient use of a raw product, proponents say. They believe that turning corn into ethanol takes a $2 bushel of corn and turns it into $3 worth of fuel and $1 worth of feed (Unknown, 2009). It is this type of thought process that would add value to the investment banker should he decide to pursue this opportunity.

Conclusion

The advice of co-workers is appreciated, giving many reasons for the banker to venture into the business of ethanol. They gave many reasons why this appears to be profitable and lucrative yet they failed to offer sound advice based on research. Setting out on any business venture is risky without the proper knowledge. The whole reason goal of the banker is to move from the busy city of New York to a less stressful environment. A good analysis will examine the market structure and figure ways to capture value for a new entrant. What needs to be determined is whether it would be profitable to pursue. What is not mentioned is the opportunity cost of moving. The banker would be foregoing an established job, which helped him save $800,000, into a market with questions unanswered. Land could still be purchased and rented to someone else to make a profit and increase personal wealth.

References
Brickley, Smith, & Zimmerman. (2009). Managerial Economics and Organizational Architecture.New York: McGraw-Hill/Irwin
Giesemann, M., Gibson, M., & Karges, K. (2006). The ethanol industry and its co-product for swine. Retrieved from http://www.dakotagold.com/Research/Download/the-ethanol- industry-and-its-co-product-for-swine-feeding.pdf
Unknown. (2009, May). Rural cooperatives. E t h a n o l c o - o p s :, Retrieved from http://www.rurdev.usda.gov/supportdocuments/CoopMag-june00.pdf

.…...

Similar Documents

Premium Essay

Analyzing Managerial Decisions: Ebay.Com

...Analyzing Managerial Decisions: eBay.com Amy T. Swindell Oklahoma Wesleyan University Adult & Graduate Studies BMB014 Analyzing Managerial Decisions: eBay.com 1. How does eBay create value? eBay creates value by bringing together buyers and sellers in online forum that enables people to buy and sell a wide variety of goods. It is a mechanism for people who want to do their shopping from their home to do so. It also provides a safe and secure way for buyers and sellers to complete transactions. 2. What potential contracting problems exist on eBay? One of the contracting problems might be the selling of damaged or inferior products by fraudulent sellers. Another would be the misuse of eBay by trading banned items. Another would be that the seller may deliver a product that doesn’t meet the expectations of the buyer based on the item description or there could be non-payment of goods by the buyer or non-delivery of the goods by the seller. It is also difficult to judge the authenticity of buyers and sellers in advance, which creates a problem for eBay by having to verify the people involved in the transaction. Also, another problem would be transportation of goods from one place to another. eBay has no control on the delivery schedule of products as they have to rely on the transportation system the seller chooses. 3. How does eBay address these problems? eBay addresses these problems by insuring the buyers for non-delivery/damaged...

Words: 429 - Pages: 2

Free Essay

Analyzing Managerial Decisions: Rich Manufacturing

...Manufacturing So many firms use cost-plus pricing for supply contracts because it is the easiest method in order to calculate cost and eliminate error. Most of the time when firms are working with numbers, they must find ways that are efficient and not time consuming. What managers do is simply target a rate of return thus saving time and increase efficiency. In fact, it can be more useful in some occasions than others. As stated by Brickley, Smith, and Zimmerman (2009), “cost-plus pricing is more useful when the rate of return that yields the profit-maximizing price on the product is relatively stable over the relevant range of cost variation for a given product and varies little across a related set of products. (p. 212). One of the potential problems I envision with cost-plus pricing is the attention to consumer demand. For cost-plus pricing, this aspect is very much ignored. According to Brickley, Smith and Zimmerman (2009), cost-plus pricing ignores the rise in costs and neglects how the price sensitivity of consumers. Disregarding demand can be detrimental to a company and is a crucial factor. “If demand is slow, then the mark-up percentage may be lower in order to lure in customers. On the other hand, if demand for the product is high and economic conditions are good, then the mark-up percentage may be higher as the company feels they can get the higher price for their product” (Peavler, 2013). Both of these factors demand and pricing, are critical to increasing......

