Business proposal for Thomas Money Inc: pricing and nonpricing strategies

Thomas Money

The operating decisions that must be made by Thomas Money include the level of output that the company needs to have in response to the prevailing economic conditions. The company is facing a difficult economic environment at present. Thomas Money's performance is strongly correlated with economic measures that focus on construction, such as new housing starts and new business or institutional construction. In the current environment, housing starts are entering into a long period of decline following the bursting of an unsustainable housing bubble (Byun, 2010). The one bright spot in Thomas Money's business is that there is strength in institutional construction in the health care industry, as the elderly population increases, driving increased demand for health care services (no author, 2007). However, this improvement is not enough to keep Thomas Money's customer in business and as a result the company is facing a high level of repossessions. This represents lost income for Thomas, and worse yet this is income that had been expected. In the current environment, characterized by low demand, it is unlikely that Thomas will realize significant value from the equipment it has repossessed. Most likely, this equipment will be auctioned at a low price to recoup something from the equipment. As a result, setting production levels is important for Thomas Money, because there are high costs associated with overproduction.

It is recommended at this point in time that Thomas Money focus on the most pressing issues in its operating environment, that being the lack of demand. The company is vertically integrated, which means that its different businesses are all related. Thus, when industry demand slumps, Thomas Money will suffer in all of its businesses. The finance business in particular will suffer as finance rates are used as a loss leader for the equipment. Thus, Thomas Money needs to undertake two key strategies. The first is that the company needs to decrease production in accordance with the reduced demand in the industry. The company does not want to overproduce, but demand is low and Thomas does not have any other industry to buffer this loss of demand.

The reduction in production must be balanced with the reality that any repossessed goods must be sold and the market for such equipment is relatively poor right now. Thus, the company needs to ensure that it produces at high enough level that its total average cost is above the cost of selling repossessed equipment, even as it must reduce its production level.

The state of current credit markets is the least of Thomas Money's concerns. The credit division of the company earns its income on the spread between the rate at which it borrows and the rate at which it finances its equipment. Under normal conditions, that spread would not change much no matter how much the company is borrowing at. The current interest rate environment is going to head towards zero, given the economic implosion about to occur. It must also be considered that the spread is going to be squeezed in order for Thomas Money to attract new business. This is why the credit environment is not particularly relevant to the company's business. The more relevant factor is the lack of demand for equipment, because this is going to drive down the spreads that the company can take, and it is going to suppress demand and therefore production. The current credit market, therefore, is not a particularly important factor in the economic environment in forming Thomas Money's strategy for the coming years.

Though the case does not provide information about the international economic environment, we will guess at how that might affect Thomas Money's business. The company operates domestically, so there is little relevance. If Thomas decided to grow its business by expanding overseas, the state of the international economy would be important, however, as the company would need to assess what markets might be viable for it to operate in. In order to make effective decisions about expanding internationally, Thomas would need to understand the rules surrounding international trade in its business. There would be tariffs on equipment most likely, and there are strict rules about finance companies operating internationally. Moreover, Thomas needs to pay attention to the motivations of competitors as well. Some, if their own home markets are depressed, may try to enter the U.S. market despite its current slump. Thomas would also want to consider what competitive advantages it has against foreign competitors -- for example of its low cost of borrowing gives it any advantage against firms in countries with higher interest rates. Comparative advantage is not a relevant theory to apply here because it is an abstract concept for trade between nations (Landsburg, 2007). For individual companies, only competitive advantage matters. Homebuilders in Country A are not going to do business with Thomas Money if it costs them more to do so, just because their country produces mangoes cheaper than the U.S. does -- there must be an opportunity cost directly for the purchaser, not for the country in abstract. If their country also produces construction equipment cheaper, then Thomas Money will not win the business, no matter if it has comparative advantage or not.

International trade and international economic conditions are more or less irrelevant to Thomas Money. The company is dependent on construction, which is a domestic business. The new housing market in particular is driven by domestic demand. The only way that international business affects Thomas is if the U.S. economy becomes affected by events taking place overseas. There is, however, little impact between the overall state of the international economy and the U.S. housing market. If anything, the relationship is the other way around, with the U.S. housing market having an impact on the global economy by way of mortgage-backed securities.