Managerial Economics

Dr. Ahmed Mabrouk

Group Case Studies

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2
3
4
5

Case Study
Citi Group
Ericsson
Star Hup
Electricity
Water

Prepared By
Farouk Gamal Abo Taleb
Mahmoud Nassef Ibrahim
Ahmed Adel Shanan
Magy Mahmoud Samy
Marwa Sanad

Citi Group case

(Discussed in group and prepared by: Farouk Gamal Abo Taleb)
a) Citi group major businesses are :
Banking services for both Corporate and Retail clients.
Global wealth management.
Alternative investments.
Brokerage and insurance.
The large scale definitely helped Citi group growing faster and be dominant for offering some products & services in
several territories enjoying the huge international branch network. Having the competitive edge of existing in many
regions with offering all these products through each single branch. Small scale can be an indicator for professionalism
or an indicator of instability.
The retail business consumer based business- needs broad range of products as all retail clients needs several
products especially in the retail banking such as different types of loans (personal loan, car loan, mortgage etc.)
b) Citigroup has succeeded in the market and survived mainly due to economies of scale and scope and cross selling
resulting from the merger. Citigroup, the new name created out of Citicorp and travelers Group, was, after the
merger, able to service its customers with a wide variety of products, which was important in a client-focus industry
such as the financial sector.
c) Economies of scale and scope are important in this sector, but having said that, a giant with different financial
services regulated by different agencies can be difficult to handle. Apart from that various reasons like such mergers
being unsuccessful in past, vulnerability of oversized companies and structural problems faced by firms being
mergered prevent the firms from following Citibank's strategy.
d) Distribution through various channels has become a key differentiator in the current environment for the retail banks
just to stay ahead of the competitor. Financial industry required channel flexibility and support for an ever widening
portfolio of products to meet the consumer expectations. Thus, focusing on distribution gives a clear advantage.
e) We suggest that Mr. Weil should maintain and enlarge the group and continue expansion but along with the
expansion it should fine tune its range of products and services. The inability of citigroup to do this successfully had
resulted in losses for some of these segments like global corporate, investment activities and global consumer
activities in sectors like insurance and e-consumer. So, both should be implemented together in order to maintain
competitive position in the world markets.

Ericssons outsourcing manufacturing activities to Flextronics.

(Discussed in group and prepared by: Mahmoud Nassef Ibrahim)
Introduction
Ericsons decision to hand off its cell-phone manufacturing operations to Flextronics is the most sweeping
outsourcing effort yet in the wireless-handset arena, and its reverberations will likely be felt by OEMs even
outside the mobile-phone market.
While its competitors have dabbled in the outsourcing model, Ericsson acknowledged in a single stroke that
the economies of scale, procurement clout, and production efficiencies of the EMS sector offer a competitive
advantage that's impossible to ignore.
1) What are the pros and cons of outsourcing relative to keeping production in -house?
As is true in many areas of the U.S. and global economy, growth in the last several years has come in large
part through increased productivity, which has allowed companies to cut production costs and compete on
price.
Related Advantages of outsourcing:
1. Lower labor cost and increased realization of economics of scale
Depending on where you outsource your production jobs, you can reduce your labor costs
significantly. This includes not only savings on salaries and hourly wages, but also on payroll taxes
and benefits. Overtime laws might also be less stringent than your locale, allowing you to add a shift
or offer workers longer hours without increasing your hourly pay rate. You might also be able to
reduce your costs by paying an outsourced manufacturer by pieces produced, helping you better
control your costs. You are less likely to face a union in many foreign countries, reducing problems
such as strikes, contract negotiations and difficulty in terminating poorly
Lower Real Estate and Plant Costs You will save considerable money on outsourcing if you reduce
or eliminate your real estate, building, maintenance, property taxes, insurance, security, utilities and
other operating and overhead costs. These savings alone might be enough to make outsourcing your
manufacturing even if you dont reduce your labor costs
2. Reduces cash outflow and optimizes resource utilization
Increasing working capital, when you outsource, you reduce your expenses, and if your sales remain
the same, youll have more money to spend on marketing, debt reduction, research and development,
headquarters salaries and other areas that can help improve your bottom line
Related disadvantages of outsourcing
1.

Reduced Quality
When a small business outsources manufacturing, it has to consider its ability to oversee and regulate
the production process taking place at its contractors location. Unless you can afford pay one of
your own employees to be on site, every shift, you wont be able to examine and control the quality
of your product. When an outsourcer produces an inferior product, it might take you weeks or
months to find this out, based on how long it takes to ship finished product to you

2.

