Executive Boardroom Meeting – Elasticity, Revenue, and Five Forces Analysis.

As a team of executive board members, you are meeting to discuss

key economic problems faced by the company and to find rational
solutions. It is based on the timeless Case Study in business strategy
of Spectrum, which follows Module Group B of the textbook
(Government in the Marketplace). The case allows you to apply core
elements from managerial economics to a remarkably rich business
environment. You need to identify key issues, present your analysis,
make and defend your recommendations and decisions. Consider this
a practice run for the real business world.

In this discussion, please focus on Memo 1, Memo 3, and Memo 6,

(included in the textbook), with additional attachments posted in
Brightspace just below this DF to address the highlighted problems
and questions in these selected Memos for this meeting.

Some more research is recommended with relevant referencing,

supporting evidence, and data.

Headline

When Andreas finished his MBA 10 years ago and joined the company,
he envisioned an exciting career in a growing industry. However,
economic and technological changes have been rapid, and he has
already been through spin-offs and mergers. Now, thanks to Time
Warner Cable’s most recent merger, he is potentially poised to join
Charter Communications. He recently met with the Executive Board,
and the Leadership Team singled him out for having “tremendous
leadership potential.”

While it felt good to be recognized, Andreas faces significant pressure

to turn things around. Cable television is plagued with declines in
video subscribers that seem unlikely to stop. The other product and
service markets in which his company competes are highly
competitive. Andreas is not interested in spending the next 20 years of
his career plugging leaks in subscribers and market value; rather, his
goal is to create sustainable growth through innovative business
strategies.
The evolution of the industry has left Andreas—and his superiors—with
a plethora of questions requiring immediate answers. He is glad that
his MBA equipped him with the economic and business tools needed to
deal with new problems—problems that didn’t even exist back in the
day. Sadly, Andreas’s immediate predecessor lacked these tools and
lost his job following the merger. He has no intention of following in
those footsteps.

Andreas closed the July 1, 2016, edition of The Wall Street Journal on
his laptop. He set aside his morning coffee to review the company’s
operations before replying to the first memo in his inbox.

Memo 1

To: Pricing Manager, Tri-State Region

From: Regional Vice President, Tri-State Region

Re: Revenue from EPIX

We recently added the EPIX Movie Channels as part of a new tier of

programming for our digital video subscribers. The EPIX channels are
sold as an add-on package for $9.75 per month, but we would like to
potentially increase our revenue from our subscriber base. Currently
we have about 15,059 subscribers, generating monthly revenue of
$146,823.

Some have suggested we should cut price, as customers tend to be

fairly price sensitive for add-on packages. However, in this case, if we
lower price for our new subscribers, we really need to cut it to all of
our existing subscribers as well. I have some concerns that lowering
price will be counter-productive.

The marketing department calculated some subscription levels at

various price points in this region, and I need you to perform the
analysis. Specifically, I want you to estimate the price sensitivity of
customers at the current price. Please address the following
questions: (1) If we lower the price, do you think this is likely to lead to
higher revenue, and (2) how much potential revenue can we generate
and how low should we go with our price?
Thanks for your help.

Memo 3

To: Junior Executive, Strategy Group

From: Vice President, Strategy Group

Re: Strategic Analysis

For our upcoming executive retreat, the Strategy Group has been
tasked with competing a strategic analysis of our business and our
industry. While there are a number of different approaches that we can
take, I would like to rely on Porter’s “five forces” framework for our
analysis of the industry structure.

Please provide an outline of each of the five forces as it relates to the

cable industry and whether conditions in the industry are favorable to
long-term profitability.

Memo 6

To: Director of Marketing, Midwest Region

From: Chief Financial Officer

Re: Economic Planning

I attended a breakfast this morning in which a group of economists

presented the economic outlook for the Midwest region for the coming
year. According to their forecasts, the likelihood of a recession is as
high as 40 percent. It is imperative that we be prepared in case a
recession hits the country.

Our research intern pulled some data on household income from the
last economic slowdown and we matched it up with the number of
subscriptions for our video services. At first glance, it looks like we
didn’t have too many cancellations. However, in looking a little closer,
it appears that a significant number of subscribers downgraded their
service to a lower tier.
As you know, our two most popular tiers of television programming are
Favored TV for $80 per month and Basic TV for $40 per month. The
programming fees that we pay for the Favored TV are $48.50 per
subscriber, while programming fees for Basic TV are $18.50. Both sets
of customers have maintenance, billing, and service costs of $9.20 per
subscriber. Currently, in this region, we have 27,800 Favored TV
subscribers and 17,800 Basic TV subscribers.

