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Business capacity decisions 

ECON First believes that business success centers around knowing the economic and demographic characteristics of each unique primary market area. While business experience, insights and intuition are important, they are substantially advanced by hard data.

A critical question facing any business is exactly when it should expand or contract. Expanding after a market peaks leads to the painful layoffs of employees, inventory over hang, and excess capacity in plant and equipment. Contracting prior to a turn up in a market means unmet sales and possible loss of customers to rivals.

Is there a simple way for a business to access the balance of its capacity to market conditions?

 

AN EXAMPLE

 

Alice is president of an engineering services firm. She had recently hired 25 new employees, and was questioning if she had expanded too rapidly.

 

ECON First rapidly provided data that allowed Alice to assess her capacity situation.

 

First, an index of the monthly payroll employment in Alice’s Primary Market Area was created. A 12 month moving average of the payroll employment was indexed to a base of January, 2006. The month to month changes in the index were then calculated. The results are shown in the graph below.

 

The data clearly shows the impact of the “Great” recession of 2008 on the economy of the PMA. It then evidences growth through early 2015 and a steady decline through the end of 2016.

 

Second, an index of the annual PMA employment in the industry of engineering services was constructed. The base year was 2006. The chart below shows the resulting annual changes in the index.

 

 

Comparing the two charts, two things jump out. First, the volatility of engineering services employment during the 2008 recession. Second, and most relevant to Alice, engineering services is now expanding while the PMA economy is declining.

 

Why?

 

The most plausible explanation is the nature of the lag in activity in the construction industry. It takes time before the industry is convinced that an economy is expanding. Then, construction contracts enter a pipeline that may last 15 – 20 months before ground breaking.

 

 

Obviously, by hiring 25 new employees, Alice has moved her firm into excess capacity.

 

 

CONCLUSION

ECON First specializes in providing the hard data that allows business owners to make more informed decisions regarding start-ups. expansion, marketing channels, and pricing strategies. It is inappropriate to apply summary measures taken from nation or state level data and assume they apply to specific primary market areas. A more comprehensive analysis is required for business success.

Let ECON First help you to better evaluate expansion into E-commerce.

 

Dr. John E. Stapleford

ECON First

www.econfirst.com