New Product Development (NPD)

Sam Shah has just started his new job at Global One High Definition (GO-HD),
which makes HD (High Definition) radios for vehicles. The company has many
products in the pipeline and has just completed a pilot study of HD2, an advanced
HD receiver. Andrew Saltore, the company founder and CEO sends an e-mail to the
R&D requesting estimates on what it will take to develop the HD2. “We gotta have
the HD2,” writes Andrew.
Sam has quickly learned that an e-mail from Andrew usually results in a flutter
of work for many. Sam also knows that he is responsible for assembling the
requested information and developing the presentation (aka, building the
PowerPoint and running the numbers) that will go to Andrew with a
recommendation on whether to move forward with the HD2.
At Sam’s request, the R&D department quickly estimates that it will cost
$300,000 to develop this product. The production department estimates the unit
cost of production (including material and labor) to be $200. The sales price will be
set at $500 per unit and the marketing department provides an initial sales forecast
of 100 sets. Sam is suspicious of these estimates. He thinks, “How could such
estimates come from the teams so quickly? Would people really pay $500 for the
HD2? How reliable is the demand forecast for a new product?”
Sam elects to develop a presentation that attempts to evaluate the financial
viability of this project under various scenarios. He would also like to capture the
impact of changes in the relevant data on the company’s decision. He also wants to
communicate his concern about uncertainty in the numbers without attacking them.
a. How would the sales forecast for HD2 affect GO-HD’s decision to develop,
produce and sell the product?
b. How would changes in the R&D cost and the selling price of HD2 affect the
company’s decision?
The Price is Right (PR)
In the recent run-up in energy prices, much was said that suggested oil
producers did adjust prices (by manipulating output) with the goal of maximizing
profits. Market demand for oil depends on the price set by the oil producers.
Assume that oil producers act in a block as a cartel and can manipulate price. Such
behavior by oil producers was seen in the early 1970s with OPEC. It is understood
and expected that although higher prices mean higher profit margins, they also
induce greater conservation effort by consumers, leading to lower demand for oil.
On the other hand, if prices are low, the demand for oil is high, but margins are not
sufficient. Thus, the cartel faces a dilemma: setting higher prices will generate
higher revenues and profits per barrel but fewer barrels will be sold, which may
lead to lower total profits for the cartel. This suggests that an intermediate price
may be optimal for maximizing total profit. What is the right price to set?
Based on the past consumption patterns, suppose the cartel of oil producers has
estimated that any price above $150 a barrel nearly zeroes or chokes-off demand.
This means that consumers prefer an alternative energy sources to oil above $150
a barrel. In the recent oil price spike, many people turned to biodiesel, ethanol, and
other energy forms at high oil prices. Also, the consumption research shows that
for every dollar drop in the oil price below $150 a barrel, there is an increase in the
market demand by 9 million barrels per month. This is based on the reality that as
oil becomes less expensive, the users of energy prefer it to other (more costly)
forms of energy. Also, they consume it more freely and conserve less, for example,
by driving “gas guzzler” vehicles.
The cost of producing oil for the cartel is estimated to be $10 per barrel.
a. What price should the cartel set to maximize its total profit?
b. How would this price and profit change as the demand choke-off price varies
over $100 to $200 range?
c. Produce graphs for presentation that clearly communicate your
recommendation of the best price for the cartel.