The Graphic Designing Firm - Term Paper Example

Table of Contents Table of Contents 1 Introduction: Services and potential customers 2 Types of services offered 2 Potential Customers 2 Factors influencing demand of the service 4 Elasticity of Demand 5 Associated costs 6 Maximization of profits 7 Extracting consumer surplus 8 Impact of Government policy decisions on supply 9 Economies of Scale 10 Minimum Efficient Scale 11 Diseconomies of Scale 11 Conclusion 12 Works Cited 12 Introduction: Services and potential customers The graphic designing firm will start at a small scale with just 3 employees including the owner of the firm. The firm’s office will be located in the east of England within the Essex county, which will give easy access to over 450,000 SMEs operating within the region (Small Business Service, 2006), primarily Norwich and Harlow. Types of services offered The firm will offer the following service to their clients: Corporate Identities (including company stationery and brochures) Logos (Logo making will be completely overlooked by the founder of the firm) Print adverts Viral Advertisements (animated, illustrated or digitally painted) Packaging designs (in all sizes) Custom Illustrations Web design (Static, full flash, or hybrid) Corporate/product photography Potential Customers These type of ventures have a significantly lower repeat-customer ratio as compared to other industries such as manufacturing or communications because of the nature of the services offered; for example a company might not need to change their product’s packaging repeatedly but only once in a few years. Although there are few categories of customers that will be back for repeat orders; the following are the potential customers of our services: Figure 1: Potential Customers Prime targets will be SMEs as many companies need to change their outlook and stance in order to expand; the founder assumes that growing companies will be easy targets; this is the reason why the firm’s office will be based in Essex County. The following statistics reveal the total number of SMEs operating in east of England: Figure 2: SMEs in UK (Small Business Service, 2006, p.1) The already established competition within the S. east and London could pose a grave threat towards the success of the company and therefore these were excluded, secondly, the economies of both these regions rely mostly upon service sector enterprises, which are not amongst our prime target customers. (Lecomte, 2002, pp.7, 9) Factors influencing demand of the service The following factors might influence the demand of our service: Cheaper competition from low-cost countries: Potential customers might choose LCCS (low-cost country sourcing) as an alternative to our services due to the marginally lower labour and operational costs of LCC competitors. Leniency of government with regards to copyright regulations which might give certain competitors the edge by saving them development costs by cloning certain foundation design elements. Alarming software piracy growth rates: Certain competitors might gain edge in terms of ROIs by using pirated software. Economic slowdown / recession: Companies usually postpone their revamping needs during troublesome times. Higher initial cost of development as the firm will be quite small at the outset. Quality of services and graphics. Elasticity of Demand Diminutive changes in the pricing mechanism of the service are unlikely to cause noteworthy changes within the demand of the product, credibly because this is a creative and artistic industry; and the average prices of type-facing and illustrations may range anywhere from £20 - £100 per hour depending upon the qualifications, creativity, and quality of the artist as well as the complexity of the project (Ferguson, 2008, pp.165-67). As the firm will not be able to provide services at such high variations, further analysis will be required in order to set the final development prices. This will be done by comparing our portfolio with the competitors in order to check which price range suits our standards. Once this has been ascertained, an ROI based on these hourly prices must be ascertained in order to check if the project is feasible. Overall the demand is quite inelastic, but if the ratio amongst the quality of our portfolio and the prices does not match, then the demand for our product would be affected significantly. Moreover, the firm will not have any brand loyalty attached initially as it will be a new venture, hence a misbalance of quality-price ratio is required in the beginning (lower pricing to quality) in order to build a reliable client base. Even though the services are essential enough for potential customers that would require a strong face to support their branding needs (as logos and packaging are their supreme brand ambassadors), it is still a very competitive industry. Associated costs Costs Description Hardware Computers required for such a business will require a heavy processor, higher RAM, and of course a pricey graphic card. Such systems are appreciably costlier than general use PCs. According to Dell Inc. such computers could cost anywhere from £789 - £1,500. (Dell, 2010) Software Licensing Graphic development packages are radically expensive. An Adobe creative suite license (which is an essential package) is priced at $2,599.00 per license (1 computer). Even the upgrades are priced at $899.00. Apart from this, other software are also required, which might be priced at another $1000 compiled. (Adobe, 2010) Corporate internet packages will be required which will cost more Office space In order to exhibit the creative side of the company, which is essential to our branding needs, an appropriate office would be required with specialized interiors. Graphic designers See Fig.3 for average salary of graphic designers (£22,000) Professional Camera For corporate/product photography Brand Building Several valuable work hours will be wasted in brand building activities such as entering designing contests, creating wallpapers, and other freebies in order to increase brand awareness. Figure 3: Average annual salary in england (PayScale, 2010) Maximization of profits Once the firm has over 200 websites in its portfolio, it will be able to afford its own server and would then stop paying rent for web space to other hosting companies. The firm could purchase used licenses for earlier versions of certain software and then update them; but this will prove to be