Case Study Blake Electronics

Case Study – Blake Electronics

Decision Making Model

1) Defining the Problem:

Should Steve contract any of the marketing companies that will assess the favorability of introducing the products to the market? If he will contract any of the two companies, which one would he choose (MAI or I&K)?
Should the new products be even introduced to the market?

2) Developing a Model:

MAI’s proposal directly gives Steve the conditional probabilities he needs - probability of a successful venture given a favorable survey. Although the information from I&K is different, we can easily use Bayes’ theorem to on I&K information to compute the revised probabilities. As such, does not need any additional information from I&K.

3) Acquiring Input Data:

Probabilities:

Cost of introducing the products: $500,000
If successful the product line, increased sales would be $2,000,000
Cost of contracting MAI: $100,000
Cost of contracting I&K: $300,000

4) Developing a Solution:

If Steve decides not to contract the marketing companies for survey, the decision is to introduce the product with an EMV of

Succesful

Unsuccesful

$700,000=
(0.6)
($1,500,000)
+
(0.4)
(-$500,000)

If he chooses MAI for the survey, the best choice is to introduce the product irrespective of whether the survey results are favorable or unfavorable. The EMV is $800,000 if the survey results are favorable, while the EMV is only $200,000 if the survey results are unfavorable. The overall EMV of hiring MAI is

Favorable survey

Unfavorable survey

$500,000=
(0.5)
($800,000)
+
(0.5)
($200,000)

If Steve chooses I&K for the survey, the best choice is to introduce the product if survey results are favorable, for an EMV of $940,000. On the other hand, if the survey results are unfavorable, the best decision is to not introduce the product for an EMV of -$300,000 (the cost of the survey). The overall EMV of hiring I&K is

Favorable survey

Unfavorable survey

$468,800=
(0.62)
($940,000)
+
(0.38)
($200,000)