Bad Public Relations

Outsourcing manufacturing often carries with it a stigma in the eyes of consumers. While some
manufacturers provide living wages and safe working conditions to outsourced workers, consumers
might resent that you are taking jobs from their communities and sending these jobs overseas.
Outsourced jobs are often performed by workers who are underpaid, physically abused, overworked
or work in dangerous facilities. Some countries allow those companies that outsource to them to
pollute the environment. When these conditions are found, consumer groups often publicize this
information and call for boycotts.

2) What are the pros and cons of outsourcing relative to exiting the business altogether?
However outsourcing is primarily undertaken to enable companies to generate better revenue
recognition and to provide them an added competitive differentiator.
While done with the best of intentions, outsourcing has a telling effect on quality of products
and services delivered as a consequence of this, either enhancing or lowering quality.
While there could either be an increase or decrease in the turnaround time while outsourcing,
it could also result in improved or decried customer service.
Outsourcing, primarily undertaken to provide companies the competitive edge, can also result
in easier management and better productivity based on how effectively the process is
managed.
Related Advantages of outsourcing:
1.

2.
3.

Better revenue realization and enhanced returns on investment effects on Sales, Pricing and
Margins, lowering labor, operating and overhead costs through outsourcing allows you to
maintain or lower your current price levels. This can lead to increased sales and the ability to
take market share from your competitors. Based on the savings you realize from outsourcing,
you can lower your prices and still increase your profit margins
Frees management time, enabling companies to focus on core competencies while not being
concerned about outsourced routine activities
Increases speed and the quality of delivery of outsourced activities
Related Disadvantages of outsourcing:

Possible loss of control over a company's business processes

Problems related to quality and turnaround time
3. Sluggish response times coupled with slow issue resolutions
4. Lower than expected realization of benefits and results
1.
2.

3) Does Flextronics role pose a long-term risk to Ericsson?

By Ericssons signing upon the outsourcing model with the wholesale surrender of its wireless-handset
manufacturing operations to Flextronics.
The move also bolstered the notion that large OEMs are devolving into engines for brand marketing and
product design as they continue to hand off production, distribution, and logistics responsibilities to EMS
providers.
While Ericsson insists it has no plans to exit the handset market, its decision raised questions about what
functions OEMs should keep in-house and how the closer working relationship they are forging with EMS
providers will affect their design, R&D, components procurement, and other supply-chain management
activities.
EMS providers have helped their OEM clients to realize these savings, but what happens when the contractor
assumes the lion's share of the responsibility-and risk-associated with an end product? Or more to the point,
how much input should an EMS provider exercise over the design process under way at its customer? This
shouldn't be confused with design services, which may be procured from a variety of sources; I'm referring to
product R&D.
With Ericsson having granted so much oversight to its EMS partner, it will be interesting to watch how this
relationship evolves and what changes Flextronics will visit on Ericsson's future product plans. Indeed, the
manner in which Flextronics' cost-reduction methodology syncs with Ericsson's market vision could foretell
how other OEMs and EMS providers adapt to the outsourced manufacturing trend. The chances that EMS
providers will exercise a greater degree of control over OEM product direction will only increase as more

companies adopt an outsourced production model. Time will tell how much control OEMs are willing to give
up cutting production costs
4) Although Ericssons arrangement with Flextronics is the most ambitious to date, others in
the industry are also turning to outsourcing. Why do you think they are doing so now, rather
than earlier in the life cycle of wireless phones?
Ericsson and rivals such as Nokia, Motorola, and Samsung had followed a patchwork system through which
they made some of their cell phones in-house and others at EMS sites. Communication-equipment
companies such as Motorola and Lucent Technologies have indicated they will increase the portion of their
products manufactured by EMS companies in a push to lower costs and regain market share. Ericsson's
strategy stands in sharp contrast with that of its rivals, which still plan to maintain some production facilities
in-house. Ericsson and its rivals are being compelled to outsource because of troubling market conditions.

