FINAL REQUIREMENTS

in

MANAGERIAL ECONOMICS AND ACCOUNTING

Dr. Jasmin Mayo

Professor

Submitted by:

Christine C. Talampas
Michael Paul I. Gabriel
 Outsourcing at Ericson
CASE ANALYSIS

Introduction

Ericson

LM Ericson Telephone Co was formed in 1918 and by 2001 was involved in International
telecommunications, including systems and services for handling voice , data, images and text. The
company was organized into three business segments: Network Operations and Service Providers,
Consumer products and Enterprise solutions. In 2000, Ericson had a 10% market share in cell phones
and sold 43.3 million cell phones worldwide and by 2001, it fell down to 7%. It traditionally focus on
network infrastructure devices, not consumer products. In the fourth quarter of 2000 , sales of consumer
product declined by 17% and caused a massive loss for the company.

Flextronics

Flextronics International Ltd. Is a leading provider of electronics manufacturing services to original

equipment manufacturers OEMs in the communications, networking , computer , medical and consumer
markets. Its relationship with Ericson started in 1996, when it bought factories and signed an outsourcing
contract.

Mobile Handset Market

In 2001, mobile handset market slowdown due to major three factors: product saturation , a longer
replacement cycle and delayed introduction of products with next generation technologies

Outsourcing

business practice of hiring a party outside a company to perform services and create goods that
traditionally were performed in-house by the company's own employees and staff. Outsourcing is a practice
usually undertaken by companies as a cost-cutting measure.
Question:

A. What are the pros and cons of outsourcing relative to keeping production in-house?

Answer:

ADVANAGES OF OUTSOURCING
A. 1. Cost And E5ciency Savings :Companies which have got experse in a
B. parcular funcon are able to perform it at low cost and in less me.
C. Ericsson will be able to save cost and me and able to perform it more
D. e>ciently, if outsourced to Flextronics.
E. 2. Reduced Overhead : Over head costs of performing manufacturing
F. would be reduced for Ericsson.
G. 3. Opera+onal Control :Operaons whose costs are running out of control
H. can be controlled by outsourcing. Departments that may have evolved
I. over me into uncontrolled and poorly managed areas are prime
J. movators for outsourcing. In addion, an outsourcing company can
K. bring be?er management skills to your company than what would
L. otherwise be available.
M.4. Sta5ng Flexibility : Outsourcing will allow operaons that have
N. seasonal or cyclical demands to bring in addional resources when you
O. need them and release them when you’re done
P. ADVANTAGES OF OUTSOURCING
Q. 1. Cost And E5ciency Savings :Companies which have got experse in a
R. parcular funcon are able to perform it at low cost and in less me.
S. Ericsson will be able to save cost and me and able to perform it more
T. e>ciently, if outsourced to Flextronics.
U. 2. Reduced Overhead : Over head costs of performing manufacturing
V. would be reduced for Ericsson.
W.3. Opera+onal Control :Operaons whose costs are running out of control
X. can be controlled by outsourcing. Departments that may have evolved
Y. over me into uncontrolled and poorly managed areas are prime
Z. movators for outsourcing. In addion, an outsourcing company can
AA. bring be?er management skills to your company than what would
BB. otherwise be available.
CC. 4. Sta5ng Flexibility : Outsourcing will allow operaons that have
DD. seasonal or cyclical demands to bring in addional resources when you
EE. need them and release them when you’re done
FF. ADVANTAGES OF OUTSOURCING
GG. 1. Cost And E5ciency Savings :Companies which have got experse in a
HH. parcular funcon are able to perform it at low cost and in less me.
II. Ericsson will be able to save cost and me and able to perform it more
JJ. e>ciently, if outsourced to Flextronics.
KK. 2. Reduced Overhead : Over head costs of performing manufacturing
LL. would be reduced for Ericsson.
MM. 3. Opera+onal Control :Operaons whose costs are running out of control
NN. can be controlled by outsourcing. Departments that may have evolved
 OO. over me into uncontrolled and poorly managed areas are prime
PP. movators for outsourcing. In addion, an outsourcing company can
QQ. bring be?er management skills to your company than what would
RR. otherwise be available.
SS. 4. Sta5ng Flexibility : Outsourcing will allow operaons that have
TT. seasonal or cyclical demands to bring in addional resources when you
UU. need them and release them when you’re don
The pros and cons of outsourcing relative to keeping production in- house are the following:

The Advantages of Outsourcing (PROS)

1. Core business focus: 

Focusing more on the company’s core competencies and thus improving its competitive advantages by
outsourcing time- consuming processed to external companies to drive the business.  