Words: 682 - Pages: 3

Premium Essay

Analyzing Managerial Decision in an Organization

...Analyzing Managerial Decision in an Organization In every organization, the aim and objectives of organizational manager is to be able to make effective and efficient decisions that aid in turning the organization around. They tend to develop a strategy that promotes economic growth and discourages competition. Organizational shareholders need to understand how a shift in demand and supply can affect organizational productivity and price stability. They need to examine their decisions in such a way that will not affect the pillar and foundation of the firm. They need to avoid all the roadblocks that hinder growth. Managers do make decisions that have significant effect on economic output, input, pricing capital expenditures and other strategic decisions. If decisions are not examined effectively, it will leads to organizational failure and collapse. Poor decision on pricing and productivity can drive down economic value for the firm. Bad economic decisions and policies within the firm can result to loss of profit and sustainability in the organization. According to (Brickley, Smith & Zimmerman, 2009) successful firms make decisions that effectively link decision making authority with good decisions right (p. 5). They introduced the organizational reward and performance system. The reward system motivates organizational stakeholders to be able to contribute tremendously to the development of the organization by increasing the market value. Strategies are developed by......

Words: 1001 - Pages: 5

Premium Essay

Analyzing Managerial Decisions

...Analyzing Managerial Decisions: eBay.com   1. How does eBay create value?       eBay creates value by bringing together buyers and sellers in online forum that enables people to buy and sell a wide variety of goods. It is a mechanism for people who want to do their shopping from their home to do so. It also provides a safe and secure way for buyers and sellers to complete transactions.   2. What potential contracting problems exist on eBay?       One of the contracting problems might be the selling of damaged or inferior products by fraudulent sellers. Another would be the misuse of eBay by trading banned items. Another would be that the seller may deliver a product that doesn’t meet the expectations of the buyer based on the item description or there could be non-payment of goods by the buyer or non-delivery of the goods by the seller. It is also difficult to judge the authenticity of buyers and sellers in advance, which creates a problem for eBay by having to verify the people involved in the transaction. Also, another problem would be transportation of goods from one place to another. eBay has no control on the delivery schedule of products as they have to rely on the transportation system the seller chooses.   3. How does eBay address these problems?       eBay addresses these problems by insuring the buyers for non-delivery/damaged delivery of products. It also establishes in-house fraud prevention and escrow services to prevent fraudulent transactions. eBay......

Words: 307 - Pages: 2

Premium Essay

Analyzing Managerial Decision: Rich Manufacturing

...previous year. An increase of 200 additional students inquired to further their education at the college than the prior year. Most college presidents would attribute this to students believing the college is better if the cost is more. Like other major colleges such as Rice University, University of Richmond and University of Notre Dame, the perception is students of prestigious schools believe costs are related to a better education. To contrast this, 10 years ago, North Carolina Wesleyan College reduced it cost of tuition and fees by 22 percent and watched its number student application fall. Recommendations to resolve the school’s cash flow problems may include the future increase of tuition and fees. This case study deals with the managerial decision of setting tuition and financial. Many factors are associated with demand and price elasticity of demand. There is an economic relationship between demand and price? After reading this paper, student will have a better understanding of those things that may affect tuition and fees for colleges.   Introduction An individual can demand so many things. The concept of demand can be easily explained. Every person has a demand. The purchasing power of a demand satisfies the want. The amount of product or service that is needed by a person at a given price is the demand of that product or service. The demand of a product has many factors such as income, price, and availability of substitutes and compliments (Brickley, 2009). As......