costlier if the number of licenses are larger due to availability of OEMs. Purchasing the camera would prove to be a better option as compared to hiring a professional, as the founder himself is a professional photographer. The firm will only concentrate on brand building activities when a designer has free time. Extracting consumer surplus According to David G. Messerschmitt and Clemens Szyperski (2004), there are certain factors that could affect the sensitivity of consumer surplus (although the author was talking about software industry, which is closely related to our sector). These factors are outlined as follows with some changes to suit the requirement of our industry (Messerschmitt & Szyperski, 2004, pp.62-70): Figure 4: Consumer satisfaction dimensions (Messerschmitt & Szyperski, 2004, pp.62-70) Every customer is different with substantially distinctive needs and tastes, customers of product packaging and corporate identity segments will have a marginally higher consumer surplus as compared to customers looking for a forum based web pattern, simply because the former’s name and goodwill depends upon the packaging and outlook. Prices will have to be set based upon the factors underlined above and in Fig 4. Impact of Government policy decisions on supply Stand on open-source software: If open source software are promoted and companies providing such software can get enough subsidies or donations; this might significantly reduce operating costs and hence will increase output. Lowering taxes on FDIs will result in increased production Taking steps to avoid foreign (especially low-cost) providers to gain market share. Subsidizing export of designs will result in overall growth in exports as the company would be able to face the global competition in a better way. Strict copyright regulations and lowering legal costs related to copyrighting would help keep cheaper and imitative competition at bay. Economies of Scale Economies of scale can be achieved with greater ease in the case of this industry as compared to the relatively larger requirement of equipment and machinery than other sectors such as manufacturing and energy. Only the following will help achieve remarkable economies of scale: Once the firm has enough work to keep at least 18 employees occupied for 40 hours per week, it can opt for OEM licensing, which will be almost 35% cheaper as compared to individual licenses for most software. Even license upgrades will cost much less. If the firm can arrange work for 25 employees for 40 hours/week, this would mean that the firm has reached minimum efficient scale. Once the firm has over 200 websites in its portfolio, it will be able to afford its own server and would then stop paying rent for web space to other hosting companies. Portfolio size: Once the firm has a significant portfolio of designing bases such as symbols and brush stroke types, and even clip arts; then the time taken to finish a design will be reduced slightly; this coupled with the experience employees and the founder gain, will undoubtedly reduce completion time by a significant magnitude. Cost of marketing will go down as the brand name gets established. Minimum Efficient Scale As discussed previously, it will not take much effort to reach the minimum efficient scale. The cost of computers does not go down notably when purchased at a higher quantity (higher quantity in our case being about 10 computers in a single invoice). Nevertheless, the largest saving would undoubtedly be the cost of software licensing, for which OEM’s are available for 15-25+ purchases (depending upon the software vendor: 25 for Adobe, and 15-20 for CorelDraw and other smaller software). Then of course, once the firm has its own server, it will no longer have to pay rent for web space, this rent which will be accumulated from clients will go towards server expenses and company’s profits. The minimum efficient scale will depend upon the type, speed and capacity of the server. It is safe to assume that the company can only afford a server if it has a minimum of 150-200 websites in its portfolio, then depending upon the type of server, it can easily hold and maintain up to 1000-100,000 websites. In our case the minimum efficient scale shall be 1,200 websites. Diseconomies of Scale In order to manage a team of designers, several project managers would be required. A creative director would be required to keep a tab on the quality of development. Cost of a larger office in a good locality would be extensively expensive. A whole HR department would be needed. Several marketing executives would be required, and the company will also need to pay them hefty commissions as per contemporary industry standards. Conclusion Keeping initial and licensing expenses apart, most of the operating expenses are towards salaries and commissions. While the economies of scale are mostly concerned with licensing and hardware, the same could not be said for the diseconomies; there is no possible way to get hard-working and loyal staff members at a cheaper rate. Extracting consumer surplus is quite difficult as this sector has a significant inelastic demand and the variation amongst pricing of graphic designs is quite extraordinary. Overall, it is a service with never ending demand, and is quite essential for the survival or expansion of businesses. Works Cited Adobe, 2010. Adobe Creative suite 5. [Online] Available at: http://www.adobe.com/products/creativesuite/ [Accessed 25 October 2010]. Dell, 2010. Dell Precision Workstation Computers. [Online] Available at: http://www1.euro.dell.com/uk/en/business/Workstations/precndt/ct.aspx?refid=precndt&s=bsd&cs=ukbsdt1 [Accessed 25 October 2010]. Ferguson, 2008. 150 Great Tech Prep Careers. 2nd ed. Infobase Publishing. Lecomte, D., 2002. The economic positioning of metropolition areas in North Western Europe. The Institute for Urban Planning and Development of the Paris Ile-de-France Region, pp.13-26. Messerschmitt, D.G. & Szyperski, C., 2004. Marketplace Issues in Software Planning and Design. IEEE Computer Society, 21(3), pp.62-70. PayScale, 2010. Graphic Artist / Designer, England. [Online] Available at: http://www.payscale.com/mypayscale.aspx?pid=2456fb58-d395-43e7-834a-f11d23da7a08 [Accessed 25 October 2010]. Small Business Service, 2006. STATISTICAL PRESS RELEASE (DTI): Office for National Statistics. [Online] (URN 06/402) Available at: http://stats.bis.gov.uk/ed/sme/smestats2005-regspr.pdf [Accessed 23 October 2010]. Read More