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

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