Need assistance with this i can\'t seem to get my numbers right. My results from

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Need assistance with this i can't seem to get my numbers right. My results from excel are different from my TreePlan decision.

On a sunny May morning, Marc Binton, CEO of Bay Area Automobile Gadgets (BAAG), enters the conference room on the 40th floor of the Gates building in San Francisco, where BAAG’s offices are located. The other executive officers of the company have already gathered. The meeting has only one item on its agenda: planning a research and development project to develop a new driver support system (DSS). Brian Huang, Manager of Research and Development, is walking around nervously. He has to inform the group about the R&D strategy he has developed for the DSS. Marc has identified DSS as the strategic new product for the company. Julie Asker, Vice President of Marketing, will speak after Brian. She will give detailed information about the target segment, expected sales, and marketing costs associated with the introduction of the DSS. BAAG builds electronic non-audio equipment for luxury cars. Founded by a group of Stanford graduates, the company sold its first product—a car routing system relying on a technology called global positioning satellites (GPS)—a few years ago. Such routing systems help drivers to find directions to their desired destinations using satellites to determine the exact position of the car. To keep up with technology and to meet the wishes of their customers, the company has added a number of new features to its router during the last few years. The DSS will be a completely new product, incorporating recent developments in GPS as well as voice recognition and display technologies. Marc strongly supports this product as it will give BAAG a competitive advantage over its Asian and European competitors. Driver support systems have been a field of intense research for more than a decade. These systems provide the driver with a wide range of information, such as directions, road conditions, traffic updates, etc. The information exchange can take place verbally or via projection of text onto the windscreen. Other features help the driver avoid obstacles that have been identified by cars ahead on the road (these cars transmit the information to the following vehicles). Marcs wants to incorporate all these features and other technologies into one support system that would then be sold to BAAG’s customers in the automobile industry. After all the attendees have taken their seats, Brian starts his presentation: “Marc asked me to inform you about our efforts with the driver support system, particularly the road scanning device. We have reached a stage where we basically have to make a go or no-go decision concerning the research for this device, which, as you all know by now, is a key feature in the DSS. We have already integrated the other devices, such as the PGS-based positioning and direction system. The question we have to deal with is whether to fund basic research into the road scanning device. If this research were successful, we then would have to decide if we want to develop a product based on these results—or if we just want to sell the technology without developing a product. If we do decide to develop the product ourselves, there is a chance that the product development process might not be successful. In that case, we would still sell the technology. In the case of successful product development, we would have to decide whether to market the product. If we decide not to market the developed product, we could at least sell the product concept that was the result of our successful research and development efforts. Doing so would earn more than just selling the technology prematurely. If, on the other hand, we decide to market the driver support system, then we are faced with the uncertainty of how the product will be received by our customers.” “You completely lost me.” snipes Mark. Max, Julie’s assistant, just shakes his head and murmurs, “those techno-nerds…” Brian starts to explain: “Sorry for the confusion. Let’s just go through it again, step by step.” “Good idea—and perhaps make smaller steps!” Julie obviously dislikes Brian’s style of presentation. “OK, the first decision that we are facing is whether to invest in research for the road scanning device.” If we elect not to do research, we could sell the DSS in its current form for $2 million. “How much would the research cost us?” asks Marc. “Our estimated budget for this is $300,000. Once we invest that money, the outcome of the research effort is somewhat uncertain. Our engineers assess the probability of successful research at 55 percent.” “That is a pretty optimistic research rate, don’t you think?” Julie remarks sarcastically. She still remembers the disaster with Brian’s last project, the fingerprint-based car security system. After spending half a million dollars, the development engineers concluded that it would be impossible to produce the security system at an attractive price. Brian senses Julie’s hostility and shoots back: “In engineering we are quite accustomed to these success rates—something we can’t say about marketing….” “What would be the next step? Intervenes Marc. “Hm, sorry. If the research is not successful, then we can only sell the DSS in its current form.” “Again, the profit estimate for selling it is $2 million—of course, we would have already spent the money on the research,” Julie throws in. “If, however, the research effort is successful, then we will have to make another decision, namely, whether to go onto the development stage.” “If we wouldn’t want to develop a product at this point, would that mean that we would have to sell the DSS as it is now?” asks Max. “Yes, Max. Except that additionally we would earn some $200,000 from selling our research results to GM. Their research division is very interested in our work and they have offered me that money for our findings.” “Ah, now that’s good news,” remarks Julie. Brian continues, “If, however, after successfully completing the research stage, we decide to develop a new product then we’ll have to spend another $800,000 for that task, at a chance of 55 percent of not being successful.” “So you are telling us we’ll have to spend $800,000 for a ticket in a lottery where we have a 55 percent chance of not winning anything?” asks Julie. “Julie, don’t focus on the losses, but on the potential gains! The chance of winning in this lottery, as you call it, is 45 percent. I believe that it is much more than with a normal lottery ticket,” says Marc. “Thanks, Marc,” says Brian. “Once we invest that money in development, we have two possible outcomes: either we will be successful in developing the road scanning device or we won’t. If we fail, then once again we’ll sell the DSS in its current form plus cash in the $200,000 from GM for the research results. If the development process is successful, then we have to decide whether to market the new product.” “Why wouldn’t we want to market it after successfully developing it?” asks Marc. “That’s a good question. Basically what I mean is that we could decide not to sell the product ourselves but instead give the right to sell it to somebody else, to GM, for example. They would pay us $1 million for it (plus the $200,000 for the research).” “I like those numbers!” remarks Julie. “Once we decide to build the product and market it, we will face the market uncertainties and I’m sure that Julie has those numbers ready for us. Thanks.” At this point, Brian sits down and Julie comes forward to give her presentation. Immediately some colorful slides are projected on the wall behind her as Max operates the computer. “Thanks, Brian. Well, here’s the data we have been able to gather from some marketing research. The acceptance of our new product in the market can be high, medium, or low,” Julie is pointing to some figures projects on the wall behind her. “Our estimates indicate that high acceptance would result in profits of $8.0 million, and that medium acceptance would give us $4.0 million. In the unfortunate case of poor reception by our customers, we will expect $2.2 million in profit. I should mention that these profits do not include the additional costs of marketing or R&D expenses.” “So, you are saying that in the worst case we’ll make barely more money than with the current product?” asks Brian. “Yes, that is what I am saying.” “What budget would you need for the marketing expenses of our DSS with the road scanner?” asks Marc. “For that we would need an additional $200,000 on top of what has already been included in the profit estimates,” Julie replies. “What are the chances of ending up with a high, medium, or low acceptance of the new DSS?” asks Brian. “We can see those numbers at the bottom of the slide,” says Julie, while she is turning toward the projection behind her. There is a 30 percent chance of high market acceptance, 50 percent of medium market acceptance, and a 20 percent chance of low market acceptance. At this point, Marc moves in his seat and asks: “Given all of these numbers and bits of information, what are you suggesting we do?” Prepare an Executive Summary to address this case study. It should be approximately 1 to 2 pages (plus appendices) and include the following sections: 1. Case Synopsis (include a brief summary of the case and the business issue(s)being studied) 2. Methodology (including a discussion of what information was provided and how you used this information to analyze the problem) Organize the available data on cost and profit estimates in a table. Formulate the problem in a decision tree and solve. 3. Findings and Conclusions (include summary of analysis results) Based on your analysis, what is BAAG’s (complete) optimal policy? What would be the expected value of perfect information on the outcome of the research effort? 4. Recommendations. What other factors need to be considered in making the recommendations? Do you agree with the decisions from your quantitative analysis? Why or why not. Adopted from case study from Hillier and Lieberman, Operations Research

