Eunice Ahaghotu

11/25/13

MEMO
To: Performance Lawn Equipment Company
From: Eunice Ahaghotu
Date: 11/25/13
Subject: Recommendation for snow blower prototype
My recommendation for the new snow blower prototype is to evaluate the
product in a North American test market (NAT). If the response in the test market is
high, market the product globally. And if the response is low still market the product
globally. In the attached Decision Tree, this is the optimal decision with an expected
value of $1,139,000.
When a risk profile (attached) for this optimal decision was developed it was
found that if the NAT market response is low, the probability that the response to
marketing the product globally will be low is 0.15 and the company will incur a loss of
$350,000. On the other hand, if the company decided to drop the product or keep sales
only in North America they will incur a loss of $200,000 or come out even with no profit
and no loss respectively. If the NAT market response is high, the probability that the
response to marketing globally will be low is .07 and company will make a profit of
$50,000. On the other hand, if the company decided to drop the product or keep sales
only in North America they will incur a loss of $200,000 or make a profit of $1,000,000
respectively.
In the first scenario, it may look smart to play it safe and keep the sales only in
North America just in case the response is low. In the second scenario whatever the
outcome, if you choose to market globally the company will come out with a profit.
However, again, the probability that the global market response to the product with be
low (in either scenario) is very low. So considering the potential profits, I would take my
chances and market the product globally whether the NAT response is high or low. You
should also keep in mind that the chance that the company will find itself in the first
scenario (where the costs to market the product globally could outweigh the costs to just
drop it) is very low because the probability that the NAT response to the product will be
low is only .03.
When I developed a sensitivity analysis (attached) for this optimal decision it was
found that this optimal decision not very sensitive. I tested the probability that the
response in the NAT is high between values .40 and .90 and for the all values in that
range, the optimal decision was to evaluate the product in a North American Test
Market.