Words: 1584 - Pages: 7

Premium Essay

Analyzing Managerial Decision: United Airlines

... Analyzing Managerial Decision: United Airlines by Ronald J. Sanders HCM-540, MBOL5, Health Care Organization Instructor: Wenyuan Teng Saint Leo University Distance Learning November 10, 2013 Abstract United Airlines is one of many airlines that look to capitalize on it’s ability to provide air service to the consumer. Like other airlines, it is challenged to be creative and profitable in a changing market. The creativity may involve creating flights or analyzing the cost associated with providing a service. This paper offers some insight on the case study of United Airlines and provides some analysis on the managerial decisions within the company. The scenario given in the case study speaks about a situation of declining profits and the costs of operating were growing. A dialogue of cost and market organization will be noted and the recommended managerial decision of; whether the airline should run a specific flight or not.   Introduction When making a business decision, many factors should be considered. The market structures in the economy are important in seeking whether the company is reasonable to continue to operate or not. The structure of the market or characteristics of the market environment that United Airline operates in is competitive market. Competition market is an economics term that refers to firms that have no influence on market price and take it as given. (Brickley Smith & Zimmerman, 2009). For United Airlines to......

Words: 848 - Pages: 4

Free Essay

Analyzing Managerial Decision: Itunes Music Pricing

... Analyzing Managerial Decision: iTunes Music Pricing by HCM-540, MBOL5, Health Care Organization Instructor: Saint Leo University Distance Learning November 10, 2013 Abstract Apples’s Itunes music store came upon the music industry in 2003. It quickly became supreme within the music industry. The iPod, Apple’s MP3 players, and iTunes software were all interfacing, making it one of the more popular technology favorites among consumers. At odds with iTunes were the music companies crying foul over infringement and pricing. Buying overpriced CDs were quickly becoming a thing of the past. Music had been illegally accessed through peer-to-peer file sharing networks. With the recognition that music was being stolen, other ways were being developed by those with a stake in earning a profit. The industry had to decide if it should allow piracy to continue of develop variable pricing alternatives. This paper takes a look at alternative pricing in the case study, iTunes Music Pricing. At the conclusion, readers will have a better understanding of variable pricing policies.   Introduction Variable pricing represents a concept use, by Apple, to describe the structure of pricing to advertise downloadable data. Variable pricing involves the different cost of a product for based on the preferences of the producers. This varies from the model of flat pricing, where one fixed price is applied to those items that are the same. Content of purchased songs, all cost......

Words: 1551 - Pages: 7

Premium Essay

Analyzing Managerial Decisions: Ebay.Com

... Analyzing Managerial Decisions: eBay.com by HCM-540, MBOL5, Health Care Organization Instructor: Saint Leo University Distance Learning November 24, 2013 Analyzing Managerial Decisions: eBay.com Ronald J. Sanders Saint Leo University MBA540 Analyzing Managerial Decisions: eBay.com 1. How does ebay create value? Ebay brings together million of buyers and sellers to its online portal creating value through virtual shopping through auctioning for goods and services. Virtual auctioning serves as another concept of allowing consumers to shop from anywhere, other than conventional stores. Additional value is added by creating safe secure measure for buyers to make payment. Without a secure method of payment, customers will feel skeptical about making purchases. The feedback forum is a way for shoppers and sellers to learn about the product or service rendered through a rating using “stars.” 2. What potential contracting problems exist on ebay? The seller would possess asymmetric information regarding the item being sold and the condition the item is in. This outs the online buyer at a distinct disadvantage .One of the potential problems that may exist is the advertising of damage goods. Even though ebay has participants sign a user agreement, there no way to know if the product is significantly damage through a photos. Fraudulent selling of merchandise can be an issue because the product can easily be disguised and service inadequate. The product may...