Ericson can concentrate more on the two other business segments which are the Network operation and
service provider , and enterprise solutions, especially that it used to focus more network infrastructure
devices not consumer products.

2. Cost and Efficiency Savings

Companies who have expertise on particular functions are able to perform it at low costs and in less
time. Ericson will be able to save cost and time and able to perform it more efficiently, if outsourced to
Flextronics.

The biggest advantages to outsourcing come with saving money on production costs and improving
efficiency across the board. Indeed, it may be much more cost-effective to produce pieces with an alternative
manufacturing resource in an environment where things can be made with greater efficiency.

Strides in the area of innovation and improved production capacity are additional advantages to working
with an outsourced manufacturer.

3. Staffing flexibility, expertise and work quality.

An outsourced contractor can provide flexibility in delivering the proper staffing level and required skill
set quickly, with less cost and time investment, as well as providing expertise that may not be available, or
is inadequate, within the in-house staff. This expertise will also positively impact the quality of the work
being performed. It provides the flexibility to utilize specialized services as needed, instead of incurring
the cost of developing in-house competencies that are not needed on a permanent or continuous basis.

However, it should be remembered that this is also a potential weakness. Dependent upon location, and in
certain markets, the craft pool may be limited and the required skill sets may not be easily obtained. Or if
they are acquired they may command top dollar and cost more in the long run.

4. Operational Control

Operation whose costs are running out of control can be controlled through outsourcing. Departments that
may have evolved over time into uncontrolled and poorly managed areas are prime motivators for
outsourcing. In addition, an outsourcing company could bring better management skills to the company
than the current practice.

5. Mitigating risk by sharing risks with the Flextronics and building meaningful partnership

The Disadvantages of outsourcing. (CONS)

1. Loss of Managerial Control

Outsourcing the maintenance function may be cost-effective, but there are restrictions when working with
contractors, such as the host company’s inability to directly manage and instruct the workforce.

2. Redundancy in management roles

Roles may be duplicated within a client and contractor organization, contributing to overall cost.
Overlapping roles and responsibilities can lead to inefficiencies within the maintenance organization and
contribute to the appearance of too many bosses and not enough workers, create conflicting priorities and
confusion.

3. Threat to Security and Confidentiality

The life -blood of any business is the information that keeps it running. Risk of losing sensitive data and
loss of confidentiality by outsourcing activities or processed to external parties.

4. Hidden Cost
 Outsourcing companies may impose hidden or unexpected costs by creating lengthy contractual
agreements with lots if fine print.

5. Quality Problems

Lack of quality control, as outsourcing companies are often profit-driven rather than focused on doing
good job.

B. What are the pros and cons of outsourcing relative to exiting the business altogether?

The advantage of outsourcing relative to exiting the business altogether is that Ericson could share
some risk with Flextronic. One of the most important factors that needs to consider here is risk assessment
and analysis. By outsourcing certain campaigns or processed on to experts in their respective fields, company
will benefit from their enhances ability to plan and mitigate potential risks. In addition, outsourcing can bring
down the cost, operational expenses and increase efficiency of the company. Thus, can improve profit and
still have the chance to continue in the same business.

On the other hand, the disadvantage of outsourcing is that there is a threat in security and confidentiality.
In this age of data protection, it’s very essential that company exercise caution whenever using information
in could be employees information or even consumer data. If you plan to outsource processes that require
personal data, you could be placing the privacy of other or security of your business at risk by passing that
data on to other people.

C. Does Flextronics’ role pose a long-term risk to Ericson?

Outsourcing can have significant benefits but is not without risk. Based on our analysis we can say that
Flextronics really do have a significant effect in terms of long term risk to Ericson which is considered
unavoidable. Functions that have the potential to “interrupt “ the flow of products or service between the
company and its customers are the riskiest. The second riskiest type of activity involve in these outsourcing
is the one that affects the relationship between a company and its employees. Due to the outsourcing,
Flextronics will have an access to Ericsons database where internal processes involving future planning and
innovation could be exposed - giving Flextronic a competitive edge that they could used against Ericson
 In general, we could say that risk aforementioned could have a great impact in the overall operation of
Ericson which could led to loss of control, loss of innovation , and loss of organizational trust.