One member of our quant group ran a regression based on incomes

and subscriptions from that two-year period, but I can’t quite figure out
what it means. Can you use the attached data to calculate the impact
on our subscriptions, revenue, and profit in the Midwest region if we
were to sustain a recession that led to a 2 percent decline in average
household income?

Based on the information provided in Memo 1, it seems that the Tri-

State Region of the company is considering potentially increasing
revenue from the EPIX Movie Channels add-on package. The current
price for the package is $9.75 per month and there are 15,059
subscribers, generating monthly revenue of $146,823. The question is
whether lowering the price would lead to higher revenue and if so, how
much potential revenue can be generated and at what price point.

 Explanationfor step 1

Based on the information provided in Memo 1, it seems that the Tri-

State Region of the company is considering potentially increasing
revenue from the EPIX Movie Channels add-on package. The current
price for the package is $9.75 per month and there are 15,059
subscribers, generating monthly revenue of $146,823. The question is
whether lowering the price would lead to higher revenue and if so, how
much potential revenue can be generated and at what price point.
To answer these questions, the Pricing Manager for the Tri-State
Region should perform an analysis of price sensitivity for customers at
the current price. This can be done by using elasticity of demand,
which measures the responsiveness of quantity demanded to changes
in price. A price elasticity of demand greater than 1 would indicate
that demand is sensitive to price changes and that lowering the price
could lead to an increase in revenue. The specific price point at which
revenue would be maximized would need to be determined through
further analysis.
  Explanationfor step 2

To answer these questions, the Pricing Manager for the Tri-State

Region should perform an analysis of price sensitivity for customers at
the current price. This can be done by using elasticity of demand,
which measures the responsiveness of quantity demanded to changes
in price. A price elasticity of demand greater than 1 would indicate
that demand is sensitive to price changes and that lowering the price
could lead to an increase in revenue. The specific price point at which
revenue would be maximized would need to be determined through
further analysis.

Memo 3 mentions that the Strategy Group has been tasked with
completing a strategic analysis for the upcoming executive retreat. It
is unclear from the memo what specific issues or questions the
analysis should address, but it is likely that the focus will be on
identifying and addressing key problems faced by the company in a
highly competitive market. A Five Forces analysis could be useful in
this scenario, as it would help to identify and analyze the competitive
forces in the industry and provide insight into the company's market
position. Additionally, the group could also use strategic analysis tools
such as SWOT analysis, PESTLE analysis and Porter's Five Forces
model to help identify the company's strengths, weaknesses,
opportunities and threats, and to understand the external factors that
affect the company.

 Explanationfor step 3

Memo 3 mentions that the Strategy Group has been tasked with
completing a strategic analysis for the upcoming executive retreat. It
is unclear from the memo what specific issues or questions the
analysis should address, but it is likely that the focus will be on
identifying and addressing key problems faced by the company in a
highly competitive market. A Five Forces analysis could be useful in
this scenario, as it would help to identify and analyze the competitive
forces in the industry and provide insight into the company's market
position. Additionally, the group could also use strategic analysis tools
such as SWOT analysis, PESTLE analysis and Porter's Five Forces
model to help identify the company's strengths, weaknesses,
opportunities and threats, and to understand the external factors that
affect the company.

Based on the information provided in Memo 1, it seems that the Tri-State

Region of the company is considering potentially increasing revenue from the
EPIX Movie Channels add-on package. The current price for the package is
$9.75 per month and there are 15,059 subscribers, generating monthly
revenue of $146,823. The question is whether lowering the price would lead
to higher revenue and if so, how much potential revenue can be generated
and at what price point.

Porter's Five Forces is a model designed by Michael Porter used to

analyse the profitability and competitive structure of an industry. It
incorporates the following 5 forces:

1) Bargaining Power of Buyers: Lower the bargaining power of buyers,

higher the profitability for the company and more attractive is the
industry.

2) Bargaining Power of Suppliers: Lower the bargaining power of

suppliers, higher the profitability for the company and more attractive
is the industry.

3) Competition in Industry: Lower the competition within existing

companies in the industry, higher the profitability.

4) Threat of new entrants into the industry: Lower the threat of new
entrants, higher the profitability.

5) Threat of substitute products: Lower the availability and threat of

customers switching to substitute products, higher the profitability.

The following table shows the various crucial parameters to be

considered and the result as per Porter's Analysis for the most
profitable segment: