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Imbias

An Economic Overview

The Inelastic Five


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The Inelastic Five


Econ Project

Introduction
IMBIAS is one of the local fashion SMEs in Lahore. It is jointly owned by a couple named
Imran & Rabia. They have been in the fashion industry for over 17 years and are seasoned
veterans when it comes to fashion design.
Initially, Imran and Rabia operated from their home in Lahore, with no external locations. In
time, they started expanding their operations by opening up an outlet in Y-block, Defence. They
also rented out a place for their workshop so that they could streamline their flow of production.
Their initial target market was bridal dresses and sherwanis but with time they expanded their
scope to party wear as well. IMBIAS actively participates in fashion shows and also conducts
exhibitions in Dubai and London. This results in a broadening of its scope and diversification in
its target market.
The current trend in Pakistan has shifted from a single boutique to a multiple designer cloth shop
and IMBIAS has kept itself abreast by collaborating with the likes of Fashion Pakistan Lounge
and Fashion Central. IMBIAS is also looking to work with new multi designers stores in
Karachi, Peshawar, Dubai and London to increase its customer base.
Product Portfolio
IMBIAS prides itself as a home of exquisite prt and couture collection ranging from simple
casual shalwaar kameez to classic groom, bridal collection and party wear based on intricacies of
cuts, shades and embellishment with the diffusion of western cuts. The wedding collection of
IMBIAS includes kurtas for mehndi, sherwanis for barat, bridal lehngas and fancy party wear for
women. In addition to that, they also offer khusa and pagri with the bridal package.
IMBIAS has diversified its product portfolio in reent years by extending its product length. It is
offering a wide variety of products such as high end wedding wear, mid-tier party wear and low
end casual wear.
IMBIAS has also increased its social media presence by maintaining an active Facebook page
where it releases pictures of latest products and promotes upcoming designs. In addition to this,
they facilitate customers by taking orders online through a collaboration with Fashion Pakistan
Lounge which allows them to extend their reach and cater to a larger number of customers.

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Factors Affecting Demand and Supply


Due to the nature of the product, there is a lot of variability in the demand and supply of the
products produced. We have identified the following variables:
1. Price of product
2. Competitors
3. Quality/Image
4. Season
5. Fashion
Let us briefly discuss how these factors affect the demand.
Price
The price of the product is an important factor in determining the demand of this industry.
However, there is a difference in the demand-price elasticity depending on the type of product.
For example, Lehngas and Sherwani which fall under formal category are sold around, on
average, PKR 250,000 and PKR 150,000 respectively. Whereas the average price of casual and
party wear clothes is around 16,000 PKR and 30,000 PKR respectively. So a price change in
formal wear is relatively in-elastic and people are willing to pay more. A price change in casual
and party wear clothes however, is relatively elastic because, customers consider these items as
less expensive and therefore of less value and opt out for other options if the prices are too high.
Competitors
IMBIAS has to face a lot of competition in terms of brand image. For example people prefer
certain Brands e.g. Swaleha Hassam Paracha (SHP), JEEM over others. So the customers are
sometimes loyal to some particular brand.
The decision to place its clothing in designer outlets also creates a big challenge for IMBIAS.
The reason behind this claim is that there are a lot of designer clothes under one roof and in close
vicinity at such places. So the customers are free to choose any brand. This competitive factor
also affects the demand

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Quality
A good product quality results in good image and good publicity among the customers. A
creative and the expert designer can create a healthy demand for his/her products. We consider
this as a proactive approach, where the designer is relying on the customers who are willing to
try new things. The products are worn in high profile events, or in parties; get appreciated; and
soon people are trying to get a hand on a similar product. Once the customers start preferring the
quality of a particular product, they are willing to pay more.
Fashion
Of the three factors above, this is the most critical one in deciding the type of product. The
fashion industry is always in a state of flux and one cannot predict which particular trend is
going to be the hot favorite of the masses. An out of fashion product will have close to zero
demand in the market and the producer may never get a chance to sell such clothes. On the other
hand, a trending mens and womens wear has a much higher demand which is where the
supplying capacity of IMBIAS is tested.
Season
Pakistan is one the very few countries in the world which experiences all four weathers during
the year. As a result, there is a lot of variation in the demand of clothes in the span of few
months. For example, the summer season requires lightweight and extremely fine fabric to
provide an effective cooling for the wearer. There is a focus on printed patterns rather than
embroidered ones to save weight and to give comfort. Light colored fabrics are used to protect
from the scorching heat of the sun.
In the hot weather, the demand is typically low because people prefer to stay at home during the
summers to avoid the high temperatures. From May to August, there is a very low activity in
terms of functions, weddings and parties. So, there is a low demand of the clothes.
Demand starts to rise up during the autumn season and goes at its peak in the winters. This trend
extends to late March, when the spring season ends. This is the time of year when most of the
weddings, parties and social events happen. People use dark clothes, with heavy embroidery
work which helps them express their taste and style. This also gives more room for asking price

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by the designer due to the amount of work put in. For example a high end party dress starts well
above 90,000 PKR and can fetch upto 250000 PKR for a wedding dress. A typical mens
sherwani (formal clothing) is price tagged between 80,000 and 150,000. The asking price
depends on the occasion and the amount of value added work done.
Sensitivity Analysis
After running a linear regression model on our data, we got the following equation:
Demand = 240 + 0.234 Price 0.116 Competitor + 0.095 Quality + 0.108 Fashion
Price is rated as: Low = 1, Medium=3, High = 5
Quality & Competitors are rated on a scale of 1-5
Fashion is rated on a scale of 1-3 Low, Medium and High Demand Fashion.
The constant value of 240 changes in a high demand season e.g wedding season to 300.

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Fixed Cost, Variable Cost and Breakeven Analysis


The Fixed Cost and Variable Costs associated with IMBIAS are mentioned in Exhibit 1. The
Total number of Machines on which these projections have been calculated is 20.
Table 1
Breakeven Analysis
Average Variable Cost
Sale price per unit
Fixed Cost
Opportunity Cost
Breakeven (Fixed Cost Opportunity Cost/
(Contribution Margin)

3153.846154
18210.52632
409000
100000
27.95086705

Breakeven analysis tells us that if Imbias is able to sell 27 units in one month, they will be able
to breakeven. The considerations taken over here are that the fixed and average variable costs are
taken for one month and the selling price per unit has been calculated by calculating the average
price for mid-tier and low tier products of Imbias. Moreover, Imbias recently closed their Y
block, DHA Lahore outlet. The shop was generating a monthly profit of Rs.100,000. So we have
considered that as an opportunity cost.

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Economies of Scope
Economies of scope is a particularly relevant topic when it comes to SMEs like Imbias. Smaller
businesses and firms have to constantly find ways to increase their profits and to reduce their
costs. Aiming for economies of scope can help in achieving both of the aforementioned results.
Economies of scope exist where joint production of multiple types of products result in a higher
reduction in average fixed cost than would have been possible if the products were produced
separately. Thus, a company achieves economies of scope by producing a number of different
products.
Imbias started out as a high end, bridal wear designer and started operations in Y-block, DHA
Lahore. However, the monthly breakeven was proving hard to achieve due to the high fixed cost
and the inability to achieve economies of scale. The sales fluctuated tremendously due to the
high demand in the wedding season, generally in the cooler parts of the year, but demand during
the remaining year made it hard to survive with the high fixed costs. The owners realized after
some time that this was not sustainable as they could not see any ways to reduce their costs by
sticking to the same product category. Subsequently, they took several important decisions to
tackle the high cost per unit issue to improve their margins.
Firstly, they closed their outlet in Y-block as it was deemed unsustainable. Secondly, they
decided to diversify their product portfolio and started designing and producing party wear and
casual clothing for women along with their bridal clothes. The response from the market was
very encouraging and the company slowly started to move away from their core business of
bridal dresses and began focusing on the casual clothing section. As they were shifting their
focus from a more sophisticated product to a relatively simpler one, Imbias did not need to
upgrade their equipment or hire more skilled workers. In fact, they were able to reduce average
costs by producing different products using the same set of workers and equipment.

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Here are several ways that Imbias was able to benefit from diversifying their product portfolio:

All the products shared raw materials such as strings, buttons etc. Production of multiple
items meant that they could buy the raw materials at lower prices due to increased

bargaining power with suppliers.


Imbias has one workshop where all the production takes place. Joint production ensures
that labor and equipment is fully utilized, which will ultimately help increase production

and increase the sales revenue.


The cost of overheads is spread over the range of products. Therefore, the fixed costs of

the generator, workshop rent and workshop manager salaries is reduced per unit.
Diversification allowed them to increase their margins by renting out racks at various
multi designer stores. This was due to the fact that the rent for the rack was distributed

over differently priced products.


Most importantly, Imbias was able to improve their bottom line margins by diversifying
as there are now multiple streams of revenue. This reduces dependence on one particular
brand and allows the company to be creative and innovative in order to grow.

Factors Affecting Resource Allocation for Imbias


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Imbias is operating in a market with many similar producers, every firm is in the market to make
profits. They compete on price and quality of their products sold. Beyond a certain level of
dresses produced and sold, the marginal cost of producing additional units will go up for Imbias.
The firm will only sell when the marginal costs of selling an additional unit are less than the
marginal revenue it will generate.
Imbias has to sometimes forgo some orders as they do not have the capacity to fulfill very large
orders. In theory they can fulfill them by enhancing their capacity through capital investment, but
they realize it is not worth it.
Resources that Imbias has at its disposal are limited, in order to gain maximum utility the firm
decides what resources to apply where. They need to decide how many units of a dress to
produce and how to price them. These decisions are usually based on the following factors:

Intuition

State of the Economy

The policies of competing firms

The time of a year

Unknown variables

Intuition
Imbias maintains a data of the sales that they make. A preliminary analysis of the data reveals
that its customers have a preference for a specific color or design at a certain price. This analysis
then usually becomes the basis of the decision to allocate more resources or less towards a
specific product.
This choice might look obvious, but it doesnt always turn out to be correct. There are other
factors that might affect how a product performs in the market, such as the gross national product
(GNP), income levels, interest rates but these are not usually considered by the firm.

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The Policies of the Competing Firms


Imbias is operating in a monopolistic competition, there are a lot of consumers and producers.
The micro economic theory says that a price reduction should increase the demand for Imbiass
products as compared to its competitors.
The factors to consider here are how this will impact the profitability of the firm. If the reduction
in price will not allow the firm to cover its fixed costs, it will not be feasible for the firm to lower
the prices to that level. This does have an impact on the decision of how many dresses the firm
will produce and at what price will they sell their products. They need to decide if they need to
spend additional amount on the display of dresses. The time a dress spends on the shelf of a store
has a cost. The management needs to decide if the cost incurred towards selling a product will
help cover its expense. As the motive of the firm is to maximize profits.
State of the Economy
Another very important factor that impacts this decision is the state of economy at any given
point of time and the time of a year. The demand trend for their dresses rises around events such
as Eid. This is an important factor for them to consider, whether they will sell their products at
lower prices than their competition, in times when economy is not doing good, and enough
demand is not being created. With the reduction in interest rates, and easy availability of capital,
it becomes easier for the firms to expand their production ability.
Other Factors
These include a change in the trends prevalent. Consumers may become tired of something, even
when it is still in fashion, and they may not want to consume more of it then. Some trends might
continue from year to year. Generally though it is hard to predict how long a dress style will
remain in fashion for.
A deciding factor in this aspect is what celebrities are doing. Consumers who are influenced by
these celebrities may buy the items endorsed by them. For dresses that go out of fashion, a part
of their cost may be recovered by selling them at a lower price.

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All of these elements - the microeconomic data, the questions it provokes, the possible outcomes
of each choice made in the decision-making process - are what business executives must
consider to assure the success of their companies and maximize their profitability.
Market Competition
Entering this market was no small decision because there were already firms such as SHP, MBM,
and JEEM. Hence, Imbias had to resort to product differentiation through innovation and
creativity to enter the market. The company competes in an environment which most closely
resembles monopolistic competition with large number of firms and substantive barriers to entry
and exit. Product differentiation along the lines of bridal wears and hand-made embroidery are
the defining feature of Imbias which help them stand out from the competition and secure repeat
purchases in a saturated and highly competitive market. There is high non-price competition in
the industry and the only way to gain market share is through provision of creative designs and
building customer loyalty.
This industry is a customer sensitive market where a large number of consumers differentiate
more on quality and are willing to pay more to get the required quality. But in case the price
difference is too high, the buyer eventually switches to another brand.
Pricing Power
The presence of large number of fashion designers, lowers the price competition. There is lot of
room for Imbias to set its own prices without having the fear of engaging in price wars with other
designers. Consequently, Imbias market decisions are mostly independent of the pricing
structure of their competitors.
As one of the leading designer brands of Pakistan in clothing, Imbias enjoys significant market
power which ultimately leads to significant pricing power. The brand enjoys economies of scope
by producing a range of dresses from bridal wears to casual and party dresses. Imbias doesnt
really need to cater for economies of scale since the brand is premium in nature and has a snob
appeal.
Even though the barriers to entry for the industry are high in terms of capital investment, Imbias
managed to keep their sunk costs low by mainly operating on rented premises and managing

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their cost of machinery low. Thus, they have the freedom to exit without suffering heavy losses
since the sunk costs are pretty low. Imbias can avail the option of exit in case of a market
collapse or a significant reduction in demand which can result in unsustainable losses.
The multi designer stores mentioned earlier provide a range of choices to the customer which
keeps the public interest and brews a healthy competition within the store. This is a great
opportunity for the customers, because they get a lot of choices, and also helps the suppliers as
they are competing under the same roof. Once again, product diversification becomes one of the
key requirements for any designer to differentiate their clothes from the other brands. Imbias has
taken years to establish itself as a high quality niche brand in the market, which is why they have
been able to develop a loyal customer base and are able to charge a premium for their products.

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Table 1
Costs
Total Raw material cost per

Amount
78000

Type
Variable Cost

40000
20000

Variable Cost
Fixed Cost
Fixed Cost

Rack Rent at 3 Multi

90000

Fixed Cost

Designer Store
Cost of Workers
Workshop Manager
Cost of Each Machine
Generator Cost
Woodwork and Decoration

234000
25000
25000
50000

Fixed Cost
Fixed Cost
Sunk Cost
Sunk Cost
Sunk Cost

Cost
Pressing Unit Cost
Dyeing Machine
Cost of Closing The

300000
45000
50000
100000

month (1040 pieces)


Workshop Electricity Bill
Generator Cost per Month
Workshop Rent per month

40000

Sunk Cost
Sunk Cost
Opportunity Cost

Shop/Monthly Loss in Profit

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