D. Although Ercicson’s 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 the wireless phones?

When firms are new to the market, they are more likely to go in a safe side which is a traditional
approach and a little skeptical about trying a more dynamic approach such as outsourcing with the idea that
confidential information as well as company’s’ internal process and control could be in a great risk. Later in
the maturity stage of product life cycle, when they start incurring losses due to soaring costs and reduction in
revenue, they start realizing the benefit of outsourcing and how it can bring down cost of operations. Thus,
other firms are also turning to outsourcing.

Pricing at Dell

CASE ANALYSIS

Introduction

In a time of crisis in the personal computer industry, Dell is taking a hit. Among the top 6 US PC
manufacturers, Dell was the only to report a profit during the first quarter of 2001.

Dell’s relative success can be attributed to many factors. Its business model is quite different from those
its rivals: Dell builds machines to order and sells them directly to the customer, rather than through
independent dealers. Another distinctive characteristics is the company’s almost obsessive concern with cost
cutting.

But low overhead is only a part of the story. Dell has system of “real time” cost information that it uses
in pricing decisions.

Questions:

a. Why has Dell be successful?

 Despite the crisis Dell was able to standout and reach success with combination of the following
methods: Direct Sales, Inventory Management and Supplier Integration. Together these allow for maximum
effectiveness with minimum cost. Dell’s success can be attributed in large part to its “direct model.” While
competitors like Compaq and IBM sold PCs through retailers, distributors, and resellers, Dell sold directly to its
customers, offering highly customized PCs at a time when the cost of computers was high enough to still
require significant tradeoffs. The bulk of sales came from business and government, as big customers
appreciated the ability to customize a large number of PCs; Dell also offered these companies’ customized
portals where employees could buy one of several company-approved computers directly. Generally speaking,
in terms of effective method and strategies Dell has it all. The methods used to its success are as follows:

- Mass customization (end result: Delivers exactly what the customer wants)
- Partnership with suppliers
- Just in time components invesntories (Quick introduction of Latest Technology)
- Direct sales
- Market Segmentation
- Customer Service
- Extensive data and information sharing with both supply partners and customers.

b. Contrast the competitive advantages that come from having low costs vs having a good knowledge
about costs. Which one is more difficult for Dell’s competitors to imitate?

Dell really does have both competitive edges; having low costs and having a good knowledge about
costs. Some rivals have attempted to imitate Dell’s practices but failed to do so or even if they do, still in a
limited degree. Based on competitors’ overview, I think they encountered difficulty-having knowledge about
costs. This approach is not something that could easily apply in an instant manner. Dell uses a system of
“real time” cost information that it uses in pricing decisions. Dell created an approach that provided them
enough knowledge on how to estimate fair and accurate costs to be presented as well as strategies to be
implemented in line with market demand and how common masses would react and benefit from it,
depending on which would imply a lower cost for Dell.
 c. How would you comment on the following quote: “By matching Dell’s prices, we are getting the
benefits from flexible prices without incurring the costs of setting up a detailed cost information
system.”

Because of the untamed success of Dell throughout the years and surpasses even the computer crisis
which greatly affect the computer industry, competitors tried to embrace Dell’s practice especially the pricing
decision. Since Dell already set up the detailed cost information system, competitors then follow this pricing
strategy in order to retain their customers. This technique benefits not only the competitors by allowing them
to adjust price to gain long-term advantage but also the consumer by allowing them to purchase at lowest
price through price matching.

The Petroleum Market: 1970 – 2001

CASE ANALYSIS:

Introduction

Prices of world oil have made astonishing ascents and descents in the last four decades. The price
stability that had characterized the world oil market since the post-war era came to an end after 1970 with
changes in the international political climate. The 1973 Arab Israeli war and the Iranian Revolution of 1979
disrupted the market and caused prices to soar manifolds before the end of the 1970s. Prices reached an all-
time low in 1986 due to overabundance of supplies following the 1979 crisis. The erratic trend in prices has
continued well into the post-Cold War era. The 1990 Gulf crisis brought a new peak in prices, and decline in
prices came after 1997 when the Asian financial crisis set in.