Star Hub
(Discussed in group and prepared by: Ahmed Adel Shanan)
A. Identify changes in demand and costs (fixed and marginal costs relative to the number of
subscribers) arising from Star Hubs acquisition of the EPL rights.
The demand for Star Hub cable TV raised as the subscriber base has shown an increase by 4% and
reached to 504,000 customers at the end of December 2007. Hence, it leads to rise in the revenue of the
Star Hub by 9% due to rise in
the number of its subscribers. The fixed cost relative to the number of subscribers would be US$160
Million which was paid by Star Hub initially to win the bid to broadcast EPL for Singapore. Since the
number of subscribers in the end of 2007 reached to 504,000, therefore fixed cost per subscriber would be
around $3.17.
The marginal cost would be the additional cost incurred due to the payment of Royalty to the content
providers such as ESPN, Discovery Travel .. based on the number of subscribers to the content. It is
expected to have a decrease in the
number of ESPN subscribers due to Star Hubs acquisition of the EPL rights. It is also possible to have an
increase in the number of other channels subscribers due to the total increase in Star Hub customers.
B. Which of the changes in (a) would be relevant to Star Hubs pricing of cable TV services?
The increase in fixed costs and the increase in demand (which may lead to increase in marginal cost for the
royalty paid to channels other than ESPN) are the most important factors in determining the pricing
decision of StarHubs
cable TV. The cable operator may have to raise its prices in order to maximize the profits as it is the only
cable operator in Singapore. That is why, after acquiring the English Premier Rights, it raised the price of
basic packages by $4
to $24 a month with effect from July 11 and the price of the sports package by $10 to $25 a month, with
effect from October.
C. Do you think that, prior to the 2007 price increases, Star Hubs prices had maximized profits?
Prior to the 2007 price increases, Star Hub reduced the prices of basic packages to $20 a month in 2001.
Also, the operator unbundled the TV package into thematic basic packages and new channels were being
added in the thematic
basic package. But still Star Hub did not increase its basic package prices even if its marginal cost increased
due to additional royalty payment to the additional channels like CCTV-9, Discovery Travel & Living and
STAR Chinese Channel. But sometime, it also increased prices for sports package in 2004, where there is
increase in marginal cost due to royalty paid to ESPN per subscriber. Hence, Star Hub profit
maximization will depend on the effects of decrease in basic package prices and increase in sports package
prices with relation to number of subscribers to each package, and if these effects caused marginal revenue
to equal marginal cost or not.
D. From the view point of a content provider like ESPN which receives a per- customer royalty
from a cable TV operator, explain the moral hazard to which the cable TV operator is subject.
Moral Hazard problem occurs in situations where one party is ready to take more risk as the burden of
that risk falls on the other party. In the above case, the moral hazard problem would be faced by the cable
TV operator because
ESPN is sponsored by the cable TV operator by paying the channel per customer royalty. Therefore, in
case if there is any problem faced by the viewers of ESPN channel, then it would be the responsibility of
the cable TV operator
to resolve that issue as customers would complain to the cable TV operators only and not to the ESPN
channel provider.
E. From the viewpoint of EPL, explain how a lump-sum bid would resolve asymmetry of
information between EPL and cable TV operators.
Usually asymmetry of information arises when one party has better or more timely information than the
other party in a transaction. In the above case, asymmetry of information between EPL and cable TV

operators arises because cable TV operators were under impression of higher profits to be earned once
they win the bid but sametime the exact number of
current and expected cable TV operators subscribers is unknown for EPL during the transaction, which
makes the monthly or annualy royalty fee risky for EPL. Also, Star Hub is able to create an EPL
monopoly in Singapore after the bid as the only cable operator, and EPL has a lack of information during
transaction about the way Star Hub will control the issue and the possible changes in cable TV operators
in Singapore in the near future.
So from the viewpoint of EPL, the agreed on huge lump-sum bid helped EPL to solve that asymmetry
and have a good profit ahead. At the same time, Star Hub made a very smart move by unbundling the
entire cable package into sports and basic package so that higher prices would be paid by only the sports
lovers. Therefore, rise in the prices of sports channel will not lead to fall in the total revenue as the price
elasticity of demand of sports channel will be very low. Winning the bid allowed Star hub to create market
power so that it would be able to earn higher profits at the same marginal cost.

Electricity
(Discussed in group and prepared by: Magy Mahmoud Samy)
-

Important Information:
In July 2014 the citys electricity consumption surged to a weekly record of 14.35 million Kwh.

Thermal coal is the principal fuel used to generate electric power in China.

In 2003, China exported 93 million tons of coal, including 80.8 million tons of thermal coal. To
assure supplies to the electric power industry, coal exports has limited to 80 million tons in 2004.
And the exports of thermal coal would fall to 70 million tons.