Explanation / Answer

Lets see the case step wise -

1) Whether to invest in the research for the road scanning device.

a) If they do not wish to invest in the research, they will sell DSS in its urrent form for $ 2 million.

b) If they wish to invest in the research, the estimated budget will be $3 million, while the outcome is uncertain. The probability of success is 55%.

2) If the research is not successful, then they will sell the DSS in the current form for $2 million.

  Result - Since $3 million has already been spent on the research, there will be a loss of $3 million if the research is not successful.

If the research is successful, then they will decide to go to the next stage or not. Otherwise sell DSS at the current form $2 million plus $2 million for the research. Total $4 million is the selling price if they decide not to go to the development level.

3) Next stage is the development stage. If the development of the new product is planned, then the execution needs $8 million. The probability of the success is 45%

4) After development, if the project is a failure, then sell the project for $4 million.

If the project is a success, then decide whether to market the new product or not.

5) If they want to market the new product, they will sell the rights to someone else for $3 million.

$1 million as the fee plus $2 million for research.

6) The acceptance of the new product in the market statistics -

a) High acceptance results in the profits of $8 million.

b) Med acceptance results in the profits of $4 million

c) Low acceptance results in the profits of $2.2 million.

7) Chances of market acceptance -

a) 30% chance of high market acceptance

b) 50% chance of med market acceptance

c) 20% acceptance of low market acceptance.

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