Words: 671 - Pages: 3

Premium Essay

Analyzing Managerial Decisions: Eastman Kodak

... Analyzing Managerial Decisions: Eastman Kodak by HCM-540, MBOL5, Health Care Organization Instructor: Saint Leo University Distance Learning November 24, 2013 1) What factors motivated Kodak to change its organizational architecture? There were several factors that persuaded Kodak to make changes to its organizational architecture in 1984. Kodak had come to the conclusion that its present organizational architecture did not fit the current business environment for the industry. The biggest factor that persuaded Kodak to make a change was the growing competition in the industry and losing the dominance it once had in the film market. The emergence of new product being made by Fuji Corporation dwindled away their market share. In the early 1980’s, Kodak saw their share price drop from a high of $85 to a low of $71 in 1984. This was cause for change to its organizational architecture. In order to stop the bleeding, Kodak realized it had to restructure and react quickly. With developing technology, Kodak was losing ground fast and was no longer the conglomerate it once was. 2) What mistakes did Kodak make in changing its architecture? Kodak was faced with trying to regain market share. It needed to quickly make changes to respond to shareholders concerns. There were obvious advances in technology that concerned Kodak. Kodak restructured creating 17 new business units with profit-loss responsibilities. Unit leaders were given increase......

Words: 687 - Pages: 3

Premium Essay

Analyzing Managerial Decisions: Medford University

... Analyzing Managerial Decisions: Medford University by HCM-540, MBOL5, Health Care Organization Instructor: Saint Leo University Distance Learning December 1, 2013 Analyzing Managerial Decisions: Medford University Ronald J. Sanders Saint Leo University MBA540 Analyzing Managerial Decisions: Medford University 1. Rather than approaching Medford University Human Resource department to propose a plan, President Kobayashi designated a task force to mull over the matter of fringe benefits. President Kobayashi designated a task force to reduce expenditures and develop a new fringe benefit package that was for the employees of the University. But while the analysis takes place, President Kobayashi does not want to disturb the value of the faculty or the staff. The president has designated a top administrator, to head the task force. He also appointed other various members to be a part of the task force, including the vice provost, who would function as the secretary of the task force.. These members are presumed to have specific knowledge that would help in the process of making the decision. If the president had asked the human resource department to put together a new benefits package, there may have been cause or concerns about who the package being created for upper class, the wealthy, and even show favoritism toward certain colleagues and staff members. 2) The president should supply the task force with a copy of the university’s financial report...

Words: 871 - Pages: 4

Free Essay

Analyzing Managerial Decisions: Ebay.Com” Page

...Analyzing Managerial Decisions: eBay.com 1. How does eBay Create value? eBay created value by ways of connecting businesses and individuals together to sell, trade, buy or trade their products. Many have witness a safe, quick and easy way to move products across the globe. This save on trying to reach buyers and sellers through local or community papers, which limits the amount of people reached. eBay also has the website structured where it is easy to locate what the seller or buyer is seeking. These different sites show many of the same items that you can choose from, negotiate, as well as compare. Anther value is that buyers are able to purchase below the market value. Buyers and sellers have the option to see tips that are offered. You may be a new-comer and need assistance, which can be provided through eBay. Sellers do have the option to set up and advertise several products at discounted prices. 2. What potential contracting problems exist on eBay? There are many potential and actual problems that have exist on eBay. In order to sell or purchase, you will have to set up an eBay account, which a signed user agreement is part of the set. A possible contracting problem is if a buyer wins an action and doesn’t pay for the product in the time it should be paid then the seller is at a loss. Also, this could be the reverse, the buyer can purchase and the seller doesn’t deliver on time or the product may not turn out to be what the buyer thought if should......

Words: 716 - Pages: 3

Premium Essay

Analyzing Managerial Decisions: Rich Manufacturing

...Analyzing Managerial Decisions: Rich Manufacturing 1) Cost plus pricing is used by many companies for various reasons. Companies first “calculate average total cost and then mark up the price to yield a target rate of return.” (Brickly, Smith, Zimmerman, p. 211). Companies use this approach to protect themselves from increase in production costs by adding their desired rate of return. This approach is also used by many companies because of its simplicity. With supply contracts, it guarantees reimbursement of cost and producing profit with no risk of loss. (Accountingtools.com, para. 2). 2) Potential problem with using cost plus pricing is that it ignores marginal cost and price sensitivity of customers. (Brickly, Smith, Zimmerman, p. 211). Price sensitivity is essential to pricing strategy in order to maximize profit. In addition, cost plus pricing is not responsive to market changes. (Magloff, para. 6). When customer demand and competition are not considered, companies can end up pricing their product too low where competition takes away potential profits or end up earning low profits by pricing their product too high. (Accountingtools.com, para. 3). Another problem with cost plus pricing is that it does not encourage supplier to limit expenditures. Hence, suppliers will have no incentive to reduce production costs. (Accountingtools.com, para. 3). 3) In this case, Gina should not contest the price increase because the current contract states that Rich......

