Question

PLE has developed a prototype for a new snow blower for the consumer market. This can exploit company's expertise in small-gasoline-engine technology and also balance seasonal demand cycles in the North American and European markets to provide additional revenues during winter months. Initially, PLE faces two possible decisions: introduce the product globally at cost of $850,000 0r evaluate it in a North American test market at a cost of $200,000. If it introduces the product globally, PLE might find either a high or low response to the product. Probabilities of these events are estimated to be 0.6 and 0.4 respectively. With a high response, gross revenues of $2,000,000 are expected; with a low response, the figure is $450,000. If it starts with a North American test market, it might find a low response or a high response with probabilities 0.3 and 0.7, respectively. This may or may not reflect the global market potential. In any case, after conducting the marketing research, PLE next needs to decide whether to keep sales only in North America, market globally, or drop the product. If the North American response is high and PLE stays only in North America, the expected revenue is $1,200,000. If it markets globally (at an additional cost of $200,000), the probability of a high global response is 0.9 with revenues of $2,000,000 ($450,000 if the global response is low). If the North American response is low and it remains in North America, the expected revenue is $200,000. If it markets globally (at an additional cost of $600,000), the probability of a high global response is 0.5, with revenues of $2,000,000 ($450,000 if the global response is low). Construct a decision tree and determine the optimal strategy. ? Evaluate the sensitivity of the optimal strategy to changes in the probability estimates. ? Summarize all of your results, including your recommendation and justification for it, in a formal report to the executive committee, who will ultimately make the decision.

Can this be done in Silver Decisions?

Answer 1

Expected Monetary Values (EMVs) of the decision and chance nodes are computed as below:

EMV of node 6 = .9*2000000+.1*450000-200000 = $ 1,645,000

EMV of node 7 = ..05*2000000+.95*450000-600000 = $ -72,500

EMV of node 4 = MAX{1200000, 1645000} = $ 1,645,000

EMV of node 5 = MAX{200000, -72500} = $ 200,000

PLE Decision Tree 2 High response $2.000.000 $1.150.000 0.00 0.60 Introduce globally -5850 000 0.00 $1,380.000 Low response $450.000 -$400,000 0.00 0.40 1 4 Stay in North American $1 200 000 0.00 51.000.000 0.00 High response 52.000.000 $1 011,500 High response 50 6 $1,600.000 0 63 0.90 0.70 $1,645 000 Market globally -$200,000 100 51.845.000 3 North American test market -$200,000 100 51211,500 Low response 5450,000 550.000 0.07 0 10 5 Stay in North American $200.000 1.00 SO 0.30 High response $2.000.000 Low response $1.200.000 0.00 7 $0 0.30 0.05 $200.000 Market globally 5600,000 0.00 S527500 Low response $450,000 -S350 000 0.00 0.95

High response 0.60 2,000,000 530,000 Introduce globally -850,000 Low response 0.40 450,000 Stay in North America 1,200,000 Best EMV 1,011,500 High response 0.70 1,645,000 High response 0.90 2,000,000 1,645,000 Market globally -200,000 Low response 0.10 450,000 1,011,500 North American Test market -200,000 Stay in North America 200,000 Low response 0.30 200.000 High demand 0.05 2,000,000 -72,500 Market globally -600,000 Low demand 0.95 450,000

EMV of node 3

==>.7*1645000+.3*200000-200000==>1,011,500

EMV of node 2

==>.6*2000000+.4*450000-850000==>530,000

EMV of decision node 1

==>MAX{530000, 1011500}==>1,011,500

Out of the two alternatives, EMV of North American test market is higher.

Therefore, optimal strategy for PLE is to evaluate it in North American test market. If the response is high, then market globally and if the response is low, then stay in North America only.

The EMV of this strategy==>1,011,500

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