Key Issues
The first key issue is the decline in the home construction industry over time. According to the Federal Reserve’s Beige Book Report of 2006, significant decline in the real estate had been noted in various parts of the country. Various districts had been recording a go-slow in home construction and sales of already constructed homes. The second key is issue is the changing target market that had been identified by Richard and his partner. When they started the real estate management firm, they identified the target market as those individuals staying around the area, within a radius of 100 miles. However, these people are no longer interested or for some reasons they cannot manage to pay for owning a property within the region.
One of the underlying issues is that Richard and his business partner, Stephen, are likely to incur losses as a result of the changing trends in the real estate market. Based on the facts provided, it is evident that the construction project is already in progress. Perhaps, they never expected the real estate business to go decline, and they had already planned the kind of houses they were going to construct within this area. Taking this into consideration, and the possibility of difficulties in fine-tuning the project budget to fall within the conditions of the current real estate market, it is possible that Richard is anticipating their company to either incur losses or a lower profit margin then they had anticipated while starting the project, which explains Richard’s reaction while leaving the project cite (Witcher, and Vinh, 22).
The other underlying issue is the possibility of making forced changes in the marketing strategy of the company so as to capture new customers as a result of a change of the initial target market of the company. According to the views of Robert, it would be necessary for Richard and Stephen to consider attracting new customers. The project they are undertaking is no longer attractive to the local people, whom they had identified as the main target market because they lack the resources to acquire the houses. However, it is attractive a high-income group, most of them from other parts of the country, even internationals. To some extent, this adds to the problem of the possibility of incurring losses. A change in their marketing strategy means extra costs, possibly unbudgeted costs (Rosenauer and John, 29).
Besides, it means that modifications of the houses would be necessary to suit the needs of the emerging new target market, which also means additional costs in the construction of the houses. In fact, it appears that the frustrations of Richard and Stephen are due to the possibility of incurring extra costs as a result of the changing real estate market trend, and the change of the target market.
Facts that affect this issues
The changing market of home construction industry over time is one of the key issues facing Richard and Stephen in their real estate business. According to the information presented in the case study, Mark Kessler, Home Builders Association’s President, the changes are as a result of the increasing cost of capital. For the past few years, the Federal Reserve has been increasing the Federal Funds rate. In 2003, this rate was 1% and by 2006, it had already increased up to 5.25%. Consequently, the initially fixed mortgage rate increased from 5.43% to 6.83% in a span of three years, from 2003 to 2006. In addition, the annual adjustable rates increased from 3.75% to 6.08% within a span of the same period.
The change in interest rate significantly affects the buying decisions of the customers. From an economics point of view, an increase in the interest rate leads to an increase in the price of houses. As the price increases, the demand of houses declines, because of the inverse relationship between the demand and price of a product. Furthermore, based on the facts presented, personal bankruptcy and foreclosures have increased over time. All these means that it is now expensive for the potential customers to acquire houses than it was in the past few years, and logically the real market estate would shrink with time. People would prefer cheaper alternatives of acquiring houses rather than using the expensive mortgage system, and it is evident that not many people would be financially in a position to use these alternative house buying options (Das and Ashis, 31).
On the other hand, the target market is changing because of partly the increasing cost of buying a house, and partly because of a change in consumer preference. Initially, Richard and Stephen identified their target market as those living within a radius of 100 miles of the construction site. Possibly, these people have been living in this area for a number of years, and they would prefer to relocate to other places for new experience with new neighbors and new regions. As such neither the Snowy Mountain nor any other development is appealing to this target market. According to Robert’s research, the local people are no longer interested in the area, but there are indications that outsiders are more than willing to buy properties in the same place, based on the number of enquiries made on the same.
However, to capture the new pool of customers, Richard and Stephen will be forced to go an extra mile to modify the houses they are constructing to include the features that are appealing to these customers. Robert argue that new potential customers have specific preferences when it comes to real estate, including energy-efficient, maintenance-free homes, and either 100% recycled-fiber carpeting or low-toxic floor finish. The location of the construction is very strategic, because these new potential customers are also looking for new experiences. All these facts show a new opportunity that Richard and Stephen could explore to avoid making the anticipated losses as a result of a change of their target market.
Possible solutions and how to be implemented
The most probable solution for Richard and Stephen is to focus on the new potential customers, the high class group, those with high income. This means that they will have to effect the required changes in their project to suit the needs of the high class people. This will not only improve on their sales despite the increasing cost of housing, but it will also create a new market niche, which is unlikely to change in the near future. To make the best out of this new opportunity, Richard and Stephen should explore changing their marketing strategy (Das and Ashis, 37).
According to Robert, the new target market could easily be reached to online services. Therefore, online marketing strategy should form the largest part of their marketing plan. For instance, using social media marketing would be a big boost in their marketing. This appears to be a viable option, especially taking into consideration that the cost of social media marketing is relatively lower as compared to other marketing options, and they will be assured of reaching a large number of potential customers not only within the local are, but internationally as well (Das and Ashis, 43).
Follow-up and Contingency Plan
It is evident that the approach Richard and Stephen will take will be a bit different from what they are used to or expected while setting up their business. Besides, it implies that they would be forced to make some changes in the manner they manage their organization and business in general. From the conversation between these three individuals, it appears that Richard and Stephen have little knowledge when it comes to online marketing. To monitor the progress of their business after implementing the above proposed solutions, they should consider introducing the marketing department in their organization to oversee the marketing functions. Bringing in expertise in this area would increase chances of success. Perhaps, creating the organization’s website would help them monitor the market trends as well as make note of any opportunity whenever it emerges (Richard, 8). As a contingency plan, they should think of the alternatives of building residential houses within the area. According to Robert, the area could be attractive for tourism because of its natural scenery. Perhaps, a recreational facility for tourists, both local and foreigners, could be a viable option to constructing residential houses (Hamilton, 23).
Works Cited
Das, Biswajit, and Ashis K. Pani. Real Estate Market: New Economy New Business. New Delhi: Excel Books, 2005. Print.
Hamilton, Dan. Real Estate Marketing & Sales Essentials: Steps for Success. New Yor, N.Y: Thomson South-Western, 2005. Print.
Richard, Dan G. Real Estate Rainmaker: Guide to Online Marketing. New York: John Wiley and Sons Ltd, 2004. Print.
Rosenauer, Johnnie L, and John D. Mayfield. Effective Real Estate Sales and Marketing. Mason, OH: Thomson/South-Western, 2007. Print.
Witcher, Barry J, and Vinh S. Chau. Strategic Management: Principles and Practice. S.l.: Cengage Learning, 2010. Print.
