ROSY 5 / E

Luigi Vittorio Tava

n° 11679
Copyright © SDA Bocconi, Milano
Revised 2017.07
SDA Bocconi School of Management Rosy 5
n° 11679

Luigi Vittorio Tava

ROSY 5 / E (§)

At Rosy 5 Co. you are considering the following mutually exclusive alternatives for the
possible launching of a recently developed and patented new product line (only monetary
outcomes are important, the product is not “strategic” for your Co.):
st
1 alternative: Manufacture and sell yourself the product, with initial non recoverable set
up costs of 20 M€ (salvage value 0) prior to any sale. Expected Gross margin: 60M€ in
case of high market demand (Prob. 60%), down to only 10 M€ in case of low demand.
nd
2 alternative: Sell to another company the production and distribution licence for this
product (which is not strategic for your portfolio), with a fixed margin of 5M€.
rd
3 alternative: Pay an Agent a fixed amount of 3 M€ plus a 5% royalty on Gross Margins,
deleting any set up cost until the agent brings you binding orders for your product.

There is no evidence that the agent can be more or less effective than your company in
selling the product (neither as volume of sales nor for their chances), but if you choose
the agent you give up the opportunity of selling the licence.

You also have the right, at your choice, to cancel the agent’s orders, paying a flat penalty
of 1 M€.
th
4 alternative: Do nothing; the product is not strategic for your Co.!

a) Choose your best strategy (using the “Expected Value criterion”) assuming a
probability of “high” demand of 60%.
b) Analyse the possible “Value of the Agent service” (cost still negotiable ….)!
c) Carry on a complete sensitivity analysis of the problem within the full range of
probability of a “high” demand.

d) ADVANCED – (only with SW support) May the “Risk Attitude” of the company top
decision maker influence the choice? – How?

------------------------------------------------------------------------------------------------------------
§) This exercise is intended for classroom discussion.

Copyright © SDA Bocconi, Milano- Revised 2019.07 2