Assessment: Product Development Decision and Marketing Research

Problem 1 – To Build or Not to Build (and How Big): That is the Question

Instructions

This assessment consists of two independent problems. For each problem, you need to:

1. Develop a spreadsheet model

1. Describe your results in a concisereport

Your reports should contain a short description of the model solutions, answers to specific questions and your interpretations of the results. The main text of the reports should not exceed three pages total of A4 (11 point, 1.5 spacing, approximately 1.5 page per problem). However, it may well be useful to include appendices with tables, graphs, etc. These must be explained in the main text. The report should be clearly structured, communicate the outcomes of your analysis in an effective way and avoid any technical jargon. Marks for each problem are displayed in parenthesis.

A company faces a decision with respect to a product codenamed Card98 developed by one of its R&D laboratories. The company now needs to decide whether to proceed with test marketing Card98 or drop it completely. It is estimated that test marketing will cost £500k. Past experience indicates that only 30% of products are successful in the test market stage. For simplicity, assume that if Card98 is not successful at the test market stage, the project will be abandoned.

If Card98 is successful at the test market stage, however, then the company faces a further decision relating to the size of the plant to set up to manufacture Card98. A small plant would cost £1.5M to build and could produce 25,000 units per year, while a large plant would cost £2.5M to build but produce double the amount.

The marketing department have estimated that there is a 50-50 chance that the competition will respond with a similar product and that the price per unit sold (in £) will be as follows (assuming all production can be sold).

Assuming that the life of the market for Card98 is estimated to be 7 years and that the yearly plant running costs are £500k for the small plant and £800k for a large plant should the company go ahead and test market Card98? If test marketing is successful, how big of a plant should be built?

To help structure your analysis, please answer the following. Marks for each question are shown in brackets.

1. Use TreePlan or manually build your own decision tree in Excel to represent this problem. 

8. Using an annual discount rate of 8.5%, determine what the expectednet present value (NPV) of the preferred alternative is. In calculating NPV, assume that the cost of test marketing is incurred up front (i.e. year 0). If a factory is built, construction costs would be incurred in the middle of the year (i.e. year 0.5), while running costs and revenues would be incurred every year after construction (i.e. years 1.5, 2.5, and so on). For simplicity, assume that the test marketing phase is short enough that if a plant is built, the costs for it are also incurred right away. Running costs and revenues, however, are incurred at the end of the year.

1. What are the pros and cons of your recommendation? In particular, if test marketing is successful, how risky is building a small plant versus building a large plant in terms of potential gains and losses?

1. Perform a sensitivity analysis on the probability that the competition will respond (if Card98 goes into production) to examine the robustness of your recommendation to possible changes in this probability. Does the decision to go to test marketing or not and size of plant to build change depending on this probability?

1. Finally, the company would like you to carry out some analysis to figure out how long it will take to build a plant. The various steps involved in building a smallplant are detailed in the table below, along with 3-point time estimates (in days). For simplicity, assume that times for a large plant are 40% extra (for all estimates). What are the expected completion

times for a small plant versus a large plant? In addition, what is the probability that a small plant can be built in 8 weeks and a large plant built in 12 weeks?

Management Science Associates (MSA) is a marketing and computer research firm based in Washington, D.C., that handles consumer surveys. One of its clients is a national press service that periodically conducts political polls on issues of widespread interest. In a survey for the press service, MSA determines that it must fulfil several requirements in order to draw statistically valid conclusions on the sensitive issue of new U.S. immigration laws aimed at countering terrorism:

1. Survey at least 2,300 people in total in the United States.

2. Survey at least 1,000 people who are 30 years of age or younger.

3. Survey at least 600 people who are between 31 and 50 years of age.

4. Ensure that at least 15% of those surveyed live in a state that borders Mexico.

5. Ensure that at least 50% of those surveyed who are 30 years of age or younger, live in a state that does not border Mexico.

6. Ensure that no more than 20% of those surveyed who are 51 years of age or over, live in a state that borders Mexico.

MSA decides that all the surveys should be conducted in person. It estimates that the costs of reaching people in each age and region category are as shown in the table below.

MSA’s goal is to meet the six sampling requirements at least possible cost.

1. Build and solve an optimisation model for MSA to identify the selection of survey participants that minimises total cost.

1. Interpret the results of the model and perform any sensitivity analysis you think may provide some useful insights in regards to the impact that some changes in the problem data may have on the model recommendations. Some example issues you may want to investigate are:

1. What is the maximum unit cost that will make it worthwhile to include in the survey persons 30 years of age or younger who live in a border state?
2. What is the impact if MSA wants to increase the sample size to 3,000?

• What is the impact if MSA insists on including people 31-50 years of age who do not live in a border state?

1. What is the impact if the minimum number of survey participants who are 30 or younger can be reduced to 900 provided that the number of participants who are 31-50 years of age is raised to 650?