The paper reviews the changing patterns of world oil prices through the study of four crises in the oil
industry: the 1973 price quadrupling; the 1979 price doubling; the 1986 price decline; and the 1990 price
rise. Each of these crises had been triggered by some political development in the oil producing Middle East:
the 1973 crisis set in after the Yom Kippur war; the 1979 crisis followed the Islamic upheaval in Iran; the
1986 crisis precipitated in the wake of the Persian Gulf War; and the 1990 crisis came about by the Iraqi
invasion of Kuwait. This paper seeks to establish the relationship between these political developments in oil
exporting countries of the world and subsequent changes wrought in prices and production of world oil.
 Explain how each of the events described above affected the world market for oil, as summarized by
Exhibits 1 and 2. Specifically, use a supply and demand diagram to explain:

(a)Why the price of oil rose sharply in 1973, 1979, and 1990.
In 1973 The first event in April 1973 was when OPEC countries agreed to increase oil prices by 5.7% to
counter a decline in the value of dollar. As a result, there was an excess supply of oil and reduction of quantity
demanded. The supply and demand curve as shown below:

Price of oil

S
P2

P1

Quantity demanded for oil

The second event occurred in October 1973 when Yom Kippur War cut a major oil production by the
OPEC countries. As a result, OPEC countries has come to an agreement to an oil embargo against United
States, Netherlands, Portugal, Rhodesia and South Africa. The effect of this move is illustrated in supply
and demand curve as below:

Price of oil
S
1
S

P1
P2

D
 Q1 Q2
Quantity demanded for oil

As we can observe from the above diagram, OPEC decision to perform an oil embargo has resulted in
shift of supply curve from S to S1. When the supply curve shifts to the left, the price of oil has increased
from P to P1. The decision to decrease production of oil has given an impact to a higher price of oil.
OPEC has also announced to cut the production of oil to 25% and this has resulted in increase of price
due to shortage of supply. The supply curve will shift to the left as shown in figure below:

Price of oil
S
1
S
P1
P2

Q1 Q2

Quantity demanded for Oil

The above mentioned reasons had caused the oil price rose sharply in 1973

In 1979
There are a few events that happened from 1978 to 1980. The first event was the political instability in
Iran in 1978 as the students protested against the Prime Minister, Shah Reza Pahlavi and few opposition
leaders had been arrested in response to that situation. As a result, many oil production workers had left Iran
and led to drop of oil production from 1.5 million to 500 thousands barrel per day. At the same time, Saudi
Arabia had also cut the oil production with a maximum of 9.5 million barrels per day. This action taken by
Saudi Arabia has led to shortage of oil in all oil importing countries and resulted high price of oil in
response to production cut.

This drop of oil price situation continues when United Stated had cancelled all Iranian imports as a few
Iranians took over American embassy in Tehran and arrest American ambassadors as hostage in November
1979. To response for US’s action, Iran had cancelled all contracts with the American oil companies and
resulted in shortage of oil supply and increase in oil price. This situation as illustrated below when supply
curve shift to the left from S to S1 and lead to increase of oil price from P to P1.

Price of oil
S
1
S

P1
P2

Q1 Q2

Quantity demanded for Oil

In 1990
The situation started when Iraqi troops occupied Kuwait in August 1990. This event had caused a
declination of 4 million barrel per day in the world’s production and had causes the oil price rose to $32 per
barrel. This rose of oil price is illustrated in figure below:

Price of Oil
 S
1
S

P1
P2

Q1 Q2

Quantity demanded for Oil

The decrement of 4 million barrel per day had shifted the supply curve from S to S1 thus resulted in
increase of oil price from P to P1.

B. Why the price fell between 1980 and 1982, and again between 1982 and 1985.

From 1980 to 1982 and 1982 to 1985

The oil price had fallen to $11 per barrel in 1985 and had resulted the same price as in 1973 if
inflation rate was taken into account in determining the comparison price. The fallen of this oil price
was suspected due to utilization of technology in alternative energy resources which were available
during this period. Other than that, greater efforts at conservation could be the probable root cause of
declination of oil price.

This situation is illustrated in supply and demand curve below. As demand for oil decreased, then the
demand curve will shift to the left as the quantity, Q moved to Q1. As the demand curve shifted to
the left, then the price of oil will decrease from P to P1 and this graph had explained the fallen of
oil price during that period of time.

Price of oil

S
 D
1

P1

P2

Q1 Q2Quantity demanded for OIl

From the study above, it can be concluded that OPEC has the power to control the price of oil. OPEC
members such as Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates have the power to control
the production of oil by reducing or increasing the oil production thus will affect the market price for
oil.