Words: 382 - Pages: 2

Premium Essay

Analyzing Managerial Decisions: Itunes Music Pricing

...Managerial Economics MBA 540 Chapter 7 Case Analyzing Managerial Decisions: iTunes Music Pricing 1. Provide an argument for why a variable pricing policy might increase the sales revenue from Apple’s Music Store. The music industry is big business and for many years, consumers have obtained music in many ways other than purchases, which is known as piracy. Today, consumers can purchase music through file-swapping networks, thus leading to a decline in the music industry’s total revenue. In 2003, after agreement with individual music companies, Apple Inc. gave customers the opportunity to purchase and download digital music and audio books through Apple’s iTunes Music Store awaiting at least some revenue from downloaded music (Brickley, Smith, & Zimmerman, 2009). At that time, Apple’s managerial staff set the product price at $.99 per song for all digital music. In 2005, the Music Store sales soared, thus encouraging record companies to ask for a more variable pricing policy. The record companies requested the price for popular songs to increase in price and the older songs to drop in price (Brickley, Smith, & Zimmerman, 2009). In 2009, after negotiations between Apple and the record companies, Phil Schiller, Apple’s senior vice president, announced Apple’s iTunes store would offer music at three prices - $.69, $.99 and $1.29 (Breen, 2009). The variable pricing policy went in effect April 2009 at Apple’s iTunes Music Store (Breen, 2009) and not long after,......

Words: 1190 - Pages: 5

Premium Essay

Analyzing Managerial Decisions

...perform subpar, then they would have compensation taken away. That may be a stronger motivating factor for some. It would also help to know the individual managers. Not all people are motivated the same and having some idea of who these people are on a personal level could help formulate the best possible motivating tactics (Brickley, Smith, & Zimmerman, 2009). In conclusion, I don’t feel like it would be wise for Bobby to just give 500 shares of stock to his struggling managers. That would not accomplish anything except create a mindset where failing equates to getting rewarded. There are plenty of other ways for Bobby to motivate his employees to perform at higher levels. References Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial economics and organizational architecture (5th ed.). New York: McGraw Hill/Irwin....

Words: 530 - Pages: 3

Premium Essay

Analyzing Managerial Decisions: Eastman Kodak

... However when making changes to one area of the company, it failed to coordinate the changes to other areas. In 1984, the company restructured and changed its decision making process to become more decentralized. As a result, 17 new departments were created. These new business units had profit-and-loss responsibilities, and their corresponding managers were given the responsibility to decide on new products, pricing, and other important policies (Brickley, 2009, p. 359). The result of this major restructuring had very little impact of the company’s plan to regain market share and profits. In reaction to this lack of impact, the company implemented the Management Annual Performance Plan (MAPP). The MAPP was a performance-evaluation and reward system. The company felt that by changing the methods of rewarding individuals and business units, it would help them to be more innovative and responsive to customer needs and demands (Brickley, 2009, p. 359). The change was also a mistake and did not have the affect the company thought it would. Employees simply were not motivated by the firm’s new performance evaluation system. 3) What might it have done differently? When making changes to its organizational architecture, Kodak should have designed it with following characteristics in mind: 1) assignment of decision rights, 2) methods of rewarding individuals, and 3) structure of systems to evaluate the performance of both individuals and business units (Brickley, 2009, p....

Words: 818 - Pages: 4