The government regulates the supply of coal to support the electricity industry by contract price.

The Chinese government dissolved the Ministry of Electric Power, and divided its functions between
(SERC) and the State Power Corporation of China.

The government sets the contract price below the spot market price.

Between 2003-2004 while the spot market price of thermal coal rose by 25%, the contract price rose
by only 10%.

Many mines sold coal on the spot market to earn higher profits and some power plants cut back
production and shortage reach 30 Million Kwh.

The government is under pressure to increase electricity prices But, this increase has not been
sufficient. The threat of a power crisis continues.
Question 1
Explain how the impact of a price increase on electricity consumption depends on the price elasticity
of demand?
We consider the electricity as a necessary product and have no substitute and the percentage of
income spent on it is very low and as a result from the previous the product in this case is
inelastic demand and price increase doesnt have significant impact in the quantity
consumption because the percentage change in electricity consumption is less than the
percentage change in price and the Price elasticity of demand < 1

Question 2
The price elasticity of the Indian demand for electricity has been estimated to be -0.65 among
residential users and -0.45 among industrial users. If these elasticities apply to China as well, how will
the impact of a price increase be spread between residential as compared with industrial?
If we assume that the increase in the fuel price impact in price with the same percentage and the
price of electricity increase by 25% :
1- If price elasticity of demand among users is (-0.65) the power consumption decrease by 16.25%
among residential users as a result of the price increase.
2- If price elasticity of demand among industrial users is (-0.45) the power consumption decrease by
11.25% among residential users as a result of the price increase.
Question 3
Many Chinese organizations ignore the market system. For instance, they borrow money from banks
and refuse to repay, thus creating bad debts for lenders. Likewise, they might consume electricity
without bothering to pay the power supplier. Do such organizations cause the demand for electricity
to be more or less price elastic?

In this case the demand for electricity is more price elastic because the percentage change in
consumption of electricity increases comparing with the percentage change in the price because the
electricity producer stop supplying to these organizations
Question 4
Suppose that the Chinese government regulates the electricity industry through marginal cost pricing.
a) how does the contract price of thermal coal affect an electric power plants marginal cost?
b) If the contract price were raised to 99% of the spot market price, how would that affect the
electric power plants production?
- Marginal cost = TVC/ Q (increase in total variable cost resulted from one unit increase in
output)
a) The thermal coal price consider as variable cost in electric power production and when the
contract price increase by 10 % it effect on the marginal cost of the electrical power plant
b) In this case the total variable cost is very high and to maintain the same marginal cost we must
decrease the electrical power production as a natural result of the cost increasing

Water
(Discussed in group and prepared by: Marwa Sanad)
A- How do you expect the price-elasticity of the demand for water to vary with the total annual
consumption of the household?
The estimated range of price elasticity of demand for water is -0.20 to -0.40.
This means that the elasticity of demand is inelastic as its less than 1. That why the percentage change in
the quantity demanded is less than the percentage change in the price.( inelastic )
To know how it will vary we have to consider the factors that influence the elasticity of Demand.
Water is a necessity product , its has no Substitute .
The time elapsed since the price has changed.
Therefore any change in the price will cause a change in the demand with a lower rate. It will have very
insignificant in the total consumption of the household.
B- Who benefit relatively more from a flat fee? Poor or rich households?
The consumption was 70% higher among users subject to flat fees as compared to those subject to
volume based rates. So I think the poor will benefit more from the flat fee structure than the rich. For the
following reasons:
Poor families will not be charged a high rate of flat fee as their houses are Small and not in
expensive areas.
The average and necessary consumption for water among different Families with the same
number of family members are almost equal; whether among poor or rich.
in the case of the poor families, they will use it or benefit from it without paying any extra fees . While for
the rich, they can afford to pay be metering and its will not be a big portion of their income.
C- Considering that a large proportion of residential users face a flat fee or even decreasing unit
prices, do you think that the price elasticity of residential demand is under or over estimated?
I think its overestimated , Since its inelastic, as the price has insignificant weight in changing the demand;
specially when facing a flat fee, and the change in the price will lead to insignificant change in the
consumption.
D- What are the implications of your answer in (c) for raising the prices as conservation policy?
-Raising the price will lead to a decrease in the consumption with a lower rate ( inelastic)
- the total revenues for the water company will increase .
for conservation of the water:
Replacing the flat fee with metering based on the real consumption.
As the water company is a monopoly; it can practice price discrimination
discrimination between household and the business usages.