From economic point of view, it is recommended that to disassemble OPEC organizations and let the
normal supply and demand nature to determine market price for oil to achieve an economic
efficiency and stability.
 Inside Job (2010)
Movie Review
“ The earth provides enough to satisfy everyman’s needs, but not every man’s greed.” – Mahatma
Gandhi is somewhat the crux of this movie. ‘Inside Job’ film is a documentary by Charles Ferguson
that gives an in-depth overview about the great depression occurs late 2007 to 2008. The film
emphasizes the evolution of the economy specifically the financial industries in a relatively short
period of time. Ferguson focuses mainly on the cause and implications of recession on the global
stage as well as the role of the United States government, financial sector, and economist.
The story begins in Iceland, a stable democratic society described as almost attaining ‘end of
history status’. This small, prosperous state of 320,000 people became a basket case almost
overnight when its three main banks were privatized and began borrowing three times the country’s
Gross Domestic Product with the capital mostly accumulated to incredible levels by bankers. In a
scenario repeated in Ireland, Britain and the United States (US) the financial regulators failed to
raise the alarm or halt the reckless borrowing and, in the case of Iceland, one-third of the regulators
went to work for the banks. The story then moves to the US and the collapse of Lehman Brothers in
2008 that sent shudders through the financial markets and sparked a global downturn.
The documentary shows the massive damage of global financial meltdown to millions of citizens
who losses their jobs and homes. Without sugar coating and taking a neutral attitude the
documentary exposed the irregularities and those people who took part to the economic
phenomenon.
One of the things making this documentary useful to the common masses is the fact that Ferguson
uses his knowledge and insights to breakdown different economic terms by demonstrating the
impact of deregulation on the economy. It also features extensive research and interviews with
journalist, politicians, financers and academists. This convey that evidence and reasoning showed
on this film creates credibility, logicality, and consistency and not less than just one of the
conspiracy theories because facts are well presented. In addition, we can say that this documentary
really helps the viewer to fully understand and make comprehensive stand with fair judgment on
how things occurred and how we make can make a great change by learning from those mistakes.
As stated on the film “uncontrollable relaxation of regulation brought the crisis”. This was a
predictable accident that could be prevented if and only if financial sector were properly governed.
Reckless risk taking, sheer greed and complex financial structure mainly by the banks are one of the
greatest caused of the economy to tumble down extensively. This well researched film clearly
explains the convolution of the recession while at the same time exposing the greed of bankers.
The documentary paints a clear picture of how deregulation gave rise to increase in lending
activities. In the post-Reagan period of deregulation the investment banks or lenders sold the loans
to investors who in turn gambled trillions of dollars on the unregulated market. When loans are off-
loaded to the private sector, the lender is no longer concerned as to the quality of the loan or the
borrower’s capacity to repay. Thus, number of loans accelerated exponentially and banks continued
to borrow recklessly ‘buying’ loans that could not be repaid. 
 Lots of problem came after that, Unemployment rate increased and there is a cut in U.S
spending. This would affect not only United States but also those countries that rely on them like
China and Singapore. After watching this film i could definitely say that , the main reason of this
crisis are those people who made so much money out of those criminal activities that occurred
before the crisis. A lot of people lost their job during this crisis while many CEO’s of investment
banks who participated in fraudulent activities got increased bonuses and retired with plenty of
money in their pockets. The appalling fact of this is no one went to jail. To the contrary, they all
walked off with billions.
We could also say that this film really did a great job in exposing irregularities but also offers
more of a voice to those who have been rendered homeless and penniless by the banks. Generally
specking, ‘Inside Job’ is lucidly narrated and skillfully done. I believe this film is the clearest ,
most easily understood presentation of the players and events of our current economic crisis. For me
this movie is both fascinating and entertaining to watch especially in that part where the
interviewees squirm under when asked simple, yet intelligent questions about their roles. It reveals
the profound conflicts of interest that continue to exist even today, and how either by willful
ignorance or, arguably, criminal negligence has made a travesty of this proud nation’s once vibrant
and admired economy.
As a whole we could say that we really enjoyed watching this tedious yet informative
documentary. We found it very well put together with emphasis on the important lesson that should
be learned. What the movie fails to show is how the criminal misconduct on behalf of the banking
industry is not a disease but a symptom. Most important part of it is that, main reason for the
financial crises are uncovered, explained in simple yet comprehensive manner. People behind the
scenes were exposed. Overall we could say that it is a great and educational movie. Highly
recommended!