A small technology company has developed a new and innovative product that they
ID: 3173355 • Letter: A
Question
A small technology company has developed a new and innovative product that they wish to launch on to the market. There are three alternative ways for them to market it:
1. The direct approach, launching onto the whole of the domestic market through traditional distribution channels
2. Only on the internet.
3. License it to a larger company through the payment of a licence fee irrespective of the success of the product.
How should the company launch the product?
The company has done some initial market research and the managing director believes the demand for the product can be classed into three categories: high, medium or low.
Furthermore, the managing director thinks that these categories will occur with probabilities 0.20, 0.35 and 0.45 respectively. Her thoughts on the likely profits (in $ thousands) to be earned in each plan are:
Launch Approach
a) Using the criterion of expected monetary value (EMV), which launch approach should the company take? Justify your answer by showing EMV for each of the three launch approaches alternatives
b) Using the criterion of mean regret (EOL), which launch approach should the company take? Justify your answer by showing EOL for each of the three launch alternatives.
(HINT: You’ll first have to create the regret table before you can compute EOL for each of the crop alternatives)
Demand --> High Medium LowLaunch Approach
Direct 100 55 -25 Internet 46 25 15 License 20 20 20Explanation / Answer
Given, Payoff table
Demand -->
High
Medium
Low
Direct
100
55
-25
Internet
46
25
15
License
20
20
20
Probabilites ->
0.2
0.35
0.45
A.a) to calculate EMV for each approach
EMV (Direct)=100*0.2+55*0.35-25*0.45=28
similarly, EMV(Internet)=24.7
EMV(License)=20
based on the expected monetary values (EMV) the company should prefer direct approach which gives 28 thousand $ in return
A.b) to calculate Expected opportunity loss(EOL) for each approach
Regret Table is given as
Demand -->
High
Medium
Low
Direct
0
0
45
Internet
54
30
5
License
80
35
0
Probabilityà
0.2
0.35
0.45
EOL(direct)=0*0.2+0*0.35+45*0.45=20.25
similarly, EOL(internet)=23.55
EOL(license)=28.25
we should choose lower EOL for better results
hence we should opt for direct approach which has lower EOL(20.25)
Demand -->
High
Medium
Low
Direct
100
55
-25
Internet
46
25
15
License
20
20
20
Probabilites ->
0.2
0.35
0.45
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